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Norfolk Southern Corp  (NYSE:NSC)
Q4 2018 Earnings Conference Call
Jan. 24, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Ladies and gentlemen, greetings and welcome to the Norfolk Southern Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. It is now my pleasure to introduce your host Clay Moore, Director of Investor Relations. Thank you, you may begin.

Clay Moore -- Director of Investor Relations

Thank you, Adam, and good morning. Before we begin, please note that during today's call we may make certain forward-looking statements which are subject to risks and uncertainties and may differ materially from actual results. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important.

The slides of the presenters are available on our website at norfolksouthern.com in the Investors Section. Additionally a transcript and downloads will be posted after the call. For comparative purposes, the fourth quarter and full year 2017 results have been adjusted to exclude the remeasurement of deferred taxes due to the enactment of Tax Reform in 2017. And 2018 comparisons are to be adjusted 2017 results. Please refer to our non-GAAP reconciliation, which is also available on our website. Now it is my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Squires.

James A. Squires -- Chairman, President and Chief Executive Officer

Good afternoon, everyone and welcome to Norfolk Southern's fourth quarter of 2018 earnings call. Joining me today are Alan Shaw, Chief Marketing Officer; Mike Wheeler, Chief Operating Officer; and Cindy Earhart, Chief Financial Officer.

In the fourth quarter, we once again delivered strong financial results. Slide 4 highlights the results for the quarter and full year of 2018 compared to the prior year. Income from operations was $1.1 billion, an increase of 27% and an all-time quarterly record. Net income was $702 million, up 44% over the prior year and EPS was $2.57, a 52% increase. The operating ratio for the quarter was 62.8%.

For the full year, we achieved record income from operations totaling nearly $4 billion, an increase of 17% from 2017. Net income increased 39% to $2.7 billion and earnings per share increased 44% to $9.51. The full year operating ratio of 65.4% was a record for our Company and was our third consecutive year of OR improvement.

In addition to lowering the OR and boosting earnings, in 2018, we returned more than $3.6 billion to shareholders through share buybacks and dividends and our Board of Directors yesterday increased the quarterly dividend by another 8%. Looking ahead, we are determined to take Norfolk Southern to even greater heights.

At our Investor Day, on February 11th, we will go over our new operational and financial targets and discuss in detail all of the initiatives with which we will drive shareholder value. Now to provide further details on our fourth quarter results, Alan will cover trends in revenue, Mike will cover operational performance and Cindy will go over the financial results.

I'll now turn the call over to Alan.

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Thank you, Jim and good afternoon everyone. As you can see on Slide 6, strength in all three business units, drove the fourth quarter revenue increase of 9%. Each business unit posted a revenue per unit gain of 7%, reflecting both improved pricing and higher fuel surcharge revenue, as Norfolk Southern delivered fourth quarter year-over-year pricing increases that were the highest in over six years.

Merchandise revenue grew 7%, generating a fourth quarter revenue record on flat volume, as carload gains and chemicals and agriculture were offset by weakness in automotive and metals and construction. Our success in pursuit of pricing improvement combined with higher fuel prices resulted in a record merchandise revenue per unit. Norfolk Southern's Intermodal franchise once again delivered record breaking revenue and volume results for the quarter. Our outstanding Intermodal franchise, combined with tightness in the trucking sector and high levels of consumer spending, has generated three consecutive quarters of record Intermodal volume. Intermodal revenue reached an all-time high in the quarter, reflecting a combination of improved volume, pricing strength and increased fuel surcharge revenue.

Moving to Coal. Revenue increased 7% with a corresponding 7% increase in revenue per unit, as a result of pricing gains and fuel surcharge revenue. Volume increased 1% as our utility franchise benefited from increased winter demand and high natural gas prices in the fourth quarter, while export volume was limited by coal availability.

Moving to Slide 7. In 2018, Norfolk Southern achieved revenue growth in all three business units, including record revenue in both merchandise and Intermodal, while handling record volumes. NS delivered 9% revenue growth in 2018, on top of 7% percent revenue growth in 2017, while improving the margins on our business through a combination of volume growth, pricing initiatives and efficiency improvements.

Our year-over-year pricing was the highest in seven years with strength in all business units. Throughout the year, the trucking industry experienced capacity constraints and high truck rates which supported strong growth in Intermodal. In addition consumer spending and industrial production both increased close to 4% in 2018, providing conditions that Norfolk Southern leveraged to drive merchandise growth.

In the energy sector, increased demand for U.S. coals and favorable fuel price differentials led to revenue gains in export coal and crude oil respectively. Overall, Norfolk Southern delivered strong top line results and improved margins in 2018. And we look forward to building on that momentum in 2019. I am excited about our upcoming Investor Day and sharing with you our outlook and plan for growth.

I'll now turn it over to Mike for an update on operations.

Michael J. Wheeler -- Executive Vice President and Chief Operating Officer

Thank you Alan. Today I will update you on the state of the railroad. 2018 was a year in which we handled record volume, record gross ton miles and achieved a record operating ratio.

Moving to our network metrics on Slide 9, we are pleased that the velocity of our railroad accelerated at the end of the fourth quarter and we drove further improvements in the first quarter of 2019. This has been achieved by the healthier T&E crew base, Clean Sheeting gaining further traction, the full implementation of our network operations center and intense energy and execution by the field. We are operating from a position of strength as we go into the year and are laying a good foundation for our operating plan changes that you will hear more about in our Investor Day next month.

Turning to some of our productivity initiatives on Slide 10, we are continuing to drive improvement in all areas. Record GTMS combined with our ongoing locomotive strategy, resulted in record locomotive productivity for 2018, beating the prior record set in 2017. We stored over 300 locomotives throughout the quarter and turned in 100 of our 180 leased locomotives. Fuel efficiency for 2018 tied our record performance from the previous year. Both of these measures have been driven by our improvements in train length, which was a quarterly record and for the full year. This is the third consecutive year we have either matched or exceeded record annual results for these key metrics.

