Norfolk Southern Corporation (NSC) Q4 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Norfolk Southern Corporation's Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Michael Hostutler, Norfolk Southern Director of Investor Relations. Thank you, Mr. Hostutler. You may now begin.

Thank you, and good afternoon. Before we begin today's call, I would like to mention a few items. First, the slides of the presenters are available on our website at nscorp.com in the Investors section. Additionally, transcripts and MP3 downloads of today's call will be posted on our website for your convenience. Please be advised that any forward-looking statements made during the course of the call represent our best good-faith judgment as to what may occur in the future. Statements that are forward looking can be identified by the use of words such as believe, expect, anticipate and project. Our actual results may differ materially from those projected and will be subject to a number of risks and uncertainties, some of which may be outside of our control. Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we view as most important. Additionally, keep in mind that all references to reported results, excluding certain adjustments, that is, non-GAAP numbers, have been reconciled on our website in the Investors section. Now it is my pleasure to introduce Norfolk Southern Chairman, President and CEO, Wick Moorman.

Thank you, Michael, and good afternoon, everyone. It is my pleasure to welcome you to our fourth quarter 2012 earnings conference call. With me today are several members of our senior team, including Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; and John Rathbone, our Chief Financial Officer, all of whom you will hear from this afternoon. Deb Butler, our Executive Vice President of Planning and Chief Information Officer is also with us today and will be able to answer questions about our capital budget, which we will be discussing in the call. Despite economic uncertainty and challenged coal volumes, we reported a solid fourth quarter, second only to last year's record fourth quarter earnings per share. Looking at our top line, revenues for the quarter were $2.7 billion, a decrease of 4% from last year. Overall volumes fell 1%, as coal volumes declined 13%, but intermodal and merchandise volumes grew 4% and 1%, respectively. For the full year, revenues were $11 billion, only a 1% decrease from 2011, despite a 17% decline in coal revenue. Don will provide you with all of the revenue details in a few minutes. The combination of volume decreases, coupled with expense control, resulted in net income for the quarter of $413 million, down 14%, and diluted earnings per share of $1.30, down 8%. For the full year, net income and earnings per share decreased 9% and 1%, respectively. And John will provide you with all of the financial details. With respect to service, Railroad continues to run extremely well. We have maintained superior service levels throughout 2012 and we saw a continued improvement in our network velocity and terminal dwell during the fourth quarter. These items were a big driver in our ability to maintain an average composite service index at an all-time high of above 83%. And as we have mentioned, an efficiently run network helps in our efforts to keep expenses under control. Mark will provide you with all of the operating details in a few minutes and give you some more information about our continuing initiatives to drive both productivity improvements and increased service levels across the network. In 2013, we'll also continue our focus on improving customer service in running our network efficiently. Part of that plan is strong capital investment. And John will provide some details of our planned $2 billion capital program. At this point, I'll turn the program over to Don and the rest of the team, and I'll return with some closing remarks before we take questions. Don?

Thanks, Wick, and good afternoon, everyone. Revenue during the fourth quarter was down $113 million, or 4%, as a weak coal market offset gains in intermodal and merchandise. Declining volumes across most coal segments and lower export pricing year-over-year contributed to a 23% decline in coal revenue. Partially offsetting this decline, intermodal revenue set an all-time quarterly record at $584 million, up 5% versus 2011, while merchandise revenue was up a solid 4%. Negative price and mix accounted for the majority of the revenue variance in the quarter at $105 million, while volume accounted for $23 million of the overall decline. This impact was slightly offset by higher fuel surcharge revenue of $15 million year-over-year and a positive $25 million lag in the quarter. Total volume for the quarter declined by 15,000 units, or 1%, with revenue per unit of $1,498, down $50 or 3%. Segmenting total revenue per unit, coal RPU was down 11%, while RPU levels for both merchandise and intermodal were up 2% versus last year. With respect to volume, total shipments for the quarter were down 1%, as robust growth in domestic intermodal and a modest increase in merchandise nearly offset a 13% decline in coal volumes. Volume growth within merchandise was mixed for the quarter, as solid gains in chemicals and automotive more than offset a decline in metals and construction. Now turning to our major markets and beginning with coal. Revenue for the quarter of $657 million was down $193 million or 23% for the quarter. Weaker demand across nearly all markets resulted in an overall volume decline of 13%, and a fundamentally weaker pricing environment for export coal contributed to an 11% decline in revenue per unit for the quarter. Utility coal, which was the largest driver of our decline in volume, was…

