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Edited Transcript of CSX earnings conference call or presentation 17-Oct-17 12:30pm GMT

Q3 2017 CSX Corp Earnings Call

Jacksonville Oct 20, 2017 (Thomson StreetEvents) -- Edited Transcript of CSX Corp earnings conference call or presentation Tuesday, October 17, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Baggs

CSX Corporation - VP of Capital Markets & IR and Treasurer

* E. Hunter Harrison

CSX Corporation - CEO, President and Director

* Frank A. Lonegro

CSX Corporation - CFO and EVP

* Fredrik J. Eliasson

CSX Corporation - Chief Sales & Marketing Officer and EVP

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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 PLC, Research Division - VP and Senior Equity Analyst

* Brian Patrick Ossenbeck

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

* Cherilyn Radbourne

TD Securities Equity Research - Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* David Scott Vernon

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

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Jeffrey Asher Kauffman

Aegis Capital Corporation, Research Division - MD of Equity Research

* John Griffith Larkin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Head of Transportation Capital Markets Research

* 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 morning, ladies and gentlemen, and welcome to the CSX Corporation third-quarter 2017 earnings call. As a reminder, today's call is being recorded. (Operator Instructions)

For opening remarks and introduction, I'd like to turn the call over to Mr. David Baggs, Vice President, Treasurer, and Investor Relations Officer for CSX Corporation.

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David Baggs, CSX Corporation - VP of Capital Markets & IR and Treasurer [2]

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Thank you, Shirley, and good morning, everyone. And on behalf of the management team here at CSX Corporation, I'd like to welcome you to our quarterly earnings call and also thank you for your interest in our Company.

Our presentation, our quarterly financial report, and our press release, which conveyed our results and reaffirmed our 2017 guidance, are all available on our website at csx.com in the Investors section. In addition, a webcast replay of this presentation will be available later today, and the 10-Q will be posted tomorrow on that same website.

This morning, CSX is represented by our Chief Executive Officer, Hunter Harrison; our Chief Operating Officer, Cindy Sanborn; our Chief Sales and Marketing Officer, Fredrik Eliasson; and our Chief Financial Officer, Frank Lonegro.

On Slide 2 is our forward-looking disclosure. Any statements about the future made during the course of this presentation or during the question-and-answer session should be taken in the full context of this disclosure.

Turning to Slide 3 is our non-GAAP disclosure. While CSX files all of our financials in accordance with U.S. GAAP, we're providing certain non-GAAP measures to give you a more fulsome understanding of the business. These measures should be taken in the full context of this disclosure and with the understanding that they are not a substitute for GAAP.

Finally, with our investor conference less than 2 weeks away and with close to 30 analysts covering CSX, I would encourage everyone today to limit their questions to one. With that, it is my great pleasure and privilege to introduce our President and Chief Executive Officer, Hunter Harrison. Hunter?

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [3]

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Thank you, Dave, and good morning to everyone and thanks for joining us. As David said, we've got a lot to discuss today, and my remarks are going to be a little different than they normally might be. I'm going to allow Frank to run through the numbers; there's no use in us both doing it. And to try to give you some explanation or at least our read on the quarter, which some could characterize as mixed results, there were a lot of dynamics going on and taking place in the third quarter, which was a carryover, to some degree, from the second quarter and with a challenging start.

So let me start here. I think that we went through, obviously, some slippage, service-wise, on the third quarter, which we were not proud of, which -- we had a listening session last week with the Surface Transportation Board with their team members. I think some of you were present. I think there were some mixed reportings there.

But I can tell you this: I've been in this business a long time, and this Company is back to where it was. It's back to where it was, and it's better. And it's climbing, and I see those issues, generally speaking, behind us, which -- I'm very proud of that. It reflects, to some degree, the resiliency of this organization, to go through what this organization has been through and to be able to come out of a 8-, 9-week little setback.

And I didn't really -- I had said initially, as we went into this transaction, I didn't want to spend a lot of time reflecting back. But I do think it will, to some degree, add some context that this was not a failure of the model, a failure of Precision Scheduled Railroading. Some of the historians aren't very good historians. This is not a new operating plan. This is an operating plan that's been in existence for 20 years plus.

It's had a pretty good track record. In fact, I would -- it's a little hard for me to be objective, but an excellent track record. And so I think as we reflect, it was more of an execution issue. We didn't execute at a lot of levels, and we learned that. And as a result, we had to make some what I would describe as painful changes. That's never pleasant to do, but we had to do that.

We had two derailments that were a real concern to me. One was a pretty horrific derailment on the side of a mountain that you read a lot about, that we have changed some procedures as a result. And I would say also that -- to the local people there that we were dealing with were extremely, extremely cooperative to our efforts of trying to get that derailment under control.

