CSX Corporation Q1 2010 Earnings Call Transcript

123jump.com Staff
22 Apr, 2010
New York City

Revenue rose 11% to $2.5 billion and net income rose 0.3% to $306 million or 78 cents a share. Operating income of $634 million up 21% from the prior period and a 230 basis point improvement in operating ratio to a 1st quarter record of 74.5%.

CSX Corporation ((CSX))
Q1 2010 Earnings Call Transcript
April 14, 2010, 8:30 a.m. ET

Executives

David Baggs – Assistant Vice President, Investor Relations
Michael J. Ward – Chairman, President and Chief Executive Officer
Clarence W. Gooden – Chief Sales and Marketing Officer
David A. Brown – Chief Operating Officer
Oscar Munoz – Executive Vice President and Chief Financial Officer

Analysts

William Greene – Morgan Stanley
Scott Group – Wolfe Research
Ken Hoexter – Bank of America/Merrill Lynch
Thomas Wadewitz – J.P. Morgan
Christopher Ceraso – Credit Suisse
Robert Salmon – Deutsche Bank
Scott Malat – Goldman Sachs
Gary Chase – Barclays Capital
Matthew Troy – Citigroup
John Larkin – Robert W Baird
Jason Seidl – Dahlman Rose
Jeff Kauffman – Sterne, Agee
Donald Broughton – Avondale Partners
Chris Wetherbee – FBR Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the CSX Corporation First Quarter 2010 Earnings Call. As a reminder, this conference is being recorded. During this call, all participants are in a listen-only mode. For opening remarks and introductions, I would like to turn the call over to Mr. David Baggs, Assistant Vice President, Investor Relations for CSX Corporation. Sir, you may begin.

David Baggs

Thank you, MaryAnne and again good morning everyone and welcome to our first quarter earnings call. The presentation material that we''ll review this morning along with our quarterly financial report and our safety and service measurements are available on our website at csx.com under the investor section. In addition, following the presentation, a webcast and podcast replay will be available on that website.

Here representing CSX this morning are Michael Ward, the company''s Chairman, President and Chief Executive Officer; Clarence Gooden, Chief Sales and Marketing Officer; David Brown, Chief Operating Officer and Oscar Munoz, Chief Financial Officer. Now, before we begin the formal part of our program this morning let me remind everyone that the presentation and other statements made by the company contain forward-looking statements and actual performance could differ materially from the results anticipated by these statements.

In addition, let me also remind everyone that at the end of the presentation, we will conduct a question-and-answer session with analysts. With 27 analysts covering CSX at this time, I would ask as a courtesy to everyone please limit your enquiries to one primary and one follow-up question. And with that let me turn the presentation over to CSX Corporation''s Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Michael J. Ward

Well thank you, David. Good morning, everyone. Last evening we reported first quarter earnings per share from continuing operations of $0.78, up 22% from the same period last year. We''re encouraged by what we see in the external environment as the industrial economy continues to gain momentum.

Revenues in the quarter improved 11% driven by volume gains across most markets, core pricing that reflects the value of rail transportation and the impact of higher fuel costs reflected in our fuel surcharge program. CSX employees performed very well.

Our network remained fluid and is running even more safely. As David will discuss, we recorded our best personal injury rate in the company''s history, a great achievement for our employees. A combination of higher revenues and strong productivity resulted in a first quarter record operating income of $634 million, up 21% from the prior period and a 230 basis point improvement in our operating ratio to a first quarter record of 74.5%.

We''re proud of the cost discipline and the commitment to safety and service that our employees are bringing to the job. We told you that we thought that this high level of performance and commitment would position CSX to stand out as a unique value in the economic recovery. We are seeing that happened today and that is why we expect strong double digit growth in earnings per share for the year 2010.

Now, let me turn the presentation over to Clarence to discuss our markets in more detail. Clarence?

Clarence W. Gooden

Thank you, Michael and good morning, everyone. In the first quarter of 2010, an improving economy helped most of the markets that we served rebound from the lows experienced last year. Manufacturing sector expanded again in March as reflected in a reading of 59 from the Institute for Supply Management''s Manufacturing Index.

Please recall that a reading above 50 indicates growth. This is the eighth consecutive month that the index has shown growth. Also, inventory replenishment continues to play a significant role in the recovery as inventories remain below target levels in several markets. At the same time, we remain committed to delivering a safe and reliable service product and we remain focused on pricing our services to reflect the value of rail transportation.

Now, let''s look at a change in revenue for the first quarter on the next slide. CSX revenue increased 11% to nearly $2.5 billion due to volume growth, core pricing gains and the impact of higher fuel costs reflected in our fuel surcharge program. As you can see on the chart, volume increases drove $106 million at the year-over-year revenue growth. Also, the combined effect of rate and mix accounted for $101 million of the increase, reflecting pricing gains across all markets as we continue to sell the value of rail transportation.

Finally, as you look further to the right side of the chart, the impact of higher fuel costs increased our fuel recovery $37 million in the quarter. Let''s turn to the next slide and take a closer look at overall volume changes across the markets that we serve. Total volume of nearly 1.5 million units was up 5% versus the first quarter of 2009.

Looking at the bars, you can see that year-over-year volume change was greatest in automotive at 64%, followed by 14% growth in intermodal and 7% growth in merchandise. Collectively, these three markets, which represent 75% of our business, grew approximately 13% for the quarter, yet these gains were partially offset by a 13% decline in coal. While coal volumes were down for the first quarter, we expect coal volumes to increase for the full year 2010.

Turning to slide eight, let''s look more closely at our pricing results. The line on this chart highlights the year-over-year change in total revenue per unit, which includes the impact of price, fuel and mix. During the first quarter, revenue per unit increased 5.9%. The bars on the chart shows the increase in price on a same-store sales basis. This excludes the impact of fuel and mix.

Same-store sales are defined as shipments with the same customer, commodity and car type and the same origin and destination. Price on a same-store sales basis was up 5% for the quarter. These shipments represent approximately 75% of the total traffic base. Our improvements in price continue to reflect the unique value CSX is providing to our customers, as well as the relative value of rail transportation.

Looking forward, we continue to expect core price increases to exceed rail inflation. Now, let''s take a look at each of the major markets that we serve, starting with coal.

