CSX Corp (CSX) Earnings Report: Q3 2015 Conference Call ... · CSX Corp (CSX) Earnings Report: Q3 2015 Conference Call Transcript The following CSX Corp conference call took place

CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion

EventDescription:Q32015EarningsCallMarketCapasofEventDate:27.91BPriceasofEventDate:27.0

©2014TheStreet,Inc.Al l R ightsReserved Page1of22

CSXCorp(CSX)EarningsReport:Q32015ConferenceCallTranscriptThefollowingCSXCorpconferencecalltookplaceonOctober14,2015,08:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

DavidBaggs;VicePresident;TreasurerandInvestorRelationsOfficerforCSXCorporationMichaelWard;CSXCorporation;Chairman&CEOFrankLonegro;CSXCorporation;EVP&CFOFredrikEliasson;CSXCorporation;EVP&ChiefSales&MarketingOfficerCindySanborn;CSXCorporation;EVP&COO

OtherPart icipants

EricMorgan;BarclaysCapital;AnalystBrianOssenbeck;JPMorganChase;AnalystChrisWetherbee;Citi;AnalystTomWadewitz;UBS;AnalystAllisonLandry;CreditSuisse;AnalystRobSalmon;DeutscheBank;AnalystTomKim;GoldmanSachs;AnalystAlexVecchio;MorganStanley;AnalystKenHoexter;MerrillLynch;AnalystRickPatterson;TopekaCapitalMarkets;AnalystJasonSeidl;CowenandCompany;AnalystMattTroy;NomuraSecurities;AnalystBenHartford;RobertW.Baird;AnalystCherilynRadbourne;TDSecurities;AnalystDavidVernon;SanfordBernstein;AnalystJohnLarkin;StifelNicolaus;AnalystBascomeMajors;SusquehannaFinancialGroup;AnalystJeffKauffman;BuckinghamResearch;AnalystScottGroup;WolfeResearchl;AnalystCleoZagrean;Macquarie;AnalystJustinLong;StephensInc.;AnalystJohnBarnes;RBCCapitalMarkets;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheCSXCorporationthirdquarter2015earningscall.

Asareminder,today'scallisbeingrecorded.(OperatorInstructions).

Foropeningremarksandintroduction,IwouldliketoturnthecallovertoDavidBaggs.Youmaybegin,sir.




DavidBaggs (TreasurerandInvestorRelationsOfficerforCSXCorporation):

Thankyou.Goodmorning,everyone.

Again,welcometoCSXCorporation'sthirdquarter2015earningspresentation.

Thepresentationmaterialthatwewillbereviewingthismorning,alongwithourexpandedquarterlyfinancialreportandoursafetyandservicemeasurements,areavailableonourwebsiteatCSX.comundertheInvestorssection.Inaddition,followingthepresentation,awebcastandpodcastreplaywillbeavailableonthatsamewebsite.

Thismorning,ourpresentationwillbeledbyMichaelWard,theCompany'sChairmanandChiefExecutiveOfficerandFrankLonegro,ourChiefFinancialOfficer.Inaddition,CindySanborn,ourChiefOperatingOfficerandFredrikEliasson,ourChiefSalesandMarketingOfficer,alongwithClarenceGooden,ourPresident,willbeavailableduringthequestion-and-answersession.

NowbeforeIturnthepresentationovertoMichael,letmeremindeveryonethatthepresentationandotherstatementsmadebytheCompanycontainforward-lookingstatements.YouareencouragedtoreviewtheCompany'sdisclosureandaccompanyingpresentationonslide2.Thedisclosureidentifiesforward-lookingstatements,aswellastheuncertaintiesandrisksthatcouldcauseactualperformancetodiffermateriallyfromtheresultsanticipatedbythesestatements.

Inaddition,attheendofthepresentation,wewillconductaquestion-and-answersessionwiththeresearchanalysts.Withnearly30analystscoveringCSXtodayandoutofrespectforeveryone'stime,includingourinvestors,Iwouldaskasacourtesyforyoutopleaselimityourinquiriestoonequestionandifnecessaryaclarifyingquestiononthattopic.Andwiththat,letmeturnthepresentationovertoCSXCorporation'sChairmanandChiefExecutiveOfficer,MichaelWard.Michael.

MichaelWard (Chairman&CEO):

Thankyou,David.Goodmorning,everyone.Yesterday,CSXannouncedthirdquarterfinancialresultsthatdemonstrateourabilitytoeffectivelymanageinadynamicmarketplace.Ourresultsincludednetearningsof$507million,whichtranslatestoearningspershareof$0.52,athirdquarterrecord.

Lookingatthetopline,revenueinthequarterdeclined9%aspricinggainsweremorethanoffsetbylowerfuelrecovery,thecontinuedtransitioninCSX'sbusinessmixanda3%volumedeclineaswecycled2014'shighdemandenvironment.Atthesametime,wecontinuetobeanindustryleaderinsafetyandweareleveragingourimprovingnetworkperformancetodeliverstrongserviceandefficiencysavingstohelpreduceoperatingexpenses.Asaresult,CSXdeliveredoperatingincomeof$933millionandathirdquarterrecordoperatingratioof68.3%.

Aswelookacrossourbusiness,lownaturalgaspricesareclearlychallengingdomesticcoalvolume.Morebroadly,lowcommoditypricesandthestrengthoftheUSdollarcontinuetochallengemanyofourothermarkets.Inthisenvironment,ourgoalremainsprovidingsafe,reliableservicethatconsistentlymeetsourcustomers'expectation.Thatserviceisthefoundationofourabilitytocreatelong-termvalueforcustomersandshareholdersasitsupportspricingforthevalueofourserviceandproducesincreasinglyefficientoperations.

NowIwillturnthepresentationovertoFrankwhowilltakeusthroughthefinancialsandtheoutlookinmoredetail.Frank.

FrankLonegro (EVP&CFO):

Thankyou,Michaelandgoodmorning,everyone.Letmebeginbyprovidingsomemoredetailonour




thirdquarterresults.AsMichaelmentioned,revenuewasdown9%versustheprioryear.Thiswasdrivenmainlybya$175milliondeclineinfuelsurchargerecoveriesanda$75millionimpactfromlowervolume.Atthesametime,corepricinggainswereessentiallyoffsetbynegativebusinessmix.Volumedecreased3%fromlastyearwithlownaturalgaspricesimpactingthedomesticcoalvolumeandlowcommodityprices,coupledwiththestrongUSdollar,challengingexportcoalandsomeofourmerchandisemarkets,particularlymetals.

Corepricingcontinuestoimprovesequentiallyandforthequarterwasup4.6%overalland4.4%excludingcoal.Otherrevenuedecreased$32millionversustheprioryear,drivenprimarilybylowerliquidateddamagesandanadjustmenttoreservesrelatedtovolume-basedcustomerrefunds.

Expensesdecreased11%versustheprioryear,drivenmainlybya$145millionfavorableimpactfromlowerfuelprices.Ourongoingfocusonefficiencydrove$42millioninproductivitygainsinthequarterwhilelowervolumeresultedinover$70millionofcostreductionversuslastyear.Asaresult,operatingincomewas$933million,down4%versustheprioryear.

Lookingbelowtheline,interestexpensewassimilartolastyear.Otherincomewasfavorableaswecycledenvironmentalchargesfornon-operatingactivities,aswellascostsassociatedwiththeearlyretirementofdebtfromtheprior-yearperiod.Andfinally,incometaxeswere$292millioninthequarterwithaneffectivetaxrateofabout37%.Overall,netearningswere$507million,essentiallyflattolastyearandEPSwas$0.52pershare,up2%versustheprioryear.

Nowletmeturntothemarketoutlookforthefourthquarter.Lookingforward,weexpectvolumestodeclineinthefourthquarter.Althoughweareprojectingstabletofavorableconditionsforseveralkeymarkets,thiswillbemorethanoffsetbyunfavorableconditionsfortheremainderoftheportfolio.Intermodalcontinuestobeastronggrowthengineasourstrategicnetworkinvestmentssupporthighwaytorailconversionsandgrowthwithexistingcustomers.Andautomotiveisexpectedtogrowalongwithlightvehicleproductiontrends.

AgricultureisneutralasstrengthduringthefallharvestseasonandourimprovedefficiencywillbeoffsetbyweaknessinexportgrainandthecontinuedriskofethanolimportsdrivenbyastrongUSdollarinachallengingglobalmarket.Chemicalsisexpectedtobedownmateriallyasenergymarketsresettoanenvironmentmarkedbylowcrudeoilpricesandreduceddrillingactivity.Weexpectthatcrudeoilvolumesmaybedownatleast25%inthefourthquarteronasequentialbasis.MetalsisunfavorableasthestrongUSdollarandhighlevelsofimportscontinuetonegativelyimpactdomesticsteelproductionlevels.Assuch,weexpecttheyear-over-yearrateofdeclinetobesimilartowhatweexperiencedinthethirdquarter.

Domesticcoalwillcontinuetobeunfavorablyimpactedbysustainedlownaturalgaspricesandwenowexpectdomesticcoalvolumetodeclinearound20%inthefourthquarter.Aswelookaheadtonextyear,significantcoalheadwindsareexpectedtocontinuein2016.Sequentially,ourquarterlyrunratefordomesticcoalvolumein2016shouldholdrelativelyflattothelevelweexpecttoseeinthefourthquarter.

Forthefourthquarter,exportcoalisexpectedtobelowerasglobaloversupplyandthestrongUSdollarcontinuetopressurevolumes.Despitetheyear-over-yeardecline,wecontinuetoexpectabout30milliontonsofexportcoalforthefullyear.Lookingahead,weexpectthismarkettobeevenmorechallengedin2016.Overall,weexpectfourth-quartervolumedeclinesaswecycleastrong2014volumeenvironment,continuetofeeltheeffectsoflownaturalgasandcrudeoilpricesandtheimpactofstrongcurrencyonourexportandimport-sensitivemarkets.

Turningtothenextslide,letmetalkaboutourexpectationsforexpensesinthefourthquarter.Overall,




weexpectfourth-quarterexpensestobenefitfromthecontinuedlowfuelpriceenvironment,aswellasproductivityandvolume-relatedcostsavingsasweremainfocusedonincreasingtrainlengthandaligningresourcestothelowerdemandenvironment.Toillustrateourprogress,inthethirdquarter,weincreasedoveralltrainlengthbyabout10%versustheprioryear,whichdroveasignificantreductionincrewstarts.

Lookingatlaborandfringe,weexpectfourth-quarteraverageheadcounttobedownapproximately2%onasequentialbasis,whichreflectsabouta6%reductionfromtheprioryear.Weexpectlaborinflationtobearound$25millioninthefourthquarter,slightlybelowwhatwesawinthethirdquarter.

LookingatMS&Oexpense,weexpectinflationtobeoffsetbyefficiencygainsandvolume-relatedsavings.Fuelexpenseinthefourthquarterwillbedrivenbylowercostpergallon,reflectingthecurrentpriceenvironment,volume-relatedsavingsandcontinuedfocusonfuelefficiency.Weexpectdepreciationinthefourthquartertoincreaseabout$15millionversustheprioryear,reflectingtheongoinginvestmentinthebusiness.Finally,equipmentandotherrentsinthefourthquarterisexpectedtostayrelativelyflattolastyearwithhigherfreightcarratesoffsetbyimprovingcarcycletimes.

Nowletmewrapuponthenextslide.CSXdeliveredanothersolidfinancialperformanceinthethirdquarterwithearningspershareupslightlyfromtheprioryear.Top-linegrowthwaslowerthanweinitiallyexpected,butourcontinuedfocusonpricingfortherelativevalueofrailservice,drivingefficiencygainsandaligningresourcestoaweakerdemandenvironmenthelpedtooffsetthosevolumeheadwinds.

Lookingaheadtothefourthquarter,wewillagainbecyclingastrongdemandenvironmentlastyear,which,coupledwiththechallengingmarketconditionswearefacingthisyear,isexpectedtoimpactourvolumegrowth.Inaddition,weexpectheadwindsinourcoalandcrudeoilmarketstoincreaseinthefourthquarterdrivenbysustainedlowcommodityprices.AsImentionedearlier,domesticcoalvolumeisexpectedtobedownaround20%versustheprioryearandcrudeoilvolumeisexpectedtodeclineatleast25%sequentially.Asaresult,weexpectfourth-quarterEPStobedownslightlyversustheprioryear.

Includedinthisoutlookaretwopossibleitemsthatcouldbefinalizedinthefourthquarter.First,EPScouldbenefit$0.05fromaconveyanceofnon-operatingpropertythatcouldcloseneartheendofthequarter.Thiswillbebookedbelowthelineinotherincome.Secondandabovetheline,EPScouldalsobeimpactedbyafewcentsrelatingtoshort-termcostsinthefourthquarterassociatedwithanewunionlaboragreementandsomestructuralchangesinourcoalnetwork.Bothofthesecostswilldrivefuturebenefitsaswegaingreaterworkforceflexibilityandadjusttolowerdemandinourcoalmarket.Lookingatfull-year2015earnings,wearestilltargetingmid-singledigitEPSgrowthandmeaningfulimprovementinourfull-yearoperatingratio.

Inaddition,aswefurtheralignresourcestothesoftdemandenvironment,coupledwithourexpectationfor2016coalvolume,wearelookingatopportunitiestodrivestructuralchangesinourcoalnetworkinordertoaccelerateefficiencygainsnextyear.Ourcommitmenttoserviceexcellencecontinuestodriveefficiencygains,strongpricingandlong-termprofitablegrowth,allofwhichsupportsinvestmentinthebusiness.Withthat,letmeturnthepresentationbacktoMichaelforhisclosingremarks.


Well,thankyou,Frank.Asyouheardtoday,CSXistakingactiontomanagethechallengesofthisdynamicmarketplace.Withcurrencyandcommoditypricesexpectedtocontinueimpactingcoalandseveralothermerchandisemarketsin2016,wewillcontinuetomatchresourcestothebusinessenvironment.Atthesametime,weremaincommittedtodeliveringstrongservicethatsupportsoperatingefficiencyandcreatescustomervaluenecessarytosupportstrongpricing,whichenhancesourabilitytoinvestforthefuture.Throughthesestrategicinvestmentsandproductivityinitiatives,wearepositioning




theCSXnetworktoleveragelonger-termopportunitiesforprofitablegrowthinourmerchandiseandintermodalmarkets.Assuch,thismanagementteamabsolutelybelievesthatCSXcanandwillachieveamid-60soperatingratiolongerterm.Wewillnowbegladtotakeyourquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions).BrandonOglenski,Barclays.

EricMorgan (Analyst-BarclaysCapital):

Hi,thisisactuallyEricMorganonBrandon'steam.Thanksfortakingourquestion.Iwanttofocusonintermodal.Obviously,areallystronggrowthdomestically.Calledoutsomeshareshiftintheinternationalside.Canyoutalkaboutjusttheoutlookforeachofthosesegmentsandifthatsortofgrowthdomesticallyisreallysustainablethroughoutnextyear?

FredrikEliasson (EVP&ChiefSales&MarketingOfficer):

Thankyou,Eric.ThisisFredrik.Onthedomesticside,Ithinkweareseeingthebenefitoftheinvestmentandimprovingserviceproductthatweareseeing.We'vebeenabletogrowthatbusinesssomewherebetween5%and10%overthelastseveralyears.Weareseeingalittlebitofanenhancedgrowthherethisquarterasweknowoneofourcustomerswhohasthecontractualabilitytofurtherdiversifytheirportfolioisdoingjustthathereinthequarter.Soweareseeingalittlebitofanuptickinthegrowthwiththatcustomerrightnowbeyondwhatwewouldnormallysee.Butwefeelgoodaboutthatbusiness,feelgoodabouttheabilitytocontinuetogrowthatatamultipleofeconomicoutputforaperiodoftimeheregoingforward.