And then we had a -- we still have under investigation a derailment in South Carolina that I'm convinced, from a personal standpoint, is clearly a case of sabotage, where we had a bulldozer put up on the track there by some pine sapling, and we came around. That's not unusual in that territory to have that. And we hit the bulldozer, derailed the cars. Thankfully, thankfully nobody was hurt. We've got rewards out.

But those things -- the derailments, the personnel changes that had to be made -- I think to some degree, we had reflected and understood that there is resistance to change. And we are going to have to deal with that, and we've had to, in a little more difficult way than I thought it might be.

But having said that, I think the most significant issue that came out of here is we learned a lot about some of our people. We've made some personnel changes, and we've developed some real -- what I would describe as rock stars, both in-house, from other rails, from the free market. And so I am very pleased that, I think, the organization is ready to go forward at what I might describe as breakneck speed.

The operating plan that we had talked about -- I think last week or the week before, we brought in our first dispatchers from the field, which takes us from -- it's this first move to take us from nine offices to one here in Jacksonville. It's a big step.

I think -- and these things are dynamic, and the markets change, but I think that we have pretty well settled in with the hump yards. I think we started off with 12, or wherever we were. Who's counting? And we're down now to four, I think, core yards, which are effectively Selkirk, New York; and Waycross, Georgia; also, Indianapolis, Avon Yard; and I guess Willard is the last one that will probably be closed soon.

So that hump yard work is mostly behind us. The dispatcher work is behind us. The personnel moves are in place. The learning curve is going up. And I'm as excited as I ever have been, or more so, about the future of the organization going forward.

So I'll have some more remarks at the end. But at this point, let me catch my breath and let Frank convert some of these things into our earnings results.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [4]

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Thank you, Hunter, and good morning, everyone. I'll briefly walk you through the quarter and touch on a few fourth-quarter and full-year items, and then we'll take your questions.

In the early part of the quarter, as Hunter mentioned, we rolled out significant changes to the network operating plan as a result of our rapid transition to Precision Scheduled Railroading. While our service took a step back in July and August, we're pleased to report that our velocity and dwell performance in September were favorable to Q1 levels, and we expect continued improvement going forward.

The changes we've made to the operating plan helped drive significant train length improvements on a sequential basis. Balancing the train plan and consolidating train types drives efficiency savings through better asset and resource utilization.

Cars and locomotives in service are down significantly year-over-year, and we are able to run our railroad and our Company with fewer resources. Compared to year-end 2016 resource levels, our total workforce is lower by over 4,000 FTEs, including over 1,000 contractors and consultants.

Turning to Slide 8, from a financial perspective we were encouraged by the results for the third quarter. While we took a direct hit from Irma, experienced a number of significant derailments, and transitioned to a new operating plan, we made good progress toward our 2017 and longer-term goals.

Jumping into the details of the income statement. Revenue was up 1% year-over-year, driven primarily by core pricing gains of 3.5% all-in and 2.2% excluding coal, as well as 1% volume growth and higher fuel recoveries, partially offset by unfavorable mix. Total expenses were $2 million favorable, with efficiency savings more than offsetting the impacts of inflation and higher fuel prices.

Our quarterly financial report goes through the details of each operating expense line item, but I'd like to quickly call your attention to a couple of key points. Our labor and fringe expense was down 6% on 10% fewer resources. Our MS&O expense was slightly unfavorable given the combined impact of several train accidents, relocation costs, and asset impairments, which offset the favorable efficiency gains from better asset and resource utilization.

And while fuel expense was up, the increase was driven entirely by a 19% increase in the price of diesel. Top-line stability plus our relentless focus on controlling costs drove a 4% improvement in operating income, a full point of operating ratio improvement, and 6% EPS growth, reflecting both higher earnings and the completion of our $1.5 billion share repurchase program.

On Slide 9, our year-to-date free cash flow generation is strong at over $1.5 billion, reflecting solid top-line gains, significant efficiency savings, and the reduced capital intensity of our business. Please note that our third-quarter cash flow benefited from the deferral of tax payments allowed by the IRS for companies impacted by the recent hurricanes. We expect to make the third- and fourth-quarter tax payments by year-end.

Free cash flow growth has enabled increased shareholder returns, including the $0.02 dividend increase earlier this year, plus the completion of our expanded buyback program. CSX's improved financial performance is reflected in our improving ROIC, which now exceeds 10% on a trailing 12-months' basis, and a stable debt-to-EBITDA ratio even with higher debt levels.

Turning to Slide 10, our fourth-quarter volume outlook on a comparable 13-week basis is neutral, with nearly two-thirds of our business expected to be growing or stable year-over-year. The global benchmark to support continued strength in export coal, with fourth-quarter tonnage expected to be similar to what we saw in Q3; and intermodal is expected to continue to grow, reflecting strong consumer sentiment and a tighter truck market.