Coal had first quarter revenue of $736 million, down 1% versus 2009. Here, the decline in volume more than offset a 14% increase in revenue per unit, which reflects the improvement in yield, higher fuel recovery and positive mix.

Domestic utility demand remained lower year-over-year, due to utility stockpiles that remain above normal. That said, stockpile levels have moderated, reflecting the winter weather and an increase in burn levels as electrical generation increased nearly 5% for the CSX-served territories . On a more favorable note, export coal volumes grew 21% year-over-year as demand was strong for U.S. metallurgical coal to China and in the industrial sector, domestic metallurgical coal, coke and iron ore volumes grew 12% on stronger steel production.

Looking forward, utility demand is expected to improve as inventories return to more normal levels and year-over-year comparison ease. Yet, natural gas prices remain at low levels leading to some displacement at utilities. Finally, we expect strength in both exports and the industrial sector to continue in 2010.

Turning to the next slide, let''s look at the automotive market. Automotive had a first quarter revenue of $170 million, up 79% versus 2009, driven by 64% increase in volume and a 9% increase in revenue per unit. The increase in volume was driven by improved demand as North American light vehicle production increased during the quarter from a low base.

Extensive customer incentives, loosening credit markets and the return of lease programs drove the improvement in auto production. Looking forward, North American light vehicle production for the full year is expected to increase 28%, reflecting the increase in sales during the second half of last year related to the Cash for Clunkers stimulus program.

In addition, the new CSX-served Kia assembly plant at West Point, Georgia, reflects new industrial development that commenced shipments in late 2009 and is expected to ramp up production throughout 2010. Turning to the next slide, let''s review the results in Merchandise. Merchandise had first quarter revenue of $1.2 billion, up 11% versus 2009, driven by 7% increase in volume and 4% higher revenue per unit.

The metals and chemical markets experienced volume growth due to increased industrial activity, increased automotive production and growth in shipments of frac sand used in natural gas drilling. Volume grew year-over-year in the agricultural-related markets due to continued growth in ethanol traffic and increased shipments of feed ingredients to the export markets.

Also, phosphates and fertilizers grew on increased export and domestic demand, as buyers replenished inventories. Finally, continued housing and construction weakness lead to lower volumes in forest products and emerging markets. Looking forward, the ongoing economic recovery is expected to result in growth across most markets, lead by growth in the non-housing related markets.

Turning to our intermodal results, intermodal had first quarter revenue of $323 million, up 20% versus 2009, driven by 14% increase in volume and a 5% increase in revenue per unit. Overall revenue per unit was up 5% in the quarter on increased fuel recovery, contract price increases in the international sector and a modestly improving truck pricing environment.

The international market lead the volume increase with 18% growth, due to U.S. inventory replenishments and improving U.S. exports against the comparatively depressed prior year volume level. Domestic volumes grew again this year, up 11% due to continued over the road conversions and expanded service offerings.

As we look forward, we expect favorable year-over-year international revenue reflecting stabilizing consumer demand, improving global trade and easier prior year comparables. On the domestic side, we expect pricing improvements to continue with the stabilization of truck capacity and market demand; however, we will see a revenue impact from our new agreement with the Union Pacific Railroad which I will detail on the next slide.

On March 29th, CSX and the Union Pacific launched the new UMAX domestic interline container program. This new program provides customers with access to more than 20,000 53-foot containers and it features more than 600 service lanes with faster and more frequent train schedules.

As the new interline program replaces the previous purchase transportation agreement, domestic volumes are expected to decline from their current run rate due to the loss of the off core traffic that solely ran on the Union Pacific network. Further, the anticipated and favorable revenue impact is approximately $40 million to $50 million on a quarterly basis.

At the same time, the impact on operating income is neutral in the near term but positive in the longer term. The new UMAX program generates long term upside potential as this new transcontinental service is among the fastest and most efficient available to customers. And now, turning to my closing slide, the macroeconomic recovery which began in late 2009 is expected to continue throughout this year.

The U.S. industrial production is expected to grow in excess of 4% for each quarter in 2010. As a result, the outlook for second quarter volume and revenue is favorable, as line haul revenue growth is expected to cross nearly all markets, including coal. At the same time, we continue working closely with our customers to develop new business opportunities as reflected in over 70 new start ups across the CSX network, during the last 12 months.

Given what we are accomplishing, we remain confident that CSX stands out as a compelling value for customers in this recovery, especially as a transportation that is both value priced and environmentally sound. Thank you and let me turn the presentation over to David to review our operating

David A. Brown

Thank you, Clarence and good morning everyone. Leadership, discipline and execution continue to be the foundation of our company''s strong financial performance. In the first quarter, even with improving volume and more challenging winter weather, our employees delivered excellent safety results, strong productivity and efficiency efforts and fluid network performance.

Our excellent safety results included an all-time record in personal injuries, as we continued to be a leader in one of the nation''s safest industries. Our strong productivity efforts helped the record financial results, including the 230 basis point improvement in the operating ratio that Michael mentioned earlier.

Finally, the network remained very fluid, although key service measurements certainly reflected the impacts of the more challenging weather we faced in this year''s first quarter. Now, let''s look at some of the details, starting with safety.

Slide 17 shows the company''s continued strong results in both personal injury and train accident performance over the last four years. In the first quarter, the FRA personal injury rate improved 38% to a new all-time record of 0.81. This marks the second consecutive quarter that we have registered new records.

Even more gratifying is the fact that more of our employees are going home to their families safe and injury-free. Looking at train accidents, our performance improved here as well, with a rate of 3.13 for the quarter.

This represents a 14% improvement from last year and reflects our commitment to keep the communities we operate through safe as well. These results, which we achieved through leadership and a sustained effort by all of our employees, keep us on the path towards our ultimate goal of zero injuries and zero train accidents.

Now, let''s look at our service performance on slide 18. Overall, the network remained very fluid during the quarter. Although key service measures declined from recent highs, reflecting the more challenging weather we faced this year. Looking at all time performance, originations declined to 69% and arrivals declined to 67%.

