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Edited Transcript of CSX earnings conference call or presentation 16-Oct-19 8:30pm GMT

Q3 2019 CSX Corp Earnings Call

Jacksonville Oct 18, 2019 (Thomson StreetEvents) -- Edited Transcript of CSX Corp earnings conference call or presentation Wednesday, October 16, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bill Slater

CSX Corporation - Head of IR

* James M. Foote

CSX Corporation - President, CEO & Director

* Jamie J. Boychuk

CSX Corporation - EVP of Operations

* Kevin S. Boone

CSX Corporation - VP & Interim CFO

* Mark K. Wallace

CSX Corporation - EVP of Sales & Marketing

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Conference Call Participants

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* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Benjamin John Hartford

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity Analyst

* Brian Patrick Ossenbeck

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* David Scott Vernon

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Fadi Chamoun

BMO Capital Markets Equity Research - MD & Analyst

* Jordan Robert Alliger

Goldman Sachs Group Inc., Research Division - Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

* Walter Noel Spracklin

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the CSX Corporation Third Quarter 2019 Earnings Call. As a reminder, today's call is being recorded. (Operator Instructions) For opening remarks and introduction, I would like to turn the call over to Mr. Bill Slater, Chief Investor Relations Officer for CSX Corporation.

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Bill Slater, CSX Corporation - Head of IR [2]

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Thank you, and good afternoon, everyone. Joining me on today's call is Jim Foote, President and Chief Executive Officer; Mark Wallace, Executive Vice President of Sales and Marketing; Kevin Boone, Chief Financial Officer; and Jamie Boychuk, Executive Vice President of Operations.

On Slide 2 is our forward-looking disclosure, followed by our non-GAAP disclosure on Slide 3.

With that, it's my pleasure to introduce President and Chief Executive officer, Jim Foote.

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James M. Foote, CSX Corporation - President, CEO & Director [3]

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Good afternoon, and thank you, Bill. Before we begin the presentation, I'd like to first congratulate the over 21,000 strong CSX workforce for a great job in delivering a really good quarter. They again showed that they are the safest, most customer-focused and best operators in the industry. Breaking their own record with an all-time low operating ratio for a U.S. Class I railroad of 56.8% was no easy task. So hats off to all of them.

I'd also like to mention several recent leadership announcements, beginning with the appointment of Kevin Boone to Chief Financial Officer and Jamie Boychuk to Executive Vice President of Operations. Both Kevin and Jamie are skilled leaders, who have played big roles in this company's transformation and are excellent additions to our executive team. I'm very pleased that Ed Harris will remain a key part of the executive team as we drive hard to get even better. CSX is lucky to have both Ed and Jamie, 2 of the best operators in our business.

We also announced changes in sales and marketing, as Mark builds a new team that is intensely focused on identifying and capitalizing on opportunities to grow the top line.

Adam Longson recently joined as Vice President of Energy. Adam's deep knowledge of the commodity market is a valuable addition.

The recent appointments of Farrukh Bezar as Senior Vice President of Marketing and Arthur Adams as Vice President, Merchandise Sales, demonstrates our commitment to working with our merchandise customers to find new and creative ways to first add value to our customers, which will then drive long-term profitable growth. CSX's service has never been this good. Now is the time to harvest the opportunities.

With that, let's turn to the presentation, beginning with Slide 5 and our financial results. The third quarter results are straightforward, with only a few unique items, which Kevin will point out.

Third quarter EPS increased 3% to $1.08 versus last year's figure of $1.05. Our third quarter operating ratio improved by 190 basis points to, as I said, a new record of 56.8%.

Turning to Slide 6. Our improved service is driving industry-leading Merchandise volumes, as customers continue to trust CSX with a greater share of the freight. Despite the softer industrial economy, Merchandise volumes held flat. However, the strength of Merchandise was offset by declines in Coal, Intermodal and other revenue, resulting in a 5% decline in total revenue to $3 billion.

I'm encouraged by the performance of our Merchandise franchise. Had it not been for the Philadelphia refinery explosion at the end of June, Merchandise volumes would have been up approximately 2% for the quarter versus declining industry volumes. In total, Merchandise revenue increased 1% on flat volumes, as pricing gains were partially offset by mixed headwinds.

Intermodal declined -- revenue declined 11% on 9% lower volumes, much of this associated with the impact of lane rationalizations implemented last fall and early this year. We have now left the first round of lane rationalizations and lapped the final 5% of rationalizations at the beginning of next year.

Coal revenue decreased 12% on 9% lower volumes, with declines in both domestic and export markets due to lower natural gas prices and weaker export demand and lower benchmark prices.

Finally, the decrease in other revenues was primarily driven by lower storage revenue at intermodal facilities and demurrage charges.

Moving on to Slide 7. I am pleased with the continued positive momentum in our safety performance. Our FRA personal injury rate was again the best in the industry, and we further improved on last quarter's record FRA train accident results to set new company records for both fewest train accidents and the lowest accident rate. We still have opportunities to improve. Technologies such as the increased use of automated track inspection cars and drones are helping to identify small problems before they become big issues and are also improving our day-to-day execution across the network. We constantly strive to make the railroad as safe as it can be.

Moving to Slide 8. Let's quickly review our operating performance. Velocity improved both sequentially and year-over-year. Dwell increased slightly for the quarter, but we see opportunities to improve this metric going forward.

We also set another fuel efficiency record. CSX is the only U.S. Class I railroad to operate below 1 gallon of fuel per 1,000 gross ton-miles. Not only does this reduce costs, but the environmental impact of this is significant. This has been partially enabled by the increased use of distributed power, which has been a focus of the operating team. This technology, which CSX had historically [not] deployed, allows us to disperse locomotives throughout the train, which improves fuel efficiency and enhances safety and reliability by reducing train separations. For the quarter, we averaged 87 distributed power trains per day, but we frequently operate with over 100.

On Slide 9, most importantly, as we focus on running a better railroad, we're creating better service for our customers. We continue to improve trip plan compliance figures for both carload and intermodal customers, with 75% of Merchandise cars and 94% of intermodal containers hitting their hourly trip plan targets, both new quarterly records. We're now providing individualized real-time trip plan tracking to our intermodal customers and will be rolling that information out to Merchandise customers in the fourth quarter. These new tools again differentiate CSX from other rails, and our customers are very excited about the tool.

I'll now hand it over to Kevin, who will take you through the financials.

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Kevin S. Boone, CSX Corporation - VP & Interim CFO [4]

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Thank you, Jim. Before I get started, I want to thank Jim and the Board for their support and confidence. I'm excited to continue to work with this great team.