Ontheinternationalside,weareexperiencinggrowthwithseveralofourexistingcustomers.Wehavelostseveralcontractsoverthelast12to18months,butoverallwefeelverygoodaboutournetworkreachandtheservicethatwe'reproviding.Sowefeelgoodaboutthatbusinessgoingforwardandwewanttomakesurewecontinuetoreinvestinthatbusiness,acriticalgoalofoursaswemoveforward.

EricMorgan (Analyst-BarclaysCapital):

Appreciateit.

Operator :

BrianOssenbeck,JPMorgan.

BrianOssenbeck(Analyst-JPMorganChase):

SoIjustwantedtoaskalittlebitmoreaboutthecoaloutlook.Maybeifyoucanjustrunthroughsomeoftheassumptionsyouareembeddinginthedomesticcoal,kindofholdingwhereitisrightnowandmayberetirements,naturalgasandanycoal-to-gasswitching.Andthenifyoucanjusttouchbrieflyonexportgoal.Alotofthethermalpricingweareseeingnowsuggeststhatthere'snotawholelotthat'sgoingtobeeconomicgoingintoEuropeatleast,especiallywhenyouadjustforFX.Sowouldliketohearalittlebitmorebehindyourassumptionsthere.Thankyou.


Sure,intermsofthedomesticcoal,Frankgaveyouaviewthereintermsofthatsequentially,afterwearegoingtobedownhere20%year-over-yearisourestimateinthefourthquarter,sequentiallyfromthere,thatrunrateofabout,Iguess,21milliontonsorsofordomesticasawholeisagoodplacetothinkabout




nextyear.Andreallythetwodriversbehindthat--oneisthatour--atthispoint,wearebeingdispatchedlastbecauseofwherenaturalgaspricesare,sothatisnotgoingtoshiftaswemoveintonextyear.Unlessnaturalgaspricescomeup,obviously,itwillbeaverydifferentandmoreappealingpicture.

Buttherearetwodriversbehindit.Oneisthefactthatwehaveprobablyabout3milliontonsthatwearemovingthisyearthatwewillnotseenextyearbecauseofplantclosures.Andthentheseconddriveris,aswelookattheinventorylevelsattheutilitiesthatweserve,theyarestillatelevatedlevels,sowearegoingtohavesomeheadwindsnextyearandthat'skindofthefoundation.Andthat21milliontonstodayIalludedto,whichisasequentialquarterlyrunrate,isprobablyabout15milliontonsontheutilitysideandabout6milliontonsonthatmetcokeandironore.

Ontheexportside,Ithinkwhatwe'vesaidisthatwedidabout18milliontonsinthefirsthalfofthisyear.Weareatarunratewithimpliedguidancethatwe'vegivenof30milliontons,12milliontonsinthesecondhalfandasIthinkaboutthesecond-halfrunrate,Ithinkthat'sagoodrunrateifyouanalyzethat.So24milliontonsfornextyear.Wewillhaveamuchbettersenseaswegettothefourthquarterbecauseweare,obviously,inthemarketrightnowtotrytoseewhatwecando,especiallyonthesteamside.Anditisamuchmoredifficultenvironmenteventodaythanitwasjustsixmonthsago.Soweareworkingthroughthat,but,asIsaid,wewillhaveabettersenseofexportmarketaswegettothefourth-quarterearningsrelease.

BrianOssenbeck(Analyst-JPMorganChase):

Okay.Andthen--thankyou--aquickfollow-uponjustsomeoftheinitiativesonthecoalnetwork.Itsoundedlikeyouaretakingsomestepstodosomerealignmentontheactualinfrastructure.Ifyoucouldjustrunthroughwhatyouaredoingandwhattypeofbenefitsyouareseeingandwhenyouwouldexpecttoseethose.Thanksalot.

CindySanborn (EVP&COO):

Brian,thisisCindy.Frankmentionedthatweareanalyzingandlookingatwhatweneedtoharvestfromourexistingcoalnetworkwherewe'veseenthemostsignificantdeclinesinAppalachia.Wehaven'tannouncedanythingyet,butwehaveplanstodosoandstaytunedonthatone.

Operator :

ChrisWetherbee,Citi.

ChrisWetherbee (Analyst-Citi):

Cindy,ifyoucouldjustbearwithme,Iwouldn'tmindjustfollowingupalittlebitonthat.Ifthere'sanywayyoucangiveusasenseofwhatmightbeonthetable,ifit'ssortofshutteringlinescompletelyoratleastsortofdialingthevolumedynamicdownquiteabit.Issortofeverythingonthetable?Justkindofcuriousifthere'sanyincrementaldetailyoucanaddtothat.Thankyou.


Chris,Ithinkeverythingisonthetable.Andasfaraswhetheritwouldbefacilitiesorlines,Ithinkyou'llunderstandandappreciatethatwewanttobeabletotalkaboutthosethingsinternallybeforewedoexternally,butthereisreallynotanythingthat'snotonthetable.


Okay.That'shelpful.Andthenwhenyouthinkaboutsortoftheheadcountofthebusinessasyoulookoutinto2016andstartyourplanningthere,assumingwemaintainsortofafairlyslowgrowtheconomic




environment,howshouldwethinkabouttheappropriatestaffinglevelsatCSXandmaybewhattheopportunityispotentiallyintermsofleveragingthatdynamicofgrowthandvolume--maybenotsomuchgrowthontheheadcountside?Anyhelpyoucangiveustherewouldbereallygreat.


Well,Ithinkwhatwe'vedemonstratedhereinthethirdquarter,wehavetorunatight,efficientandreliablenetworkandweare,asyoumentioned,inaverydynamicenvironment.Fromastandpointofoperationsheadcount,wedohave1200T&Eemployeesfurloughed.Wehaverampeddownourtrainingsignificantlyandwewillbecontinuingtodothatgoingforwardtomatchdemand.Clearly,wehavefurloughsthatwecanpullbackintoactiveserviceifneeded.Althoughthereareahandfuloflocationswherewehaveveryfewfurloughedandwewillneedto--mayneedtohireinthoselocations.Wewillbeofferingopportunitiesforexistingemployeesinwhatwewouldconsiderdeepfurlough.Thoseopportunitiesjustgobackthere--backtothoselocations.But,generallyspeaking,wearemanagingthatonboththehiringsideandrecognizingthatwehavefurloughstopullfromasneeded.


Okay.Allright.That'shelpful.Thankssomuchforthetime.Appreciateit.

Operator :

TomWadewitz,UBS.

T omWadewitz (Analyst-UBS):

SoIwantedtoaskyouaquestiontostartwithonthepricingside.Youguyshavedoneagreatjobatrampingupthepricingandreallycapturingtheopportunitywiththefurtherrampupinsame-storeprice.Ithinkwhenwesawthetightnessin2014,wethought,well,maybethere'satleasttwoyearsofgoodprice,butobviously2015volumeshavebeenprettytough.Howdoyouthinkthattranslatesintopricingin2016?Wouldyousay,well,giventheweaknessinvolumes,wearelikelytoseeadecelerationversusasame-storeprice?Isthatrealisticordoyouthinkthere'ssomewaythatyoucanjustreallyleverageyourpositioninthemarketandsustainwhat'sbeenverygoodpricingthisyear?


Well,Ithinkthekeythingiscontinuedserviceexcellenceforourvaluepropositionwithourcustomersandthat'swhatweare--Cindyandteamisdoingagreatjobhereastheresourceshavearrivedtoreallyprovideserviceexcellenceforourcustomers.Sowearepleasedwiththeresultshereinthethirdquarterintermsofthesame-storesales.Andasyouwellknow,youwillbeabletoseethateachandeveryquarteraswemoveforwardintermsofwhatweareabletoaccomplish.Butstrongpricingisacriticalcomponentofwhatwearetryingtodofromanoverallvalueequation.It'soneofthekeyleverswearepullingandaswecontinuetoimproveourserviceproduct,wefeelgoodaboutwhatwearegoingtodogoingforwardaswell.