While down, these levels still supported train operations that remained very fluid during the quarter. Turning to network performance, you can see that velocity declined to 20.9 miles per hour and that terminal dwell increased to 25.8 hours, primarily reflecting the decline in all time performance. I''m confident that with our teams commitment to serving our customers safely and reliably, that we will improve these measures going forward.

Turning to slide 19, let''s take a look at network efficiency. As Clarence mentioned, volume grew 5% during the first quarter. At the same time, total crew starts were down 2% collectively, as we handled the increased volume within the existing train network.

That network has been stable at these levels since the end of the first quarter last year. As volume continues to grow, we will need to increase our resource levels to meet the growing demand on our network. At the same time, we will actively manage our resources to the optimal level that supports both the increasing business activity and the need to provide our customers with a strong service platform.

Now, let''s look at key resources. As you can see, we continue to have a number of employees and equipment available to support the increasing business activity although down from the peak, we still have over 1000 train and engine employees furloughed and many of these employees will return to work as needed.

In fact, a number of furloughed employees returned to work during the first quarter to offset attrition and to support volume growth at specific locations. As business levels continue to improve, we look forward to calling additional employees back to work. At the same time, we have also started hiring employees in specific locations where we have significant growth or attrition and anticipate a need for new employees later in the year.

For example, we are hiring in key corridors where export coal volumes ramped up quickly. Looking at readily available equipment, we still have 272 serviceable locomotives and over 12,000 freight cars in storage. As you can see, these levels are also down from the peak and we continue bringing locomotives and freight cars out of storage to support the growing volume levels.

Now, let''s wrap up on the final slide. Looking forward, we will build on our momentum in safety and continue to be a leader in one of America’s safest industries. We will drive increased productivity, control costs and manage resource levels closely as volumes grow.

Finally, we expect the network to return to higher performance levels and for service reliability to improve for our customers. Our employees hold themselves and each other accountable for delivering a strong service product. It is the foundation of our success with our customers and for delivering shareholder value.

Now, let me turn the presentation over to Oscar to review the financials.

Oscar Munoz

Thank you, David. Good morning everyone. Let me begin with an overview of the quarter''s results starting at the top of slide 23. Revenue improved 11% to $2.5 billion, lead by volume, pricing and the impact of higher fuel cost on our fuel surcharge program. Expenses were up 8% or $132 million, with 65% of that increase driven by higher fuel prices.

In addition, labor inflation plus higher incentive compensation impacted the quarter. Finally, continued productivity improvements largely offset the cost increase associated with the higher volume. Our continued attention to cost discipline coupled with top line growth resulted in operating income of $634 million. This represents the first quarter record into the 21% gain from last year.

As we look below the line, other income was up $8 million with real estate sales being the largest driver. Income taxes were $197 million in the first quarter and do include a $7 million one-time charge related to the recent healthcare reform legislation enacted by Congress. This additional expense resulted in a reported tax rate for the quarter that was slightly above our normal range.

All in, we finished the quarter with EPS from continuing operations of $0.78, an improvement of 22% versus last year and consistent with our strong double digit earnings guidance for the full year. So with that background, let''s take a look at our expenses in more detail starting with labor.

Labor costs increased 10% or $67 million from last year. Two items are driving this variance. Incentive compensation increased $48 million due to both our stronger earning production coupled with the reductions of this expense in the first quarter of 2009. As a reminder, incentive compensation is both for management and also our contract workforce on performance-based agreements.

Looking forward, we expect this variance to moderate somewhat, but we will continue to see year-over-year headwind of approximately $20 million each quarter as we cycle lower 2009 incentive pay out. Also, as discussed last quarter, CSX and the rail industry are facing rising health and welfare cost as well as the normal increase in wages. In the first quarter, these items accounted for a $40 million increase in labor expense. Looking ahead, we expect a similar amount per quarter for the remainder of the year.

Partially offsetting these costs was our continued productivity efforts, which produced savings of $34 million. Looking at the chart on the left, average headcount for the quarter declined by nearly 6% reflecting efforts throughout 2009 to adjust our workforce to business levels as volume declined.

Finally, we have other expense of $13 million, approximately half of this is related to ongoing pension-related cost with the balance being more unique to the quarter. Now, let''s continue our expense review on slide 25. MS&O expense declined 5% or $24 million versus last year. Walking down the table to the right, we had insurance and legal recoveries of $17 million, including a settlement of the remaining claims from Hurricane Katrina.

Additionally, reflecting a continued trend of safety improvements over a number of years, we realized $7 million of cost reduction from the ongoing benefit of last year''s casualty reserve adjustments. Lest we forget, although not on the chart, the cost of the increased volume and inflation again were offset by our continued focus on productivity.

Looking ahead and as a reminder, in the second and fourth quarters of 2009, we had favorable casualty reserve adjustments of $85 million and $20 million respectively, which we will be cycling this year. Now, let me discuss fuel on the next slide. Total fuel costs increased $92 million or 48% versus last year. Looking at the table to the right, increasing fuel price accounted for nearly the entire variance as CSX''s average cost per gallon climbed over 50%.

Volume accounted for $7 million of incremental expense but those costs were largely offset by a $5 million improvement in efficiency as measured by gallons per thousand gross ton miles. The chart to the left highlights the continued improvement in this efficiency measure as indicated by the 3% improvement on a year-over-year basis.

On the next slide, let''s review the remaining expenses. All other expenses collectively decreased 1% or $3 million versus last year. Beginning with inland transportation, these costs increased $5 million due to gains in off-core and transcontinental intermodal volume.

As Clarence discussed earlier, we expect a quarterly reduction of intermodal revenue of approximately $40 million to $50 million and we also expect a similar reduction in the inland transportation expense. Moving to rent, they declined $13 million, related primarily to the cycling of unfavorable settlements with other railroads that occurred in the first quarter of 2009.

Looking forward, you should expect our rent expense to continue to move in line with volume. Finally, depreciation was up $5 million year-over-year, as the net increase in our asset base was partially offset by a lower depreciation rate from the life studies completed in the fourth quarter of 2009.

Now, that we''ve reviewed our expense items in detail, I''d like to update you once again on our scorecard as we move to the next slide. As we did all throughout last year, while our volume was declining, let me give you a view of our cost structure, now that volumes are increasing and we''ve updated our scorecard to include an additional column on the far right that adjust our expenses for fuel price.