On the other side of the ledger, several markets continue to be impacted by specific headwinds, most notably the anticipated decline in North American light vehicle production, the evaporation of unit train shipments of crude oil, and the secular challenges of domestic utility coal. Looking forward, as our service product continues to improve and we transition to a faster, more reliable service solution for our customers, we will see growth prospects across a wider spectrum of our markets.

Wrapping up on Slide 11, we are on track to deliver an operating ratio around the high end of the mid 60s, record productivity savings, EPS growth of 20% to 25%, and free cash flow of around $1.5 billion. We completed our buyback program in five short months.

We look forward to seeing you at our investor conference in 2 weeks and would now be delighted to take your 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 Ken Hoexter with Merrill Lynch.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [2]

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Hunter, maybe you can talk a little bit about your thoughts on kind of share loss and your ability to regain that, given some of the service issues. Do you see that you've kind of lost some share? And is it -- would it be permanent and tougher to win back in that case? Or as you get the service improved, do you think that starts to shift back?

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [3]

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I think it shifts back immediately. Look, shippers out there, they're trying to get the bargain -- best bargain they can get. And as soon as you provide a competitive service at a competitive price, your name's back in the hat, and you're going to re-win the business.

This is not the old days of some kind of relationship sales. This is about who's got the best products, who's got the lowest price. We think we're going to be there.

And so anything that speaks of market share -- and I'm not a big advocate of the market share data and the accuracy of what it reflects, but not to dwell on that, I'm convinced of this. All you got to do is get our service where we know it can be, where it needs to move to and prove to, and have a competitive price out there, and you'll have your fair share of the business plus.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [4]

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Great. Thank you.

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Operator [5]

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The next question comes from Brandon Oglenski with Barclays.

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Brandon Robert Oglenski, Barclays PLC, Research Division - VP and Senior Equity Analyst [6]

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Hunter, I mean, we've heard all the anecdotal evidence from the shippers about what went wrong and how service deteriorated on your network. But maybe -- can you just give us a little bit deeper lessons learned through this process, and why you feel that the organization is now in place to deliver better results coming forward?

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [7]

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Yes, sure. I can share some things. I can share that when we got back from the hearing with the Surface Transportation Board, we had three customers that we were having to embargo because they couldn't accept the shipments that we were alleged delaying. And now we're accused of being in violation, where we have got one shipper that's got 60 cars on hand, and he can't -- it will take him 5-plus weeks to unload them.

You know, there's two sides to this story. Now, look, we knew going in that there was going to be significant change here. I talked about significant change and the resistance that people give to it. I talked about that going from a proxy fight into a change is not the greatest environment.

So we had some resistance. And look, I don't want to -- I'm not trying to point a finger at anyone. Some of our best railroaders, hardest workers, some of our labor union people, took it the last time when I talked about -- that I was pointing the finger at them. I'm not pointing the finger at them. The first tranche of people that left the organization were high percentage of management people.

So I'm not pointing the finger. Collectively, as a team, we didn't get the job done. And as a result of that, we made some personnel changes. We had some -- well, I'll just be frank. We had some embarrassing situations that we had to deal with and we dealt with. Are they hard to deal with? Yes, they're hard to deal with.

We had some -- at one of our major gateways, we had a case where some people falsified records on car movements so they wouldn't be criticized about cars being delayed. We can't tolerate that. And so we got maybe a little ahead of ourselves on the hump yard closures. Maybe I was pushing too hard.

But I think we've learned all the lessons that there are to be learned. We've seen what we can do the last 6 to 8, 10 weeks. I think Cindy and her team have done a stellar job of recovering and putting us back where we need to be.

And it's going to get even better. I mean, that's the encouraging thing. And so if you can just get out from under the anecdotal and -- you know, if you were there at some of those hearings last week, the hearings weren't about CSX service, in my view. The hearings were about more political issues of reciprocal switching, and open access, and some of those things.

Now, look, we're ready to participate in that dialogue, but let's call a spade a spade. We had -- I think I counted that day -- I participated in that session; I think there were 10 or 11 customers, specific customers, that testified. We had more positive responses from customers that weren't there at home.

So -- and some of the, quote, surveys that are going on out there are -- you know, I don't put a lot of faith in. And if you looked at what they're looking at and how many people have actually given honest, frank feedback and discussion -- I guess bottom line, there's no hurdle out there going forward that we can't get over.

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Brandon Robert Oglenski, Barclays PLC, Research Division - VP and Senior Equity Analyst [8]

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Thank you.