In closing, our full attention is looking forward. We are excited about the momentum we are delivering in operations and we expect our performance to continue to improve in 2019 and beyond. I will now turn it over to Cindy who will cover our financial achievements.

Cindy C. Earhart -- Executive Vice President Finance and Chief Financial Officer

Thank you Mike. And Good afternoon everybody. We delivered another strong quarter and finished the year with record financial results. I'll start with fourth quarter summarized operating results on Slide 12, which as Clay mentioned earlier, are compared to the adjusted 2017 results. As a reminder, 2017 results have also been recast to reflect the required reporting reclassification of certain pension from post retirement costs.

As Alan discussed, our strong revenue growth has continued into the fourth quarter. The 9% increase in revenues when combined with the slight decrease in railway operating expenses resulted in all-time quarterly record for income from railway operations of $1.1 billion, 27% higher than last year. We also achieved an operating ratio of 62.8%, improving on last year's results by 550 basis points.

Let's take a look at the component changes in operating expenses in more detail on Slide 13. In total, operating expenses were $4 million lower than last year's expenses. Gains from the sale of operating properties more than offset higher inflationary and volume-related increases.

The material and other category decreased $111 million or 66%. This quarter included $145 million in gains on the sale of operating properties as compared to approximately $25 million in the fourth quarter of 2017. Property sales do fluctuate from quarter to quarter. The large sales in this quarter highlight our ongoing strategy to monetize assets that are no longer needed in our operations.

The variance in this line item also includes $20 million of rental income associated with operating property, which you will recall, is now included in this expense category. This favorability was partially offset by higher casualty and claims expenses which were $9 million higher than fourth quarter of 2017. We also incurred expenses associated with the dispatch center relocation, which was completed in December.

Compensation and benefits rose by $27 million or 4%. The largest driver of this change is related to increased pay rates of $30 million, primarily due to negotiated rate increases for our union employees that occurred in the second half of the year. Incentive compensation expense was unfavorable by $12 million this quarter related solely to the timing of these approvals, as incentive compensation is about even for the year as compared to the amount earned in 2017.

Overtime and recrews also added $11 million of cost this quarter. Consistent with our experience in prior quarters, health and welfare rates resulted in savings of approximately $9 million. Purchased services and rents increased $30 million or 7% compared to prior year results. This increase was primarily attributable to higher expenses associated with our volume-related increases, higher technology costs and additional transportation and engineering activities. The remaining $8 million increase is related to higher equipment rent expense, reflecting slower network velocity and the cost of additional short-term locomotive resources.

As we mentioned last quarter, we expected equipment rents to drop sequentially in the fourth quarter. And it did, by $14 million. Fuel rose by $36 million, primarily due to higher prices, which added $29 million. Consumption was up 2% over the prior year. And as Mike mentioned, we held our fuel efficiency metric constant.

Slide 14 shows a summary of our fourth quarter results. As you can see other income earned for the quarter was fully offset by year-over-year negative returns on our corporate own life insurance investments due to the decline in market performance experienced this quarter. Net income of $702 million was up 44% compared to last year's adjusted results, benefiting from a full year of the lower effective tax rate, due to the enactment of tax reform. Diluted earnings per share was $2.57, a 52% improvement over fourth quarter 2017.

Full year results are shown on Slide 15. We set Company records in both income from railway operations and operating ratio. Income from railway operations of $4 billion was a 17% improvement over 2017. The full-year operating ratio of 65.4% was a 270 basis point improvement as compared to last year's result, and was a record for full year OR.

Slide 16, depicts our full-year cash flow. Cash from operations totaled $3.7 billion dollars, covering capital spending and generating a record $1.8 billion in free cash flow, 16% higher than last year. We returned more than $3.6 billion to shareholders through dividends and share repurchases. Our previously announced $1.2 billion accelerated share repurchase program was completed during the quarter and we continued our ongoing open market purchases.

Our share repurchases underscore our confidence in the business as we continue to drive growth and create shareholder value. As Jim noted, our Board of Directors remain committed to returning capital to shareholders and approved an increase in our quarterly dividend to $0.86 per share, reflecting an 8% percent increase over the previous quarter's dividend. This marks the third increase in our dividend over the past year.

We continue to deliver improving financial results and are excited about the momentum we have to drive ongoing shareholder value into the future.

Thanks for your attention. I'll turn the call back to Jim.

James A. Squires -- Chairman, President and Chief Executive Officer

Thank you, Cindy. Three years ago, we announced a strategic plan aimed at delivering value to our shareholders through growth, productivity and bottom-line improvement. Thanks to the hard work and dedication of our employees. We did just that. We lowered our operating ratio over 700 basis points, improved operating income by 39% and increased EPS 86% compared to three years ago. Building on these successes, we have been overhauling our operations from top to bottom in the quest for shareholder value. In short, we have been reimagining Norfolk Southern.

At our Investor Day next month, we will discuss our new financial targets, the initiatives that will propel us into the future and the metrics you will use to assess our progress. Today, our focus will be our fourth quarter and 2018 results.

Thank you for your attention and we will now open the line for Q&A.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now be conducting our Q&A session. (Operator Instructions) Our first question comes from the line of Allison Landry from Credit Suisse. Your line is now live.

Allison Landry -- Credit Suisse -- Analyst

Thanks. Good afternoon. I realize that you've planned to share a lot more detail in a couple of weeks, but wondering if you could speak broadly to when do you think network fluidity will start to improve in a material way, such that you can begin to eliminate the need for recrews and additional locomotives and other added costs?

James A. Squires -- Chairman, President and Chief Executive Officer

Sure. Good afternoon, Allison. We will go into a lot more detail at Investor Day, not only about our new financial targets, but about the operating initiatives that will drive the financial results. And as I mentioned, we'll also be introducing some new metrics with which to gauge our progress. Today, we are going to try to keep the focus on 2018.