Let''s review those fuel adjusted results within each cost category. First, short-term variable expenses increased only 1%, despite a 5% increase in volume. This 5% increase in car loads also translated into a 5% increase in ton miles, a standard measure of work load for our industry.

Next, our long term variable expenses increased 2%, driven primarily by inflation affecting our network crews as well as weather related expenses. Finally, our fixed and indirect expenses increased by 4%, lead by the previously mentioned incentive compensation, partially offset by insurance and legal recoveries which are included within the general administrative category.

Collectively, we were able to mitigate the impacts of inflationary pressures and volume gains through continued productivity improvements. Overall, after normalizing for the impact of fuel price, total operating expenses increased 3% in the quarter in support of that 5% volume increase.

Moving forward, we are committed to maintaining the appropriate level of resources against improving volumes and we look forward to updating you periodically on our cost structure. And now let me wrap up on slide 29. As the economy recovers we are seeing growth in many of our markets and expect that strength to continue. As we execute our operating plan and generate cash flow for shareholders, we remain committed to investing in the long term future of our business.

To continue that requires a balanced regulatory environment which we continue to advocate for in Washington. As we communicated earlier, we will invest $1.7 billion in 2010 with $170 million devoted to positive train control.

The Federal Railroad Administration has released its final rules and we are finalizing implementation plans to be filed later this week. Because of the ongoing work to insure compliance and the timely completion of PTC, our current estimate of this multi-year investment has increased and is at least $1.2 billion.

Finally, our focus on safety, service and productivity, as well as superior value to our customers under lie the strength in our ability to deliver strong double digit earnings for 2010. Our actions have allowed us to emerge from the recent recession as an even stronger company and will continue to allow us the improving benefits of an improving economy. With that, I''ll turn it back to Michael.

Michael J. Ward

Thank you, Oscar. When we stand back and look at CSX, we see a strong company with a culture and track record of continuous improvement and a strengthening economy. We believe that recovery is sustainable, but in any case, we are keeping our focus on the fundamentals of safety, service and productivity.

This has served us well through excellent and severe economic conditions and today, as the economy continues to recover. It is also critical that we continue to look over the horizon with respect to capital and the future needs of our customers.

Our commitment to the future has been evident over the past three years as we have invested approximately $5 billion in our network and again this year as we add another $1.7 billion. Railroads must maintain a safe, service-ready network and pay their own way.

The regulatory framework in effect today allows us to do that. As you are all aware, there continue to be serious discussions in Washington concerning potential regulations that would have an impact on the railroads. Though the Service Transportation Board Reauthorization Bill has not moved forward due to other legislative priorities we have remained in active discussions with Congress.

The outcome of this legislative process is critical. The current regulatory framework allows us to provide a safe, essential and environmentally friendly transportation service and build our network for the future. In the last five years, the major U.S. railroads have invested a remarkable $40 billion plus.

Every government study out there says that even that pace will not be enough to meet the transportation needs of the next 20 years. That investment and the associated job creation will not be possible without future earnings growth to support it. That is the decision that''s on the table in DC, to build or not, to create jobs or not and that''s why we remain concerned about potential legislation and continue to be active in working for a balanced solution.

At a time when the U.S. competitive advantage for manufacturers is critically needed, we provide a unique and compelling benefit for U.S. businesses in the Global market place. We want to keep it that way for our customers, our employees, our communities and for you, our shareholders.

With that we''ll open up for your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin conducting a question-and-answer session. Ours first question comes from William Greene of Morgan Stanley.

William Greene - Morgan Stanley

I was wondering if you could talk a little bit about the capacity in the network. There was a time, maybe a quarter or two ago where we talked about the merchandise network having sort of 20% to 30% capacity or the ability to add cars to that. I''m just wondering if you can add color where we stand there, how much is sort of left before you really have to start adding back employees and resources, sort of above and beyond what you''ve still got furloughed?

David A. Brown

Okay, Bill, this is David. Certainly, we stand behind that sort of upside. It really depends a lot on the corridor and the lanes and the business areas where volumes coming back and we''re seeing volume coming back in automotive and that usually tends to mean additional train starts where some of the other general merchandise volumes are returning and we''re able to absorb that into our existing network. We are always looking at that operating plan, what we call the one plan and we will make additions in terms of additional train starts as we need to do that to serve our customers but as we stand today, a large part of the volume that''s coming back now is being absorbed into the existing current one plan.

William Greene - Morgan Stanley

Do you still have a lot left in that, sort of where is I don''t know, think about a load factor perspective?

David A. Brown

That really varies considerably by the lane and again by the type of traffic that we''re talking about. There''s considerable upside in some lanes, maybe a double digit number and some are getting closer to a capacity level that''s a single digit opportunity for growth before additional starts occur.

William Greene - Morgan Stanley

Fine. Clarence, one quick question on inventory, when you talk to your non-utility customers, do you have a sense for whether they''ve rebuilt their inventories or are they still running leaner and there''s a rebuild or a restock left to go?

Clarence W. Gooden

Bill, we''re finding that they''re still running leaner. For example, in the steel industry, the forward servicing centers are still building inventory as they go and that''s been true in some of our chemical markets and it''s less true in our paper and forest product markets.

William Greene - Morgan Stanley

Thank you for the time.

Operator

Our next question comes from Edward Wolfe of Wolfe Research LLC.

Scott Group – Wolfe Research

Good morning guys. It''s Scott Group in for Ed.

Michael J. Ward

Hi, Scott.

Scott Group – Wolfe Research

How are you? Clarence, in the past, you''ve talked about 4% to 5% pricing for the year. I don''t think I heard a number this quarter but with 5% in the first quarter and our cap looking like it''s going to start working for you. Do you see a chance for upside to that 4% to 5%?

Clarence W. Gooden

Scott, we''re going to stand by our guidance that we''ll be between the 4% to 5% range.

Scott Group – Wolfe Research

Okay. And then sticking with pricing, can you give a little color on coal yields? They were a lot stronger than we expected. What''s driving that? Is it the export of some new contracts? Can you just give some color and how sustainable is that?