Turning to Slide 11. I'll walk you through the highlights of the summary income statement. As Jim mentioned, total revenue was down 5% in the third quarter, as the impact of intermodal and coal headwinds as well as lower fuel recoveries and other revenue more than offset the benefit of pricing gains across nearly all markets.

Expenses declined 8% year-over-year, really a great performance. The team continues to drive efficiency across all areas of our business. Overall, third quarter expense results reflect the company's sustained operating improvements, a significant progress in labor and asset efficiency.

Before running through the expense line items, I want to note a couple of unique items in the quarter, including a $22 million impairment related to an intermodal terminal sale agreement and a net headwind of $15 million related to state fuel tax matters. These 2 items totaling $37 million impacted MS&O and fuel expense, respectively.

Real estate saw $65 million in gains this quarter, an increase of $12 million year-over-year. We continue to see a pipeline of real estate opportunities, though the impact of these transactions will remain uneven from quarter-to-quarter and year-to-year.

Labor and fringe expenses were 8% lower, with average head count down 6%. Our ongoing refinement of the operating plan continues to drive savings from fewer crew starts, enabling a 9% year-over-year reduction in active train and engine employee base and driving a 6% improvement in crew utilization, as measured by gross ton-miles per active train and engine employee.

T&E overtime and relief starts are also down 12% and 77% respectively as we operate more efficiently. As I mentioned on the second quarter call, overtime is a strong focus area across all operating departments. Through reward force efficiency and management execution, we reduced overtime across all operating departments by nearly 14% sequentially.

Additionally, the active locomotive count was down 11% year-over-year in the quarter. The smaller fleet combined with fewer cars online and freight car repair efficiencies helped drive an 8% year-over-year reduction in our mechanical workforce.

Also while velocity on-time originations and on-time arrivals improved sequentially quarter-over-quarter, Jamie and the operating team are confident there remains additional opportunity to continue to improve train speed and dwell, which will further deliver cost savings.

MS&O expense improved 12% or $59 million versus the prior year, driven by efficiency in operation support costs and savings related to lower volumes. We continue to see efficiencies attributed to lower active locomotive count driving savings in locomotive materials and maintenance costs. Freight car repair costs were also lower, driven by significantly fewer train accidents in the quarter.

In addition, we're intensely focused on driving engineering efficiency. This led to significant savings in the third quarter on materials, travel, vehicles and outside services. Our continued train plan refinements also drove savings in crew travel and repositioning expenses, which were down 10% year-over-year.

Fuel expense was down $45 million or 17% year-over-year in this quarter. These savings were driven by a 13% decrease in the per gallon price, record efficiency and lower volume. Our focus on utilization of distributed power and energy management software combined with train handing rules compliance drove another quarter of record fuel efficiency.

As I noted earlier, there was also a unique item related to state fuel tax matters that had a $15 million unfavorable impact in the quarter.

Looking at other expenses. Depreciation increased 1% due to the impact of larger net asset base. Going forward, we expect a sequential increase of approximately $15 million to depreciation in the fourth quarter, mainly related to group life depreciation study on equipment assets that occurs every 3 years. Losses associated with previous asset sales are amortized over the life of the remaining assets. This obviously has no impact to free cash flow.

Equipment rents expense increased 17%, as the impact of inflation and other items more than offset the benefit of lower volume-related costs and efficiency gains. As reduced dwell and improved days per load, we should see further improvement.

Equity earnings increased $3 million in the quarter due to higher net earnings at our affiliates.

Looking below the line. Interest expense increased primarily due to higher average debt balances. Income tax expense increased $13 million primarily due to [cycling] of 2018 benefits related to the settling of state tax matters. Absent the unique items, we would expect an effective tax rate of approximately 24.5% going forward.

Closing out the P&L. As Jim highlighted in his opening remarks, CSX delivered nearly $1.3 billion of operating income in the third quarter, in line with 2018 despite a weaker volume environment.

We also delivered a record operating ratio of 58.6% -- 56.8%, an improvement of 190 basis points; and earnings per share of $1.08, representing a 3% improvement over third quarter of 2018.

Turning to the cash flow side of the equation on Slide 12. We continue to invest in our core track infrastructure to provide safe and reliable train operations. Year-to-date, capital investment is down $49 million or 4% year-over-year. Overall, our reduced asset intensity has enabled us to sustain lower levels of capital investment without compromising safety or reliability. The level of PTC spending has also come down significantly in the last 2 years.

Free cash flow remains a focus for this team. Generating operating improvements while driving better capital efficiency has produced differentiated free cash flow growth. Growth in CSX's core operating cash flow generation, including improvements in working capital, drove a 15% increase in adjusted free cash flow to $2.8 billion through the third quarter.

Year-to-date, we have returned nearly $3.4 billion to shareholders, including approximately $2.8 billion in buybacks and $600 million in dividends. Dividend payments in the quarter reflect a 9% increase from $0.22 to $0.24 per share we announced in February this year, net of the lower share count.

With that, let me turn it back to Jim for his closing remarks.

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James M. Foote, CSX Corporation - President, CEO & Director [5]

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Great. Thank you, Kevin.

Turning to Slide 14. Let's wrap this up by reviewing our outlook for the year.

Freight demand is generally in line with the expectations set out at the end of last quarter when we adjusted our forecast to reflect what we felt was a realistic view of softer underlying economic activity. Nothing in the industrial economy has really changed since then. Despite the swing from a plus 1% to 2% growth environment to a down 1% to 2% environment, we are maintaining our full year operating ratio guidance of below 60%, and we're still on course for record operating cash flow. These are impressive accomplishments.

We have fundamentally changed CSX over the last 2 years, not just in how the company operates, but also the way we approach our business and our customers. We are encouraged by our customers' positive response to our improved service and are working tirelessly to find innovative new ways to better serve their needs.

Despite the significant progress made to date, we are still -- there are still meaningful opportunities to operate more efficiently and reliably as we move towards our goal of being the best run railroad in North America.

Thank you, and now I'll turn it back to Bill.

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Bill Slater, CSX Corporation - Head of IR [6]

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Thank you, Jim. (Operator Instructions) With that, we will now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Chris Wetherbee with Citi Research.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [2]

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Maybe if we could start on sort of the OR, obviously significant progress here yet again in spite of meaningful volume declines. I guess when you think about sort of the outlook, maybe if we can go beyond sort of the near-term target of sub-60% and the efficiency and other opportunities that you've highlighted are still on the table, how can we start thinking about things, I guess, maybe putting your hat on, for 2020 and thinking about what the world may look like? Is this going to be more of a return to volume and maybe a little bit less operating ratio when we think about 2020 or maybe a little bit more operating ratio? Just want to get a sense of maybe how you're thinking about sort of guiding the business into 2020, which hopefully has a more stable volume outlook.