I do want to emphasize a couple of things that Mike pointed out in his portion of prepared remarks. We posted annual records and key productivity measures in 2018. Locomotive efficiency and train size for example. We stored more than 300 locomotives in the fourth quarter and we returned 100 leased locomotives. And that was while over the course of 2018, we handled record volume and record gross ton miles. In the latter part of the fourth quarter, we achieved our highest monthly network velocity for 2018. That was in December, with service and velocity continuing to improve in first quarter. So the point is, we have a lot of momentum early in 2019 as we head into our new planned period. We've gained traction through Clean Sheeting and full implementation of our network operations center. And we're operating from a position of strength as we implement the new operating plan.

Allison Landry -- Credit Suisse -- Analyst

Okay and maybe a question for the quarter. Could you parse out the growth in domestic versus international, Intermodal and maybe on the domestic side. I know you talked about tight capacity, but relative to Q3 or you know even if you went back a little further, has there been any change or sequential loosening in truck capacity because of lower spot rates?

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Good afternoon Allison, our international volumes were up 9% and the fourth quarter and domestic volume was up 4%. And yes, we've seen some loosening in the truck market, although the market is still tight. And we're encouraged by what we're seeing so far in dead season. And we're also encouraged by what we're hearing from our channel partners with respect to their outlook for both price and volumes as we move through 2019.

Allison Landry -- Credit Suisse -- Analyst

Okay. That's helpful. Thank you guys.

Operator

Thank you. Our next question comes from the line of Chris Wetherbee from Citi. You're now live.

Chris Wetherbee -- Citigroup -- Analyst

Thanks. Good afternoon. I wanted to just sort of make sure I understood how you guys are viewing the 2018 performance. So the 65.4% operating ratio obviously includes some gains and there's going to be gains and probably losses to a degree when you make transactions in the portfolio. So I get that. I just want to get a sense, do you think sort of 65.4% is a good read off of which sort of the future builds or maybe do we think about something that's adjusted ex some of those gains. I just want to get a sense maybe how you guys think about the process?

James A. Squires -- Chairman, President and Chief Executive Officer

Let me comment, generally Chris, on how we view our 65.4% annual operating ratio for 2018 and then I'll let Cindy address how we might want to think about that going forward. We started out three years ago with a goal of a sub-65% operating ratio by 2020. And here we are with a 65.4% operating ratio in 2018. So that represents excellent progress under our prior strategic plan. And we made many other financial improvements along the way.

So, we're pleased with our performance up to this point. We recognized that we have much more to do and we are intent on continuing to drive financial results and shareholder value in the future and we'll have a lot, lot more to say about that at Investor Day.

Cindy C. Earhart -- Executive Vice President Finance and Chief Financial Officer

Yes, Chris. I had mentioned this in my comments, we did have $145 million worth of gains of operating property this quarter, which is high. I mean compared to $25 million in the fourth quarter of 2017. We're going to continue to look at these assets and try to monetize them. It's very, very difficult as you know, to be able to predict what quarter sales may come in. I certainly think that we've got a very large gain in the fourth quarter around some property in Atlanta. That is pretty unusual, but we're going to continue to sell property as we can.

And it's going to continue to help from the operating ratio, although I will say that going forward, even though that we will continue to do that, the benefits in the operating ratio are really going to come from improved revenue and continuing to push on productivity and that, that's what's going to drive our operating ratio long term.

Chris Wetherbee -- Citigroup -- Analyst

Okay. Okay, that's helpful. And then just maybe, Alan, if I could switch gears on to the coal side, just to get a sense, I know again, trying to keep it relatively focused on the current period, but just sort of in the context of what you're seeing in the market today, maybe a comment on the utility side what you see from an inventory perspective in early '19 and then maybe some thoughts on the export side would be helpful. Thank you.

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Yeah, absolutely. On the utility front, stockpiles have declined in the north and in the south by 17 days over the past year, and talking to some of our coal producing customers, it's pretty clear that utilities are screaming for coal at this point. And that's kind of the factor that we're seeing right now, limiting both volumes in the utility franchise and on the export side is coal availability, particularly thermal coal availability.

Chris Wetherbee -- Citigroup -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Justin Long from Stephens. You are now live.

Justin Long -- Stephens -- Analyst

Thanks and good afternoon. So I wanted to ask about incremental margins, if we look at the gains on sale impact this quarter and what it was last quarter and kind of back that out, I think you get to low-40s kind of incremental margins, which I think is below what we've come to expect from a lot of the rails, especially with some of that productivity initiatives in place. Could you give us some sense of the incremental margins you expect going forward and what's your view as a more normalized number?

James A. Squires -- Chairman, President and Chief Executive Officer

Sure. Again, let me address that generally and then I'll invite Cindy to add to my comments. I think, when you think about incremental margin as being a reflection of the lower marginal cost of additional volume in part, the price -- the impact of pricing on the bottom line and productivity, those three key components. Incremental margin will be a significant objective and output of the initiatives we undertake in all three areas in our new strategic plan, so recognizing the importance -- the critical importance of incremental margin that will certainly be a big part of the plan.

Cindy C. Earhart -- Executive Vice President Finance and Chief Financial Officer

Justin, I would just say that, I think we've said in the past that 50% incremental margin is kind of what we've talked about in the past. Of course, that is going to vary from quarter to quarter. We did have in this quarter increased cost, particularly in comp and benefits, around incentive comp based on the business results that we had. So, I mean, I think that's sort of the way that we think about it.

Justin Long -- Stephens -- Analyst

Okay. And maybe for my second question, I know that you're going to give more details about the specific financial targets here at the Investor Day. But just bigger picture as it relates to the OR performance, we've heard from a variety of other Class 1 rails that they want to lead the industry or be near the top of the pack. I know, like I said, we're not going to get the details today, but just from a high level, are there any reason why Norfolk can't progress from what is now the worst OR in the industry to something that's at least in the middle of the pack. Just curious how you're thinking about the OR performance relative to the rest of the industry?