Clarence W. Gooden

Scott, there were three big factors that drove that. The first was our price increases in both our export and domestic markets. The second factor was the average length of haul increased as well as our tons per car and the third factor was higher fuel surcharge recovery. So those were the three factors on the first part of your question. On the second part of your question, which is can we sustain this going forward, the answer is absolutely yes.

Scott Group – Wolfe Research

Okay. Great and then last one, Dave, can you just give some color in terms of headcount? It was flat sequentially over fourth quarter. It sounds like the people are starting to come back. What kind of magnitude of sequential headcount increases do you expect going forward?

Oscar Munoz

Hi Scott, it''s Oscar. With regards to headcount, obviously we''ll be very sensitive to the volume increase in making sure we have enough folks. I think through the clear line of sight we have right now, obviously there will be sequential ramp up over this next quarter. We are thinking between one and 2% above prior year headcount for the second quarter and we will keep updating you of course as the year goes by.

Scott Group – Wolfe Research

Great. Thanks for the time guys.

Operator

Our next question comes from Ken Hoexter of Merrill Lynch.

Ken Hoexter – Bank of America/Merrill Lynch

Hi, good morning. I just want to talk a bit about the UMAX business and what impact we can see on the margins here. I know you said that, so are you basically saying this was all breakeven business, that despite the fact you were getting such low rates on their network and so then of you give this up, what do you lose by giving it up?

Clarence W. Gooden

Well first, Ken, I think you''re going to see the margins in business going up in general in the intermodal business, particularly as truck capacity starts to ease and we''re able to price more and more to the market, so that''s the first part in your question. And the second point, we were making money in the intermodal business on a trans-con basis and it''s based on what we were able to do in the East on that. And certainly a third factor in the past years that has driven the profitability in the programs was the ability of fuel surcharges to fly, which intermodal has obviously an advantage versus the truck transportation and doing that. Now, what was the second part of your question?

Ken Hoexter – Bank of America/Merrill Lynch

I just was wondering if there was something that you gave up in order to I guess move away from the contract early?

Clarence W. Gooden

No, I think it was just the natural evolution that came in that contract, as the marketplace was changing, as we saw opportunities to grow our business. We decided it was time to change the business model that we had. I don''t think we could have picked a better partner to do that within the Union Pacific. They run a very fine intermodal network. It has given us as we pointed out more than 600 lanes to put the service in. It is the fastest scheduled service on a transcontinental basis in all of the major markets in the East and so it was a very positive thing for us.

Ken Hoexter – Bank of America/Merrill Lynch

Wonderful. Thanks Clarence and then my follow-up would be just on coal. Just a quick one here, you talked about length of haul being one of those. Is there something that shifts that, brings that whether it''s bringing more stuff to the barges, something that shifts back that can adjust that pretty quickly or is that business that disappeared? Can you just talk a little bit about that in detail?

Clarence W. Gooden

Well, a main driver in that mix was actually less river coal than we normally ship and as you know, Ken, as better than most, the river market is a highly volatile market as the year progresses. So it was actually less short haul business as opposed to more longer haul business.

Ken Hoexter – Bank of America/Merrill Lynch

So that''s something you could see snapback pretty quickly then?

Clarence W. Gooden

You could.

Ken Hoexter – Bank of America/Merrill Lynch

Okay. Thanks for the time.

Operator

Our next question is from Tom Wadewitz of J.P. Morgan.

Thomas Wadewitz – J.P. Morgan

Yeah. Good morning. Wanted to ask Clarence, I guess sticking with you, in terms of the coal volume outlook, can you give us a little bit of perspective on some of the drivers for volume looking forward? I think you, last quarter, I thought, you gave some information on utility stockpiles and if you could give a little sense of where you think stockpiles in your service territory are now and also the potential for further export orders from China or elsewhere to potentially add even additional demand for what you''re seeing today?

Clarence W. Gooden

I think, Tom, there was three factors that are influencing coal in your question. First, the export market is going to stay very strong for us both through Baltimore, Newport News and through Mobile, Alabama so we feel very positive about what''s happening there. Secondly, on the stockpiles, they are trending downward. They''ve been cut almost in half as a result of the severe winter weather we experienced and the electrical generation and the CSX serves territory, on a year-over-year basis is up about 5% and the only mitigating factor that we see in that is should natural gas prices drop precipitously from where they are now.

On the China question, we could have more export coal. Indirectly, we may benefit from China taking more thermal tons as that makes a shift in the water borne transportation. And you are in fact seeing API to thermal index in Europe start to trend upward in the short-term and the longer term forward curve of that is moving up.

Thomas Wadewitz – J.P. Morgan

Okay. Thank you for that. I appreciate it and then the follow-up question, in terms of pricing, so you''re right at the high end of your 4% to 5% range in first quarter. It seems there''s a lot of potential for the truckload market to substantially tighten through the year which should benefit your intermodal and also as you see strength in volumes perhaps you could be more aggressive on your rail to rail competitive business. So do you think there''s a chance that you actually see the pricing accelerate through the year or how would you tend to view that?

Clarence W. Gooden

Are you talking about intermodal pricing?

Thomas Wadewitz – J.P. Morgan

Your pricing overall.

Clarence W. Gooden

We have got currently about 85% of our contractual business already signed and in place and we''ve got a fairly good clear line of sight to remaining 15% of that business so I want to stay with our guidance that''s at the 4% to 5% range for right now.

Thomas Wadewitz – J.P. Morgan

Okay. Great. Thank you.

Operator

Our next question comes from Chris Ceraso of Credit Suisse.

Christopher Ceraso – Credit Suisse

Thank you, good morning. Typically, your full year operating ratio is about two points better than what you post in the first quarter. Are there any reasons to believe that pattern won''t hold this year? Is there anything in the first quarter that was particularly strong that you expect to moderate as we go through the year?

Oscar Munoz

Hi, Chris. It''s Oscar. I think the guidance we''ve given is that we will have operating ratio improvement over the course of the full year so we''ll stick with that for now.

Christopher Ceraso – Credit Suisse

And that order of magnitude doesn''t find that unreasonable?

Oscar Munoz

We think the operating ratio will improve over the course of the full year.

