CSX Corp (CSX) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CSX Corporation Third Quarter 2013 Earnings Call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode. For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation. Sir, you may begin.

Thank you, Laurie, and good morning, everyone, and again, welcome to CSX Corporation's Third Quarter 2013 Earnings Presentation. The presentation material that we'll review this morning, along with our quarterly financial report and our safety and service measurements, are available on our website at CSX.com under the investor section. In addition, following the presentation, a webcast and podcast replay will be available on that same website. Here representing CSX Corporation this morning are Michael Ward, the Company's Chairman, President, and Chief Executive Officer; Clarence Gooden, Chief Sales and Marketing Officer; Oscar Munoz, Chief Operating Officer; and Fredrik Eliasson, Chief Financial Officer.

Now, before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the Company contain forward-looking statements. You are encouraged to review the Company's disclosure in the accompanying presentation on slide 2. The disclosure identifies forward-looking statements, as well as risks and uncertainties, that could cause actual performance to differ materially from the results anticipated by these statements. In addition, let me remind everyone that at the end of the presentation, we will conduct a question and answer session with the research analysts.

That said, with approximately 30 analysts covering CSX, I would still ask, as a courtesy, for everyone to please limit your inquiries to one primary and one follow-up question. With that, let me turn the presentation over to CSX Corporation's Chairman, President, and Chief Executive Officer, Michael Ward. Michael?

Thank you, David, and good morning, everyone. Last evening, CSX reported third quarter earnings per share of $0.46; up from $0.44 in the same period last year. The quarter benefited from overall revenue growth, excellent operating results, and items that are outlined in the quarterly financial report and covered later in the presentation. As the energy markets continue to evolve, our business mix is increasingly favoring Merchandise and Intermodal movements. The team is effectively managing this change by capitalizing on the modest growth in the economy and by focusing relentlessly on safety, service improvement, and asset efficiency. These are important drivers of our foundation for long-term profitable growth.

In the quarter, this foundation helped our operating income and operating ratio remain strong at $854 million and 71.5%, respectively. The 31,000 employees of CSX have learned from experience that the best way to stay on track through the ups and downs in our marketplace is to focus relentlessly on the things that are in our control. As we go through today's presentation, I think you'll see we're doing that very well as we focus our resources on capturing the longer-term opportunity in rail transportation. We'll begin our discussion with Clarence, who will provide a more in-depth analysis of the top line results and a forward outlook. Clarence?

Thank you, Michael, and good morning. Starting at the left side of the chart, total volume increased nearly 3% to over 1.6 million loads in the quarter with mixed performance across the diverse markets we serve. Growth in the Merchandise and Intermodal markets was partially offset by declines in coal volumes. As a result, Merchandise and Intermodal now combine for 82% of our volume. Moving to the right, total revenue increased $105 million to nearly $3 billion in the quarter, reflecting overall volume growth, price increases across most markets, and a $38 million year-over-year increase in liquidated damages. Looking at the bottom of this panel, Merchandise and Intermodal now combine for nearly three-quarters of our overall revenue.

Next, revenue per unit increased to $1,825. The impact of core pricing gains and liquidated damages was partially offset by the unfavorable mix impact related to growth in Intermodal versus the decline in coal. Finally, core pricing on a same-store sales basis remains solid across nearly all markets. Recall that same-store sales are defined as shipments for the same customer, commodity, and car type and the same origin in destination. These shipments represented 78% of CSX's traffic base for the quarter. On this basis, all-in core pricing was 1% in the quarter; down from 1.5% in the same quarter last year, reflecting continued rate pressure in the export coal market and more modest increases in domestic coal pricing.

Since we have now greater variability in both our export and domestic coal business, reflecting global market conditions and our fixed to variable contract structure and since our Merchandise and Intermodal markets are becoming a larger portion of our business, we have also provided you with the same-store sales pricing for these two markets on a combined basis. At the bottom of this panel, you can see core pricing for these markets to average 3% for the quarter. This is slightly down from what we've been seeing over the past several quarters, reflecting lower rail inflation, which is embedded in many of our contract escalators. A strong service product provides a solid foundation for pricing above rail inflation over the long-term. We are confident in the value of our product offering and remain focused on profitable growth.

Now let's look at the individual markets in more detail, starting with Coal. Coal revenue declined 9% in the quarter to $720 million. Domestic coal shipments declined 7%, impacted by lower electrical demand and high stockpiles in our service territory. Export coal volume declined 10% on softer demand for US thermal and metallurgical coals, due to a global oversupply of coal. Finally, total revenue per unit was down 2%, with lower export pricing more than offsetting the modest domestic pricing gains.

Next, let's look at the Merchandise business. Overall, Merchandise revenue increased 7% to over $1.7 billion. Chemicals remains the key driver for the industrial sector, growing 11% on strength in energy-related products including crude oil, liquefied petroleum gas, and frac sand. Overall volume in the agricultural sector was slightly down. Feed grain shipments declined as a result of low inventories, due to last year's severe drought. In addition, ethanol shipments declined due to lower gasoline demand and production levels. Finally, in the construction sector, building products and industrial waste increased due to high construction activity and the continued recovery in the residential housing market.

Moving to the next page, let's review the Intermodal business. Intermodal revenue increased 8% to $431 million. Domestic volume was up nearly 9%, setting a new quarterly CSX record driven by growth with our existing customers and continued highway-to-rail conversions. International volume was up 3% as growth with existing customers and from new service offerings more than offset volume losses from a carrier port shift. Total Intermodal revenue per unit increased 2% on core pricing gains. Finally, 90% of our Intermodal traffic is now moving in lanes that are double stack cleared and that number will continue to grow through strategic network investments, most significantly in the Virginia Avenue Tunnel clearance project in Washington DC.