Okay.Soitsoundslikeyoudon'twanttoreallycommentatthispointon2016pricing,whetheritgetsbetterorworse?Whataboutthesensitivitytothetruckloadmarket?Ithinkthere'sbeengoodtruckloadcontractpricingthisyear,butthespotmarkethasbeenweak.Isthatsomethingyouwouldexpecttoimpactyourpricingfairlybroadly,oristhat--wouldyousay,well,that'skindofnarrowintermsoftheimpactsmaybeon2016pricing?





Idothinkthat--andjustgoingbacktoyourfirstpoint--wedolookatpricingasbeingacriticalcomponentofwhatwearedoingandwehavesaidthisforalongtimethatstrongpricingisabsolutelyparamounttoourlong-termsuccessfinancially.Sothatisakeydriverforusgoingforwardaswell.

Intermsofwherethetruckmarketis,clearly,sequentialoverthelastprobablyfourtosixmonths,ithasgottensofter,butyoualsohavetorememberthat,ifyoulookatwheretruckpricesaretodayversusthebeginningoflastyear,theyarestillupsignificantlyandwehaveonlybeenabletotouchportionsofourcontractbase.Ithinkyouknowthat,inourmerchandisebusiness,onlyabouthalfofourbusinessisuponannualbasisandmostoftheotherbusinesses,theyaremostlythreetofive-yearcontracts.Sowedofeelthatwewillhavegoodopportunitiestoreflectwhatthevaluewehaveinthemarketplaceandwithimprovingserviceontopofthat,wedofeelgoodaboutourpricingopportunitiesgoingforwardaswell.


Okay,great.Thankyouforthetime.

Operator :

AllisonLandry,CreditSuisse.

AllisonLandry(Analyst-CreditSuisse):

Withinthecontextofyourcommentsoncoalfor2016andspecificallyonthedomesticside,couldyouhelpusthinkaboutcoalyieldswithinthe--giventhevariablecoalpricestructure?Obviously,wesawsomeimpactthisquarter,butthinkingabout2016,anycolortherewouldbehelpful.Thanks.


Yes,sointermsofthecoalyieldsoverall,notjustondomestic,butontheexport,ifyoulookatthebookofbusinessasawhole,therearethreereallydriversthere.Ononehand,weareclearlygettingcorepricinginthatbusinessandweexpecttocontinue.Clearly,theexportsideisverydifficultrightnow.But,onthedomesticside,wearegettingsomegoodcorepricing.

Thefixedvariablewasclearlyalsoabigdriverhereinthethirdquarterasvolumecamedownsignificantly.About20%oftheutilitycontractshavethatsortofastructureintermsoftheircontractualnature.Andthenalsolapping,fullylapping,thesignificantpricingdeclinesthatwetookinourexportmarketinthesecondhalfoflastyear.Havingfullylapped,thatwasalsoveryhelpful.Sowehavethreedrivers.

Aswemoveforward,Ithinkyouaregoingtocontinuetoseetheexportmarketbeingverychallengedandlittleopportunityifanytoreallyimprovepricingthere.Butontherestofthemarket,wearegoingtocontinuetoseewhatthevaluepropositionisandwearegoingtolookplantbyplanttoseewhatwecando.


Okay.Andthenjustonthe20%ofutilitycontractsthathavethefixedvariablestructure,doyouhaveasenseofwhatthatpercentagewouldbein2016?


Idon'trightnowseethatthatischangingmaterially,butaswegothroughthenormalnegotiations,thatmightchange,butrightnowIdon'tseethatchangingmaterially.





Great.Thankyousomuchforthetime.

Operator :

RobSalmon,DeutscheBank.

RobSalmon (Analyst-DeutscheBank):

Asaquickfollow-uptoAllison'squestionwithregardtothefixedvariablecomponent,withthedomesticcoalexpectedtobedownevenmorestronglynextquarter,shouldweexpectcoalyieldstoimprovesequentiallyevenwiththelowerfuelprice,oriskindofQ3aprettygoodrunrateforus?


Well,IthinktoTom'sdismayofafewquestionsearlier,wetrytostayawayfromspecificallyforecastingourpricing.Mixwillalwaysplayanimpactinit,butultimatelythesame-storesales,Ithink,isthebestwaytolookatourpricing.Sowearegoingtocontinuetodowhatwecantomakesurewecapturethevaluethatweprovideinthemarketplaceandthenletthechipsfallwheretheyfallintermsofwhattheultimatenumberwillbe.


Fairenough.AndFrank,inyourpreparedremarks,youhadmentionedkindofyouguysweredoingsomeworkonalaboragreementandtherebeingpotentialsavings.CanyouremindmewhetheritwasacostorabenefitweshouldbeexpectinginthefourthquarterandanysortofpreliminarythoughtsthatwecanuseaswethinkouttonextyearforwhatthatmeanstothebottomlineforCSX?


Right,sopubliclywehaveannouncedthatwehaveatentativeagreementwithsomeofourmechanicalunions,whichwouldimply,ifratified,aslightcostinthisquarterandthenbenefitsaswegoforwardintonextyearandbeyondbasedonlaborefficienciesthere.Butwearenotgoingtoquantifythatrightnowuntileverythinggetsratifiedbytheunions.


Understood.Andthecostinthefourthquarter,whatdidyoucalloutinthepreparedremarks?


Yes,wesaidafewpenniesandwebundledacoupleofthingstogethertherethatareabovetheline--theunionagreementthatIjustmentionedandsomeofthecoalstructuralthingsthatCindyhadtalkedaboutpreviously.


Gotit.Appreciatethetime.

Operator :

TomKim,GoldmanSachs.

T omKim(Analyst-GoldmanSachs):

Wantedtoaskontheserviceside.Obviously,wearestillseeingsomegoodincrementalimprovement,butwedidnoticethatsequentially,whetherinspeedorindwell,therateofchangeortherateof




improvementslowedalittlebitandI'mjustwonderingcanyougiveusasenseonhowyouarethinkingaboutthetrajectoryofwhenyourservicelevelsgetbackclosetothat2013levelandifyoucouldframelikewhatsortofcost-savingsopportunitythatpresentsforus,Ithinkthatwouldbeveryhelpful.Thanks.


Ithink,Tom,wearewherewethoughtwewouldbeonourservicemeasuresaswelookedatthisaboutthistimelastyear.Wefeellikeourcustomersareseeingandfeelingthatbenefit.Andwearealsoseeing,fromaperformanceperspective,reductioninovertimecrewsandthosetypesofcosts.Anditisworthnotingthatwehaveaccomplishedthesesignificantimprovementsduringthesametimeframewe'vebeenworkingveryhardonouroperatingplantoinstituteourvariabletrainschedules,whichhasalsogivenussomeconsistentandvaluableproductivity,particularlyontheT&Eside;yetisstillgivingourcustomersaveryclearandobvioustripplanthattheycandependon.

SoIthinkaswegoforward,wewillcontinuetoseesomeimprovement.Idon'tthinkitwillgetquicklybackto2013levelsatallaswearechallengedatsomelocationsonthesouthernpartofournetworkwithsightingcapacitywithourlongertrains.Butwewillseeincrementalimprovementandwethinkwearedoingaprettygoodjobofbalancingtheservicemeasurementsalongwiththeproductivityandefficiencysidebytakingthisapproach.

T omKim(Analyst-GoldmanSachs):

Thanksverymuch.

Operator :

AlexVecchio,MorganStanley.

AlexVecchio (Analyst-MorganStanley):

Iwantedtojusttouchontheefficienciesinthequarter.Itlookslikeyougotabout$41millionto$42million,ifIaddeditupcorrectly,inthequarter,roughlyinlinewithkindofthefirsthalf.Isthatkindof$40million-ishperquarterproductivitysavingssomethingthatyouwouldexpecttokindofcontinue,orkindof--shouldweexpectthattomaybeaccelerateinto2016asservicecontinuestoimprove?Iknowthere'salotofmovingpieces,buthowdowethinkaboutthatproductivitysavingsandmaybewithinthecontextofyourlong-termhistoricalproductivityachievements?