Christopher Ceraso – Credit Suisse

Okay. The bridge that you gave on page six for revenue where you talk about volume, rate, mix and price, do you have something like that that you can help us with sequentially versus Q4 to Q1?

Oscar Munoz

No, but again, it''s roughly the same order. Obviously volume increased significantly sequentially and price continued to show its force and then the fuel surcharge, so the numbers will be slightly different but those are the three main drivers.

Christopher Ceraso – Credit Suisse

Okay. Thanks Oscar.

Operator

Our next question is from Justin Yagerman of Deutsche Bank.

Robert Salmon – Deutsche Bank

Hi, guys, this is Rob Salmon on for Justin. With the follow-up on the intermodal discussion, could you give us a sense how pricing trended sequentially in that market, given some of the dynamics that we''re seeing on the truckload market with spot pricing increasing in the higher fuel surcharges?

Clarence W. Gooden

Yes, Rob. Our same-store sales in pricing was up versus last year. We saw, we were able to take some increases in our international traffic area. We saw domestic prices in the first quarter start to firm up. We saw a tightening of truck capacity. I think you''ve also seen that in regards to the Morgan Stanley truck index, so we saw a firming of prices in the first quarter.

Robert Salmon – Deutsche Bank

And does that give you cause to go back to the market in terms of trying to get more looking out into the back half of the year?

Clarence W. Gooden

Absolutely. We try every day to price that market and get every penny that we can conceivably reasonably justify and provide value to our customers.

Robert Salmon – Deutsche Bank

And I guess a follow-up, in the quarter obviously you guys purchased quite a few shares or $230 million worth of repurchases in the quarter, which was a return to share repurchases. How should we be thinking about that element of returning cash to shareholders as we look out from here?

Oscar Munoz

This is Oscar again. Of course, as you may know, we have a balanced deployment of capital that we have adhered to for a while and so as business outlook and markets continue to improve, you will see us obviously investing in our business, increasing our dividends and getting back in the share repurchase market.

Robert Salmon – Deutsche Bank

Appreciate the time, guys.

Operator

Our next question is from Scott Malat of Goldman Sachs.

Scott Malat – Goldman Sachs

Just a question for David, on the on time train originations, I know weather obviously has a lot to do with that. I was just wondering if there''s some volume impact to this, meaning is it harder to get the trains back on schedule after a disruption, now that volumes have increased a bit and as we move through the recovery, how tough does it get to deal with disruptions like weather?

Clarence W. Gooden

It''s really, the weather slows us down, there''s no question that winter weather makes the railroad run slower. We do then apply the resources if necessary to return our service levels and our originations arrivals to the high level that we expect to be at. Volume is not a factor at that in this point. I guess there is a level of volume that could be a factor, we''re really dealing with the winter impact and the necessary resources it took to recover. We''re seeing that snapback to those higher levels and we''ll continue forward on that basis.

Scott Malat – Goldman Sachs

Thanks and maybe just on some train lengths, I know we''ve talked before about 35% of coal trains are at 110 cars or more. That''s up significantly from really nothing I think in the beginning of 2009. Where is that now and how do we think about train sizes in bulk commodities?

Clarence W. Gooden

What you''re referring to is our TSI initiative which is an initiative we have in all of our bulk commodity areas to partner with our customers, increase train sizes to the most productive level possible. We have seen gains in that and we''ve had information out in some of the analyst meetings about where we are, where we''re headed in the future. We continue to see very positive improvements there in all of the bulk commodity areas and continue with the strong focus we have on that.

Operator

Our next question comes from Gary Chase of Barclays Capital.

Gary Chase – Barclays Capital

Good morning everybody. Wanted to see if I could ask you Clarence to clarify. You said and I didn''t quite understand if you said coal increases for 2010 on a full year basis or whether you intended to say for the rest of the year you expect that''s going to gain because obviously that would be a big difference between the two.

Clarence W. Gooden

Gary, on a full year basis.

Gary Chase – Barclays Capital

And is there a way to quantify, can you give us a rough sense of what the core price impact was specific to coal?

Clarence W. Gooden

I don''t know right off the top of my head to be honest with you.

Oscar Munoz

Gary, it''s Oscar. We don''t really provide that level of detail. Just what we have on those charts, sorry.

Gary Chase – Barclays Capital

And then just the last one actually Oscar for you. When you were answering the question about balanced return of capital, is there a way we can think about a balance sheet that you''re targeting what you think would be appropriate and is that how you will manage, how you''ll quantify what''s appropriate to return to shareholders?

Oscar Munoz

I think, yes, that we''ll continue, the balanced deployment will continue to be an issue but beyond that staying with investment grade is certainly a key factor for us and so again, all those issues evolve over time. There''s probably more specific areas that we could be focused on and again, will evolve over that as again the market and the business issues continue to look favorable, we''ll obviously be more specific on areas.

Gary Chase – Barclays Capital

Okay, guys. Thanks.

Operator

Our next question is from Matt Troy of Citigroup.

Matthew Troy – Citigroup

Yes. Thanks. I wanted to ask about PTC, specifically the CapEx guidance in fourth quarter was above $750 million and now that''s up to $1.2 billion or more. Just wondering what''s driving that more precise but higher estimate and if we think about linearity that would imply roughly given what you said you''d spend in 2010, about $250 million per year. Should we think about it being a straight spend lake that or will it be back end loaded?

Oscar Munoz

Let me address the second part first. Linearity doesn''t quite provide, I think we''ll have a couple of years of increased spend and then it should sort of taper off in the out years and sort of in the fifth year. But with regards to our cost estimates, they basically have been refined as a result of developing information including the FRA''s final rule that was issued, the development of the implementation plan that''s being finalized this week. So the components therein and of course always the continuing refinement of the specs around the technology that''s required. As you know, some of that has not yet been built or tested so it does create some additional things, so I think this is in line with the rest of the industry as well.

Matthew Troy – Citigroup

Okay. And then is that $1.2 billion, are you comfortable, granted these things are always a moving target but is that fairly close, in the ballpark or could we expect material revisions as we learn about the technology and it is developed, because as you say some of it''s not even done yet.

Oscar Munoz

Right. That is our current estimate and again the emphasis is estimate and we''ve had a pretty big move recently, so I would expect to stay along that area but we''ll keep you updated.