James A. Squires -- Chairman, President and Chief Executive Officer

We will do what we need to create shareholder value, Justin, and so we understand the importance of operating ratio and that is certainly front-end center as we think about the future. So, we're going to continue to push on operating ratio. We'll get there as well as operating income and other key financial metrics, we will get there through a combination of growth and efficiency.

Justin Long -- Stephens -- Analyst

Okay. I'll leave it at that. Thanks for the time.

Operator

Thank you. Our next question comes from the line of Amit Mehrotra from Deutsche Bank. You are now live.

Amit Mehrotra -- Deutsche Bank -- Analyst

Thanks, operator. If we take out the $145 million non-cash gain in the quarter, the core operating ratio is more like 67.8%, unless I'm calculating something incorrectly. That's an improvement year-over-year, but not nearly that impressive in the context of best pricing environment in seven years, which I think was a comment that was earlier made. So -- and also obviously still far away from your peers. So what are the issues, I guess, either from a cost or volume side that maybe, is not allowing you to make that type of progress on the profitability side in the context of pricing. And I guess, maybe you can also address in this answer the fact that you have CSX out there that is in a much better profit position and has taken out significant costs and maybe in a position to drive a little bit of a market share shift?

James A. Squires -- Chairman, President and Chief Executive Officer

I think you know if you step back, we have produced over 700 basis points operating improvement -- operating ratio improvement under our old strategic plan. We've made significant progress on operating ratio and we've -- that's been accompanied by very strong earnings growth. And shareholder returns as well. We've taken that the cash that we have generated, we've reinvested it in our company and we've returned it to shareholders in the form of dividends and share repurchases.

So, it's been a strong performance for the last three years. Now we recognize that we have more room to increase shareholder value and that's obviously our objective in the new plan. So, we're going to continue to push, operating ratio is front-end center, as I mentioned. And we'll pull out all the stops to generate shareholder value in the coming years.

Amit Mehrotra -- Deutsche Bank -- Analyst

Okay. Just one follow up if I could on the balance sheet, really on the cash flow side. You know -- every -- well know, I mean UNP just brought their number down to 13.5% of sales in terms of their CapEx. CSX has been there. I think you guys are still up in that kind of much higher level. Is CapEx and leverage levels, really CapEx -- is there an ability to kind of bring down CapEx toward where the rest of the industry is as part of this evaluation. Just any update or thoughts there as you guys look at that?

James A. Squires -- Chairman, President and Chief Executive Officer

The level of CapEx going forward will obviously be dependent on the returns that the capital spending can generate. In our view 16% to 18% of revenue has been a solid range. That's what we've been doing for the last several years. And -- likely we will continue to, again, depending on the returns we believe at that level of capital spending, we can generate excellent shareholder returns.

Amit Mehrotra -- Deutsche Bank -- Analyst

So, it's 16% to 17% for the next several years, is that -- was that going to be updated in February?

James A. Squires -- Chairman, President and Chief Executive Officer

Look, we'll talk more about that at that in the Investor Day for sure. But we've previously said that we believe 16% to 18% is an appropriate zone for capital spending. Because it can drive the shareholder returns that we're trying to drive.

Amit Mehrotra -- Deutsche Bank -- Analyst

Got it. Alright. Thanks for answering my questions. Appreciate it.

Operator

Thank you. Our next question comes from the line of Tom Wadewitz from UBS. You are now live.

Tom Wadewitz -- UBS -- Analyst

Yes. Good afternoon. I wanted to get a thought on the -- you've talked about Clean Sheeting, you identified some of the metrics that saw some benefit from that and in terms of some of the productivity metrics. Just wanted to see if you could give us a sense of where you're at in that process? I know that's focused on, I guess, the local yards, so that I'm sure there's a lot more to go that you'll tell us about in February, but maybe just some thoughts on where you're at in the work on the local yards and the Clean Sheeting process?

James A. Squires -- Chairman, President and Chief Executive Officer

Okay. And we will talk a lot more about that in a few weeks. But let me turn it over to Mike for some thoughts on what we're doing right now.

Michael J. Wheeler -- Executive Vice President and Chief Operating Officer

Yeah. So the initial phase of the Clean Sheeting process is going to be completed essentially across the railroad, early summer and it is going very well. We're really pleased with it. That's why we really focus in a lot on it, but the idea of using good industrial engineering practices to look at the way we do business in our local serving yards and really any of our yards is going to kind of come the way we're going to do business, the NS way in the future.

But once we get the Clean Sheeting initially done, we'll be rolling out the new operating plan on top of that in mid-summer as well. But I'll tell you, we're taking the opportunities we see now, when we see an operating plan change that, that works now, we're going ahead and implementing it, but Clean Sheeting will be done by mid-summer and then we'll be implementing the new operating plan then.

Tom Wadewitz -- UBS -- Analyst

Okay, great. And then a question for you on the export coal side or maybe on the broader coal side. Alan, you mentioned that supply issues are a constraint. Is that a temporary constraint? Is that just kind of a near-term issues at existing mines or is that something where you say that just kind of tapped out where they're running and you'd have to bring new mines online in order to produce more coal?

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Tom, good question and thank you for allowing me to clarify that. That is -- our perception is a temporary constraint from speaking with our partners on the production side, something that we feel like is going to cycle off by the end of the first quarter. There's very strong demand out there, both overseas and domestically.

Tom Wadewitz -- UBS -- Analyst

Okay, so you could see tonnage growth, given the markets, but just probably not in first quarter, given the mine constraints?

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Yeah, the production is going to be our limiting factor here in the near term.

Tom Wadewitz -- UBS -- Analyst

Okay, thank you.

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Yep.

Operator

Thank you. Our next question comes on the line of Ravi Shanker from Morgan Stanley. You are now live.