Thanks, Don, and good afternoon. Starting with safety. Based on preliminary data, our fourth quarter performance through December stands at 0.80, and our performance for the year was 0.80 as well. That's not quite as good, but in the same range as 2011, which was 0.75. 2011 was our best year ever. Turning to service. On the next slide, our composite service metric continues to show year-over-year improvement. For the fourth quarter, composite performance stands at 83.4%, our highest quarterly composite ever, and it represents a 9.4% improvement over the fourth quarter last year. The gains were lead by train performance, which has improved 25% versus the same quarter last year. And all the service components, train performance, connection performance and plant adherence, continue to be at or above targeted levels. For the year, composite performance stands at 83.1% and represents a 9.5% improvement over last year and our best annual performance ever. Advancing the slide to train speed, we reported our highest ever quarterly train speed in the third quarter of 2012, which surpassed our 2009 record, when volumes were considerably lower. And we've set yet another record in the fourth quarter, increasing 3.2 miles an hour, or 15% compared to the fourth quarter last year. We've seen consistent sequential and year-over-year improvement through 2012. For the year, we posted a 13% improvement over 2011. On the next slide, Terminal Dwell, is the other major component of network velocity, and it also has showed continual improvement. For the fourth quarter, Terminal Dwell was 21.7 hours, compared to 24.5 hours for fourth quarter of 2011, a reduction of 2.8 hours or 11%. For the year, we posted a 12% improvement over 2011. Turning next to operating efficiencies. As evidenced in the previous slides, the fourth quarter and really all of…

Thank you, Mark. I'll now review our fourth quarter and full year financial results. Let's start with a recap of revenues. As Don described, Railway operating revenues totaled $2.7 billion, down $113 million or 4% compared to prior year's fourth quarter record. The components of the decrease are illustrated on Slide 3 and were driven by a change in our coal traffic, which translated into lower price and negative mix and lower volumes. Fuel revenues of $302 million were slightly higher than last year, and we also experienced a favorable fuel lag of $25 million during the quarter. Slide 4 displays our total operating expenses, which decreased $27 million, or 1% for the quarter. The resulting income generated from Rail Operations was $714 million, down 11%, largely due to the decrease in revenues. Our operating ratio was 73.4%, or 2 points higher than our 71.4% reported in the fourth quarter of 2011. Turning to our expenses. The next slide shows the major components of the $27 million decrease. And I'll go over each of the components in detail. Materials and others fell $22 million, or 10%, due primarily to a $17 million reduction in our personal injury-related expenses, as we recognized benefits for improved safety. Next, compensation and benefits decreased by $8 million or 1%. Reduced employee activities and lower performance-based compensation, partially offset by increased pay rates and higher pension and postretirement costs. As displayed on Slide 8, fuel decreased $8 million or 2%. Decreased consumption of $21 million more than [ph] offset the impact of higher prices. Diesel fuel consumption was down 5% relative to a 2% decline in gross ton miles and was achieved by our improved network performance. Lastly, purchase services and rents decreased by $1 million. Lower engineering and transportation services and lower equipment rents…

Thank you, John. As you've heard, given the ongoing downturn in our coal franchise, Norfolk Southern posted good results for the fourth quarter, driven at least in part by good expense control and a strong operating performance. As you heard from Don, some of our business group, such as export coal, are difficult, if not impossible to forecast in these uncertain economic times. But we remain committed to continued productivity improvements, as well as making sure that our costs reflect to the fullest extent possible what our actual business levels are. One of our core strategic initiatives is to lower the long-term cost curves for both of our -- both our expense and capital budgets. And we're confident that we have the people, processes and systems to do just that. Mark showed you how we're doing that in our operating expenses, while driving even higher levels of customer service. And you can see it happening in our capital budget as well. To reiterate a couple of examples you've heard. On the capital side, we're committed to using new technologies, which will allow us to maintain our infrastructure at its current high state of repair with lower material cost. Another example is our continuing programs to rebuild our existing locomotive fleet using our superb locomotive shops at Altoona, Pennsylvania. We're also making sure that we spend our capital dollars wisely based on our business levels. For example, as we've told you before, a large percentage of our coal car fleet is becoming life expired over the next few years. However, given the near-term uncertainty around our coal franchise, as John told you, we chose this year to only continue with a less expensive program to rebody some of the fleet rather than buy any new cars. And we'll make sure that…

[Operator Instructions] Our first question is from Justin Yagerman of Deutsche Bank.

I wanted to dig in a bit on this coal pricing. Obviously, down 11%. You said that it was materially weighted towards the export side. So curious how export broke down from a volume standpoint, thermal versus met. And then, also, if you could talk a little bit about mix and how length of haul may have influenced some of the yield deterioration in the quarter, that'd be helpful.

Justin, this is Don. With respect to export first. 75% of our export tons in the quarter were metallurgical coal, 25% was steam. And I would add for the year, the tally was 79% met and 21% steam. That market, as we indicated in the remarks, continues to be challenged with respect to world pricing. We have seen Australian coal to Asia here recently tick up a little bit from 1 60 to 1 70 per ton. So a little bit of encouragement there with the world market improving with respect to settlement in China. On the mix and length of haul, we did have an increase in the quarter of Illinois basin coal going to the river for Convent, Louisiana for export over the Port of New Orleans, that is shorter haul business, it's a good business for us, but it does generate a lower RPU. Also, as I pointed out, our Lamberts Point tonnage was off 10%. Carloads were off 10%, and our Baltimore traffic was up 8%. And our Baltimore exports carry a lower revenue per unit than our longer haul Lamberts Point export. I hope that covers the question.

Yes -- no, that's extremely helpful. Switching topics a little bit, I wanted to dig in. You called out crude by rail as one of the opportunities as you're looking out this year. It looks like PBF has a contract with you guys that should be increasing this year. And wanted to also get a sense how that pipeline looks as you look out at 2013. By our calculations, it looked like just that ramp alone is like a 30% bump to your current run rate. So curious, as you pick up these different contracts, how excited you are about this opportunity as we look out over the next several months?