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James M. Foote, CSX Corporation - President, CEO & Director [3]

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Right, Chris. Well, first of all, we're not going to get into 2020 just yet. We'll ramp up the fourth quarter here, and then we'll start trying to give guidance. As to what 2020 is going to look like, I guess, only just 2 general comments, and then either maybe Kevin or Mark want to jump in with some additional commentary, but just 2 general comments. It's difficult, still very, very difficult to gauge where the overall economy is going. I think we feel very confident for the fourth quarter, as we called what we thought was a pretty soft outlook going forward. And so we're going to have to wait and see and start figuring out what the revenue is going to look like next year.

But again, generally speaking, our plan is to grow this business. And to the extent that we can grow this business, we're going to do it. And then secondly, our plan is to run this company as efficiently as we possibly can, and we're going to continue to focus on that. So this is not a -- they are not mutually exclusive. We're going to do both at the same time, and that's what we've been showing we can do this year.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [4]

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Okay. That's very helpful. And if you'll allow me a quick follow-up sort of along those lines. You've made some changes within some of the sales positions of the business and seems like Merchandise is an interesting potentially big opportunity for you as you move forward. Can you talk a little bit about sort of the opportunities that you see, maybe put some sizing around some of them as we move forward 2020 and beyond just to kind of get a sense of what you see as the opportunity for CSX in Merchandise?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [5]

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Sure, Chris. It's Mark. Listen, this is not something that's new. We've been talking about it for quite some time now. As we look at the future of this business, we see a huge opportunity in our met Merchandise segment. It's 2/3 of our business. I think going back a quarter or 2 when we initially put Kevin as the Head of Marketing, we highlighted the fact that we were going to grow our marketing department, because traditionally, CSX did not have one, traditional marketing department. Kevin did a great job in the short time that he was there, bringing in some people, both externally and internally, looking at some things differently and focusing on growth. We've now with these recent additions moved Farrukh over as Senior VP of Strategy into the Head of Marketing Department. So he's going to carry on. And we've split out the sales and marketing roles from a lot of our Directors. Some people used to wear dual-headed hats. Now we've got Directors of Sales. And in Farrukh's group, we've got Directors of Marketing.

And so as Jim said in his opening remarks, an intense focus on the marketing -- on the Merchandise sector. Clearly, if we look at the size of the opportunity in the North American spend for transportation every year, there is a lot of truck volume out there. And we believe that by renewing our focus on the Merchandise segment and looking for truck conversion opportunities, that we're going to go out and capture that market share. So a huge focus for us going forward and we're pretty excited by the work that's already been started.

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Operator [6]

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And our next question comes from Allison Landry with Crédit Suisse.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [7]

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Good job on the OR during the quarter. I wanted to ask about the Coal yields. They seem to have held up a little bit better sequentially than I would have expected, given the export benchmarks. So maybe if you could talk about the mix trends within this segment and the quarter and compare that to what you saw in the second quarter. And then if you could just maybe comment on how we should be thinking about Q4.

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James M. Foote, CSX Corporation - President, CEO & Director [8]

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Let me highlight mix, Allison. I always get the mix questions. So let me address that overall, and we can get into Coal if you want. But overall, we experienced a negative mix within most of our business segments this quarter. And as I've talked about many, many times, and as usual, you see within each business segment, and again, in Coal, there was always ups and downs between the commodities that hold different RPUs, and we'll continue to see these mix issues quarter-over-quarter. And I don't -- we don't manage the business to solve for how mix falls in any given quarter, and we're focused on delivering long-term sustainable growth.

But clearly, on the Coal side, we did have negative mix on Coal. A lot of that was the shorter-haul business to some utilities in the north. I think that was a phenomenon we saw in the second quarter, and we also had some growth to -- some shorter-haul growth to [mobile] out of the mines in Alabama. So -- and less going export, as the export volumes were impacted by the benchmarks.

So as I said, a lot of mix issues going in overall in each of the commodities, but again, in Coal, just given the decline in some of the longer-haul exports and then we picked up some shorter-haul utility business. So that phenomena continued.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [9]

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Okay. Perfect. And do you have any thoughts on Q4, just given the one quarter look back in the benchmark for the export met?

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James M. Foote, CSX Corporation - President, CEO & Director [10]

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Well, I'll tell you, Q3, I would say that export, the met side, which again is 2/3 of our export coal. The business was soft, but the global steel markets continue to weaken with the industrial slowdown and some of the sourcing issues in Europe had impacted obviously the benchmark prices. As you know, the majority of our contracts we price quarterly. So in Q3, we were less impacted by price, because the price of the export, the met benchmarks, in Q2 were relatively strong. But as we move into Q4 and given where the benchmarks were in Q3 and where they are today of about $150, clearly there's going to be some RPU impact in Q4.

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Operator [11]

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The next question comes from Todd (sic) [Tom] Wadewitz with UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [12]

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It's Tom. I wanted to ask you on the overtime initiatives. Kevin, it sounds like you're getting a lot of traction on that pretty quickly, which is great. I wanted to see if you could give us kind of a ballpark of maybe on an annual basis how large is the opportunity for cost savings from reduced overtime. Is it $50 million? Is it just some kind of a ballpark for that. And perhaps how much of that you would have captured on run rate basis in the third quarter?

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James M. Foote, CSX Corporation - President, CEO & Director [13]

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Yes. We haven't gotten real specific, but it's not single million digits, it's tens of millions of dollars that we execute across mechanical engineering and the T&E employees out on the field. So it's a large opportunity for us still going forward. We've just begun. And I'm sure Jamie can talk more to all the efforts that we've started probably in the late second quarter as we saw some of the volumes come down and started to focus on this item.

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Jamie J. Boychuk, CSX Corporation - EVP of Operations [14]

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Yes. On one of the -- obviously, where we've really seen some good traction is on that engineering and mechanical side. We have seen some traction on the transportation end but that's where our bigger opportunity is. And as the team spends time out in the field visiting locations and continuing to look for opportunities, that's one of the larger opportunities that we see out there still left on the table going forward.

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Kevin S. Boone, CSX Corporation - VP & Interim CFO [15]

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But Tom, going back to the magnitude of the size, I think previously, I mentioned in many categories were 30%-plus overtime as a percent of straight time, so the opportunity is still pretty significant there.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [16]

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Okay. And then I guess, a related question to that in that per worker comp and benefits in the quarter were a little bit lower than we expected, down about 2% year-over-year. Was that primarily a function of lower overtime? Was there something going on that incentive comp or something else in -- is that something we should model in fourth quarter in terms of lower per worker cost?