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Operator [9]

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Our next question comes from Brian Ossenbeck with JPMorgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [10]

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So just touching on intermodal markets and the strategy, we're seeing some reports on Northwest Ohio's role in the intermodal network, maybe some service offerings being adjusted. So as you move past the initial stage of design with the hump yards and flat switching, is the hub-and-spoke design for intermodal something you're also considering to rework? And what does that have -- what implications are there for Ohio and also the Carolina Connector that was planned for North Carolina? Thank you.

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [11]

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Thanks. Let me just answer that two ways.

Number one, we've got an investor conference coming up in two weeks now that we will talk thoroughly about that and other issues. But at the same time, I could answer that like I'm going to answer several other questions: everything we're doing is under review. Now, I can't tell you what the outcome is going to be. We don't go in there and look at an issue and have an answer. We go in there to look and develop an answer. So we'll see what it brings.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [12]

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Okay. Thank you.

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Operator [13]

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Your next question comes from Chris Wetherbee with Citigroup.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [14]

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I know you highlighted sort of what the derailments cost you specifically in the quarter, but I was wondering if you could maybe help us understand a little bit sort of how the service ran through the model and sort of what the expense is related specific to that, and maybe a little bit of weather. I just want to kind of contextualize how much of the operating ratio improvement you could have gotten in addition to what you did if you had a sort of cleaner quarter.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [15]

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Hi, Chris. Frank. Yes, we obviously experienced some transitional issues in the first part of the quarter as we transitioned to a new operating plan over the July 4 holiday. And as you know, any time you've got a network-related set of changes, it's hard to quantify the dollar impact of that.

You do see on the revenue side, the impacts of that transition really muted the top-line growth. If you compare us to our peers, we probably left some demand on the ground. We probably saw some temporal shifts of business to either truck or to other rails. We do expect -- as you heard Hunter say in his opening, we do expect that to come back pretty quickly.

And then on the expense side, anytime your network is a little sluggish, you're going to see higher overtime re-crews, fuel car higher, that nature, but not something that we're able to put a pinpoint type of an estimate. But it certainly did impact us both from an operating income and operating ratio perspective in the quarter.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [16]

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Okay.

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Operator [17]

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Your next question comes from Tom Wadewitz with UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [18]

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Hunter, I know you've commented some on the -- kind of the network and how it's running. Wondered if you could give a bit more perspective in terms of is the carload schedule pretty much stable at this point? How would you think about the trajectory? I don't want to be overly focused on the metrics, velocity and dwell and so forth, but sometimes they help us see how the network is running.

So is it stable at this point? Would you expect to see further momentum build, that the metrics improve and costs fall out further? Just kind of where are you at in terms of the network and the trajectory today?

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [19]

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Sure. The -- Tom, we're not -- we have not completed -- if you remember back a little bit from our other experiences with installing these trip plans, that effort is not complete. Now we're much further along than I thought we would be, but I would think that we're probably 85% there. And I think that by midyear '18, it will be -- have everything fully in place with the plans.

And that means that the plan to some degree will be upgraded where it's required or necessary, and the market is asking for it, as we develop the ability with our point train speed and dwell time. Our dwell time is -- as we speak today, as I look at the morning report, is down to about 10 or 12 hours, which is pretty impressive.

Overall, our productivity cars per hour has improved even more so, which is -- even further shows the ability we have. So the train speed, the true velocity has picked up pretty significantly.

So I guess what it does is it looks and says -- the scouting report we did, we have even more confidence in now that we're going to kind of be able to produce the results that have been talked about over the next four years. Now, the timing within that four-year timeframe might adjust a little bit up or down. But I think that -- I don't want to get ahead of myself for a couple of weeks; I just think that the opportunities are very bright going forward.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [20]

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Okay, great. Thank you for the response.

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Operator [21]

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Our next question comes from Allison Landry with Crédit Suisse.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [22]

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Hunter, I wanted to ask if you thought the customer and employee response to the changes that you're implementing and the resulting dislocation -- has that led you to rethink any of the elements of Precision Railroading as it applies to the CSX network? And is there anything that you need to do differently or that we should be thinking about for CSX relative to what we observed at CP or CN?

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [23]

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No, I don't think so. I think that the only one little caveat I'd put there is this. Look, this model, in my view, will work here as well as it will work or has worked anywhere, and even more so.

I do think that, potentially, maybe we learned a little bit that even here, personnel and the execution and the selection of those people is even more important. And so I think we're kind of fine-tuning that a little bit.

If you look at -- and I'm not -- I don't say this critically. People see the world different ways. But we have a lot of people, a lot of operating supervisors, that were hired and have got seven or eight years' experience off the campus put in an operating world as assistant train master. And that's asking a whole lot of them to be able to do that. And so I think we're going back to do some retraining.