Matthew Troy – Citigroup

Thanks. Last question would be for Michael. Obviously with the log jam on healthcare now removed, Congressional tension can turn to other endeavors, people we talk within Washington are saying the dust is starting to stir on the OSTB Reauthorization Act and we might see some activity there. You mentioned earlier in discussions, maybe if you could give us more detail of update in terms of process, what needs to happen next or what happens next and just again what your conversations are or what your dialogue is like on the Hill.

Michael J. Ward

We''re having good active dialogues with the Senate Commerce Committee and making them aware of some of the concerns we have suggesting some modifications we think would make this more balanced and allow us to continue to make the moneys to make the investments that are required so it''s still on the committee. I think you''re correct, clearly with healthcare out of the way, that it''s one of the issues crowding the calendar but there''s also financial reform that I think they are pretty focused on right now, potential talk around either energy or climate legislation. So I think we''ll continue our dialogue with them and hopefully have something productive come out of that. But at this point I don''t see any dramatic change in the pace of movement.

Matthew Troy – Citigroup

And just leaning on the anti-trust issue, is that changing at all or is that still more status quo?

Michael J. Ward

I think that''s probably the correct categorization. We think that may eventually be forward into the Senate Commerce legislation but I think that''s been an ongoing dialogue and really has not changed dramatically since our last call.

Matthew Troy – Citigroup

Thank you for the time.

Operator

Our next question comes from John Larkin of Robert W. Baird.

John Larkin – Robert W Baird

Good morning. Clarence, on the intermodal side can you give us guidance in terms of the $40 million to $50 million, how much of that comes out of volume and how much comes out of rate per revenue per shipment?

Clarence W. Gooden

John, it comes all out of volume. It''s related to what we call the off core business, which was the business that originated and terminated for the account of CSX only on the Union Pacific Railroad so the Union Pacific will still handle that business but CSX won''t handle it.

John Larkin – Robert W Baird

So there won''t be shipments that go transcontinental where the revenue per shipment that you recognize is lower but you''re still recognizing the shipment count? I thought it would be a combination of both.

Clarence W. Gooden

Yes. That''s correct.

John Larkin – Robert W Baird

So in that case, then it will impact revenue per shipment as well?

Clarence W. Gooden

Well, what…

John Larkin – Robert W Baird

Or the reported number is I guess what I''m asking about.

Clarence W. Gooden

Yes, it will affect the reported number, because we won''t have the transcontinental, we''ll just have the Eastern division.

John Larkin – Robert W Baird

So again, kind of that''s the original question then, thinking about the mix of volume versus revenue per shipment in terms of how it''s reported in the financials, should we think about that as more evenly split between volume and revenue per shipment?

Clarence W. Gooden

I don''t know to be honest with you. We''ll have to get back with you on that question.

John Larkin – Robert W Baird

Okay, very good and then the follow-up question was just with regards to labor. You talked about up 1% to 2%, Oscar I believe, so that''s up maybe as much as 5% sequentially. Is that enough to see productivity degradation because you''re bringing on workers that are less seasoned or coming off the shelf if you will?

Oscar Munoz

I''ll let David answer the second part of the question. Just a quick clarification, John. You said labor, just to be specific, headcount will increase between 1% to 2% year-over-year and yes sequentially that is a ramp up, as far as their productivity and ability I''ll let David answer that.

David A. Brown

Yes, John, we have a great training process that we utilize for all of our new employees and most of our hiring is for attrition, so we are replacing people who are retiring and there will be additional hiring that might add a few additional employees but they all get the same training attention, we believe industry leadership in training with our Tony Ingram Ready Center, so we''re pushing that and the importance of that as we have in the past because that is a key element in our sustainable improvements in safety and productivity.

John Larkin – Robert W Baird

Thank you.

Operator

Our next question comes from Jason Seidl of Dahlman Rose.

Jason Seidl – Dahlman Rose

Good morning gentlemen. Clarence wanted to touch a little bit more on coal follow-up on Gary''s questions. Could you give us the break down between met and thermal on the export side in Q1?

Clarence W. Gooden

The preponderance of it was on the met side.

Jason Seidl – Dahlman Rose

That''s helpful. Also when you''re looking out and you said for the full year you expect coal to be up it sounds like a little bit of a change from what we were talking about last time when you reviewed fourth quarter. What''s the delta change? Is it you''re expecting a lot more export now, so you''re going to eclipse maybe 30 million tons of the year or is it just that now you''re starting to see thermal come back and look better on the domestic?

Clarence W. Gooden

It''s driven mainly on the export side.

Michael J. Ward

And just one clarification there, Jason. When we had our fourth quarter call, that export coal had not yet developed and I think when Oscar was at a conference in February, it had and that''s when we first said we would be up year-over-year in total volumes in coal, so it was largely driven by that Chinese export demand, which was not apparent when we had our fourth quarter call.

Jason Seidl – Dahlman Rose

And Michael, are we still looking at close to 30 million tons for the full year or has that gone up even since then?

Michael J. Ward

I think, we''re looking in the 30 million range.

Clarence W. Gooden

That''s right.

Oscar Munoz

That''s correct.

Jason Seidl – Dahlman Rose

30 million range okay and could you talk a little bit about pricing between met and thermal? Has there been a big difference in the price increases you''ve been able to extract?

Clarence W. Gooden

Yes, there has. In fact, we have a new export tariff that went into place April 1 that took our export rates and metallurgical rates up significantly.

Jason Seidl – Dahlman Rose

So met is going higher than thermal then?

Clarence W. Gooden

That''s right.

Jason Seidl – Dahlman Rose

On a percentage increase? Okay.

Clarence W. Gooden

Yes.

Jason Seidl – Dahlman Rose

My next question, the follow-up is regarding PTC and this, Michael, might be one for you. I listened in on a conference wall where there was a lot of people talking about the technology involved in PTC and some of the people, even some of the designers of the technology weren''t even quite sure it could do what everyone wants it to do. Is there a chance that the rail industry could actually push back the implementation date because of potential technology problems?