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James M. Foote, CSX Corporation - President, CEO & Director [17]

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No. I'd say it was a combination. I think you got it right. Certainly, overtime played a factor in that. You did see slightly lower incentive comp year-over-year as well. We'll continue on a good trend here going forward.

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Operator [18]

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The next call comes from Ken Hoexter of Bank of America Merrill Lynch.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [19]

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Congrats on a solid operating ratio, great to see. Jim, maybe just your thoughts on -- if you're -- you mentioned that kind of nothing has changed in the outlook, but maybe get a little more specific if there is anything shifting in particular coal, metals, fertilizer taking a step down. Is there anything in the market that you look out that alters your view as you look out?

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James M. Foote, CSX Corporation - President, CEO & Director [20]

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No. All of the external metrics, to try and get a sense for where the business is going, have seemed to somewhat stabilize at this lower, softer -- these numbers. It's -- my personal opinion is, it took a while for them to get there, and if they're going to turn around, it's going to take a while for them to turn back up. And while there is some sense -- more sense today of optimism than maybe there was 10 days ago, these metrics and these numbers are not going to turn around in a couple of weeks. So we see this kind of slow growth environment throughout the quarter. And as we get nearer to the end of the year, hopefully we can see -- have a little more light shown on the pathway beyond the end of this year and we'll be in a better -- to opine on it.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [21]

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Appreciate that. And I guess for my follow-up then, since you're sticking with your 60% -- sub-60% OR, are you somewhat indicating a step-up in a hard fourth quarter margin? Or any reason you're not taking it down? Just given the run rate for the 3 quarters is sub-58%, yet you're not going to a sub-59% or even at a 58%. Are you indicating something is going to happen in the fourth quarter or are just being -- keeping a high number as a easy bogey?

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James M. Foote, CSX Corporation - President, CEO & Director [22]

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Boy, when we were in New York a couple of -- it was about 18 months ago, Kenny, when you -- I said we were going to get a 60% in 2020, I didn't hear you say, "Boy, that's an easy question." So yes, we're going to get to our target -- we said we would beat our target a year early and clearly had not put in our plan this kind of softening in the overall economy, not only in the U.S., but globally, impacting all of our business units here kind of at one time. So we're kind of -- are we being cautious? No, I think we're being -- we have the same realistic viewpoint of the economy today that we had 3 months ago when we told everybody we didn't see a hockey stick coming into the second half of the year in terms of growth.

You also have what is traditionally the fourth quarter from a seasonality perspective, we expect similar kinds of behavior on the cost side this year. So that's just -- I think it's just a realistic assumption as we always do. We hope we do better than that. But putting -- to say that we're going to have an annual operating ratio below 60% this year is a pretty good achievement in a difficult time.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [23]

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I don't disagree, just you're 3 quarters in, you're already at 58%. So it just seemed like -- I didn't know if you were sending a signal that you expected a deterioration in fourth quarter beyond normal. But I appreciate the insight.

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Operator [24]

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The next question comes from Amit Mehrotra with Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [25]

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By the way, congrats, Kevin and Jamie, on the new appointments, well deserved. I wanted to ask a question about the operating ratio shockingly and just the company's ability to maintain or grow profits in a down revenue environment because this is supposed to be a business with theoretically high incrementals and decrementals. It's a capital-intensive business. So I'm just trying to understand how much runway you have on the cost and efficiency side, because you decided to put that in extra this time on the looking -- the forward-looking slide. And so I'm just trying to understand how much room there is on the cost and efficiency side that's going to allow you to continue to hold the line on profits or grow profits on a year-over-year basis in an environment where revenue continues to be challenging or down.

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James M. Foote, CSX Corporation - President, CEO & Director [26]

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Well, just a clarification, so I can answer the question correctly. I think our slide in terms of what we're talking about in terms of the efficiency and operating ratio is the exact slide that we used 3 months ago, and I think that's the exact slide we've used the quarter before that.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [27]

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Well, unless I'm mistaken, I think you added significant remaining opportunities to further improve -- I mean we're nitpicking here, but I think you added another bullet regarding efficiencies -- some service and efficiency, further improvement there.

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James M. Foote, CSX Corporation - President, CEO & Director [28]

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Well, like I said, we're always trying to get better, and we believe there is a lot of opportunity out there for us to continue to get better. It'd be a hell of a lot better -- easier to get to a better number with a little bit more robust economic environment. So we're going to continue to always, always, always focus on efficiency in running the railroad in the best way we possibly can. And we believe that there are many, many opportunities out there for us to continue to do that. And I don't think that's anything different than I've ever said before in comment. In terms of other opportunities, yes, they might be a little more difficult to find, identify and execute on, but there are always tons of opportunities out there for us to get better. We've always believed that. We've always been optimistic and bold in our convictions of where we thought we could take the company. And I don't think anything has really changed.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [29]

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So would you be -- Jim, would you be -- I'm just trying to understand this. And as a follow-up to this question, as you look out over the next 12 months, I know you are not talking about 2020, but just conceptually, given the opportunity you see on the cost side, could revenues -- if revenues are flat to down next year, do you think you could see year-on-year OR improvement in 2020?

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James M. Foote, CSX Corporation - President, CEO & Director [30]

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Well, again, we'll give you a more solid view of that at the end of the quarter. Aspirationally, do I think that this team can repeat the fantastic job they did this year with revenues? Again, as I said in my comments, we started the year thinking the revenues were going to be up as much as 2%. And now, we're saying the revenues could be down as much as 2%. And for us to have delivered this operating 56%-something in operating ratio was nothing short of amazing. Am I going to challenge the group and is this group going to accept the challenge to try to do the same thing again next year? I certainly hope so but in terms of putting it in the books and saying that that's our forecast, we're going to wait 3 months before we make that kind of bold statement.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [31]

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Yes, that's very fair. My second question is just on the pricing environment. When I just look at revenue per RTM, kind of adjusted for other income and ex fuel, it continues to moderate. And I know it's not a perfect metric to -- or proxy for pricing, because there's a lot of stuff that goes into it, especially mix, but can you just talk about kind of when we should see revenue per RTM, what is that a proxy for? And can you we extrapolate that into the overall pricing environment, just making it harder to get pricing in the volume environment? Any comments around that would be helpful.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [32]

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Yes. I mean it's Mark. Listen, I won't repeat what I told Allison when I talked about the mix. Clearly, that has a significant impact on the revenue per RTM. But let me address the pricing, because I always get this question on price. And let me be crystal clear here, we're not sacrificing volume for price or price for volume. And within Merchandise and Intermodal, our same-store sales pricing in Q3 was the strongest that we've seen in the past 3 years, and all our contracts that come up for renewal in the quarter, we exceeded our same-store sales pricing. So -- and we're going to continue to price to the value of the business and price to the value of the service that we provide, and -- but again, on RPU and then the revenue per RTM, you're always going to see these mix issues. So -- but don't read into it that it's a pricing issue, we're still continuing to generate the best price for the value of our product.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [33]

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Congrats on the great results.