We started back again the last -- two weeks ago, I think, Hunter Camp -- shame on Hunter. But I had a session with the Board, and the Board asked me about Hunter Camps. I said, you know, I'm just not sure I'm going to have time to do that. And I learned quickly, and they quickly told me, you don't have time not to do it.

And so we had the first four sessions, I believe; they were a knockout success. And so I guess the main thing, Allison, is the view of personnel. I think we -- I talked about this term mud. I think we had a lot of internal talent that was covered up with mud. And I think we've taken a hose, washed some people down, and damn if we didn't find some rock stars here. So that's really encouraging.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [24]

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Okay. Thank you.

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Operator [25]

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Your 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 [26]

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Hunter, I guess there is really no one that implements Precision Railroading as quickly or as effectively as you. There is a feeling that your ability to do this has been in large part due to the hands-on nature of your involvement, sort of walking the tracks, so to speak. If you could just talk about that in the context of the turnaround at CSX in terms of your ability or inability to spend time with the rank-and-file and drive change at a grassroots level, to the extent you have in the past and previous turnaround, any insight there, I think, would be helpful. Thank you.

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [27]

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Well, look, I'm not 45 years old anymore. I wish I was for a lot of reasons, but I cannot -- I've been accused, and it's probably not for me to say, but being hands-on. But I've written a lot of books, and papers, and case studies, and so forth. I receive a lot of correspondence from people trying to understand even more the concepts.

I think our team starts to get it. And I think one of the things that we talked about with the Camp was this: I'm not -- as much as I'd like to be able to, I'm not going to be able to get to everybody myself individually to sit down with them, but I can hopefully be effective at developing disciples that say, "Look, this makes sense. This is not just something thrown up on the wall. This has got a lot to it. It makes sense. It'll work," and they buy into it.

Now -- and so I need to be able to do that more so through my team, and I emphasize team, and lieutenants than maybe I've done in the past. And maybe I should've done more in the past. But if I could do it myself, I did it myself, and I didn't bring them into the fold.

So if you say how to optimize this, maybe I hadn't optimized it, but I can tell you this: we'll get to the same type results. They might like to book a little different, but the results are going to be there.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [28]

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Got it. Okay, that's very helpful. Thank you very much for answering my questions.

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Operator [29]

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Your next question comes from Ravi Shanker with Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [30]

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Hunter, in your slides you pointed out that the 4Q outlook has about 50% of your end markets at the favorable outlook versus -- I think it was 66% the last quarter. Not to steal any of your thunder from the Analyst Day, but just broadly speaking, as you kind of look at your long-term or any efficiency targets for CSX, how much do kind of end markets feature -- or kind of how much of a role do they play in actually hitting that? And if end markets are slowing, what's the offset to that? Thanks.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [31]

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Ravi, it's Frank. Obviously, we'll share a lot more with you in a couple of weeks when we get to the investor conference. The top-line growth is certainly part of the future.

But on a proportional basis, I would tell you that the expense line is really important to the future. And if you go back and you look at what Hunter has done at CN and CP, that's an important part of the future, making sure that we drive productivity savings and the operating ratio lower. But we certainly are focused on growing the top line as well.

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [32]

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Yes. Let me just give you -- I'll just use a little preview or segue here into that -- into the market -- to the Analyst Day. Contrary to conventional wisdom, the results that we achieved at the so-called other three turnarounds -- well, first of all, we weren't sensitive to the market, which was wrong. We grew revenue at all three places.

But we were successful net-net at all three places, and so I can tell you this: there's nothing in the end markets that have stopped what the bottom-line approach is here. We have never -- we have always gone into -- right or wrong, we have always gone into, in every one of these turnarounds, with an extremely conservative approach from the other administrations.

My last employers, okay, we went there, and they had a growth curve of 11%. I couldn't see it, and I didn't understand it. And I very frankly didn't believe it. We had 3%.

So we had 3% on the bottom line; they had -- on the top line. They had 11%. When it was all said and done, our operating GAAP ratio was 20 points lower with 4 points than their number. So -- look, you can play with these numbers all you want. The bottom line is the bottom line.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [33]

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Great. Thank you.

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Operator [34]

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Our 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 [35]

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Just in the context, Hunter, of everything that you've talked about with regard to the cadence of the operating plan and when it should pull through, when do you think you'll be able to extract value in the form of price from the service that you'll build into the network? Obviously, as we look into '18, truckload capacity has tightened up; probably more favorable pricing environment as a result of that across the market. But when do you expect to be able to realize extracting value in the form of price at CSX from these changes? Is that more of a '19, '20 back-end-loaded type thought process?