Justin, we see a material opportunity in crude oil, and I will confirm that we have executed a contract with PBF for its Delaware City, Delaware refinery. We're very pleased to have that. And we see some significant opportunities for growth in 2013, on top of the base that we built in 2012.

All right. Well -- and any color on those crude by rail carloads from a yield standpoint, how they compare to the rest of your chemical line?

I can't get into the particulars because these are contract based rates. But I will tell you that those are revenue per unit, unit train moves that are appealing to us.

Our next question is from Bill Greene of Morgan Stanley.

Don, in the quarter, did you have any revenue from take-or-pay, so liquidated damages in the coal contracts? And if so, how much was that?

We had one entry on a ongoing contract shortfall in volume. And Jake, I think it was in the range of $9 million.

Okay. And that would be in the coal revenue line or is it in another revenue...

Yes, in the coal.

Okay. So not too big at this point. Okay. And now...

And it's a long-term, ongoing accrual on that, Bill, not just a quarterly accrual.

Okay. Okay. And then, as you think about what occurred here in 2012, should we expect that, that will be a driver to sort of coal yields in 2013?

Not a driver, no.

Okay. And then when you look at sort of the long term here and we look at kind of what happens with coal and I realize Norfolk Southern has a large and very profitable coal franchise. So if coal levels today are kind of steady from here, is it the sort of thing where you can get back to industry-leading margins like you had at one point, or do we need coal to come back in a much bigger way, given the mix effect it has on the overall business?

Bill, I'll segment that question into 2 parts. As you know, our utility franchise is about 70% of our coal volume. And utility business, we were off about 20 million tons of coal for the full year, about 5 million tons in the quarter. We estimate that gas competition, for the year, was about 50% of that shortfall. And then you -- it cascades down into demand that was weaker due to weather, plant maintenance, a couple of small plant closures. So for utility business to rebound in terms of its volume and to help us grow that business back, we need electricity demand to pick back up, we need industrial load demand for electricity to improve, and we need gas prices to move up into the -- above the $3.50 to $4 range. The PRB coal dispatch is at $3, but Central App does not. Even Northern App coal is pressed. So we need to see natural gas prices move up above $3.50 to $4. So that addresses utility. And it's all about demand and it's about gas competition. On the export side of our business, we need a couple of things to happen: One, the world economy needs to improve. China, you probably saw, had a record December, which helped us in our December, as far as export metallurgical and some steam coal. But Western Europe, where 50% of our export coal is destined, continues to be very anemic with respect to its economic recovery. So those are the kind of things we need to see before we will see export coal pricing and see the delivered price of coal improve in the world where U.S. coals are more competitive. As you know, year before last, metallurgical coal prices hit $330 per metric ton in the world market. That gave plenty of room for U.S. coals to compete, with it dropping to $1.60, now at $1.70 on the latest settlement. There's a lot less room for supply chain pricing and the coal price and still be competitive in the market.

So -- sorry, Don, I don't want to put words in your mouth, but just for clarification. So in terms of the ability to kind of get back to industry-leading margins, I suppose all of this was sort of to say what we've got underway here can help get us there. But it doesn't get us all the way. What we really need are some of these things that you listed here to push us back. Is that what you were trying to convey?

No, we certainly need those in addition to the things we're doing from an operational efficiency perspective . For coal, we need the pricing to improve and the market improve to allow for that.

Our next question is from Peter Nesvold of Jefferies & Company. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: I'm just going to keep it to one. I mean, it's actually similar to some degree, I think, from the prior question. I think what I'm trying to struggle -- what I'm struggling with right now is how much of the decline in coal volumes actually comes back in domestic business at some point? Sort of point taken, there are a lot of variables, electricity consumption, that gas prices, et cetera. But if we were to say that perhaps roughly, coal tons domestically are down 28% from Norfolk's past peak, if you were to get back to sort of normalized levels of nat gas prices, industrial production, et cetera, how much of that do you think comes back as opposed to volumes that are sort of gone forever?

Well, from the utility perspective, we think that we would see significant improvement in the tonnage levels that we handled in 2012. The 122 million tons that we handled the prior year is certainly not an unattainable target. If we had industrial production improve, if we had natural gas prices move up, we still have the utility generation plants that are base loaded. We have a great franchise in utilities that we serve. And we have great franchises with respect to origin coal coming out of all the basins. So the stage is set if we had all of those other things coming back. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Is there any way to kind of quantify it though? I mean, I think you had said, in response to Bill's question, that half of the declining utility was nat gas related. But I suspect that there's also an element of electricity consumption in there as well?

Right. Right. The demand being soft from the industrial usage side, as well as residential demand. And then the weather component that generates a demand component as well.

Our next question is from Jason Seidl of Dahlman Rose. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Two quick questions for you, I guess. One, sticking on the coal side, you mentioned that 50% of the coal that you guys ship is destined to Western Europe. What percent is destined to China?