Now let's turn to the outlook for the fourth quarter. Looking forward, we expect stable to favorable conditions for 79% of our markets and the overall volume outlook for the fourth quarter is positive. Looking at some of the key markets, agricultural is favorable with higher year-over-year crop yield supporting mid-teens growth in grain shipments. We expect growth in chemicals as we continue to capture opportunities created by the expanding domestic oil and gas industries. Intermodal growth will continue as our strategic network investments and service reliability continue to support highway-to-rail conversions. In addition, we will be cycling the impact of Hurricane Sandy from last year's fourth quarter.

Export coal is expected to grow slightly despite soft global market conditions, as we're cycling weaker comparisons from last year's fourth quarter. That said, pricing levels will be lower as we continue to focus on keeping US coal competitive globally. The outlook for the automotive market is neutral as the benefit of increased vehicle production is offset by competitive losses. Finally, domestic coal volume will decline. We will continue to expect the full-year volume will be 5% to 10% lower on a year-over-year basis as we expect fourth quarter volume to decline slightly more than that range.

Now, I'll wrap up on the next slide. The slow steady expansion of the US economy is expected to continue with projected fourth quarter GDP growth of 1.7%. In addition, both the ISM purchasing managers and the customer inventory indices point to continued growth. This macro environment is supportive of growth across all three merchandise sectors; industrial, agricultural, and construction. In addition, the Intermodal business continues to grow at rates that well exceed the rate of the broader economy. Finally, coal headwinds are expected to persist into 2014. Both the export and domestic coal markets are challenged due to the low demand levels and the high inventories. Thank you and I'll turn the presentation over to Oscar to review our operating results.

Thank you, Mr. Gooden, and good morning to everyone. Allow me to be brief, as I'm happy to once again report that CSX continues to demonstrate excellence in what have been our key focus areas over the last few years; safety, customer service, and efficiency. On the chart, I'll begin with the safety on the left. The personal injury rate was essentially unchanged from the prior year and the train accident rate improved 23% to 1.70. This reflects our continued commitment to keep our employees and the communities where we work safe. Moving to service, on-time performance remains at record levels, reflecting the diligent efforts of our organization. Looking at the network, velocities improved once again and dwell is at an all-time low, which means that customers are receiving outstanding service while we continue to maximize our assets. Moving to the far right and as a result of all these efforts, we still expect to deliver over $150 million in efficiency savings this year.

Let's talk about resource management on the next slide. The Company's improvement in operating efficiency complements the great service CSX is providing to its customers. Carloads and gross ton miles were up about 3% in the third quarter and we absorbed this additional workload with fewer resources on a year-over-year basis. As you move down the chart, you can see road crew starts were nearly 3% lower as volume growth was largely incorporated onto existing trains. Additionally, the active locomotive count was 3% lower than last year and total operations employment was down 4% in the quarter. This demonstrates our ongoing commitment to adjust resource levels to operate reliably and efficiently.

Now if I could, let me discuss one of our productivity initiatives in a bit more detail on the next slide. Gross ton miles per road crew start was up over 6% versus last year. Now remember that crew costs are variable with train starts and the improvement in this metric allows us to grow volume without significant incremental costs. Now, this ability to absorb volume with an existing train service does not happen by accident and while it takes many departments working together to make this so, I want to thank our operations research and service planning teams who develop sophisticated modeling tools that allow us to optimize our complex network. Field execution of this operating plan enables us to deliver this excellent service while also realizing the greater efficiencies. Now going forward, there's still additional capacity on existing trains and as business grows, we'll absorb that volume whenever possible, always monitoring customer service levels closely to ensure reliable and predictable train performance.

Now let me wrap up. The safety of our employees and the communities we work in remains a primary focus for us and we urge our employees every day to look out for and support one another in this endeavor. Service and customer satisfaction remain at high levels and we remain committed to providing flexible solutions for our customers to enable their growth while driving improved asset utilization and of course, long-term value for you, the shareholders. Finally, as I mentioned earlier, we remain on track to deliver our $150 million in efficiency savings this year. With that, let me turn it back to Fredrik for his review of the financials.

Thank you, Oscar, and good morning, everyone. Starting to the left of the slide, revenue increased $105 million in the third quarter to $3 billion as gains in Merchandise and Intermodal continued offset declines in coal. At the same time, other revenue, which included $51 million of liquidated damages in the quarter, were $38 million year-over-year, also contributed to the improvements. Moving to the right, relative to the third quarter of 2012, operating income was flat at $854 million. Here, higher revenue and productivity gains were offset by the cycling of last year's SunRail gain, as well as higher incentive compensation, inflation, and volume-related costs. As a result, the Company's operating ratio increased 100 basis points to 71.5%. Overall, EPS increased to $0.46 per share up 5% versus last year, reflecting growth in net earnings and the impact of share repurchases.

As we turn to our next slide, let's briefly discuss how fuel lag impacted the quarter. On a year-over-year basis, the effect of the lag in our fuel surcharge program was $10 million favorable. This reflects $6 million of negative in-quarter lag during the third quarter of 2013 versus $16 million of negative in-quarter lag for the same period last year. Based on the current forward curve, we would expect the year-over-year fuel lag impact to be slightly unfavorable in the fourth quarter.

Turning to the next slide, let's review our expenses. Overall expenses increased 5% in the quarter. I'll talk about the top three expense items in more detail on the next slide, but let me briefly speak to the bottom two on this chart. Depreciation was up 3% to $277 million, due to the increase in the net asset base. Equipment rent was down 2% to $94 million, predominantly driven by reduction in locomotive leases.