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [36]

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I think it's more -- in my view, it's more of a -- what the competition does. Yes. The competition out there is tough. And if the competition cuts price and improves their service, it'll have impact on us that we can't ignore. But my thought is, if you say, well, what do you think is going to happen? I think that we will start to see -- not in '18, okay, necessarily, to the degree that maybe what you described -- but I think in '19, we will start to make nice, reasonable pickups of price, relative to service; and that as we continue that and move into '20 and beyond, we'll be rewarded for that good service and price.

I mean, when -- if you have got as good a service or better, I think we'll have better in the future, okay? And you're the low-cost carrier -- you got a lot of leverage. You go out there, you get the same service level, okay? If your cost is higher by 10%, it's tough. It's damn tough.

I don't -- I think this organization has the ability to grind through that. But I think it'll be -- would be a little bit bold on my part to sit here in 7 months or whatever and try to tell you about markets that I hadn't dealt a lot with. But that's just kind of my conventional thoughts, if you will.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [37]

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That's helpful. Thank you.

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Operator [38]

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Your next question comes from Cherilyn Radbourne with TD Securities.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [39]

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In looking at your volumes in the third quarter, I'm curious which segments you think were most impacted by some of the challenges that you encountered during the quarter, and in particular how much you think the intermodal network was impacted, particularly as you were onboarding a new international intermodal customer during the quarter.

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer and EVP [40]

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Yes, I mean, -- this is Fredrik. I think we saw impact on all our markets in the third quarter from the challenge and, of course, also the hurricane impact of Irma. So, I mean, I think it was pretty widespread, and so this is hard to pinpoint clearly.

We had the benefit of onboarding a new -- two new customers in the intermodal space and also continue to see opportunities to convert things off the highway system as the market has tightened. And so we feel good about where it is. And I think you're already seeing, as Hunter alluded to, as [service now returned] and is much stronger, you're seeing the kind of the weekly numbers that comes out that indicates that we're back, and the customers are coming back to us very rapidly.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [41]

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Cherilyn, Frank. I will just ad lib a little bit on the hurricane to make sure that it can be dimensionalized for folks -- probably about $0.02 in the quarter, most of that being top line. A lot of that was (technical difficulty) the fact that we had some plants shut down in the Southeast for, in some cases, a couple of days; in one particular case, a couple of weeks.

So as you think about the transition impact on the service side, you -- I think you remember, we also had the hurricane in the middle of that. And then there were some costs in the third quarter which are part of that $0.02. We had at 8,000 trees down, I think, Cindy? And overtime, everybody was pulling overtime. We had some third-party contractors in there.

And then we probably have a little bit of trickle-over of costs into the fourth quarter, single-digit millions, when invoices come in in October. But I just want to make sure we dimensionalize that for everybody.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [42]

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That's helpful, and that's my one. Thank you.

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Operator [43]

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Our next question comes from Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [44]

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So wanted to ask -- coal yields fell, I think, 7% sequentially. How much of that is sort of the mix of met and thermal and export? And how much of that maybe is from just lower met export pricing?

And then if I can just also ask Hunter -- you know, we had a noisy third quarter. Can you help maybe calibrate headcount and operating ratio expectations for the fourth quarter?

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David Baggs, CSX Corporation - VP of Capital Markets & IR and Treasurer [45]

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Scott, you're breaking the rules. One question.

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer and EVP [46]

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So let me take the first part of this in terms of the coal yields. Clearly the second quarter was a very strong quarter, as you saw on the indexes. And so that certainly helped the met yields. And yes, there is a little bit of a mix change as well, because the thermal market -- export market has gotten stronger. So I think you alluded to both of them, and both of them are drivers of that.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [47]

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On the operating ratio, Scott, Hunter can chime in on the headcount. But in terms of the operating ratio, I mean, year-to-date we're at 66.7. Q4 will be better than Q3, obviously. And you know where our guidance is, so you can get pretty close on Q4.

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [48]

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Yes. I mean, Frank, the headcount number is -- I think the projection -- year-end we'll be 4,500.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [49]

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Yes. On a year-to-date basis, full year against where we ended 2016, total headcount in that 4,500 range. You heard us talk about over 4,000. I think the number at the end of Q3 was like 4,200. And, again, that's all-in; that's management, union, plus contractors and consultants.

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [50]

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I guess the only other thing I'd add that we'll talk about at the Analyst Meeting -- you know, there's been a lot of noise and a lot of things happening that I'm not sure exactly what fourth quarter is going to reflect. I think if you're -- this is a longer story than fourth quarter, and I think the long story is exciting. If you're sitting there on the edge of your seat waiting for fourth-quarter results, you might fall off your chair before it's over.

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Operator [51]

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Our next question comes from Jeff Kauffman with Aegis Capital.