Youareright.Wesawalittlebitover$40millioninproductivityinthequarterandalsodeliveredover$70millioninvolume-relatedcostreductions.Sometimesthatgetsleftoutoftheconversation,but,forthefourthquarter,Ithinkyoushouldexpectasimilarproductivitylevelfromusthatyousawinthethirdquarterandagain,volumecostsoughttocomedowninlinewiththevolumedeclinesaswell.

Forthefullyear,asyouprobablyremember,westartedtheyearapproaching$200millionasourproductivitytargetandthroughouttheyear,wehelpedyouunderstandthatthatwouldbemoreandmorechallengingasvolumescamedownandourmixbegantochange.Andwearenowtargetingfull-year2015productivitytobeapproximately$160million.Andagain,that'sinadditiontothevolumerightsizingthatwearedoingaswetakeresourcesasvolumesdecline.


Okay,great.That'shelpful.AndthenIjustwantedtoclarifyacommentonthe4Qguidance.Doesthe4QguidanceforEPStobedownslightlyyear-over-year,isthatinclusiveofthetwoitemsyouhighlightedas




possiblyoccurringandfinalizedinthequarter?


Correct.


Okay,thanks.

Operator :

KenHoexter,MerrillLynch.

KenHoexter (Analyst-MerrillLynch):

Justwantedtofollowuponthecoaloutlookfornextyear.Youmentionedkindofrunrateinthesecondhalf.Doesthatmeanweshouldnotseeacceleratedplantclosingsorcontinuedconversionstonatgaswhenyoulookatthat,particularlyonthedomesticside?JustIwantedtounderstandFred'skindofsecond-halfoutlook.Andthenjustafollow-uponthatlastquestiononthechargeinthefourthquarterthatyouhaveincluded,doesthatlookatthegainoffsettingthecost,orcanyouquantifyisonelargerthantheother?Thanks.


Letmejustclarifythecoalguidance.Therearetwopiecestoit.Oneisthedomesticguidancewherewesaidthatweexpectthefourthquartertobedownabout20%.Andfromthatabsolutelevel,whichimpliesa20%decline,about21milliontonstotalfordomestic,thatthat'sagoodrunrategoingforwardbyquarterfor2016.Thesecond-halfguidanceisreallyrelatedtotheexportcallmarketwherewesaidwedidabout18milliontonsinthefirsthalfofthisyearandweare--impliedintheguidanceof30millionisthatyouaredoing12millioninthesecondhalfandIthinkthat12milliontons,ifyouanalyzethat,itgetsyoutoabout24milliontonsin2016.That'sagoodstartingpointatthispoint.Theyarestillinthethirdquarterorearlyinthefourthquarter.Wehavealotofworktodoheretoseewhatultimatelygetsplaced,butourbestestimate,justtogiveyouasmuchtransparencyaswecanontheexportside,isthat'sprobablyagoodstartingpointfor2016.


OntheEPS,Ken,yes,thepropertysalebelowthelineisanickelandthenwehavesaidafewpenniesinthecombinationoftheunionagreementandthecoalstructureandIwillletyoudrawyourconclusionsfromthere.

KenHoexter (Analyst-MerrillLynch):

Great.Iappreciatethefollow-up.Thankyou,guys.

Operator :

RickPatterson,TopekaCapitalMarkets.

RickPatterson (Analyst-TopekaCapitalMarkets):

AquestionforCindy.Couldyouupdateusonlocomotivecapacityandifthere'sanythingmoreyouneedtodothere?Forexample,arethereanyplanstoincreaserebuildsbeyond150orincreasenextseasonyourorderbeyondthe100currentlyonthebooks?Thanks.





SoIthinkwherewearewithlocomotives,we'vegot--ouractivelocomotiveshavedecreasedintermsofnumbersequentiallyfromquarteronetoquartertwotoquarterthreeandweare--toaccomplishthat,wearereturningleasesandwearealsopayingbackhorsepowerhours.Sothosearetheoutputs--whatwearemovingoutoftheactivecount.

Weare,asyoumentioned,gettingnewlocomotives.Wehave65yettoreceiveinthefourthquarterandanother65rebuildsofwhichaportionofthoseare[forex]locomotivesforourlocalfleet.Sooverall,weintendtomanagedemandbystoringlocomotivesasthenextoptiontotakeoutanyexcessthatwewouldhaveandyoumentionedthepurchasesin2016alsothat,yes,wearereceiving100in2016.Butwewillmanageourlocomotivefleetbasedondemandandobviouslybalancingthatwithservice.

RickPatterson (Analyst-TopekaCapitalMarkets):

Thankyou.

Operator :

JasonSeidl,CowenandCompany.

JasonSeidl(Analyst-CowenandCompany):

Letmestartonintermodalfirst.Canyoutalkalittlebitaboutthedemandsidebecausewearestartingtohearaboutpricingexpectationsandtruckloadslippingandgiventhatdieselpricesarenearsix-yearlows,areyoustartingtoseeanyweakeningonthedemandfrontintermsofconversionsoutEast,orisitstillstayingstrong?


Well,intermsofthefuelreferencethatyoumadethere,Ithinkoverallit'simportanttorememberthatourfuelsurchargeonourintermodalbusinessisdifferentthantherestofthebusiness.Itreallymirrorsthetrucker,soitreallydoesnotcomeintoplaythatmuchintermsofwhatfueldoesinregardstohowmuchwecanandcan'tconvert.Wearestillseeinggoodvibrancy.Thereisnodoubtthoughthat,atleastonaspotbasisrightnow,thatthetruckrateshavecomedown,butthecontractualsidecontinuestohave,asfaraswecansee,prettygoodrateincreasesonthecontractualsidebecauseIthinkpeoplestillarecognizantofwhatwillhappenlongertermbothintermsofdrivingretentionandsomeofthenegativeproductivityinitiativesthatthetruckingindustryisfacing.

Soobviously,wewouldliketoseeitgetsequentiallystrongerfromwhereitistoday,butknowingwherethecontractratesareandthefactthatifyougobackayearandahalf,rateshavecomeupquitesignificantlysincethenonthetruckingside.Westillfeelthatthere'sgoodopportunitiesbothtoconverttrafficandtocontinuetohavegoodpricingvibrancy.


Okay.Thankyou.Thatwasgreatinformation.AndifIlookoutto2016,yougaveussomereallygoodstartingpointsonhowtolookatcoal.Idoubtanybodyhadcoalupintheirinternalmodels,butwewillhavetoseehowthatpansout.Howdoyoulookattherestofthebusinessgiventhatcoalisgoingtobeadragagain?Areyouguysgoingtobeabletogrowyouroverallvolumesin2016basedonwhatyouseenowinyourbookofbusiness?


Ithinkthat'salittlebittooearlytotell,butclearlywiththissignificantdeclineinourcoalbusiness,it's




goingtobeverydifficulttodothat.Whatwearegoingthroughrightnowisournormalplanningprocesstolookattherestofthebusinesstoseewhatwearefacing.Therearesomeopportunitiesforcontinuedgrowthinseveralmarkets.Inseveralmarketsstill,wearefacingbothsignificantvolumefromlastyearthatgetstheyear-over-yearcompsdifficultfortherestoftheyearandperhapsevenalittlebitintothefirstquarterandwearecontinuingtoseethenegativeimpactonthedollarandthelowercommoditypricesaswell.

Soaswethinkaboutthebookasawhole,there'salotofdynamicsthatgoesintoplanningfornextyearandwecontinuetofeelgoodaboutsomeofthesecularthingsthatweareseeingouttherelikedomesticintermodal,forexample.Sowewillhaveamuchbetterviewofthataswegetintothefourthquarterandespeciallywhenwegettothefourth-quarterearningsrelease.


Fred,Iappreciatethecommentsandthetime,sir.

Operator :

MattTroy,Nomura.