We are, Jason, we are currently about 30% to Asia, including China. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: 30% to Asia. Okay, but that includes China. Okay, which I imagine is the bulk of it. Next question, jumping back to intermodal, because I'm very intrigued by the increase in capacity in the Crescent Corridor this year, and especially, the comment that you made that you're not going to really have to increase that many train starts to accommodate that. So I guess, I'll ask you the question in a different way. What percent of the business that you're going to be bringing on to these new -- some of these new lanes? There's going to go on existing train sets. Is it going to be 80? Is it going to be 75?

Jason, I'll answer that in a slightly different way. We expect our crew starts to be up less than 2% for intermodal, for all of 2013. And I cannot share with you our specific volume expectation. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: You can just e-mail that, that's fine.

But I will tell you that our expectation is higher than that number.

Our next question is from Scott Group of Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So, Don, another one for you, on the coal side. I appreciate what you said earlier about mix. I wanted to see if you can get a little more granular. You gave some great color last quarter about export, met coal rates that were tracking down. I think you said about 25% in the September, October timeframe. I'm wondering if you can give us an update on where we stand on that pricing today? And if you can give us a similar thought on the export thermal pricing as well?

Scott, the pricing environment has not improved materially from the third quarter to the fourth quarter, moving into the first quarter. That glimmer of hope that I mentioned earlier on this most recent settlement might indicate that we have reached the bottom, that the world market may be poised for some improvement. We'll have to wait and see if that is reality. But we continue to see a very soft world market for coal because of the delivered price constraints. That's both on metallurgical and thermal coal. Thermal coal exports from this country, which are heavy to Europe, the API 2 index is such that it's been averaging $92 per ton. And at $92 per ton, many of our mines are out-of-the-money, with respect to being competitive of selling coal into a market with that type of a price. Scott H. Group - Wolfe Trahan & Co.: That's helpful. Can you give us a little bit of just color on how you're actually pricing the business now? I feel like the met used to be priced annually in April. How is that being priced now?

Well, from April 1 on this past year, we were basically pricing on a spot basis. As we entered the third quarter, we started to price on a quarterly basis, and the fourth quarter was priced on a quarterly basis. And I will tell you that the first quarter is as well. But that doesn't mean that we are not completing some spot deals on the side over and above the quarterly pricing. Scott H. Group - Wolfe Trahan & Co.: Right. So I guess, maybe relative to 28 million tons of export in '12, is there any way of thinking how much business you have -- what percent of that you've got locked in for '13?

No, because frankly, even with the quarterly pricing, we have an indication of potential volumes. But we don't have volume guarantees with that pricing. Scott H. Group - Wolfe Trahan & Co.: Okay, that's really helpful. And just last thing on the Intermodal side with all of the Clutch [ph] and Carter [ph] coming online. Maybe for Wick or Don, can you talk about how you're thinking about your Intermodal partners and relationships there? And any changes or improvements or anything that you'd like to accomplish?

Well, there's nothing on the horizon right now in terms of changes or -- of any significance with our partners. We obviously have some great partners on the domestic side: Hunt, Hub and a lot of other folks and then some steamship carriers that we are close to and do a lot of business with as well. But we don't anticipate 2013 as being a year in which there are changes of any kind in our relationship with those partners. What we're really focused on, as Don said in 2013, is taking the opportunity to realize some significant gains on the Crescent Corridor, given the investments that we completed in our new intermodal terminals and our infrastructure improvements.

Our next question is from Chris Wetherbee of Citigroup.

Maybe just a question going back on to the coal side. Just from a utility standpoint, Don, how should we think about kind of the book of business in 2013? Do you have significant renewals that we should be expecting in '13? Or is most of that book covered at this point?

Chris, we have the vast majority of the book covered. We had one contract that I mentioned in the third quarter that we were addressing. That was about 5% to 6% of our utility tons. We have settled that contract for 2013.

Okay. And the rest is just continuing on multi-year deals.

Right.

Okay, that's helpful. And then, I don't know if you can give it to us, but you did last quarter. Just kind of an update on how January volumes from an export perspective are trending. So we got, obviously, the quarter and just wanted to get a rough sense of kind of how to think about that beginning here in the first quarter, if you could.

Well, January is off to a fairly solid start. Volume-wise, our coal continues to be down overall. Up through about the first 18 days, we're somewhere in the range of 10% off year-over-year. Our merchandise business is up in the range of 5% and our intermodal business is up a little north of that, 10% or 11%, in that range. So car loadings are -- the overall car loadings are off to a pretty good start in January. With respect to export, we're continuing to see the boat show up, let me put it that way. And we won't have as strong a January as we had the end of the quarter in December. But we expect a decent export month in January.

Our next question is from Chris Ceraso of Crédit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: What is your outlook for rail inflation in 2013? Just a ballpark number. And then in your comment on pricing, you mentioned that you expect to exceed, over time, pricing in excess of rail inflation. I'm wondering if that's an innovation in the language of the phrase over time suggest that there will be periods where, whether it's coal or something else, causes you to trail rail inflation even for a limited period of time.