Now let's discuss our Labor and Fringe, MS&O, and Fuel Expense in more detail on the next slide. Starting to the left, Labor and Fringe expense increased 5% or $37 million versus last year. Here, the primary driver was higher incentive compensation as labor efficiency, volume-related costs, and wage inflation all offset each other in the quarter. Looking at the fourth quarter, we currently expect headcount to remain roughly flat on a sequential basis, although as we continue to demonstrate, we will adjust our resources to reflect the current volume levels and drive efficiency. In addition, we expect labor inflation in the fourth quarter to continue to increase $15 million to $20 million year-over-year and the incentive compensation headwind to be slightly less than the level we experienced in the third quarter.

Moving to the right, MS&O expense increased 10% or $51 million versus last year, driven primarily by the cycling of last year's SunRail gain and inflation. Looking at the fourth quarter, MS&O expense will continue to be impacted by the cycling of real estate gains, which, as a reminder, totaled $35 million in the fourth quarter of 2012. Lastly, Fuel Expense increased 3% or $10 million versus last year, as an improvement in efficiency and price was more than offset by volume-related costs and adjustment to interline fuel receivable, which was the primary driver of the unfavorable variance in other fuel.

Now let me wrap it up on the next slide. In the third quarter, CSX once again displayed the benefits of a diversified portfolio business to generate record third quarter earnings per share. This was achieved by ongoing strength in our Merchandise and Intermodal businesses, and helped by $51 million of liquidated damages in the quarter. Through the first three quarters of the year, CSX has generated nearly $2.7 billion in operating income, a 70.2% operating ratio, essentially flat to last year, and earnings per share of $1.43, despite continuing coal headwinds in both the export and domestic markets. As a result of this performance, we now expect CSX to deliver 2013 earnings per share that is slightly up compared to the $1.79 that we delivered in 2012. We expect to do so despite the fourth quarter that is not anticipated to include any real estate gains or material liquidated damages, as I mentioned earlier. At the same time, we will be cycling below the line $57 million pretax gain on the sale of a nonoperating property last year.

With our earnings remaining strong in this evolving energy environment, we remain committed to deploying cash within the balanced framework that prioritizes investment in the business to drive long-term value creation, along with dividends and share repurchase that also provide value for our shareholders. At the same time, we continue to target an improving credit profile that balances between financial flexibility and cost of capital through a full business cycle.

Looking forward to 2015, we continue to target a two-year CAGR of 10% to 15% for EPS. However, due to the continuing near-term coal headwinds, especially in the export market, this target has become more challenging and achieving this guidance will most likely not follow a linear path requiring higher growth in 2015. Looking at the operating ratio, by continuing to focus on the things that are more within our control -- safety, service, efficiency, above-inflation pricing, and profitable volume growth, CSX will continue to drive towards a high 60s operating ratio by 2015 and sustain a mid-60s operating ratio longer-term. With that, let me turn the presentation back to Michael for his closing remarks.

Thank you, Fredrik. Since the beginning of 2012, the CSX team has successfully overcome almost $0.75 billion dollars in coal revenue loss due to the transition taking place in the energy markets. As you heard this morning, we expect that this transition will continue into next year. As it does, our focus will be the same. First, relentlessly pursuing safety, customer service, and efficiency; the things we control the most. Our culture and systems are built for this and it has seen us through many ups and downs in the marketplace. Second, continue to pursue opportunities in our growing Merchandise and Intermodal businesses. That growth is already happening as the economy continues its slow recovery. Third, continue to invest in the most promising long-term growth opportunities we see, especially in our Intermodal business where we are finding that the marketplace is very receptive to our enhanced capabilities.

Our third quarter results show the resiliency of this team and its ability to work through transitions, while also managing to grow volumes in most of the product markets we serve. Once the transition in the energy markets is complete, we believe that the investors will appreciate the new diversity and vibrancy of our product portfolio, especially when paired with an underlying business that is strong, highly focused, and able to capitalize on opportunities in the near and long-term. This team's energy and motivation is not only fueled by the market opportunities we see now in Merchandise and Intermodal, but also by the ongoing belief in the long-term outlook for rail transportation as population and consumption increases. American manufacturing gains competitiveness and the global trade requires the movement of products across this country in ways that are good for the economy and the environment. That's what we do. With that, we'll be pleased to take your questions.

(Operator Instructions)

Anthony Gallo, Wells Fargo.

Congratulations. I'm wondering if there are other markets that may lend themselves to the type of pricing flexibility that you introduced into the export coal market? The one that comes to mind is crude, obviously, where you've got differentials that can play a role in volume. Are there other markets that lend themselves to that flexibility?

Anthony, this is Clarence Gooden. We've looked at a couple of the markets, but we just haven't seen one. Crude was one that we looked on early on and we just did not see where we had any flexibility at all to price as we do in the coal market.

Okay. I hope this is related question, does the change in your coal pricing influence how liquidated damages may or may not occur next year? Thank you.

It does. On the fixed variable, there would be no liquidated damages. The fixed part almost, in effect, it's replacing the liquidated damages. All the other contracts that are in coal that are not fixed variable you could assume would have liquidated damages applicable.

Great. Thank you.

Ken Hoexter, BofA Merrill Lynch.

Clarence, on coal, you noted export coal pricing could be down next year or as you move into fourth quarter. Can you talk about the scale necessary? If you look at API at 81, 82, is it still in the money for producers and what kind of scale do you have to take pricing down?

Ken, I think you'll see, in the case of the export coal, just a slight downward movement in the rates for the thermal side of the business into coal, particularly with that API index starting with the 7.9 or 8.0 is essentially to keep our producers in the marketplace during this downturn until it kicks back up. It will only be a very slight downward movement in our rates and you'll see the producers having to absorb a lot of that downturn in order for them to keep their mines in production.