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Operator [34]

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The next question comes from Brandon Oglenski from Barclays.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [35]

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Congrats again, Kevin and Jamie, well deserved. So Jim, maybe just to clarify that last line, a question here, I think some investors have gotten really focused on maybe more glossy "PSR" presentations at your competitors and the -- maybe the common thought here is that CSX really has nothing more to go on precision scheduled railroading. So maybe in that context, you guys have head count down roughly in line with attrition this year. I think you're sticking with that. I mean should we be thinking that when we give back to a growth environment, there's still more to go on the cost side? Or can you scale into this new level of cost with a lot more growth? I guess how can you help us on that line?

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James M. Foote, CSX Corporation - President, CEO & Director [36]

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Well, yes, we don't have good slogans, but we're working on making that -- fixing that whenever we can. What we're doing is, yes, I mean we're responding to a softer environment and are looking for every opportunity we can where we don't impact service or safety. And what we're doing here is that we're building in an enormous amount of operating leverage into this organization. So when the economy, not if, but when the economy begins to turn around and we begin to see a slight uptick and a better environment to work in, we're going to see the impacts of that leverage. And we're not going to -- we have tons -- we have -- like, the way we run the company today has created a tremendous amount of potential growth opportunity for us on the capital side, one, because we've freed up a tremendous amount of capacity because of the way we run the railroad today.

And we've said many times, we could probably put 30% growth into the organization without adding any additional capital. And the same is true on the operating side. We've got capacity on our existing trains today where we could put a lot of growth on the railroad incrementally and not have to start adding that expenses. And so both from a cash perspective and an operating perspective, I think we're well positioned to perform well in either direction, either in a soft environment or in a strong environment.

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Operator [37]

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The next question is from Brian Ossenbeck with JPMorgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [38]

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First one, just to follow up on the extra capacity theme. Mark, what are you thinking in terms of some of the bigger chunks of truckload conversion? And how have some of the larger shippers or maybe in some of the industries received better service, the better tools, increased visibility? How -- what's your sense as to when you can start to make some of those conversions even at a smaller scale?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [39]

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Brian, we're seeing it today. We're seeing it every day. I would say I'm blessed and my team is blessed. The work that Ed and Jamie and their teams have done, Jamie deserves to be sitting at this table today, and the work that he's done over the last 2.5 years to really give us the service product that my team now has the ability to grow and sell. And we think tap into the truck conversion opportunities that this franchise has never been able to go after in the past is exciting. And so we're seeing those truck conversions today. We're seeing it across the board, all across our merchandise segments. Large things to talk about right now? No, but we're seeing incremental volumes from existing customers day in and day out. We're talking to customers who may be used to -- ship by rail but because of the poor service that they experienced over the last couple of decades, abandoned rail [as a thought] and have been using truck ever since. Those are the kinds of shippers that we're talking to, and we're penetrating that -- those markets and that business and we're being successful.

Listen. We're also on the technology side, as Jim mentioned in his opening, trip plan compliance is a huge, huge game changer for our customers. They now -- and as we said, we rolled this out for intermodal on October 1, and our merchandise customers will see trip plan compliance visibility December 1 on ShipCSX. This is a game changer for them. They will see every car that they ship on CSX in every lane and our performance against the trip plans. We rolled this out a couple of weeks ago at our customer engagement forum, and I can tell you, customers are excited. So we've got great visibility into their service. No other railroad is doing this. We've got -- we're blessed with the great service that we've got that the operating team has worked very hard to deliver to us. And so right now it's for us to go out and identify that -- those opportunities and convert on them with the new team that I've put in place here over the past week.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [40]

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Appreciate all the details there. Kevin, maybe a quick housekeeping for you. The other revenue line continues to come down for the reasons you mentioned on the demurrage and the storage. Is this the current run rate that you expect for the rest of this year? And just wondering, as shippers sort of figure out what to do with the new operating models that are being rolled out through the U.S., do you think this stays -- -- demurrage in general, do you think it stays structurally higher as some shippers just use the storage as part of the cost of doing business? Or do you think this eventually goes back to sort of where it was pre-PSR?

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Kevin S. Boone, CSX Corporation - VP & Interim CFO [41]

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Yes, I think -- look, I think we told you we expected this to come down and it's kind of trended in that direction. In terms of the run rate going forward, somewhere between the second quarter run rate and the third quarter is probably where we land. So -- and that $110 million to $120 million range is probably the new normal unless something dramatically changes from here. I might let Mark talk to the additional opportunities. But look, it's -- I think we expected this in the -- without something meaningfully changing from here, probably at these same run rates.

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Operator [42]

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The next question comes from Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [43]

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So I want to ask the productivity question maybe a little bit more directly. Do you think you can do another mid-single-digit reduction in head count from here? And then does a 57% OR with revenue down 5% give you more confidence that ultimately, you can run this business, not next year but longer term, at closer to mid-50s OR if you're growing revenue?

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Kevin S. Boone, CSX Corporation - VP & Interim CFO [44]

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Scott, this is Kevin. Look, I know the focus has been on our head count. I know -- we report head count numbers every quarter. Labor represents roughly 35% of our cost base. There's a lot of other costs to go after as well. We're looking at those. I think you saw great improvement in MS&O, which is a huge cost line item for us. But there's other ways to reduce costs than pure head count reductions. We talked about over time, it's a huge, huge category for us. So we're getting -- there's a lot of other areas for us to go after than just simply head count. But if the volumes continue to be challenging, we'll look for new ways to drive costs down. If we run faster and take down dwell, the assets drop out and the costs go down significantly. So we'll look at every way to go out -- go after these costs.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [45]

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And the OR more broadly?

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Kevin S. Boone, CSX Corporation - VP & Interim CFO [46]

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Sorry?

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James M. Foote, CSX Corporation - President, CEO & Director [47]

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And the OR. Scott, again, we're not going to get into 2020. As we've said, we think we have opportunities to continue to improve on the efficiency side. We said that we would improve on efficiency in a good environment and in a bad environment when we started the year, and we've done it. Some people didn't think we could, but we've shown the world that there's no limit to what hard work and ingenuity can produce.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [48]

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Okay. That's fair. And just, Jim, just one other. It's been a busy 3 months in Washington with rate case proposals and accessorial proposals and a lawsuit from you guys on one-man crews. Maybe just give us a lay of the land as you see it in D.C. And any of the proposals from the Board a real concern? Your thought -- maybe just some color on this lawsuit on the one-person crews, just D.C. Broadly as you see it.