When we look at rail inflation, right now, I think we would guesstimate it's in the 3% range, looking at labor contracts and other things like that. I think what Don and I would both tell you in terms of our core belief on what we can do with pricing, as Don said it, over the long term, we'll price at or above whatever rail inflation is running. We've seen it in the past. We'll probably see it again where we make it a quarterly hiccup of some kind and not quite make that. But our goal is to do it over the long term.

And Chris, just -- this is Don. To add one other data point. As you already know, I'm sure, the all-inclusive, less-fuel assumption for '13 is 1.4%. It's about 2.2% for the year and the RCAF is somewhere in that same range. Christopher J. Ceraso - Crédit Suisse AG, Research Division: I'm sorry, can you repeat that? What was the 1.4% versus that 2.2%?

The 1.4% is the annual growth in the all-inclusive, less fuel. And the unadjusted RCAF, the annual RAF [ph] is 2.2% for whatever that means. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. But you're thinking, including labor, et cetera, you'll be in, more or like, the 3% range?

That's -- it's our guess right now.

Our next question is from Walter Spracklin of RBC Capital Markets.

I'll move off the coal topic here. And Don, perhaps focusing on the Met Con business. I know that was an area of weakness out of a franchise that, outside of coal, is progressing along pretty nicely. But with some of the leading indicators now turning in the right direction, your conversations with your customers in that line of business, are you getting the sense that 2013 might see that area coming back a little bit?

On metals and construction, 2 segments. On the steel side, we do see it coming back. Even though in the fourth quarter, total steel production was off 4%. We think that both in the energy market, for pipe, tubular goods, as well as flat-rolled steel for automotive, the outlook is pretty good for 2013. On the construction side, we've got 2 drivers. One, the aggregates market and cement markets for highway construction, along with asphalt, is being impacted by state highway departments not having the money to build highways or to maintain highways, in some cases. So that's hurting the aggregates business. Also, we've seen a 27% decrease in the rig counts for natural gas drilling. And the inputs to that process is frac sand, pipe, drilling pads, et cetera. That business has softened as those rig counts has fallen.

That's very helpful. Just a follow-up question now for Mark. There are, obviously, lots of moving parts in each of the different businesses, some doing very well and then coal suffering a little bit. When you look at your headcount plans for 2013, do you have a sense of where you might be in terms of changing headcount? And just a rough view, I think you mentioned, I think 3% was mentioned in wage inflation. I guess, we should pencil that in, in our models for wage inflation but just curious on headcount.

Well, as far as our T&E goes, of course, that's going to move with the volume. But we've made some adjustments where we've actually reduced our T&E headcount here by several hundred, as I mentioned in my remarks. And then in addition to that, we've got projects under way, Walter, where we are going to be pretty much trimming across the board. We've got -- I mentioned we've got 300 people in engineering that we will be reducing through attrition throughout the year. And we've also got projects ongoing in a similar fashion in mechanical. So we're looking at all areas to reduce headcount to the extent we can.

So you think that headcount at the end of the year will be less than where it was at the end of 2012?

It should be.

Okay. And just as a follow -- just last one here for you, Mark. You talked a lot about the efficiencies, great job in terms of seeing those jobs. So I'm just curious into -- in terms of how much of that is really coal driven, obviously, a different dynamic here with coal haul and perhaps getting some relief as result of that. In other words, if we do start to see this discussion about $3.50, $4 gas price, and we sort [ph] of factor in a little bit higher coal haul, how much of those efficiencies, Mark, do you think you can hold on to that are not coal related and are true productivity enhancements?

The productivity projects, Walter, are really across the board. They are -- these are system-wide. Of course, we've got projects that are going on that are in our coal service area as well, including infrastructure projects, projects connected with equipment. But for the most part, our projects are system-wide projects and are really not -- are not relative to volume per se, such as fuel-saving projects, projects in the mechanical area and the engineering area. Those are more system-wide.

Our next question is from Tom Wadewitz of JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wouldn't want to give you too long of a break from the coal question. So I'm going to jump back to one of those. How do you think about -- Wick, perhaps, you can take this one. How should we think about the magnitude of the earnings headwind you have from export coal? I guess the conclusion I reached from Don's comments is that maybe you keep the tonnage kind of static. You've done some, given some support to the producers. But you probably are facing a bit of a pricing reduction, at least, in the first half of the year on your export business. And that's a headwind in terms of year-over-year earnings growth. Your comps are probably more difficult in the first half than the second. So I don't know, is there any way you can frame that in terms of how we might think of that export coal headwind?

Well, I think the -- the way I would look at it is that, particularly on a year-over-year basis, as we keep saying, we just really don't know about the volumes. We do have some reasons to think that, as Don mentioned, that export coal -- that the coal itself, the pricing is fairly close to a bottom. Maybe it's turned a little bit. And as the price of high-quality met coal moves up, which it will over some period of time. In fact, that hopefully will provide us some tailwind in terms of our pricing ability rather than a headwind. So looking just at the year-over-year, going basis forward from where we are, I don't know that we see that as quite such as headwind, certainly, as we saw in 2012. Does that make sense? And I think we have other, as Don mentioned, in other business groups, and as Mark mentioned, I think we have some other tailwinds behind us in terms of our overall profitability that we're looking forward to capturing. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Would it be fair, though? I mean, I guess, I think Don you said something about a 25% reduction in export coal transport pricing, maybe that was third versus second or fourth versus third. But if you run at that rate in first half of the year, then there's some kind of a headwind that you do have at least in the first half of the year from the export pricing. Is that fair or am I missing that?