On domestic coal volumes, you noted that was going to be down 5% to 10% throughout this year. Are there any thoughts initially on how you look at next year? Are the plants shut that need to be shut or do you still look at accelerating declines on the utility side?

I think for next year, the plants that are down currently today that are, for both have been shuttered or that are being impacted by low natural gas prices, will stay in that mode as long as gas prices are down. The major impact we will see next year will remain in our southern utilities where stockpiles continue to be stubbornly high and will probably remain that way through the mid-year or beyond.

Appreciate the insight.

Brandon Oglenski, Barclays Capital.

Fredrik, I wanted to come back to that 10% to 15% earnings CAGR you have for 2014 and 2015. Sounds like, with the coal headwinds that Clarence is talking about heading into next year, you could have maybe a little bit worse outcome than flat coal like you had been predicting before. What are the assumptions you're baking into 2015 that gives you the confidence you're still going to get that CAGR in two years?

As we said and I've said this now for a period of time, it's become more challenging because of both what we're seeing in the export market and the fact that the utility stockpiles has not worked itself down as we'd expected originally by the end of this year. The economy, though, it continues to be strong or growing at a relatively slow pace, but it's still moving forward, which is a good sign. What we said what we laid out the guidance was that we expect coal to be flat and as we look at 2014 and 2015, in order to get that, we'd like to get pretty close to that assumption. Clearly, with continued strong productivity gains, a little bit stronger pricing than we have or the economy's doing a little bit better than we think, we still think there's a shot at getting to that 10% to 15% CAGR. But clearly, it has to be not linear at this point based on what we're seeing in the coal markets today, which is why we think that 2015 has to probably be a little bit higher growth rate than what we're going to expect in 2014.

Is that going to be growth in the merchandise segment or are you going to have a bigger ask on the productivity side as well?

I think that we will see it. I think as you've seen in the past, here, one thing that you know when you layout a plan, it really never comes to fruition exactly the way you had planned, so you're going to have to be flexible and agile and that's exactly the way we execute. We focus on the things that we control and productivity is one of the areas that we do have relatively good control. If we also can get some help on the commercial side, both with price and additional volume, there is still a path to get there.

All right. Thank you.

Christian Wetherbee, Citi Research.

A question just on the utility coal contract side -- I think you guys have mentioned that about 20% of the book of business comes up for repricing. Clarence, maybe an update on what the uptake of the fixed and variable strategy that you're taking has been or is it too early, yet, to determine that because the contracts haven't been settled?

It's a little too early right now, Christian, to determine that. As we told you in the past, our fixed variable contracts account for about 25% of our total domestic coal revenue. We've got about 20% of our utility contracts up for renewal this year, so depending on how that goes, by the end of the year, we'll have a better outlook on that.

Just a follow-up, as you think about the structure of maybe some of these contracts historically, we've tended to think about coal contracts on the longer term basis. Is it fair to assume that maybe these contracts will be in shorter duration, as short as maybe a year, or do they get less than that? Do they get longer than that? Just curious what your thoughts are there.

They tend to be longer than a year.

Okay. And the expectation would be as they renew, they would still stay longer than a year?

Yes.

Okay. Thank you very much for the time, I appreciate it.

Allison Landry, Credit Suisse.

My first question was on Intermodal pricing. It seems that the RPU was fairly solid, but if I think about the growth in domestic versus international, it seems that would have a negative mix impact, which seems to imply that pricing was actually quite robust during the quarter. I was wondering if you had any comments on that?

Allison, pricing was strong for Intermodal during the quarter and it was on the domestic side, that is true.

Okay. Am I thinking about it correctly that the domestic Intermodal has a shorter length of haul than what you're moving internationally?

Not necessarily true. In fact, it could be just the exact opposite. It depends on whether or not the international traffic is originating on the West Coast and coming East to us or originating in our East Coast ports and coming inland. We'll tend to have a longer length of haul on that traffic that we interchange from the Western carriers than we do have the traffic that originates in the East. It just depends on which direction it's coming from and whether or not the private asset parts of it also on the domestic side have a difference in the pricing.

I got you. Okay, thanks. My follow-up question, in the past you've talked about your coal sourcing moving more towards the Illinois Basin and interest from your southern utility base to start testing that and ultimately, possibly, burning that. How has this changed in light of the mild summer conditions and the lack of inventory drawdowns? Is this something that is off the table in the near-term?

No, not all. In fact, the Illinois Basin coal is actually growing for us; both Illinois basin coal now and [Powder River] coal combined are accounting for nearly half of the coal burned on CSX.

Okay. Great, thank you very much.

Justin Yagerman, Deutsche Bank.

Oscar, my question's for you -- your team's done a pretty good job here of offsetting inflation, even with the difficult economy and mix. What I'm curious about is, as we look out, if we're looking at an environment where volumes are flat to down, can you do better than offsetting inflation, do you think? How much wood, basically is what I'm asking, is there left to chop in productivity if we're in this muted growth environment?

Justin, thanks. I might quibble with a pretty good definition. I think we've done a great job for the team, but thanks. If I characterize your question as, can you continue to deliver productivity in softer environments, I think we've proved that we can. The answer to that is yes. Is there more to be had? I think there is.

There's a lot of opportunity in our field. When you think of our local serving areas versus our mainline road, there's an opportunity there. Our assets are still -- could use a lot more efficiency in how they're utilized across our system. We see lots of activity going forward. In fact, we just recently completed a review of our next year's productivity savings and happy to say, as well, that we are very much in line with the long-term guidance we've given at this early-stage. There's a lot there to be had and there's a lot of details behind it. I think we're going to talk here in November at one of the analyst conferences and I think I'll be outlining some of the more specifics in that area to give you more confidence in our ability to continue to do that.