Ravi Shanker -- Morgan Stanley -- Analyst

Thanks. Good afternoon. Just to clarify on the Clean Sheeting, did you say that you're working on the plan just now and will be implemented over the summer? I just wanted to check if you've already started implementing certain actions and if there are any kind of cost drags in the fourth quarter or is it all of that?

James A. Squires -- Chairman, President and Chief Executive Officer

We have been implementing Clean Sheeting for some time now, in fact, for much of 2018, we were Clean Sheeting the railroad and we are making some changes in the operating plan even as we speak with more of that to come in 2019.

Ravi Shanker -- Morgan Stanley -- Analyst

Got it. Are there any pretty tariff (ph) cost items you'd like to point out as being a drag as below that.

James A. Squires -- Chairman, President and Chief Executive Officer

No, not as a result of Clean Sheeting or implementation of the high velocity plan.

Ravi Shanker -- Morgan Stanley -- Analyst

Okay. Got it. And just a follow up. I mean just given the pricing environment that you mentioned. Going ahead into 2019 and the potential loosening of truck markets and maybe a broader macro slowdown, can you just clarify your broader strategy on pricing going forward? Are you happy to push for more pricing gains even if that means a loss of volumes and shippers switching from rail to truck?

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Yes, Ravi, our strategy is one that drives shareholder return and this is a great environment to push on price. We're going through bid season right now in the Intermodal network and we're seeing continued strength there. So, I'm very confident in our ability to continue to price through 2019. We've talked about that basically for over the past year that 2019 was lining up to be a strong pricing year and we would still see that and we're expecting the momentum that we created in 2018 to carry over into 2019.

Ravi Shanker -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Matt Reustle from Goldman Sachs. You are now live.

Matt Reustle -- Goldman Sachs -- Analyst

Thanks for taking my question. Just back to the Intermodal business, you did see deceleration in volume and pricing in the fourth quarter. It sounds like the environment is still strong. Is that purely a case of lapping tough comps? Is there anything else there in terms of competition picking up loosening truck market that's driving that deceleration?

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

We actually saw an acceleration of pricing in the fourth quarter Matt. And I'll point you back to the fact to your point that fourth quarter 2017 at the time was a record volume and a record revenue quarter for us in Intermodal. We've got a great Intermodal franchise, we've got the best Intermodal franchise in the east and there's great opportunity for highway to rail conversions going forward. We're going to take it (multiple speakers).

Matt Reustle -- Goldman Sachs -- Analyst

Okay. Yes, I'm looking at RPU on an ex-fuel basis and it looks like 3Q to 4Q, it came down a bit. But -- but understood.

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

We had talked about a shift. International and Intermodal grew 9%, domestic Intermodal grew 4% in the quarter. So that's a negative mix within Intermodal. Irrespective of that, we had a great pricing quarter in fourth quarter in Intermodal and expect that to continue and based on what we're seeing so far with bid season, we're very confident it will.

Matt Reustle -- Goldman Sachs -- Analyst

Understood. Okay. And it is more of a philosophical question, looking back at 2018, you've mentioned a couple of times coming off a year where operating income is up in the high teens, it's at the high end of the peer group. You showed all our improvement. So when you look at 2018 results, what drives the need to shift to a new operating plan? What is it that stands out, that was disappointing which requires a full new operating strategy versus the progress that you've been making over the past couple of years?

James A. Squires -- Chairman, President and Chief Executive Officer

Financial results were good, network performance and customer service were not what they should have been in 2018. And so, it's a push to achieve higher levels of network performance, customer service and greater efficiency as well of course that has us taking another look at the operating plan.

Matt Reustle -- Goldman Sachs -- Analyst

Okay. Understood.

Operator

Thank you. Our next question comes from the line of Brandon Oglenski from Barclays. You are now live.

Brandon Oglenski -- Barclays -- Analyst

Hey, good afternoon everyone. Thanks for taking my question. Jim, I get it that you guys have the land sale (ph) gains and we include those for other carriers too, but it was pretty chunky. I guess, just wanted to circle back, because the OR is trailing your peers now. I mean, is there a sense of urgency inside the organization that says clearly there is an operating model that can drive lower cost in a system, better service. I mean, how are you guys incentivizing I guess the organization to go on achieve these goals?

Michael J. Wheeler -- Executive Vice President and Chief Operating Officer

Sure, absolutely. There is a lot of urgency around here and a lot of enthusiasm, energy and excitement about this new mode of operations we are adopting. Based on perform -- precision schedule railroad. So we talked about that on the third quarter call, about the people that we have brought into the organization to help us drive PSR practices, and it's working. You see it in the service metrics thus far in the first quarter and in the latter part of the fourth quarter as well. So it's clearly taking hold. We feel like there's a lot of momentum and yes, there's a great deal of urgency here about the new plan. We'll talk a lot more about it at Investor Day.

Brandon Oglenski -- Barclays -- Analyst

And, I guess that you want to save a lot of discussion for Atlanta, but the headcount line -- we saw headcount move up a little bit in the fourth quarter and I think a key tenant when we've seen these PSR implementations work as very rapid reduction in employee counts, because productivity gets that much better. So how do we think about, just in the context of heading into '19, the movement between volume in the network and headcount and the ability to drive incremental labor productivity?

James A. Squires -- Chairman, President and Chief Executive Officer

Significant improvement in operating ratio, which is our goal, will be premised on a combination of growth and productivity. Productivity in turn is a function of better efficiency with respect to labor, locomotives, fuel and other resources in the business. So, that's the foundation. All of that is the foundation of our new strategic plan. And we'll get into a lot more detail on those things in February.

Brandon Oglenski -- Barclays -- Analyst

I appreciate it.

Operator

Thank you. Our next question comes from the line of Walter Spracklin from RBC Capital Markets. You're now live.