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Jeffrey Asher Kauffman, Aegis Capital Corporation, Research Division - MD of Equity Research [52]

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Just a quick merchant or group question on auto. I think a lot of us were surprised to see an 18 auto SAAR in the most recent month, and we've heard stories that maybe 0.5 million cars plus might have been lost in the storm impacts in Houston and a little more in Florida. Could we be underestimating auto if there is a rebound? I know secularly, we've talked about how autos -- the outlook is just not great. But I was really surprised by the most recent monthly SAAR. And I was just talking to some folks in Texas, and they were saying a lot of autos need to be replaced.

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer and EVP [53]

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Yes. And I think that's a good question, and we certainly have seen a fair amount of inventory drawdown there, because it's back to kind of a more normalized level here year-over-year, which hasn't been the picture previously in the year.

So that's a good sign. I think the production numbers for next year indicates about 200,000 more vehicles than we're seeing this year. So I think there are some -- there could be an opportunity there. I certainly know that we're -- our automotive network is running well within our merchandise network, and so we're seeing some pretty strong demand right now. We'll see ultimately how much of a impact it has, but it certainly has been helpful.

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Jeffrey Asher Kauffman, Aegis Capital Corporation, Research Division - MD of Equity Research [54]

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That's my one. We'll see you guys in a few weeks. Thanks.

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [55]

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Well, the one number I thought the other day that was -- in fact, gets your attention, is that I think it said that General Motors, as we speak, is selling -- their sales are -- 24% of them are cars. The rest of it is other type vehicles.

So, now, if you're just talking about SUVs and the whole thing, it's one thing. But if you're talking about cars, there's great slippage, which -- the implications start to be, what about car types, and drives, and dyes, and do they fit the new models, and that type of thing. But that's -- could be an opportunity.

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Jeffrey Asher Kauffman, Aegis Capital Corporation, Research Division - MD of Equity Research [56]

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Thank you, Hunter.

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Operator [57]

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Your next question comes from David Vernon with Bernstein.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [58]

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Fredrik, maybe a question for you on the long-term intermodal dynamic. If you look at the business, the RPU today is kind of where it was in the 2005 timeframe. Volumes have been growing quite a bit.

As we look out over the next 5 or 10 years, should we be expecting more of a volume growth story in intermodal or a little bit of pricing as well? And what should drive the change in that market dynamic?

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer and EVP [59]

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I mean, I think consistent with what Frank said earlier, we will address many of these questions, specifically about intermodal, as part of the Analyst Conference. Clearly, we think there's an opportunity here to continue to convert traffic off the highway system. And it's going to come in the form of either price or volume, depending on where the market is, how tight the market is, and what service offerings are.

But nothing has fundamentally changed the premise that you've seen over the last decade, where we've been able to convert at a pace of 5% to 7% a year on average. And as we look forward, we see no difference. As we implement this operating model, we think we should have an even better chance of doing that.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [60]

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And -- but as far as kind of the rate of volume take versus share take, I mean, in the long run the RPUs are still running kind of where they were a decade ago. Do you -- should we expect that as the market tightens up, you'll be able to get a little bit more pricing power? Or is this going to remain a competitive market where it's going to be more volume?

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer and EVP [61]

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I think this should have better pricing power as well as we continue to improve the service product. And one of the things with intermodal, obviously, as we continue to drive train length and other productivity initiatives, while the top line might not have reflected what you've seen in some other markets, the bottom line has, as we have really seen a significant increase in train length, terminal productivity, double-stack clearance, et cetera. And we are -- not just in intermodal, but across all markets, very, very focused on making sure that every carload unit pays for itself. And that's going to be the continued focus as well.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [62]

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All right. Thanks for the time.

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Operator [63]

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Our next question comes from John Larkin with Stifel.

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John Griffith Larkin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Head of Transportation Capital Markets Research [64]

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I just wanted to dig into the utility coal volumes, which took quite a haircut year over year. Where do those stockpiles stand? And when do you think that will stabilize, and we'll see perhaps more stability in utility coal volumes?

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer and EVP [65]

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Yes. So I think as we think about the fourth quarter, I would say that we're going to be, overall in domestic coal -- roughly flat with what we saw here in the third quarter is probably the best expectation. In terms of the actual stockpiles, I would say at this point, the stockpiles in the North are probably a bit higher than we would like to see. But in the South, they're probably a little bit below. So it gives us an opportunity to replenish some of those in the South, which is usually a longer length of haul and higher revenue because of the length of haul.

In addition to that, just to remind you, at the beginning of the year we had a very short-haul business contract that we lost, the utility coal, that we indicated, I think, about 6 million tons or so. And that's going to -- that will be with us for the full year, will be with us in the fourth quarter as well.