Great. Our follow-up is at least somewhat related, when I think about the growth in Intermodal as a piece of the overall franchise, a question I get a lot from clients is, how does core Intermodal profitability compare to the rest of the total business? Obviously, and we know the RPU is lower so it takes more volume to create that overall revenue effect, and it would seem obvious that the incrementals are quite good, but if you could give us a quantification, especially now that you've got more of your network double stacked, of how you feel about core Intermodal profitability as it relates to the total business? I think it would give us a good idea of how to think about profitability for the total business given how much growth has taken place here.

I think, Justin, you answered your question there. If you think about what's occurred over the last couple of years with the double stack clearances that we've done and the fact that we are continuing to make sure, as Clarence alluded to before, have solid pricing gains in that market, as well, coupled with the train density that we've been able to build up over the last few years, the investments we've made there, we think that our profitability is not just on an incremental basis, but an average long-term economic basis is very attractive and at par with the rest of our Merchandise business with maybe one or two exceptions. We feel very good about our ability to not only grow that business going forward, but also make a significant amount of money on it going forward.

Okay. That's very helpful. Thank you very much.

Thomas Kim, Goldman Sachs.

Just wanted to follow up with regard to the question on the 10% to 15% CAGR target. Could you perhaps provide a little bit more color in terms of the breakdown of that? What percentage of that do you anticipate being driven by the ongoing core pricing gains versus improvements in productivity?

One of the things we've said in the previous seven or eight years or so, it's been driven a fair amount by a lot of legacy pricing and then clearly, productivity as well. As we now look to the next few years, our view is that it's going to be a little bit more balanced between all three levers; productivity, price, and volume and that's really how we're thinking about it going forward. Clearly, because of some of the challenges we see on the coal side, we do expect the rest of the business to remain pretty robust during this period of time, because of some of the initiatives that we have in place.

Thank you. If I could just ask a follow-up question with regard to pricing. We've noticed, in the last quarter or two, some of the companies, in particular some of the brokerages, are starting to face a little bit of pressure with regard to the pricing environment coming from shippers showing reluctance to pay higher freight rates. I'm just wondering, to what extent are you beginning to see any concerns with your ability to raise pricing, in particular in the Intermodal side where there are ongoing pressures within the retail environment with their own ambitions to be pushing up their margins by cutting cost? Thanks.

We think we offer a good product, a good value. We think our fundamental economics are good. We think that the environmental aspects of the product that we offer, Tom, are pretty good. As always, you get pushback from any of your client base on price increases, but we've been able to get those increases in the marketplace. As you can see in the same-store sale results that we had today, we had a 3% year-over-year improvement in our same-store sales pricing and that compares with last year on the same comparison basis of 3.3%. Most of the difference there has been the difference in what the escalators were for inflation. We feel pretty solid about being able to get above inflation pricing going forward, here, in the next quarters as we move forward.

Tom Wadewitz, JPMorgan.

There has been a surprising lack of questions on export coal today, so I wouldn't want to guys to miss out on the export coal comments. You gave some thoughts on 2014 that export coal would be a source of a little bit of pressure. I'm wondering is that on the thermal side and is there some impact from multi-year contracts expiring where maybe some coal that wouldn't be economic in the current environment's being taken by European utilities? How do you look at the multi-year contract impact and where we do you think thermal exports might shape out for how they may look in 2014? Thanks.

Tom, the multi-year contract are pretty much phased out and that was mainly driven by the forward curve of the API 2 because it continued, as you're aware, to drop precipitously over the last year. The ability to sell forward for most of our producers and our coal traders just simply hasn't been there. We expect some pretty strong headwinds until that API 2 thermal index picks up in Europe for 2014. It's going to be a tough year in that thermal environment for 2014. Does that answer your question?

I'm just trying to figure out if all of the thermal coal from central [App] that's being exported is uneconomic or if the 4 million ton level in third quarter of export thermal coal, if that's the level that's still going to be economic at current level prices or where you go between that?

Somewhere in that area where you're describing now is about the low end of the economic level.

The level in third quarter is the low-end or somewhere between 4 million and zero?

The level in the third quarter is the low-end of the economic level.

Right. If I can get a second topic quick, Oscar, you are obviously, I'll give you a great job on productivity. The performance is strong there. Can you give a quick insight on your trained length in Merchandise and Intermodal? You said there's productivity there and what that looks like relative to what capacity would be?

Yes, we got, as you can imagine, and likely plenty of capacity, probably 20% to 25% in some of those markets. Again, we're waiting for the volume to come back to fill those. Train size is actually increasing a little bit, but be careful with that. Because higher capacity cars, double stacking, all of that's affecting those lengths, so mix does affect that a little bit. But overall, on both Merchandise and in fact, across our system, all train lengths have improved quarter-over-quarter.

Okay, great. Thanks for the time.

Bill Greene, Morgan Stanley.

In the press release and even the slides, you don't reference, as much as you have in the past, competitive losses. I'm curious if that is a reflection of lapping some of those losses on or does it feel like the dynamics in the market are improving from a competitive standpoint?

Bill, this is Clarence. I think the main reason is we've lapped most of the ones that we've already had in there earlier. The automotive loss that you saw in there and we had the port ship which really wasn't a was in a competitive loss, business just shifted ports. We have a lot of puts and takes here all the time. We lose some business, we gain some business. That's what you're saying a reflection of.

Okay, there's not any real change in the competitive dynamic from your perspective?

Right.

Okay. Secondly, Clarence, when you look at the growth rate you've just delivered on domestic Intermodal, how much of that would you attribute to these new hours of service rules? Could folks even move their business yet to rail or does that take a little bit longer?