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James M. Foote, CSX Corporation - President, CEO & Director [49]

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Boy, I would not want to -- that's kind of open mic, let you know what my real thoughts are about what's going on in Washington, D.C. So I'll just stick with what's going on at the STB. The STB, after a number of years of not being really fully staffed, is stepping up and taking care of some issues that have been lingering out there for a long time, and I think that they're just doing their job. And they put forward some suggestions which have been kicked around for a long time in terms of is there a way to change, simplify, modify some of the procedural steps that shippers have to go through if they have complaints. And I think the industry, we have thoughts on what they want to talk about and the rest of the industry does as well. And I think we'll work through all of that in due course, and similarly on trying to begin to have some discussions at least about what revenue adequacy might be. That's a long-term process. So I just think that the STB is kind of working -- back to work. And being in a business and an industry that's regulated, you just work with the regulator in due course.

So I'm not freaked out about anything that's going on there. And hey, we're starting -- and your comment about litigation over labor negotiations, we're just now starting a long process to begin the new round of industry-wide bargaining, and everybody starts out trying to posture and get themselves in the right position. And so again, nothing out of the normal course of business there. So I think it's just business as usual, and we'll continue to remain vigilant and active in that area. But I send Nathan to D.C., I try not to go there unless I absolutely have to.

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Operator [50]

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The next question comes from Ben Hartford with Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [51]

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Jamie, maybe just some perspective on your view looking into 2020 from an ops perspective. This quarter, good progress on train velocity improvement, but dwell hours were flat. Any specific projects into 2020 that you have on the horizon that you think can really affect change particularly on the dwell hours side? I mean maybe talk us through how you see the next 12 months progressing from an operations point of view.

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Jamie J. Boychuk, CSX Corporation - EVP of Operations [52]

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Yes, for sure. Thanks for the question, Ben. We -- the operating team is completely focused on controlling costs, but providing the best service, as Mark mentioned. And not only providing the best service, but doing it safely. So as we continue to assess the market conditions and making sure that we're nimble enough to make the moves that we need to heading into the next quarters, we're getting out there as an operating team, I've been able to work really close with the guys over the last couple of years and developed a fantastic team of railroaders out there.

And to your point, dwell is one of those metrics that isn't where we want it to be, particularly on the network side of dwell. And that comes along with car hire, and car hire is a big expense that we want to continue to work towards going into the next few quarters and just getting out in the field, being out there, traveling with the guys. I've spent the past couple of years really performing most of my work or a lot of my work here in the network center with the team. Now we're kind of spreading our wings and getting out there and working with those -- the operating guys in the ground and making sure that the team is taking a look at every opportunity we have out there to continue to bring those costs where they need to be. But ultimately, this is about providing the best service we can and giving our marketing team a product that they can go out there and continue to sell while we continue to drop those costs.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [53]

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Any notable projects on the immediate horizon? Or is this going to be kind of iterative from here forward?

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Jamie J. Boychuk, CSX Corporation - EVP of Operations [54]

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Look, there's a lot of projects out there with respect to getting out, as I mentioned, getting out in the ground and trying every -- minimum every 2 weeks, taking a team out, flying into different terminals. Last week, we made a trip over to St. Louis unannounced, sat down with the operating team and came up with some ideas on how we can move cars quicker, faster and reduce head count. So those opportunities are what we're going to continue to push and drive forward. The senior vice presidents, both Bob Frulla and Brian Barr, are traveling with me out there, and we're finding the external talent we have -- sorry, internal talent we have within our company and moving boxcar as quick as we can and most efficient. That's really what we're going to continue to do, pushing forward with the assets.

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Operator [55]

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Justin Long with Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [56]

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Congrats on the quarter. Jim, you mentioned the industrial environment and your view that things really haven't changed relative to your expectations last quarter. But could you comment on what you're expecting on the retail side of the equation? And just curious to get any updated thoughts around peak season and maybe what intermodal volumes could look like once we lap all the rationalizations and start to see more normalized numbers in 2020?

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James M. Foote, CSX Corporation - President, CEO & Director [57]

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Yes, sure, Justin. And again, one of the reasons -- one of the issues we've been struggling with throughout the year is the fact that everything, whether it's the stock market, whether it's interest rates, whether it's all of these consumer-driven sides of the economy, were all doing so well. And we saw very early in the year that the industrial economy was separating and was not performing very well at all. And so last quarter when I said this was confusing, I think we had a pretty good sense of where things were going, and it's proving out as we move through the second half.

With that, I'll let Mark, who's totally on top of intermodal and what -- whether or not we're going to have a peak or not, to answer your other question.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [58]

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Justin, yes, I mean our expectations for peak are somewhat muted this year. I think we'll see a little bit of a bump, but not the traditional ball peak. And stuff is still coming into the -- sort of the consumer economy is still doing relatively well. So the apparel and the toys and the plastic Christmas trees and stuff are coming -- still coming in. But as we all know, intermodal carries a lot more than just that kind of stuff. They carry a lot of stuff that goes into the industrial economy: machinery and auto parts and a whole bunch of other stuff. So because of the economy -- the industrial economy, being soft and IDP being so weak, yes, it's affected a lot of the intermodal volumes.

Fourth quarter, because of the economy and because of the consumer economy, we're hoping to have a relatively good post-Thanksgiving holiday peak, so into the Christmas time frame. Hopefully, people order a lot of stuff online, and we have the pleasure and the honor of moving a lot of that stuff.

So I think that'll help our intermodal volumes this quarter. But going into next year, as we said, we're not going to give you a lot of guidance there, but it really depends on what's driving the economy and where we are. But longer term, as we get through all these lane rationalizations and get through all this mess, in a good, solid economy, I would expect intermodal to do very well.

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Justin Trennon Long, Stephens Inc., Research Division - MD [59]

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Okay. Great. And maybe as a quick follow-up for Kevin, gains on sale, there was a step-up relative to what we saw in the first half on just the quarterly run rate. Could you talk about what you're expecting from a gains on sale perspective in the fourth quarter? And then any early read on what we should be looking at in 2020?

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Kevin S. Boone, CSX Corporation - VP & Interim CFO [60]

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Yes, I mean the $65 million was a little bit above the normal run rate that you've seen historically. I would expect something well below that in the fourth quarter, something more on the normalized range, in that mid-20s, low 20s range for the fourth quarter. We'll wait -- we'll hold off on 2020 to go through. We still have a great pipeline. Timing is always difficult to predict on when those transactions will hit, but I know Mark and his team continue to see a really good pipeline going forward.