No. Tom, you are -- you're correct. Until we clear the first quarter for sure and then part of the second quarter, we will have an earnings headwind with respect to export pricing. And as the -- if the market improves and as we clear that comp, obviously, we'll see that in improved numbers. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. So I mean, is it reasonable for us to think about flat margins next year or improving margins? Or is it just hard to have visibility, given that you don't really know where export going, from the overall business in terms of margin performance?

My guess would be the latter. The visibility is not clear enough for us to really take a stab of that.

Our next question is from Matt Troy of Susquehanna International.

Question for Don. There's obviously a lot of moving parts and pieces to the Intermodal story at Norfolk. I was just curious, we've been in some form of de-stocking for almost 18 months now, on and off. But given the lackluster peak and the decent holiday sales and a limited window until Chinese New Year, I was just curious in terms of your conversations with the international export -- excuse me, import side of Intermodal. I would have thought volumes would be a little bit better this time of the year, with some post-holiday restocking. What's your crystal ball? What's your conversation with customers indicating in terms of people's restocking intentions, specifically, as it relates to international Intermodal volumes, which have been weak for the rails generally sequentially?

We had a favorable fourth quarter in international, reflecting that restocking and some ILA worries too in terms of labor negotiations. Excluding the Maersk contract, as I mentioned, our volumes for the quarter would have been up 11%. So that's a pretty robust fourth quarter in international. We're seeing that continue pretty much this month. The Chinese New Year comes a little bit earlier this year. And we are seeing that restocking component in the volumes currently. I will tell you that, in terms of the AAR reportings on our total volume, we set a new 52-week high in volume, the week ending December 15, which is highly unusual. We never see a 52-week high in December.

Don is being mild when he says highly unusual.

Right, I understand. I'm just looking more I guess at the industry rate of growth and port volumes, which I would have thought would have been better and not to undermine your results by any means. I guess, the second piece of my question would be, given the quarter is opening up, given the double-stacking capability and frankly, just given the wage and driver pay inflation, the shortage issues in truckload, the umbrella against which you price Intermodal, is it reasonable to assume that the Intermodal pricing over the next 2 to 3 to 4 years might be better than the last 2 to 3 to 4 years? And if I think about margins in that segment, and we know it's a hard business to make a buck in, but can we think of maybe some small step function of those approaching, what I would consider, your corporate average over that time frame?

That's a very good assessment, and we concur with your assessment. We see an environment that should support the improvement. Truckload capacity is not expanding. The hours of service law will probably go into effect in July that will cost the motor carrier industry 3% to 5% of productivity. And drivers are not becoming more plentiful. They're getting shorter. So a lot of things, a lot of the drivers are set in the environment to support better pricing. And of course, we have invested in a network that we think is going to be very efficient in realizing that opportunity.

Our next question is from Brandon Oglenski of Barclays.

Wick, I wanted to come back to Tom's question, maybe just to think about it from a different perspective. Export coal is only about 20% of your tonnage mix in the coal business, which is 25% of your revenue. So as we look at what Don laid out, which is pretty favorable trends in Intermodal growth in the merchandise segments. Mark is talking about improved efficiencies. Is that small percentage of your book of business giving you that much contribution that we can't look forward to earnings growth until we get more clarity?

Well, we don't drill down into the contribution of each component of our business. But it's -- as you know, coal is a very good business for us. And it has, in that regard, some impact on our earnings that's probably a little disproportionate to the actual volumes. So it is -- it's something we contend with. And we have to look at, not only the export coal, where, as Don has outlined, we've seen the -- some negative comps on rates to -- in order for us to remain competitive. But I mean, the other big piece of this is that 70% of our business is utility coal. And that's a substantial headwind right now. And until we see all of the things that Don outlined, more expensive gas, a return to more normal temperatures and an economy that starts to drive increased utility demand, that's going to remain challenged in the way that it has been for the last year. So I don't think you can just look at the export coal and draw conclusions. You have to look at the whole package in terms of our coal business.

And so then, is it fair to say that earnings growth is possible, but you're not going to have a lot of confidence until we get coal comps that are at least flat or even increasing slightly?

Well, as I -- it's -- I think, as I said in my conclusion, we feel confident, Don has talked about it, in the strength of a lot of pieces of our business. And right now, all we can do with coal is tell you what we see. And right now, unfortunately, for all of us, including our coal customers, who -- whose crystal balls are no clearer than ours, coal is going to be the wild card over the next number of months and maybe for the year or maybe even a little longer. We're just going to have to wait and see how coal does.

Our next question is from Ken Hoexter of Bank of America.

Can you talk about your long-term investment -- Intermodal investment needs? You talked about the 4 yards coming online last year. You've got another one and you've kind of talked about slowing your CapEx. So what kind of capacity does the network have right now for utilization of the network?