Bill, I've got to tell you, I think what I've seen and what our Intermodal people have seen is that the hours of service law has really had negligible impact on the trucking industry. What it has, in effect, done is put more regulation and has made it more expensive and more difficult for the truckers to do business with, which is another dynamic that is making Intermodal a better product for the customer to use. I would attribute more of our growth success to the fact that we put a lot of emphasis on organic growth and we had a specific program launch and put a specific sales force behind the program that we call highway-to-rail conversions. We've been very successful in that program this year in going out to the beneficial cargo owners, along with our channel of sales partners and introducing to people who were not traditional users of the Intermodal product or were fairly light users of the Intermodal product what Intermodal is, what its capabilities are. With the service product that our operating team is delivering for us, those combinations together have proved to be very successful for us.

Yes, it's very impressive. Would you favor growth or price going forward on Intermodal? Because 9% is a lot of growth.

I would favor both.

Thanks for the time, guys.

Jeff Kauffman, Buckingham Research.

Clarence, I want to ask a little bit more on coal and export pricing. If I just do the math on the revenue ton miles and tons it looks like length of haul in coal was probably up about 3%. All things being equal, you'd think revenue per car would end up being up something similar, but it was down almost 2%. You've got a 500 basis point differential. How much of that can be explained by mix versus say pricing of international shipments versus what's going on domestically?

I would say there were two major factors that occurred there -- one was what we had described both last quarter and this quarter and that's the fixed variable component that is in the domestic part of our coal and a principal driver, then, would be the rates in the export coal.

Okay, but wasn't the domestic fixed variable component net positive to yields?

No, no, it was not.

No, okay. Thank you very much.

Scott Group, Wolfe Research.

Clarence, just one more on export coal, can you give us a sense, how much business, at this point, is on contract or contracted for 2014? Do you think that's a meaningful number or at this point in the year, do you just not have a lot on contract for the next year?

It's not a meaningful number and at this point, we don't have much under contract for next year. With everybody playing coy right now, it's going to be difficult for us to know that number, really, right up until the end of the year.

It's tough, at this point, to give any kind of rough forecast for millions of tons of coal for export next year?

It is.

Okay. Second question, the new breakout of Merchandise and Intermodal pricing, that's very helpful. Can you just give us some historical context here? That 3% and 3.3% that you got last year, how would that compare with four or five years ago? Are we seeing better pricing there now because the service is getting better or is that the pricing is getting a little bit tougher there just because it's later in the pricing story and you had some legacy in Merchandise and Intermodal as well? Just some historical context on that 3% would be helpful.

Scott, I'll take this one just having looked at that not that long ago. Clearly, as I said earlier in my remarks, that pricing going forward is not going to be as big of a portion as it's been over the last decade or so, because of legacy pricing. Merchandise, just as some of the other margin, is probably higher back then. But as the run rate that we've seen here this year and what we saw last year has really impacted predominantly by what Clarence outlined before, the change in the escalators in our contract, as they've come down, as rail inflation's come down. But I would say the last few years has been pretty stable in those markets.

Okay, that's helpful. Thanks, guys.

Jason Seidl, Cowen and Company.

I'll talk about the Intermodal side. When you look at the trucking market and you look at your success in the pricing market, is there any concern that you might drive some business back to the highway? Because, clearly, what we've seen on the truckload side is their lack of ability to raise pricing.

We don't have that concern right now, no, it hasn't come up. In fact, it's just the opposite. Number one, we expect to continue this growth. I think it's important to point out to you that -- and I hope you've picked up in our prepared remarks that we'll be cycling Hurricane Sandy in the fourth quarter, so we expect to continue to see good growth throughout this year.

Okay, very good. Let me switch a little bit to the crude markets. If we look at everything combined, we've seen, obviously, frac sand looking a little bit better as operators looking to pump more sand per lateral feet. If you add up your crude business, your fracs, your tubulars, your pipe, what percent of the overall business are those things combined now?

I don't have that number in front of me, but it is a relatively small number compared to our overall business.

Okay. If you guys can get that, you can shoot it to me offline. I appreciate the time, as always, guys.

Ben Hartford, Robert W. Baird.

Clarence or Oscar, could you provide -- I'm looking for some context in terms of what the differential between a like for like domestic Intermodal move is relative to truck? I assume it's still at a discount, but I also understand that the difference has narrowed from that 10% to 15% discount that we had experienced over the past several years. Could you provide what it would be today, the discount domestic Intermodal relative to truck?

It depends on whether you're dealing in the transcon or in eastern move, but typically, in an eastern move, you might see that number somewhere between 5% and 10%, transcon, you may see that number around 10%.

Okay, that's helpful. How should we think about it over the next three to five years? You guys want to continue to grow volume and raise rates and raise rates above the cost of rail inflation, obviously with some of the pressures that we're seeing in the truck market. Should we expect that differential to continue to narrow or are there opportunities, from a productivity standpoint, that allow you to keep a 5% to 10% discount and continue to take share at a healthy clip? How should we think about that balance over the next period of years?

I would think two ways -- number one, a truck is always going to be a more direct form of transportation, a higher premium than is going to be an intermodal move, simply by the sheer nature and design that the vehicle itself and what you're doing. What we're trying to do is stay focused on the bottom line contribution and the profitability of that move. We'll probably, for the foreseeable future, carry a discount against the truck itself. Our focus is going to be on improving the contribution to the bottom line of that intermodal move.

Okay, that's helpful. Thank you.

David Vernon, Bernstein.

Oscar, quick question for you -- on the GTMs per crew start metric that you provided, what percentage of the labor costs would that productivity metric apply to?

What percent -- I'm sorry --

The GTMs per road crew start, obviously, you guys are doing a lot to drive more efficiency on the road crews. What I'm trying to get a sense for is what weighting that would have on the total labor cost in the P&L?

I don't have that number in front of me. Labor's our biggest line item and of course, operations is the biggest. Probably, I would say one-third, maybe.