Walter Spracklin -- RBC Capital Markets -- Analyst

Yes. Thanks very much. Just going back on the -- on your characterization, I'm a little surprised by Jim your characterization of your operating ratio, given how significant the gains were. And I'm just curious whether there -- how much gain was predicated in the sub-65% OR that you had anticipated compared to what actually came to play? And should we bank on continued gains to this level over the next few years or maybe some guidance around what gains, what level of gains you expect?

James A. Squires -- Chairman, President and Chief Executive Officer

Walter, I can't give you good guidance on real estate gains, except to say that they will occur from time-to-time and in some quarters they will be significant as they were in the fourth quarter. Monetizing real estate and all underutilized property is part of our strategy. And that results in better results for shareholders. That will not be the driver of our success as a company going forward. What will make the difference for shareholders and will drive shareholder value will be railroad operations, pricing and growth. And so that will be the focus. From time-to-time, there will be significant gains, and sure enough there were in the fourth quarter.

Walter Spracklin -- RBC Capital Markets -- Analyst

So you did compare your quarter to the sub-65%. So you did obviously have an assumption for gains for that sub-65% level. How do they compare to what you're realizing the share?

James A. Squires -- Chairman, President and Chief Executive Officer

We've known all along that real estate gains would occur from time to time. It's very difficult to predict when you will book the more significant gains. But certainly that's part of the strategy, part of the plan and we saw a lot of it in the fourth quarter.

Walter Spracklin -- RBC Capital Markets -- Analyst

Okay. Just on coal, you had done a good job just kind of characterizing a quarter-to-quarter kind of expectation for how your domestic volumes would come in. Any -- I know it's uncertain obviously, but any move toward giving contextualizing the sequential quarter going forward with regards to domestic utility coal?

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

We'll talk more about that on the 11th. Demand is strong. Stockpiles have declined and our customers are searching for coal. So dependent upon the availability of thermal coal could be a pretty strong quarter.

Walter Spracklin -- RBC Capital Markets -- Analyst

Okay. Thank you very much. Appreciate it.

Operator

Thank you. Our next question comes from the line of Jason Seidl from Cowen and Company. You're now live.

Adam -- Cowen and Company -- Analyst

Hey, this is Adam, on for Jason. I guess just a couple of quick questions on precision schedule railroad and Clean Sheeting. First, in terms of Clean Sheeting. How many locations were you guys able to attack in the fourth quarter and kind of go after with the Clean Sheeting process?

James A. Squires -- Chairman, President and Chief Executive Officer

Mike, why don't you take that one?

Michael J. Wheeler -- Executive Vice President and Chief Operating Officer

Yeah. Well, we ramped it up in the fourth quarter, as we planned to do, because we are excited about what results we're getting out of it. And we've even ramped it up a little bit more going into this year to get it done early into the summer. So we are moving ahead of pace on what we wanted to get done in Clean Sheeting. But I'll tell you, in addition to putting teams out there that we're doing Clean Sheeting from location to location, we've embedded people into the field to just make this the part of the way of life at NS. So while we are Clean Sheeting across the railroad, we're also building it into just the daily operating practices at the railroad. So early summer when this thing's all done, we'll be ready to go with our new operating plan.

Adam -- Cowen and Company -- Analyst

Got it. Thank you for that. And I guess just a quick follow up as well. You just cited a customer service as kind of one of the drivers here for improvements and for what you're looking to do. I guess maybe just a little bit on -- your conversations with shippers and with your customers concerning PSR, what have those been like? What have the back and forth has been? What have shippers been telling you guys about PSR and the effect it's had on them, either positive or negative?

James A. Squires -- Chairman, President and Chief Executive Officer

Ours has been and will continue to be a consultative approach. We are working with our customers as we overhaul our network. Let me turn it over to Alan to talk a little bit about the dialogue with customers as we go through Clean Sheeting.

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Absolutely. Our approach with our customers has been highly collaborative. They want us to succeed and they want a supply chain partner that can support their growth. And so, their goals are aligned with ours. We're focused on improving service and also putting a product out there that lets them compete. And we're seeing that. We've got 9% growth in 2018 on top of 7% growth in 2017. And we're very excited about the growth opportunities that we see in 2019.

Adam -- Cowen and Company -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Ossenbeck from J.P. Morgan. You are now live.

Brian Ossenbeck -- JPMorgan -- Analyst

Alright. Thank you. So Mike, just going back to some of the performance in the quarter. And we'll get to see more metrics in the next couple of weeks. But last call you mentioned network velocity measured at the car level, that was near the highest for the year and group activity was also strong. So I was hoping --- can you give us an update as to where those metrics pour (ph) in the fourth quarter and did they also improve through the middle of January?

Michael J. Wheeler -- Executive Vice President and Chief Operating Officer

The answer is yes. They've continued to improve. We saw our terminals really get fluid into the third quarter going into the fourth quarter. And that's where I was referring to, that was getting the cars through the terminals. And then at the end of the fourth quarter our main lines really became fluid. So, yes. And it's continued on even into the first quarter. So both of those are doing well going forward. So pretty excited.

Brian Ossenbeck -- JPMorgan -- Analyst

Alright. Thanks for the clarification there. Jim, I see there's some more tariffs and credits going into effect on the network next month. And these have obviously been used to incentivize compliance with service design changes, other aspects of PSR at different networks. But with the STB is starting to look at these demurrage and accessorial fees, do you think that approach has to change this time around? And appreciate some context in terms of interaction with the regulators, some of the shipper response to these items and how you might plan to utilize them in the future?

James A. Squires -- Chairman, President and Chief Executive Officer

I'll ask Alan to talk about the specifics of our demurrage changes. But let me say that we are in regular dialogue with our regulators including the STB. As you know Chairwoman, Begeman, sent a letter to all of the Class 1s about changes in demurrage programs, to which we responded. And we will continue to keep up that dialogue that open relationship with our regulators. Alan, some more specifics on our changes in accessorials?