Well, we've added substantial capacity, Ken, obviously, with the numbers that you describe. And actually, if you look at it in terms of lifts, which is the way we look at it, just the work we have done over the past year has added the capacity for about 800,000 lifts beyond what we're doing today. And the Charlotte terminal will give us another 115,000, 130,000, somewhere in there. So we have a network today, which has opened up new capacity. And our goal right now is to start moving to fill that capacity without looking at significant new investments in Intermodal facilities unless an opportunity comes along in which we feel that it is justified by the business. And we have the capacity to grow and grow for, as I said, some number of years now. And that's what we intent on doing.

On the utility settlement in -- the one you mentioned -- Don mentioned at the end of last year, or I guess going into this year's third quarter, did the utility change the volume commitments? Has the environment drastically changed in how the utilities are addressing those contracts?

Ken, this is Don. They changed some of the sourcing assumptions from various basins and also adjusted some volumes based on their projected burn rate.

I'm sorry, can -- they changed the burn rate and the sourcing.

They changed some of the sourcing assumptions, as well as the overall volume from those basins based on their projected burn rate for 2013.

Okay. And then lastly, just if I can step back maybe and just a big picture here. You're slowing CapEx. You're reducing headcount. Is this -- are you making a statement more than coal in terms of -- in the years past, you've made the commitment that we're going to keep increasing CapEx because we want to show the regulators and the others that, as long as we're increasing returns, we're going to keep going there. So is this kind of sticking to that, as returns have come in a little bit, you pull back everything? Is this a bigger statement about long-term growth than just what you're seeing on the coal side? Maybe you can extrapolate a little bit on that.

No, I wouldn't read this that way at all. I think just on the coal side, as we said, we're going to be a little cautious this year in coal cars, and we talked before about -- we're going to have a long-term need for that. We'll be able to -- and the fortunate thing is the need is arising as the business is changing, and we'll be able to adjust. But I think what you're -- what our rest of our capital budget is reflective of, is the fact that we have finished a significant set of investments in Intermodal corridor, and the Intermodal corridors are largely finished. We think that positions us very well to grow. And we continue to make investments in other parts of our business, where we see growth opportunities. And we're going to take advantage of a network that's running very efficiently with a high velocity and continue to invest to make it run even better, that provides better customer service, and we've proven to ourselves and shown you, that more and more costs fall out as a result. So I think this is a very -- it's a very solid capital budget. I think it's going to position us to continue to grow, and it's also going to continue -- we'll also continue to run a more efficient railroad.

The next question is from Keith Schoonmaker of Morningstar.

Maybe a little more obscure question on domestic coal. Could you please comment on any PRB coal opportunities, perhaps current magnitude in your outlook for the next few years?

In terms of PRB coal, it's about 17% of our current coal tonnage. Central App continues to be the highest component. It's at 31%. Northern App is about 27% of our sourcing. And Illinois Basin coal for the year was about 20 million tons and is growing very quickly, very fast, as a source for some of the export traffic to the river, as well as utility coal going to utilities with scrubbers.

And can you show the split on PRB? What's -- is any of that export or is that for domestic burn?

It's all domestic utility burn.

Do you anticipate any export in that in the future or is it just too low value?

No. We are looking at various supply chains for PRB coal that -- where we possibly could be part of that supply chain for export. It's something we are continuing to analyze and review.

The next question is from John Larkin of Stifel, Nicolaus. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: If you can tolerate just one more coal question here. It was interesting to hear that you've perhaps seen some modification of the minimums included in the contracts. I'm wondering if those minimums have been lowered sufficiently such that the excess stockpiles that exist -- I think you mentioned that the stockpiles actually sequentially had increased from the third quarter to the fourth quarter, whether those minimums are now low enough that stockpiles can be reduced to the levels within, say, 6 to 12 months, such that we can reach, what I would call, steady-state delivery volume. That assumes, of course, that natural gas stays at $3.50 or lower and doesn't get up into that level where Central App and Northern App coal starts to look more attractive.

John, that is a difficult question to answer. I would hope that demand improves to the point where we see the rising stockpile, I mentioned, 6 days higher than the third quarter, where the stockpiles are drawn down. And we reach a steady state that way. I don't think the contracts themselves, the ones we have, will address the stockpile situation. I think demand is going to be the driver for that. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: Okay, that's very helpful. And then maybe more of a operationally oriented question here. The increases in network velocity and the decrease in Terminal Dwell, they've both been quite terrific here, certainly, year-over-year. Do you think that the headcount reductions and the amount of rolling stock, both locomotives and freight cars that you've been able to temporarily or permanently park, correlates with the tremendous increase in system velocity and the rate at which you're turning the assets?

Definitely. The velocity has been the primary component. And for this year -- and it depends some on factors that we can't control, weather, most notably. But this year, we don't see any reason why we can't continue our velocity and even improve upon it. But we're not going to see the type of large improvements that we saw during the last 12 months. The improvements will just be somewhat more modest. But we'll continue to get benefit from reduced recrew activity, some reduced overtime on top of what we've seen before and just an overall tighter operating plan. So I see better things in the coming year but not to the large extent that we saw over the past 12 months. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: I guess I would have seen -- expected to see a bigger reduction in headcount in the monthly STB filings. It did look like that was dropping enough relative to the great improvements that you've made. I was wondering if that's because the STB numbers include those that are on the retention board.