Great, thank you. Fredrik, with the commentary on pricing maybe getting a little bit weaker than it has been in the last decade, does that start to change the way you guys think about CapEx a little bit going forward?

No, I think that, once again, the focus from our perspective has always been the bottom line. We're going to continue to push inflation plus pricing. Nothing has really changed there, but we do think that we're seeing now is an opportunity to grow volume in a more meaningful way than we have over the last decade. As we grow volume, there's going to continue to be a need to reinvest in our business and expand facilities. The guidance that we have out there, about 16% to 17% of core capital is potential revenue, we still think that's the right place to be.

Okay. Am I hearing you correctly in that there's a little bit less pricing than we saw maybe over the last decade?

No, nothing has really changed. What we're saying is we had a lot of legacy pricing that we have opportunities to reprice early on in this rail renaissance cycle. Over the last few years, there hasn't has been a lot of legacy pricing opportunities anymore, so we continue to push inflation plus pricing, just not at the same degree as we've seen before. Nothing there is changing going forward from what we've seen the last few years.

Okay, great. Thank you.

John Larkin, Stifel Nicolaus.

I wanted to dig a little bit into the terrific growth you've had on domestic Intermodal. Could you break that down between local east and transcon? Is the local east really driving that or are you still seeing growth with connecting traffic in the west?

John, I don't have that number in front of me and I'm doing this strictly from memory. I'll be directionally correct, I'm doing it from memory of the last review I had with our Intermodal people, but the growth will tend to have been more in the east than in the transcon.

And your sense is that growth has many years ahead of it in terms of capturing share from the highway, even though the price discount is only 5% to 10%? I guess that 5% to 10% discount does not include the differential in fuel surcharge, is that right?

That's right. We just had a study updated this past quarter that we had done last year, as a matter of fact. We've got 9 million addressable loads in the east, over 550 miles that we still haven't touched as an industry that could be possibly converted to Intermodal.

All right, that's very helpful. That's all I had.

Matthew Troy, Susquehanna International.

Michael, question for you, if I could. It seems if I look at the long-term spectrum, last 10 years next 10 years, the railroads have subtly shifted from, let's call it, victor to victim in coal, yet you've accomplished a lot in terms of US infrastructure. I'm just wondering, the dialogue in Washington for the last several years has been focused around [three] regulatory risk. I'd love to hear your thoughts about one, your dialogue in Washington now about what the railroads provide and how they seem to be somewhat collateral damage of the current administration's war on coal, but more importantly, how you and the other railroads may be posturing in Washington to demonstrate what you do provide, both from an infrastructure perspective and a reinvestment perspective on a long-term basis.

When we visit with the legislators, Matthew, the one thing that they really do appreciate is the private capital we bring to the infrastructure of the United States. Clearly, we have huge challenges with our infrastructure and quite frankly, all the rails have been investing 16% to 17%. They realize that's valuable help to relieve highway congestion and some of the burden there. They're very supportive of the fact that we are making more and I think the fact that we are making more but investing more is an equation that, for them, makes really good plans. On the issue of coal, clearly, we knew that there was going to be some issues come 2015; natural gas obviously accelerated that with the low prices.

The one thing that I read in the Journal today, though, that you might find of interest is the Supreme Court has agreed to take up the issue of EPA expanding the SO2 from mobile sources to stationary sources, which I think could be a very interesting twist because, quite frankly, the law does not allow them too do the stationary sources in the manner that they are doing so. We're really pleased that the Supreme Court is taken that up. But clearly, this administration doesn't favor the use of coal. I think personally that we're going to find it's going to be part of the mix longer-term. If you look at the nuclear plants that are being built, they're already being delayed to late in this decade, maybe even next decade. I think, over time, and this is my own personal view, we'll find coal will once again have a role, but it is going to be a tough few years here with this administration's war on coal.

I appreciate that. My follow-up would be, them, to either you or Clarence. You obviously have the 2015 regulations. To what extent have you modeled out or can you help us just understand versus your current haulage base or tonnage base, what those regulations may mean in terms of some of the utility closures and what that might mean from a tonnage or carload perspective when they go into effect? Thank you.

Matthew, we've looked at what is in place up now to 2015 and it probably won't be much impact to us because the plants that will be impacted have already been impacted, either by shutting down or by the impact of natural gas itself. The proposed EPA requirements that may or may not go into effect for the existing power plants, we haven't really taken a look at that, because as you're probably aware better than I am, that'll be litigated you for any impact of that occurs.

I don't think they're even going to propose rules on existing plants until the middle of '14 and putting in place the middle of '15; so certainly, far out and not even known whether they're planning on that.

I look forward to talking about that in 2017. Thank you.

Walter Spracklin, RBC Capital Markets.

I wanted to cover off a little bit on the guidance, perhaps for you, Fredrik. When I look at what your 10% to 15% encompasses, it's off the $1.79 as a starting point or it could be off 2013, you can clarify. But essentially, what I've seen in 2013 is a fair degree of SunRail gains, tax benefits, liquidated damages, which you add up, it probably equates to anywhere from $0.06 to $0.09 lift on your earnings this year. I'm curious just to see how you make up for that next year? In other words, what I was hearing is that we're not going to see anywhere near the same benefit from those more lumpy or one-time items.

You're indicating you'll be able to make up for that and still achieve a two-year CAGR of 10% to 15%. Without ramping significantly other items to get to that, I guess where I'm going is to offset that $0.06 to $0.09, it had to ramp significantly your pricing, your volume, your expense savings to get to a 10% to 15% CAGR. Perhaps you can walk or give me a little bit of sense where perhaps my math is wrong on my starting points here or there's something I might be missing on our assumptions going forward.