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Operator [61]

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Jordan Alliger with Goldman Sachs.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [62]

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Just a real quick question. I know it may be tough because of the demarketing of the lanes in intermodal. But I'm just curious, when you look at domestic versus the international intermodal, can you give a little color on both those pieces of business, relative order of magnitude, weakness or thereabouts?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [63]

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Our international business has been stronger than the domestic business. So the domestic -- as I talked about just a minute ago, the domestic business has been impacted by a number of factors. The economy is certainly one of them. But I think clearly, a lot of capacity. We saw a very tight truck capacity last year. Clearly, a lot of new trucks came into the market. A lot of new drivers opened up a lot of additional capacity. And so I think intermodal has been competing with that truck capacity this year. Prices obviously -- I mean the truck spot prices have come down since -- from last year. They're still above sort of the 5-year average. But clearly, prices have come down. So I think the domestic business, while good, has just been soft and -- but our international business is still relatively okay.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [64]

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Just a real quick follow-up, just for perspective. Do you have a sense for what proportion is just international versus domestic of the total carloads or revenue in the intermodal?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [65]

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Yes, it's about 50-50. It's about 50-50.

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Operator [66]

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Next question is from Fadi Chamoun.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [67]

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I always say 40%. So actually, it's a useful answer in the future.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [68]

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Perfect.

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Operator [69]

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Next is Fadi Chamoun with BMO Capital Markets.

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Fadi Chamoun, BMO Capital Markets Equity Research - MD & Analyst [70]

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Just to follow up on this intermodal conversation. Maybe, one, I mean your service product is obviously getting a lot better and the network is highly efficient. And correct me if I'm wrong, in intermodal, you tend to have less capital intensity as far as how you run the business. Is there over the medium term given the truck opportunity a potential to reinvest kind of OR to accelerate growth? Or you don't think that's a needed strategy to grow intermodal?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [71]

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Well, Fadi, it's Mark. This company has spent a lot of capital dollars over this year -- over the past decade or so to grow intermodal volumes, and it was not very successful. And so today, we have -- we've spent the last 1.5 years, 2 years reengineering the traditional hub and spoke intermodal franchise that was built over the past little while. So to answer your question, no, I don't believe and I don't think we believe that we need to spend any significant capital dollars to continue to grow our intermodal franchise.

The team's focus right now is about taking touches out of the system. As you know, the more you touch and handle an intermodal container, your costs go up and the profitability goes down. And so we're focused on streamlining that business and getting it as efficient as possible and bringing on additional capacity. Well we've got ample capacity now to grow intermodal. And when the volumes will return, to Jim's point, the economy will turnaround. And when intermodal volumes do come back, we have ample capacity in the network now without spending any additional capital to move that product.

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Fadi Chamoun, BMO Capital Markets Equity Research - MD & Analyst [72]

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Okay. And just also a follow-up on the previous question. So if contract rates -- truckload contract rates stay flat or slightly down in the next 12 months, can you still grow domestic intermodal in the environment?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [73]

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Well, our -- the majority of our Intermodal business is locked up in long-term contracts, Fadi. So we don't have any short-term opportunities to reprice a lot of the business. So again, a lot of the focus has been on the cost side and the efficiency side. But clearly, as the economy comes back and we handle more intermodal business and are handling it in a more efficient way, yes, I mean we'll -- we can grow the business that way.

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Operator [74]

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The next question comes from Ravi Shanker with Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [75]

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Just a clarification. At the start of the call, Jim, I think you said something along the lines of 5% rationalization in lanes. Can you just clarify that a little bit? Is this more intermodal lane rationalization in 2020? Is this what's left over from 2019 ones? What exactly were you implying?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [76]

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Ravi, it's Mark. Let me be clear and just so everybody has all the facts here. January of 2018, we began the rationalization of about 7% of the franchise. Last October, October 1 of last year, we took out an additional 3%, rationalized additional 3% of the lanes and then in January of this year, we did another 5%. And so we, to Jim's earlier comment, we will be lapping in the fourth quarter the 3% rationalization that we took out last year. And then in January, we'll be -- the lane rationalizations will be completely behind us.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [77]

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Got it. So no more rationalizations in 2020?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [78]

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No.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [79]

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Okay. And just as a follow-up, thanks for the color on the export coal pricing and the quarterly reset into next quarter. I think in the past you guys have said that you have take or pays in the export coal business to a certain extent until your contracts renew. Is that, again, the same quarterly cadence you're talking about? Or is that more of an annual thing? And kind of did that have any impact in 3Q?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [80]

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No, both -- Ravi, both on the thermal side and on the met side, we have built into the contracts, contract minimums. So as I mentioned I think in Q2, given the weakness in API2 and everything that was going on globally with thermal coal, we're experiencing a slowdown in volumes and we saw our customers shipping at their contract minimums, that has not changed given the continued weakness in export coal benchmarks. I will say, and something that hasn't come up, we still expect our export coal volumes to hit sort of the 39 million to 40 million ton range for the year. Last year, we did about 43 million tons. But even with everything that's going on, we still expect to be between 39 million and 40 million this year.

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Kevin S. Boone, CSX Corporation - VP & Interim CFO [81]

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And Ravi, just to clarify, we didn't have any liquidated damages in the third quarter.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [82]

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Correct.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [83]

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Understood. You articulated much better than I did in terms of the minimum volume shipped. So Mark, just to kind of -- I know you guys are not talking about 2020, but if the benchmark were to stay at current levels, you would expect that 40 million to be lower next year once the minimum shipment levels reset?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [84]

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If I could only predict what's going to happen to things that are completely out of my control, met benchmarks and API2s and -- I don't have a clue. I don't have a clue what's going to happen to the economy and I don't have a clue what's going to happen to export benchmarks. So I get on my hands and knees every night and pray. But clearly, yes, it's a headwind right now.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [85]

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You and me both, Mark. That's understandable.

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Operator [86]

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Bascome Majors with Susquehanna Financial Group.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [87]

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Kevin, now that you're firmly in the CFO seat, can you share your priorities for the finance organization, be it balance sheet management, capital deployment? And over the next 2, 3 years, what could change and what definitely won't?

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Kevin S. Boone, CSX Corporation - VP & Interim CFO [88]

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Thank you for the question. My priority is cash. I think when we look across the organization, and I was talking to my team last week, sometimes we prioritized OE over capital, and I think we have a lot of ability to look at our capital spend and focus there and make that a lot more efficient. There's opportunities. Jamie and I now sit right across from each other. We're talking every day about -- and sharing information about where we see the opportunities, whether it's over time, like we mentioned time and time again, that was a new initiative, and he's working closer and closer with all the people in finance and just to uncover those opportunities.