Michael J. Ward

Well at this point, I think the intention of the freight rails is that we will live with the law, which is to have it in place by 2015. I think there''s some, uses potentially in the commuter side as they look at some of their needs. There''s clearly some potential technological challenges, we think we can overcome them at this point. Should that prove to not be the case, then obviously we would work with Congress to implement as quickly as possible.

Jason Seidl – Dahlman Rose

Okay. Thank you, Michael.

Operator

Our next question comes from Jeff Kauffman of Sterne, Agee.

Jeff Kauffman – Sterne, Agee

Thank you very much. Congratulations guys, solid quarter. Real quick, I just want to clarify and make sure I''m hearing this right. The 14% RPU in the coal business, which was fantastic, if I just assume your same-store and your surcharge recovery is similar in coal as it is to other businesses that accounts for about half of the 14% which would imply about 7% increase in RPU from more weight per car, change in length of haul, change of mix. Does that sound about right?

Clarence W. Gooden

Yes, that sounds, it could be a little on the low side, but it sounds close.

Jeff Kauffman – Sterne, Agee

And then in your comments to Jason just a minute ago, you talked about an April 1 tariff increase which raised the met rates as well. So could I actually see higher than 14% RPU in the next few quarters?

Clarence W. Gooden

You could if the coal originates at different locations and is subject to that tariff increase. The answer would be yes.

Oscar Munoz

But if your tiver coal bounces back that pulls down your RPU.

Jeff Kauffman – Sterne, Agee

Right. That''s shorter haul than going to Mobile. I''ve got that. Final question, the incentive comp accrual of 48 million. Is that the level of incentive comp that should have occurred given what happened or might there have been some excess incentive accrual this quarter just because the numbers were so good?

Oscar Munoz

There''s a combination of things. Clearly, we are cycling some lower numbers from last year. And of the number that we discussed, the $40 million-plus, there is a portion of it that''s for longer term adjustments but the predominant was for this year''s performance.

Jeff Kauffman – Sterne, Agee

Okay.

Oscar Munoz

And the run rate as I''ve said will moderate to about 20 per quarter for the remaining three quarters.

Jeff Kauffman – Sterne, Agee

Okay, guys. Thanks so much.

Operator

Our next question comes from Donald Broughton of Avondale.

Donald Broughton – Avondale Partners

Good morning, gentlemen. Perhaps, you could help me. I''m a little confused. I''m looking at what happens with train speeds, dwell time and I understand that we had some rather severe weather in the January and especially February time frame, but if I look at current dwell times. So just the last couple of weeks of March, first week of April and I look at train speeds. Certainly on an absolute basis, train speeds are nowhere near as bad as they got in February but instead of say 22 or 23 miles an hour, we''re only 20, 21 miles an hour, dwell times are not down to the 22 hours, but still up at 24.5. So on a year-over-year basis versus end of March, beginning of April last year, train speeds are still down 3%, 3.5%, dwell times are still up 7.5%. What gives you confidence those metrics will improve from here and that''s not volume driven because it''s obviously at this point of the year, it''s not weather driven?

David A. Brown

Yes, Donald. We have seen it continue to improve since we came out of the winter weather impact. It does take a period of time because you have to apply additional resources to begin to catch up after we have the slowing down through the winter period which really lasts into mid March so we have seen that continue to improve.

I would encourage you to look deeper at the velocity, look at intermodal velocity because there is a mix factor. And when you look at the intermodal velocity versus the total average number, you''ll see our premium service velocity is back at a higher level and that reflects that we are operating at normally higher speeds in terms of velocity. And when we look at dwell, we see that recovering more slowly but continuing to improve. We also, a function of that is our operating plan and there are cycles throughout the week where dwell is higher or lower based on the operating plan, days of service for local operating plan, days of service for general merchandise trains, so all these are factors in how those numbers are determined and it is a roll up of a lot of numbers to create an average that spans a lot of factors. I think you got to look deeper at those two numbers when you look at the overall measures.

Donald Broughton – Avondale Partners

Right. But what gives you confidence? Cars online are down, I would think that would allow you to rebound faster from the weather problems. What gives you confidence that''s going to continue to improve?

David A. Brown

We are confident in our people and the fact they are devoting the energy, time and diligence it takes to continue to improve to bring those measures to the level they need to be at that they''ve historically been at. You''ll see that occurring so you''ll see that in future numbers.

Donald Broughton – Avondale Partners

Well, we''ll monitor it and good luck guys.

Operator

Our final question comes from Chris Wetherbee of FBR Capital Markets.

Chris Wetherbee – FBR Capital Markets

Great. Thanks guys. Clarence, on kind of the core pricing, just wondering from a seasonal perspective, is there anything that would cause a potential acceleration or deceleration to the core price growth as you go through the year whether it be pockets of legacy contracts, you may or may not have or any impacts of the met coal business going forward?

Clarence W. Gooden

Well, there is no significant legacy contracts that''s evolved in the year 2010. As we have told you, pricing is about 85% of our contracted business is already firmed up, so we feel very positive about staying in that 4% to 5% range that we''ve given you. On the spot market business, we''re going to price to the market as we go forward. So if you see it tightening and capacity particularly in the truck markets then you''ll see us pricing to where that marketplace has taken.

Chris Wetherbee – FBR Capital Markets

Great. Fair enough that makes sense and then just final follow-up, Oscar on the health and welfare cost increase you mentioned the $40 million I think per quarter. I’m assuming that''s based on your outlook for headcount growth as you go forward in the sequential basis. Is there any variability or scaling that goes on, based on the headcount that you have?

Oscar Munoz

Yes. Chris, 40 million is both labor wage increases as well as health and welfare and that was a projection given earlier. Volume again, obviously managed with productivity will drive that, that will scale that number. That 40 is just sort of inflationary/price increase over the year. So it will scale.

Chris Wetherbee – FBR Capital Markets

So it will scale, meaning it will go up to the extent that there''s more on the network?

Oscar Munoz

And those are volume related costs which of course will be offset by the great productivity that Dave''s team is providing.

Chris Wetherbee – FBR Capital Markets

Okay. Great. That''s very helpful. Thanks for the time guys. Appreciate it.

Michael J. Ward

Well, thank you for your participation and we''ll see you next quarter.

Operator

This does conclude today''s teleconference. Thank you for your participation in today''s call. You may disconnect your lines at this time.