Yes. Keep it -- 2 things for that. One, keep in mind that as far as headcount goes, to the greatest extent, we're paying people when they work. And like we've talked about before, it's an activity-based thing as far as transportation goes. And so as the velocity of the railroad improved, the fluctuation, that in itself is not going to have so dramatic an effect on headcount. But there were some reductions that took place as far as furlough activity and retention board activity more recently. And that was most likely not reflected in numbers you were looking at, unless it's just been here in the last several days.

Our next question is from Ben Hartford of Robert W. Baird. Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division: This is Kenton Moorhead in for Ben. I had a question in terms of the Intermodal capacity and terminal growth that you guys had. I know that the Memphis terminal had come online in June. Do you guys have any sense for the capacity utilization that you're getting right now in that particular terminal? And then, are there sort of any read-throughs in terms of variances that you would expect on the Birmingham and Greencastle terminals?

Kent, we have transferred our domestic business from the current terminal in Memphis at Forrest Yard over to Rossville. So all of our domestic activity now is at that ramp. Our international business is over at the original terminal at Forrest Yard. The Crescent Corridor growth for the fourth quarter was about 25%. And Memphis utilization would be in that number. Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then I had another follow-up question in terms of -- what is your box count growth expectation for the -- your fleet for 2013 or do you guys know [ph]?

We would rather not give a specific forecast for that business. But from Bakken -- from the Bakken crude basin, we expect material growth -- significant growth. Box? Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division: Box, sorry, I said -- yes, Intermodal count. That's container count.

Additional Intermodal boxes? Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division: Yes, for 2013.

Okay. I'm sorry, I misunderstood the question. We have a -- how many, Deb, do we have? 1,340 boxes in the plant, a modest acquisition.

Our next question is from Jeff Kauffman of Sterne Agee. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Sal Vitale on for Jeff. Just a quick question on the crude by rail. Seems to be an impressive commodity in terms of growth. Can you give a sense for -- of the 9% growth in chemicals, what was attributed to growth in crude by rail?

Most of the 9% was growth in crude by rail. Plastics traffic was also up, but the majority of that 9% was driven by crude oil. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Okay. Would it be reasonable to extrapolate that into the -- into 2013? Or do you think that, that will accelerate or decelerate at some point?

We believe it will accelerate. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Okay. Can you give any color on the length of haul of that traffic? Has it been expanding?

Chicago, into the East Coast, into the Philadelphia, New Jersey area. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Okay. So I assume that the RPU -- that the yield on that has been attractive?

As we indicated earlier in the call, it is a base of business that is attractive to us, and we're working with refineries, as well as producers in that regard. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Okay. Just a second question, just a housekeeping question. The -- your tax rate was 33.5% for the quarter. I -- we were looking for something like 37%. Did you give guidance of something in the 37% ballpark at some point?

We normally give a guidance of about 37% to 38% out but -- for the annual tax rate. But it fluctuates by quarter. And traditionally, the fourth quarter is a lower tax rate because of either settlements with state tax issues that normally run through the statute of limitations. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Okay, understood. So in terms of your guidance going forward, it's still around 37%.

Yes, 37% to 38%. I would -- yes.

And our final question comes from David Vernon of AllianceBernstein. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Don, you mentioned at the beginning of the call that the MetCon outlook could be improving towards the back half of the year. Could you kind of talk through what you think is the opportunity here, the risk associated with that expectation of volume recovery?

David, on the steel side, I think the energy sector continues to expand. And with hydraulic fracturing and lateral drilling, we expect that sector to continue to expand. We see opportunities for the tubular steel business to grow. And on the automotive side, as you know, automotive production is set to go up again in 2013. In flat-rolled steel, we're well positioned, with flat-rolled producers, cold-rolled producers in that regard. So in steel, we see a fairly good outlook for the year, tempered somewhat by this RG Steel plant closing, which I will tell you that, in the first 2 quarters of the year, on a comp basis, was about 14,000 cars and about $19 million of revenue split between coal and metals. That -- though -- when I mentioned RG Steel as a comp headwind, that's the order of magnitude. Once we clear that June 1, we will see our numbers actually improve further based on what we see for the market. On the construction side, if drill -- if rig counts -- drilling rig counts continue to be down, our frac sand volumes won't go back up as quickly, although we expect, with the energy production escalating and ramping up, that we will see improved activity in 2013 in that regard. The aggregates market and cement market in construction materials is really contingent upon highway construction and commercial and residential construction, which is slated to be better. But the aggregates business for highway construction is being constrained by budgets -- budgetary constraints by state highway DOTs. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then -- and for rolled products, I guess -- and then I'll let you guys get off. For rolled products, is that dependent on drilling activity in the Marcellus? Or are you guys also shipping some rolled product out to the western oil plays?

We are shipping some product out to the West. But I will tell you that the vast majority of our inbound products is Marcellus and Utica.

This ends the question-and-answer session. I would now like to turn the floor back over to management for any additional or closing remarks.

Thank you, everyone, for listening in with us. And we look forward to talking to you again next quarter. Thanks.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.