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Hey Brian, our accessorial program is designed to align our interests and our customers interests with our mutual benefit. And really it complements the efforts of our operating department to improve our service and efficiency. And we're delivering that. As Mike has said and you can see in the public metrics, our train speed is improving, our dwell is declining and customers are seeing improvements in our service. That's ultimately what they're looking for.

Brian Ossenbeck -- JPMorgan -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Bascome Majors from Susquehanna. You're now live.

Bascome Majors -- Susquehanna -- Analyst

Yes, thanks for taking my question. As we look into the first part of next year and I realize the -- that mean, the guidance is going to come in a couple of weeks here. But, other than the gain and maybe some elevated incentive comp expense, is there anything abnormal about the fourth quarter results when we think about what they mean on a run rate or seasonal basis going forward?

James A. Squires -- Chairman, President and Chief Executive Officer

Cindy went through the particulars in the expense lines and flag the things that stood out in the fourth quarter. Cindy, other things that...

Cindy C. Earhart -- Executive Vice President Finance and Chief Financial Officer

No, I would just say that you noticed in my comment, I did talk about we still had some additional costs associated with recrews and overtime and some equipment rents associated with this -- somewhat slower network velocity. So there were some of those, but nothing else.

Bascome Majors -- Susquehanna -- Analyst

Okay. And with the headquarters move from an economic perspective, should we expect anything lumpy over the next couple of years, be it in labor with packages for people who don't decide to relocate or rent additions for new facilities or capital costs? Just anything financially from the headquarters move -- that can move the needle on a price basis? Thanks.

James A. Squires -- Chairman, President and Chief Executive Officer

We'll begin relocating employees in 2019 in the middle of the year and we'll relocate the majority of the employees in 2021. Tallying up all the costs associated with those moves, we would not expect them to be material over that period of time. So, the purpose of the headquarters relocation, I might add, is closer alignment and so we're very excited about that. We think that having all of our folks in one headquarters' building, will be a very good thing.

Bascome Majors -- Susquehanna -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Ken Hoexter from Merrill Lynch. You are now live.

Ken Hoexter -- Merrill Lynch -- Analyst

Good afternoon. Cindy, you noted the incentive comp boosted salaries and benefits. Do you include the gains in that to get to your OR target? Are the gains included to get to that incentive comp and then were there any other real estate gains throughout this year or only in the fourth quarter?

Cindy C. Earhart -- Executive Vice President Finance and Chief Financial Officer

In terms of the gain on the sales of operating property, as you know, Ken, it adds to operating income and operating ratio. Those are two key components of our incentive comp, so it did add to incentive comp. We obviously have had property sales this year throughout the year, not to the extent of the fourth quarter and we've had them in -- obviously in previous years as well. So it does add, it does add to the incentive comp.

James A. Squires -- Chairman, President and Chief Executive Officer

Ken, as Cindy mentioned, incentive compensation for the full year 2018 was roughly comparable to 2017.

Ken Hoexter -- Merrill Lynch -- Analyst

I asked just because if I look at the largest full year gains for CP, it was $95 million, CSX was $140 million. So you'r one quarter here was bigger than full year that both those compensation (ph) included. So is there any -- you mentioned there were others earlier in the year, but I don't think they got called out. Can you give us the total for what they were for the quarters?

Cindy C. Earhart -- Executive Vice President Finance and Chief Financial Officer

Yes. So Ken, in total they were probably $10 million to $15 million for the three quarters.

Ken Hoexter -- Merrill Lynch -- Analyst

Okay. Alright. And then on -- I guess Mike, if we can -- just on the -- your KPIs that you talked about, Jim noted you're taken out locomotives and I presume that's accelerating as your performance improves or you plan to improve that. But your gross ton miles per locomotive chart that you had there was, was flat year-over-year. Just wondering as you step back and think about that given the Clean Sheeting should, is that something we should have seen improvement that we should going forward see more improvement I guess, is that something you focused on with or whether it's train length growing or improved sidings, how you think about that metric?

Michael J. Wheeler -- Executive Vice President and Chief Operating Officer

Yes. It is absolutely one of our KPIs now and and going forward. But if you look at the fourth quarter, you'll see that in December it really changed. It was a big step function up in the quarter. So, you know, we took the locomotives out near the end of the quarter, we've continued to take locomotives out even into this year. So, absolutely train lengths, train weight are all part of the operating plan changes we're putting in place and again, we're not waiting when we see opportunities, we're taking advantage of it. But the more holistic operating plan will be in the next next quarter or two.

Ken Hoexter -- Merrill Lynch -- Analyst

Great. Appreciate the time.

Operator

Thank you. Our next question comes from the line of Scott Group from Wolfe Research. You're now live.

Scott Group -- Wolfe Research -- Analyst

Hey thanks. Afternoon guys. So a couple of things for you Cindy. Can you give us any guidance on other income going forward? Can you give us some thoughts on how much of an increase we should expect in accessorial revenue and I guess since you don't report other revenue, will that be just put in revenue per car? So, two questions there. And then I guess maybe just the comments and you like in the future if we ever have some like really big gains, just an 8-K like, let us know about in advance would be helpful?

Cindy C. Earhart -- Executive Vice President Finance and Chief Financial Officer

Scott, in terms of of other net, I think it's sort of a run rate perspective. We would say that's probably about $80 million annually, is a good run rate for that. In terms of the accessorial, you're right. I don't know, that we're expecting there to be big changes in that and it has become part of the normal revenue part (ph). So, that answer your question?

Scott Group -- Wolfe Research -- Analyst

Yeah. I guess, why wouldn't there be big changes, like we saw pretty meaningful increase in that other revenue for CSX this year as they made changes. Are your changes different than what they did?

James A. Squires -- Chairman, President and Chief Executive Officer

Alan, you want to take that.

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Scott, our changes are designed to improve our efficiency and our network velocity. So, we're not counting on additional revenue with these. What we're doing is we're collaborating with our customers on our service changes. They're bringing broad in on the front end of this, because we want to make this smooth for them and smooth for us. They can help us, we can help them and we can both grow together. That's the overall intent.