There's opportunities everywhere. There's small buckets that can add up to a lot of dollars over time. But that's my priority is really looking at particularly just the return on capital. If there's really high-return projects out there that we can invest in, we generate a lot of cash flow today, I would love nothing better for my organization to come with me with 20%-plus return projects that we can invest in our business to drive value over time. That's really where I'm focused on the next few months. Procurement also has been my area, and I know that, that group is doing a great job of finding additional cost savings from our suppliers, working with them. But we're not afraid of investing in the business going forward.

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Operator [89]

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David Vernon from Bernstein.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [90]

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So Mark, I wanted to ask you the export coal question a little bit differently. If you think about 2Q to 3Q, did we see any weakness in the rates you guys were getting on the export shipments that you still retained? Or any sort of increase or decrease, just to kind of how that has moved? And just wondering kind of what percentage of the tonnage you guys are moving right now is hedged at prices from earlier in the year?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [91]

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Well, again, on the thermal side, these contracts -- our annual contracts for this year, they were negotiated late last year, early into 2019. So those -- well, they were set at -- they're tied to the benchmarks, and the benchmark for API2 was a lot higher at the beginning of the year, late last year. On the met side, as I said, they get repriced quarterly, most of them. Some of them are monthly, but the majority are quarterly. And as I said, in Q2, the benchmark prices was over $200. Q3, it fell to $160-ish. And so we're going to feel that impact heading into Q4.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [92]

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But have -- did we see that from 2Q to 3Q? Or is this going to be showing up in 4Q?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [93]

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No. We saw it -- on thermal on the volumes in Q3, and we saw it in volumes in met well.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [94]

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But not in the rate there, right?

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Kevin S. Boone, CSX Corporation - VP & Interim CFO [95]

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We saw some [impact on the rate].

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [96]

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Yes, yes, certainly.

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James M. Foote, CSX Corporation - President, CEO & Director [97]

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At the beginning of the process where we're -- because of the lag, it's just the beginning of the process. And yes, we'll see more of it as we go into the fourth quarter and next year.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [98]

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The rates were set -- for thermal, the rates were set, and really it's been a volume play.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [99]

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Okay. And maybe just on the petroleum products business, can you give us a sense for what you're running right now in terms of the split between crude and NGLs? And for the crude shipments, kind of is this mostly Bakken origination coming into the East Coast? Like, what -- give us some idea of what the flow is on the crude that's still in the business?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [100]

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Yes, I don't want to speak too specifically because others are listening, but we're moving crude today mostly from the Bakken. We've had, obviously, with the refinery explosion, and we've seen some slowdown there which has impacted us for the remainder of the year. But it's probably as much as I want to go. We -- I should mention, both on coal and on all the crude business, we brought in Adam, who's our new VP of Energy. He's taken a fresh look at all these portfolios and tasked with figuring this all in for us. Clearly, these are interesting commodities to manage, but Adam's a very, very smart guy and he's doing a great job looking at different things to help us out longer term. So look forward to updating everyone on the future on that.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [101]

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Any split on the crude versus NGL?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [102]

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No, I don't want to get into that, not right now. We're not -- we won't [step down for it].

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Operator [103]

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The last question today comes from Walter Spracklin with RBC Capital Markets.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [104]

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Jim, you made reference to some technological innovations that you might or are currently looking toward implementing. I know there's at least one other rail that's investing significantly in those technologies. How much would you say, and maybe this is a better question for Kevin, how much of your current CapEx envelope is dedicated to, let's call it, these pure technological innovation-type of projects? And what's your strategy there? Is it more to see what others develop and then if it works, we'll devote dollars to it? Or would you see yourselves adding more incremental dollars to your capital envelope to look for these technological innovation opportunities?

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James M. Foote, CSX Corporation - President, CEO & Director [105]

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Yes, Walter, thanks for asking the question. Right now our --you asked a bunch of questions. I'll try to answer them all. What we spend today out of the total amount is a very small amount, but it has a meaningful impact on what we do. In many respects, historically speaking, the rail industry, and CSX being no differently, we were kind of beholden to the supplier to come up with new ideas and new technology. I think now we work more collaboratively with the way to do things. And we talk amongst ourselves in the rail industry about what works and what doesn't work and how we can do things more effectively and efficiently and leverage technology, and technology is changing all the time. So clearly, new opportunities for us. So it probably -- number one, probably should and therefore probably will, that dollar amount that we spend on technology to help us run the railroad more efficiently will become bigger. But clearly, it's never going to get to the point where it's equal to what we spend on rail.

So -- and we're all over everything, whether it's automated, artificial intelligence to help us do dispatching; using more and more technology in our locomotives, not just PTC, but other technologies that's available out there to help us do things more effectively and efficiently. I mean just this little amount, we've got 3 of these cars that are out there running around the railroad doing constant inspection of our rail and the subsystem and everything else. We've seen a big improvement in reducing our slow orders, our incidence of rail breakage, all of this because we catch it earlier than we would have if -- when we weren't doing as much. So we're leveraging the heck out of that as much as we can, and we're going to add more again next year and next year and next year and next year because it's hard to put a dollar value on what can happen if you have a big derailment associated with a rail break if you knew you had a railcar out there that could have found it before that happened. So we're all over it and we're going to continue to do that, and I would say, it will be in the -- it will creep up over time.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [106]

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Looking at way out, is there anything -- and maybe, Jamie, you might have seen something that hasn't crossed Jim's desk yet, is there anything way on the horizon conceptual that if implemented, really could hit the ball out of the park here in terms of those type of disruptive technologies?

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Jamie J. Boychuk, CSX Corporation - EVP of Operations [107]

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Look, no, I think a lot of the technology that we're on to, the only thing that I would really mention on top of those are train inspection portals. Not only are we looking at the track, we're also making sure that we X-ray vision and take camera footage of cars going by through inspection portals. But we've got a very strong IT development department within CSX, probably one of the most impressive I've seen in the industry. We are developing some yard intelligence, crew intelligence. The crew intelligence is really something that I truly believe, as we've been working on it for about a year now, almost done that project, that's going to allow us to look 12 to 24 hours in advance to make sure that our crews are lined up where they need to be and in position where they need to be.

So as much as we balance the railroad, you've still got to worry about availability, and that crew intelligence and some of the yard intelligence that our team is working on here at CSX is going to really help us carry forward.

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Operator [108]

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I will turn the call back over to the speakers.

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Bill Slater, CSX Corporation - Head of IR [109]

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Thank you, everyone, for joining. I believe that concludes our call for today.

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Operator [110]

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