MattT roy(Analyst-NomuraSecurities):

Ijustwantedtoaskaquestiononthebroadereconomy.Obviously,wearegettingmixedsignals,butdirectionallythereseemstobeasensethatsomeoftheindustrialweakness,someoftheenergycommodityweaknesshascreptintoconsumerendmarketsbeginninginthespringandmaybespreadabitfurtherintofall,earlywinter.Wantedtogetyoursense,ifwestripoutenergy,howdoesthatconsumereconomylook?You'vegotgoodcommentsaboutintermodal,butyouguyshavebeenatthisforalongtime.Howdoestheeconomyfeeltoyouandwheredoyouthinkweareinthecycle?


Yes,Ithinkthatifyoulookatsomeofthecoretenetsofoureconomysuchasthehousingandtheautomotiveside,youseesome--youcontinuetoseegoodvibrancy.Obviously,growthfromalowbaseinhousing,but(inaudible)beingatpeakdemand,butcontinuedexpectationsforgrowththere.Thecorechemicalbusinessisalsodoingokay.Andthenwiththelowerfuelprices,Ithinktheconsumersarefeelingalittlebitstronger.Butthenyoudohavetheenergysidethatyoutalkedaboutandthefactthat,ifyoulookatkindofthebroadindustrialproductionindex,youseeindustrialproductionsequentiallycomingdown.AndIthinkthelatestnumberIsawforthefourthquarterwasactuallythatindustrialproductionwouldactuallydeclineyear-over-year.

SoIthinkyouhavealotofdifferentvariablesthatgoesthroughrightnow.Clearly,weareverymuchdependentontheindustrialeconomy,sothatisabigdriverofours.But,atthesametime,wedo--wearegettingmoreandmoreexposuretotheconsumersideofthingsaswecontinuetogrowourintermodalbusiness,sothatishelpingtooffsetthat.Sowithoutsayinganythingmorethanthefactthatit'sadynamicenvironmentandwearerecognizingtheindustrialsideofthingsarestrugglingsequentially,westillfeelgoodaboutourlong-termprospectsintermsofbeingabletogrowourbusiness.


Thanks,Fredrik.AndIguessonefollow-upwouldbe,asyoumentionedspecificallyinyourcommentsinthepressrelease,thatyou'velostseveralcontractsininternationalintermodaloverthelast12,18months.Werethereanyadditionalonesinthelastquarter,orareyoumerelyhighlightingtheonesyou'vepreviouslyhighlightedandthelagimpacttheyhadthroughthequarter?I'mjusttryingtogetasenseifthecompetitiveenvironmenthaschangedatall,orwasthisjusttheresidualimpactofcontracts




wealreadyknewabout.Thanks.


Yes,theseweretheresidualcontractswealreadyknewabout.Ithinkwepointedoutinoursecondquarterearningsreleaseaswellandsonothinghasreallychangedfromthatperspective.Wecontinuetobefocusedonournetworkandcontinuetobefocusedontheserviceproductthatweareproducingandmakingsurethatwhateverwecarryonournetworkallowsustocontinuetoreinvestinthebusiness.


Okay.Thanks,everybody.

Operator :

BenHartford,Baird.

BenHartf ord (Analyst-RobertW.Baird):

Cindy,specifically,canIgetyourperspectiveonserviceandyourexpectations?Obviously,wearedealingwithaweakervolumeenvironment.Wehavebeenthisyear.Nextyear'soutlookisbeingtaperedlower,butintermsofthepaceofserviceimprovement,couldyouprovideanycontexttowhatexpectationsshouldbenextyearandwhetherthere'slineofsighttogettingbacktosomeofthepriorpeaklevelsof2012,2013'sexperienceatanypointintimeduring2016?


SoasImentionedbefore,Ithinkwewillcontinuetoseesteadyimprovementinserviceperformance.Asfaras2013,that'scertainlyaspirationalforus.Ireallycan'tgiveyouthatatthispoint;it'sabalanceofbothservice,which,obviously,ourcustomersexpectofus--wewantthattobeveryreliable--butwealsohavetomanagetheefficiencycomponentofthataswell.Sothat'skindoftheplacethatweareininfiguringoutwhenwewillgetbackto2013.


Asafollow-up,hasanythingchanged--hastheexperience,Ishouldsay,overthepast18months,hasitchangedyourconfidenceintheabilitytogetbacktothosehighwatermarksasitrelatestoservice?


Idon'tthinkit'schanged.Ithinkit'sjustsimplybalancing,makingthebalancingactinanenvironmentwhereweareseeingthereductioninvolumesthatyou'veheardustalkabout.


Okay,thankyou.

Operator :

CherilynRadbourne,TDSecurities.

CherilynRadbourne (Analyst-TDSecurities):

Justontheeconomyagain,therehasbeensometalkthatwhatweareseeingatleastinpartisaninventorycorrectionthat'srelatedtotheWestCoastportdisruptionbecause,ineffect,shippersoverorderedwhentheyweren'tsurehowquicklyinventorycouldmovethroughthesupplychain.Justcurious




ifthat'sadynamicthatyouareseeinginthemarketplace.


Yes,Idothinkthatthat'sagoodpoint.Weareseeingthattheinventorylevelsarecomingup.Ithinkwerefertoitinourpapermarketforexample.Andasyoulookatsomeoftheofficialstatisticsoutthere,youhaveseenanincreaseincustomerinventories.Sothatcertainlyisplayingafactorhereintermsofthemoremutedvolumeoutlook.


Andthenjustaveryquickoneonlaborexpense.Itlookslikelaborinflationinthequarterwasalittlehigherthanyouhadbeenexpecting.Wasthereanythingofaone-timenatureinthere?


Yes,theresurewas.Inthequarter,wehadinflationof$33million,whichisslightlyhigherthanyounormallysee.Thebasewageinflationwasnormal.Wedidhaveafringeadjustmentrelatedtoemployeefurloughs,soyoushouldexpectamorenormalized$25millionrunrateinthefourthquarter.


Perfect.Thankyou.That'sallforme.

Operator :

DavidVernon,Bernstein.

DavidVernon (Analyst-SanfordBernstein):

Maybejustbiggerpicture,Michael.Asyouthinkaboutlookingforalowdouble-digitdeclineincoalnextyearafteramid-teensdeclinethisyear,asyouthinkabouttheearningspowerofthebusiness,howshouldwethinkaboutthat?Obviously,longerterm,peoplehavebeenthinkingrailsaslowdouble-digitgrowers.Thisyearhasbeenatransitionalyearofmoremid-single.Isnextyearalsogoingtobesettingupasmoreofatransitionalyear,ordoyouthinkthatthereisachanceyoucangetbackuptothatdouble-digitEPSgrowthrate?


Well,clearly,wehavethechallengesofcoalwe'vediscussedprettyextensivelyhere.Ithinksomeofitdependsonwheretheeconomyheadsbecause,asyouknow,overthelasttwotothreeyears,we'vebeengrowingthoseotherbusinessesfasterthantherateoftheeconomicgrowth.Iftheeconomyimproves,wethinkwecandothatagainnextyear.Ifitstaysata(inaudible)rate,obviously,itismuchmorechallenging.


Soistheremoreyouguyscandoontheproductivitysidetohelpoffsetsomeofthat?Obviously,thecorepricingisgood;thesharegainsinintermodalaregreat.I'mjustwondering,obviously,youdidalittlebitofbackofficeworkinJacksonvilleearlierthisyear.Shouldwebeexpectingyouguystodigalittlebitdeeperonthatfrontaswell,orhowshouldwebethinkingabouttheproductivitysidefor2016?


Ithinkyouaregoingtoseeusextremelyfocusedontheproductivityside.Yousawevidenceofthathereinthethirdquarter.Thatsameintensitywewillbringto2016andwewilltakeactionstomakeourselves




moreandmoreproductivegoingforward.


Allright.Thanks,guys.

Operator :

JohnLarkin,Stifel.

JohnLarkin (Analyst-StifelNicolaus):

I'mfascinatedbythestrategytorunlongertrainsbyrunningessentiallysixtrainswithinaseven-daywindowwhereyounormallywouldhaverunseventrains.Howfaralongistheimplementationofthatstrategy?Andthenasafollow-ontothatquestion,howlongwillittaketoaddenoughpassingsightingsorextendexistingpassingsightingssothatthoselongertrainsdon'timpingeuponnetworkfluidityandservicequality?