Scott Group -- Wolfe Research -- Analyst

And are you seeing compliance with it right away?

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Yes. You can see improvements as Mike talked about. We're storing locomotives at the end of December, while volumes were accelerating and our train speed was improving.

Michael J. Wheeler -- Executive Vice President and Chief Operating Officer

Yeah, the customers are really engaged in this and they want, as Alan noted, they want to see us in this process succeed.

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Yeah, and we've gotten off, Scott, to a very strong start, to start January in terms of both volume and service product. Now the storms in the Northeast have had an impact on our volumes and our velocity so far this week. But we're very confident in the product that we're delivering and the demand out there for our product.

Scott Group -- Wolfe Research -- Analyst

Okay. And then, I know we're going to get long term sort of labor productivity headcount guidance, but in the interim, can you just give us some guidance on 1Q for headcount?

James A. Squires -- Chairman, President and Chief Executive Officer

I think, if you can hold off for just a couple of more weeks, Scott, we'll give you as much forward looking guidance as possible. That's obviously going to be a big focus of Investor Day, to give you the longer-term and shorter-term, in some cases shorter-term financial goals and the resource components thereof.

Scott Group -- Wolfe Research -- Analyst

Okay. That makes sense. I know I'm going over, but just to help us get ready for next month, should we be thinking five-year targets, three-year targets, just -- I just want to get prepared?

James A. Squires -- Chairman, President and Chief Executive Officer

We'll get into the plan period, duration of the new plan period in February along with everything else.

Scott Group -- Wolfe Research -- Analyst

Okay. All right. Thank you.

Operator

Thank you. Our next question comes comes from the line of David Vernon from Bernstein. You are now live.

David Vernon -- Bernstein -- Analyst

Hey, guys. Thanks for taking the time. Alan, when you look at the Intermodal per unit in -- for the revenue per unit for Intermodal, up 7% with fuel, up 4% without fuel, coming off a sort of mid-teens increase in truck rates. Should we be expecting that number to creep up a little bit as a lag effect sort of -- kind of comes into the business or is that a good kind, 15 gets you a 7% kind of -- kind of ratio to be thinking about for the pricing leverage you guys can take out of the truck rate inflation that's happening in the market?

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Hey David, we've -- as I said our pricing improved throughout the year, which we're very good about where we're headed as we move into 2019. Bid season has started for us pretty well and the feedback that we're getting from our channel partners is, there's continued strength in Intermodal pricing. We're seeing a strength everywhere as you know, our RPU was up 7% in every single one of our business units, you'd have to go back seven years to find that. So, we're very confident in our pricing strategy and our approach. It will continue into 2019.

David Vernon -- Bernstein -- Analyst

Is it reasonable to think that it could approach those sort of levels that you saw in truckers? Is that going to be -- is that just kind of asking too much from kind of Intermodal?

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

We're going to push it as hard as we can. And you saw that this year. We got -- we delivered 18% revenue growth in our Intermodal franchise in 2018 on top of 11% growth in 2017, while improving margins. That's exactly what we need to do.

David Vernon -- Bernstein -- Analyst

Alright. Thank you. That's helpful. And then Cindy just to clarify comments you made before. I think you said other net should be about 80. Is that inclusive of the reclassification of some of the rental income up above the line or today, I am just trying to reconcile the zero in 4Q this year to a -- so expecting like an 80 for the full year of '19 on that other net line?

Cindy C. Earhart -- Executive Vice President Finance and Chief Financial Officer

Yes. The 80 is, we would expect for an annual run rate. I mentioned in my comments in the fourth quarter, we had about $25 million decrease year-over-year in returns on our Company of life insurance. So that's what you're seeing in the fourth quarter, that was pretty unusual, it was tied very much to just market performance in the fourth quarter.

David Vernon -- Bernstein -- Analyst

Okay. And then just in that other -- offset to the other line that moved above the line, I'm assuming the coal royalties would be included in that? And can you give us any sense for how much of an increase you might've gotten in the fourth quarter this year on that number?

Cindy C. Earhart -- Executive Vice President Finance and Chief Financial Officer

Yes, it's not significant.

David Vernon -- Bernstein -- Analyst

Okay. Thanks.

Operator

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the call back over to Jim Squires for closing comments.

James A. Squires -- Chairman, President and Chief Executive Officer

Thank you. We are proud of what we have accomplished and are excited about our prospects for future success. In a few weeks, we will discuss the strategic initiatives we have under way, which will further strengthen our Company and deliver even more value to our shareholders. And we look forward to discussing them with you at our Investor Day on February 11th. Thank you.

Operator

Thank you ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation and have a wonderful day.

Duration: 61 minutes

Call participants:

Clay Moore -- Director of Investor Relations

James A. Squires -- Chairman, President and Chief Executive Officer

Alan H. Shaw -- Executive Vice President and Chief Marketing Officer

Michael J. Wheeler -- Executive Vice President and Chief Operating Officer

Cindy C. Earhart -- Executive Vice President Finance and Chief Financial Officer

Allison Landry -- Credit Suisse -- Analyst

Chris Wetherbee -- Citigroup -- Analyst

Justin Long -- Stephens -- Analyst

Amit Mehrotra -- Deutsche Bank -- Analyst

Tom Wadewitz -- UBS -- Analyst

Ravi Shanker -- Morgan Stanley -- Analyst

Matt Reustle -- Goldman Sachs -- Analyst

Brandon Oglenski -- Barclays -- Analyst

Walter Spracklin -- RBC Capital Markets -- Analyst

Adam -- Cowen and Company -- Analyst

Brian Ossenbeck -- JPMorgan -- Analyst

Bascome Majors -- Susquehanna -- Analyst

Ken Hoexter -- Merrill Lynch -- Analyst

Scott Group -- Wolfe Research -- Analyst

David Vernon -- Bernstein -- Analyst

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