First of all, it is off the 2013 base and not the 2012 base. It is a two-year CAGR and you're absolutely right that because of the fact that we have received some additional one-time benefit, that perhaps we did not anticipate originally, we have made the two-year CAGR a little bit more difficult as the base for this year has come up. But that is incorporated into our statement around the fact that it has become more challenging. Once again, as we look to the next two years, it is a two-year CAGR. It is going to mean that, at some point, in order to get there, coal is going to have to come back. As we have outlined, we think that's going to be more in 2015 versus 2014. Overall, I would say that those two assumptions, the economy is going to be growing, albeit at a slower pace, is still something we feel good about, but the coal assumption obviously is still challenging.

So to paraphrase, you need coal to come back to hit those targets in 2015?

I think right now, we've said it, in '15, we need some help on coal again. It doesn't mean that we need it all the way back because in any plan, you also have opportunities to do better in other areas of your business, including pricing, productivity, the economy comes back a little bit faster than we had expected. But clearly, some help on the coal side from where we're currently seeing it is probably something that is required.

Okay, fair enough. Second question here is on pricing -- when I consider your inflation plus objective and perhaps as you (inaudible), we've seen that core 3% ex-coal coming in, albeit ticking down, as you mentioned, due to increased flexibility or legacy contracts or what have you. When I look at it next year, have we lapped enough of the coal contracts, which are bringing overall core pricing down to the 1% level, such that we can go back to some normal run rate of inflation plus for next year or do we still see some negative impact from lapping perhaps early year coal contracts that is still going to run us below that inflation plus pricing overall for next year?

I think that the additional rate adjustments that we made here in the third quarter to keep these producers in business and us maximizing the value of our export portfolio is going to be with us into 2014 and well into 2014. Obviously, we also will see what the fixed variable contracts will do. Also if, for example, the domestic business picks up a little bit, you will see some impact on that all-in pricing number, as well, that will be negative. That's what we've broken out here. The Merchandise and Intermodal business, because I think that's the truest indication of what same-store pricing will do and that's what we're focused on right now to keep that above rail inflation.

Okay, got it. That's all my questions. Thanks very much, guys.

Justin Long, Stephens.

You referenced some of the excess capacity you have in the network earlier and I would imagine as you continue to rebuild density in the non-coal businesses, these volumes are coming back at pretty favorable incremental margins. I also know that's getting matched by what's happening in the coal business. I was wondering if you could give any insight into what non-coal incremental margins look like today and also how we should think about that metric as we go forward?

You're very far away, repeat the end of the question again.

It was on incremental margins in the non-coal business and what you're seeing today and how you're thinking about that metric as we go forward.

We've said this repeatedly -- obviously, incremental margin, as you add volume onto existing train network, is very attractive. As we continue to grow that business, we grew it 5% here, the non-coal business in the third quarter, you will have some train starts, so it's not like [function] change, you'll have some train start increases, but clearly, the incremental margin is very attractive. But we do look at everything from a long-term economic perspective. That's how we measure profitability and that's how we look at things over a longer period of time. But one of the reasons why we've been able to hold up as well as we have with the significant change in our coal business is because of the fact that of the incremental margin in the Intermodal network and the Merchandise business is very attractive.

Thank you. As a follow-up, as I think about CapEx for the next year or so, I was wondering if you could comment on your railcar equipment needs and any areas that might be pressing in terms of either replacement or growth.

I think we are comfortable with, as I said earlier, the 16% to 17% of revenue. We have long-term plans that we're executing against. We are in a good place in terms of our railcars reinvestment cycle. Locomotives, we will bring some additional locomotives on next year, probably not so many in 2015, but we do also have some assets stored. We feel we're in a good place with equipment, even if the economy comes back a little bit faster than we might currently be expecting.

Okay, great. I appreciate the time.

Donald Broughton, Avondale Partners.

I was looking at a difference in complexion of your operating statistics in that we continue to see train speeds improve, dwell times come down. Obviously, all good performance metrics for which you're to be applauded, but there's some disparities when I look at the different terminals. Some of the terminals have been rather static in their dwell times and others have had remarkable improvements; an example being Louisville. Is that due to a change and did you get a different yard master? Did you change technology or is there a change in mix? What's driving the disparities and the change in dwell time between the different terminals?

I think there's a degree of movement and mix. Something like, Louisville has got a lot of the auto business going through it and so as I mentioned before, we have an operational design team that's constantly looking at it. In fact, we're in the process of making some investments with another railroad, the LIRC, to actually understand the choke points we have in that area and be able to relieve them. It is purely a function of, as our train movements go from place to place, we'll always have these little choke points. How you react and recover from them is the critical area and from that particular place, in Louisville for instance, we have a very specific solution point. But thanks for noting.

Thank you.

Keith Schoonmaker, Morningstar.

A question for Oscar probably -- Oscar, the 6% gain in GTM per road crew seems like a pretty large increment. You just mentioned greater double stacking and slightly longer trains, but does this improvement stem mostly from a mix that might be richer and longer hauls or were there some other levels that you pulled to accomplish this?

It's a combination, so certainly longer hauls are part of the mix. There's a lot of difficult planning and work and a lot technology that has been involved recently. We have items like trip optimizer, dynamic train planning, and a host of other areas that actually affect that. At the end of the day, the operating train plan is the one that has to be developed efficiently to get those things. It's not just about a longer haul movement.

Oscar, was this a step change unique to this period or do you think this gain may be not as great an increment and but is this going to be more routine?

Yes, like everything else, as the team continues to work and collaborate closely and allow the use of all these tools, it is a nice slow and gradual ramp up. We hit our mark very nicely this quarter.

Great, thank you.

Thank you, everyone, for your attention and your interest and we'll see you again next quarter.

This concludes today's teleconference. Thank you for your participation in today's call. You may disconnect your lines.