Ithinkwhatyou'llseeisweareprettyfaralongintheadjustmentsthatwearemakingforlongertrainsinourmerchandisenetwork.Wearealso,asanaside,increasingthelengthoftrainsinourbulknetworktoo,sowearetaking--wearepushingbothlevers.Whatisgreataboutthevariabletrainscheduleis,asdemandrequires,wecanflexupandflexdown.SoIthinkitwillbeacontinuingeffortonourparttomatchdemandinwhathastraditionallybeenafairlyfixed--whatwe'veconsideredfixed--networkonourcarloadside.SoIdon'tknowthattheanswer--Ithinktheanswerisweareprobablynoteverdone,butaprincipalandpreponderanceoftheworkhasbeendonebasedonthedemandthatweareseeingrightnow.AndIcouldn'trememberyoursecondquestion.


Passingsightings.


Passingsightings.SoIthinkweareevaluatingreallywhereweareinthecorridorsthatweneedtoadjustthelengthofpassingsightings.Wearereallyinthemiddleofthatnow.Sothere'ssomecorridorsthataremoreimpactfultousthanothers.Obviously,thenortherntierismostlydoubletrack.Whatwearegoingtobeworkingonisinthesouthernpartofournetworkthatispreponderanceofsingletrack.


Maybejustafollow-ononthegeneraltopicofcapacity.Sinceintermodalisgrowingquitenicely,particularlyonthedomesticside,wheredoyoustandwithrespecttoexcesscapacityintheintermodalnetwork?Canyouabsorbanother5%,10%,15%?Wheredowestarttorunintocongestionproblemsandalittlebitofcapacityissuesasintermodalcontinuestogroweveninatepideconomicenvironment?


Ithinkfromatrainperspective,Ithinkwe'vetakenadvantageofourNorthwestOhioexpansionandactuallyhavereducedsometrain--orincreasedsometrainlengthonourintermodalnetworkasaresultofthat.Butwedohavecapacityonthetrainsfortheforeseeablevolumethatwethinkwewillsee.AndIwillremindyouwe'vedonealotofworkondoublestackclearancesandsoforthaswell.Sowefeelprettygoodaboutwherewearethere.





Thankyouverymuch.

Operator :

BascomeMajors,Susquehanna.

BascomeMajors (Analyst-SusquehannaFinancialGroup):

Iwantedtodiginalittlemoreontothelonger-termchangesyouareconsideringmakingtoyourcoalnetworkhere.AndIknowyoudon'twanttotalktacticallyaboutwhat'sgoingtohappennextyearandtheimpact,andIunderstandthat,butyoudidsayeverythingisonthetable.AndIamjustcurious,theendgame,threeorfouryearsdowntheroad,couldyouframemaybesomemetricsthatwouldapplytoyourcoalnetworktoday,whetheritberelatedtocapitalinvestment,CapExtorevenueonsomeofthededicatedpartsoranywaythatwecanthinkaboutitandwhatyourgoalsarefortwoorthreeyearsdowntheroadtochangethatnetworkandimprove,beitprofitabilityorcapitalefficiencyonthatpartofyournetworkwhererevenuesaredownconsiderably?


Ithinkwhenwelookatthecoalnetwork,it'skindofaspaghettibranchlinekindofoperationwithsomemainlinesinbetween.Asweareseeingsomeoftheloaders--loadouts--eitherclosingandconsolidating,itisour--wehaveaneffortafootheretotrytofigureoutwherethebestefficienciesare.Someofitwillbemainlineoperations.Someofitwillbefacilities.Clearly,thecapitalinvestmentshavebeenovertimenotmaybetransparentexternally,buthavebeenovertimecomingdown.Thatwillcontinuetotakeplaceandaswereallyloseonaparticularbranchoraparticularlinevolumethere,wecanalsolookatrepositioningsomeoftheassetsintootherpartsofournetworkwherewearegrowingandbacktothesidingcapacityquestionthatIgotafewminutesago.

Sothere'skindofamultifacetedwaythatwearelookingatit,but,asyoucanimagine,it'saverycomplexchallengebecausewewanttocertainlyservethecustomersthatareloading.Itisveryprofitablebusinessforusandasyouprobablywouldrecognize,noteverybodyononebranchisclosing.Wehavemultipleexamplesofplaceswherewe'vegotsomeclosing,somenotthatwehavetolookathowwearegoingtoserve.SothatprojectisunderwayandIprobablycan'tgiveyoumorecolorthanthat.


IguessIwouldonlyaddwedoexpectthatIllinoisbasincoaltocontinuetogrow.Asyouknow,wemadeaninvestmentlastyearinwhatwecallourCaskeyyardtoallowustomoveunittrainsfromtheIllinoisbasindownintotheSoutheastinamuchmoreefficientmanner.Soit'snotjustlookingatsomeassetsthatarelessintense,butalsomakingsurewearepositionedforthefuturegrowth.


Understood.Appreciatethecolor.Tyingitalltogether,isthereanenvironmentwhereCapExcouldbehittingitscyclehighwatermarkinthisyearandlastatthe2.5range,orisittooearlytoseeifthatcouldfalloffmateriallyaswelookintonextyearand2017?


Ithinkit'sprobablyalittleearlytolookatthat.Obviously,wearestillgoingtobemakinginvestmentsinthebasesafetyandefficiencyofournetwork,but,inaddition,asweseeouropportunitiesinthe




intermodalmarketgrowing,therewillprobablycontinuetobestrategicinvestmentsthere.SoIthinkit'salittleearlytogiveyouanoverallnumberonthat.


Understood.Thanksforthetimethismorning.

Operator :

JeffKauffman,BuckinghamResearch.

Jef f Kauf fman (Analyst-BuckinghamResearch):

Congratulations.Toughenvironmentoutthere.Theseareterrificresults.


Thankyou.


AquestionforCindy,becausealotofmyotherquestionshavebeenasked.Wetakeastepbackandlookathowthesechangesintheenvironmentarechangingthenetwork.So,forinstance,youarestilldownaboutamileandahalf,almost2milesanhour,ontrainspeed,butmaybethetrafficmixdoesn'tallowyoutogetbackthere.Wearestillat204,000carsonlineversuslike182,000twoyearsagobeforewegotthebigvolumesurge.Canyoutalkaboutwhereyouareintermsofgettingproductivitytowhereyouwantittobe?Andasyoumentionedwiththelongertrains,maybethat'sadragontrainspeedandlookingbacktotwoyearsago,maybethat'snottherightmetrictothinkaboutwhereyouwilleventuallybe.Butwhenwelookattrainspeed,whenwelookataccidents,whenwelookatassetsonline,wheredoyouthinkweeventuallygosayoverthenextonetotwoyearsasyouarelookingtogetthenetworkwhereyouwantittobe?


Soasfarasproductivity,we,obviously,wanttobeareliablenetworkandserveourcustomers,butweareprobablyneversatisfiedontheproductivityside.Whenyoulookatvelocityandyoulookat--toyourpoint,takeitastepback,weareseeingaconcentrationofvolumeononeportionofournetworkandweareseeingatremendousreductioninvolumeonotherpartsofournetwork.Soyou'vegotacompressionthereontopofbuildinglongertrainsthatwetalkedabout,whichinasingletrackrailroadcanbealittlebitchallenging,atleastattheonsetuntilwemakemaybeafewinvestmentsthere.

Iwouldn'tsaywehaveatargetwithcarsonline.Ithink,withvolumerunningwell,youdon'twantthatnumbertoevergettozero.Youwanttobeabletoserveyourcustomersandyouwanttobeabletodoitefficientlyandeffectively.Ithinkourviewpointsongoingforward,it'sprobablyontheproductivityside,thecycletimeofequipmentandtoalesserextentmaybethevelocityside.Althoughthatisanimportantcomponentintermsofturningassets,buttheassetcomponentisreallywherewewillbespendingthemostofourtime.


Okay.AndCindy,thisquarter,wesawabigjumpinon-timeoriginations,buton-timearrivalsstillcontinuedtolag.Canyoutalkaboutwhat'scausingthatfrictionandwhenyouexpectthatgaptonarrow?





Yes,sowe'vetalkedaboutthatonpreviouscallsthatweareseeingthespanonourarrivalsdecreaseandthathascontinuedintothethirdquarter.Sowhiletheabsolutenumberisexactlywhatyousee,weareseeingtheamountoflateness,ifyouwill,godown.Andthisisoccurringaswearedoingsometremendous--I'vetalkedabouttremendousandsignificantchangestoouroperatingplan.Soweexpectthattogettomorenormalizedlevelsgoingforward.


Okay.Everybody,thankyouandcongratulations.

Operator :

ScottGroup,WolfeResearch.

Scott Group(Analyst-WolfeResearchl):

Frank,canyoujustclarifyonequickthing?Thecommentonfourth-quarterearnings,isthebasefromlastyearthatyouareusing$0.49,orisitthe$0.52excludingsomeoftheone-timelaborstuff?


Yes,it'sonthereportedbasis,Scott.


Okay.SoIseefourthquarterisgoingtohavereallygoodproductivitywithlabordown6%orso,verygoodpricing,butabigcoalheadwindandearningsdown.Kindoffeelslikethat'stheenvironmentfor2016ofgoodpricing,goodproductivity,butcoaldownalot.What'syourconfidencethatyoucangrowearningsinafull-year2016environment?


Well,Ithinkyoursummationofthefourthquarteriscorrect.It'sprobablytooearlyforustotalkaboutthespecificson2016.We'vecertainlygivenyoualotofvisibilityintodomesticandexportcoal.Andaswealwaysdo,wewillbefocusedonthethingsthataremostwithinourcontrol--rightsizingtheresources,drivingefficiency,runningabetterrailroadandvaluepricingandgrowingwhatwecangrowwiththemarkets.


Okay.AndMichael,maybejustoneforyou.Sowehadsomeunexpectedmanagementchanges.Maybegiveusyourperspectiveonthechanges,thenewteamandwhatitmeansforyouandyourplanandlongtermatCSX.


Well,Ithinkevidencedtodaybytheanswersyou'vebeengettingfromthisnewteamwehaveinplace,wehaveasuperteamheretodriveusforward.Ithinkwe'vegotthetalentweneed.Ourdirectionasacompanyisnotchanging.It'sallaboutcontrollingthethingswecancontrol,growingwherewecanandI'mveryexcitedaboutit.Iwillbearound.I'vecommittedtobeatleastanotherthreeyearstotheBoardtomakesurethatwehaveagoodtransitionhereasweworkourwaythroughthistransition.ButIfeelverygoodaboutitandIfeelgreatabouttheteamwehave.


Okay.Allright.Thankyou,guys.




Operator :

CleoZagrean,Macquarie.

CleoZagrean (Analyst-Macquarie):

Goodmorningandthankyou.Myquestionrelatestoyourtargetforlong-termoperatingratioimprovement.Canyoupleaserefreshusonyourlatestviewonhowthebuildingblocksforthatmayhavechangedbasedonyourexperiencethisyearandyourlateststrategicupdate?Whereshouldoperatingimprovementcomefrommost--price,volume,productivityoranyotherwayyouwouldliketodescribeittous?Andasafollow-up,relatedtothat,howshouldwethinkofthemiximpactonmarginsgiventhatintermodalversuscoalcontinuestoevolve?Thankyouverymuch.


Thankyou.Intermsofthelong-termguidance,again,yousawinourpreparedremarksandinthepressrelease,wearestillconfidentinourabilitytodeliveramid-60soperatingratiolongterm.Ithinkthedriversaregoingtobethesamedriversthatyou'veheardustalkaboutoverthelongtermandthosearetheefficiency,theserviceandthevaluepricingandadjustingourresourcestovolumesastheytickupandtickdown.Butweareconfidentinthatability.Intermsofthemix,certainlymixwillbeanimpactforusinthefourthquarterandmovingforward,butthatdoesn'tchangeourconfidenceinourfuturethatwewillreachamid-60soperatingratiolongerterm.

CleoZagrean (Analyst-Macquarie):

Thankyou.

Operator :

JustinLong,Stephens.

Just inLong (Analyst-StephensInc.):

Soaswethinkaboutthepaceofpricingoverthenextseveralquarters,doyouthinkintermodalpriceincreaseswillberoughlyinlinewithcarloadpriceincreases,oristhereareasontobelievethatpriceincreasesinoneofthesebusinesseswilloutpacetheother?


Idothinkwe'regoingtostayawayfromspecificguidance.Weareprettytransparentalreadyintermsofthesame-storesalesthatweprovideyouintermsofalookbackinthepreviousquarter.Intermodalisalwaysthemostdifficultonetogetsustainedinflationpluspricing,butneverthelessbasedonthefactthatwehaven'tbeenabletotouchasmanycontractsaswewouldlikesincethebeginningoflastyear,wedofeelgoodaboutwhereweareheadingonpricinggoingforward.


Okay,great.Andmaybeaquicklastone.Iwantedtoaskaboutsharebuybacks.Withthepullbackinthestock,Iamjustcuriousifyouconsideredamoreaggressiveapproachtobuybacksgoingforward?


Wehaveconsideredthat.Atthesametime,wearerailroaders,notstockpickers,sowe'vealsodonesomepost-auditworkonpriorprogramsandreallylookedatwhetherornotaratableapproachora




timingapproachwasbetterandwearestickingwitharatableapproach.Soyoucananticipateasimilarrunratetowhatyousawinthethirdquarter.


Okay.That'shelpful.Iappreciatethetime.

Operator :

JohnBarnes,RBCCapitalMarkets.

JohnBarnes (Analyst-RBCCapitalMarkets):

Mike,IknowyousaidyouwerealittlereluctanttodelvetoodeeplyintotheCapExbudget,butyourlong-termguidancehasbeeninthathighteenspercentofrevenue.Lookslikeyouaretrackingabitoverthatthisyear.Isthattherightmetrictolookatgoingforward,ordoweneedtofocusontheabsolutedollaramountofcapitalrequiredinthebusinessandjusthowdoyouthinkaboutthatguidancegoingforward?


Well,John,that'sinterestingyoumentionedthat.Theremaybeabetterwaytolookatitjustastheabsolutedollars.Obviously,withthefuelsurchargerevenuesgoingdownandasyouknow,that'snotaprofitelementforus,butitclearlyimpactsthosetop-linerevenuesandmaybethatpercentage.SoIthinkthinkingofitintermsofabsolutedollarsmaybethewayweevolveovertime.


Allright,great.Fredrik,youtalkedaboutthecontracts,theintermodal--Iguesstheinternationalside--thatyoulostearlierintheyear.Isthereanythingelsefromacompetitivestandpointcontract-wisethat'scomingupforbidthatisouttherethatweshouldbekeepingoureyeon,nervousabout?Hastherebeensomechangeinthecompetitiveenvironmentthatputsanyotherbusinessmaybemoreatriskthanithasbeeninthepast?


No,Ithinkwecontinuetobefocusedontheintermodalsidespecificallyonmakingsurethatwecontinuetoreinvestinthebusiness.Wehaveagreatserviceproduct.Wehaveastrongnetwork.Wehavesomeveryinnovativethingsintermsofwhatwe'vedonewithourhub-and-spokesystemthatgivesusanetworkthatIthinkisunparalleledintheEast.Andaswemoveforward,wealwayswillhaveacontractthatcomesupandwewillalwayshavesomewinsandlossesovertime.Thekeythingforus,asIsaid,we'vegottomakesurewecontinuetoreinvestinthatbusinessandthat'showwejudgeintermsofhowwelookatandhowweapproachcontracts.


Verygood.Nicequarter.Thanksfortakingmyquestions.


Thankyou,everyone,forjoiningus.WeÕllseeyouagainnextquarter.

Operator :

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CSX Corp (CSX) Earnings Report: Q3 2015 Conference Call ... · CSX Corp (CSX) Earnings Report: Q3 2015 Conference Call Transcript The following CSX Corp conference call took place