But beyond that, I think we're seeing a market that is in pretty good shape. Clearly, the summer was not helpful, but we are still seeing natural gas prices around 3, which is much -- very helpful. Like to have them even higher, but it's certainly more helpful than where we saw them last spring.

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John Griffith Larkin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Head of Transportation Capital Markets Research [66]

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Thank you very much.

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Operator [67]

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Our next question comes from Bascome Majors with Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [68]

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Yes. So from your longer-term shareholders, succession planning is a pretty important issue here, as the situation is really very different from CP, where you really had an heir apparent a few months into the job. So Hunter, I was curious if you could comment a little bit on the timeline for the Board deciding who is going to lead CSX after you retire? And any signposts that we as investors should watch for on this front along the way?

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [69]

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Well, I can tell you that it's something that the Board is very sensitive to and has me and others working on, and not something that we're ignoring. I'm hopeful that maybe we could give you more insight at the Analyst Meeting, but I'm not sure of that, okay?

But all I can say is this: I understand what you're saying. We share your concerns. I share your concerns, both as CEO and a shareholder. And it's something that we will -- until we receive an answer, we will stay on top of and [glad to weigh it].

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Operator [70]

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Are you ready for the next question? That comes from Jason Seidl with Cowen and Company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [71]

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Frank, real quick, when you talked a little bit about what the hurricane cost you in the quarter, you did a good job of parsing it out for us. Can you talk a little bit about potential rebuilding that you might benefit from in 4Q and maybe even possibly beyond?

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Frank A. Lonegro, CSX Corporation - CFO and EVP [72]

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Sure, and let Fredrik chime in as well. But obviously, as Florida rebuilds, as Texas rebuilds, there can certainly be end markets that can benefit from additional volumes and types of products that we ultimately haul, so yes. I mean, I think there is certainly some possibility of some demand uptick. It really depends on how quickly folks are able to rebuild in those areas. But anything that helps the end markets is ultimately going to help CSX.

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer and EVP [73]

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I agree. And I mean, I think we're seeing also the impact on the trucking market itself that allows us to participate in some moves that we probably otherwise wouldn't and also continue to convert things over to intermodal solution. Of course, building products, and we talked earlier about vehicles being replenished, so I think there are some opportunities out there for us to capture.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [74]

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And are you seeing that occur right now, Fredrik?

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer and EVP [75]

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Well, I'm clearly seeing the truck market tightening. We're surely seeing that. I think it's a little bit earlier -- early to see in terms of building products. But we have certainly seen some of the vehicle opportunities, just based on the need to -- or see what inventory levels are and how quickly they've come down. So it's been very helpful.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [76]

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Okay. That's my one. Thanks for the time, as always.

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Operator [77]

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Our next question comes from Walter Spracklin with RBC.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [78]

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So my question on free cash flow for Frank and the buyback that's coming from it: you noted in your guidance -- you got $1.5 billion guidance, but you're kind of there already three quarters in. And you've made a quite a move on your buyback here this quarter. So are we just being conservative on this? And are you expecting kind of flat free cash flow for the back half? And how should we look at your share buyback momentum as a result of that free cash flow going forward?

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Frank A. Lonegro, CSX Corporation - CFO and EVP [79]

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Sure. Well, on your -- the last part of your question, we'll certainly have some more information for you as we get to the investor conference on shareholder returns and capital allocation in a couple of weeks.

In terms of the free cash flow, obviously we had a nice benefit in the third quarter by deferring the tax payment, and we'll make good on those payments in December. So the fourth quarter is generally a lighter free cash flow quarter. But at the same time, if we're already at $1.5 billion to $1.6 billion, even if you look at the fourth quarter, if I were a betting man, I'd take the over.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [80]

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Okay. Thank you very much.

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Operator [81]

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Our next question comes from Justin Long with Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [82]

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So I wanted to ask about export coal, since it's recently held up a bit better than expected. Do you have any early thoughts about the export coal market in 2018? And just looking longer term, as you think about the structural positioning of your network, how are you thinking about the role export coal will play?

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer and EVP [83]

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We will certainly cover that as part of our investor conference. We feel we're very well positioned strategically in terms of our ability to reach the port, both on the East Coast, down in the Gulf; and that we think we have an excellent service product and good reach into some of the key export players. So we feel good about it. We feel good about where we are here for the remaining of this year. And obviously, where the forward curve seems to be right now, it's a good opportunity for the U.S. producers to participate next year as well. But we'll give you more color as we get to the investor conference.

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Justin Trennon Long, Stephens Inc., Research Division - MD [84]

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Okay, great. Thank you.

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Operator [85]

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Thank you, and this does conclude today's question-and-answer session. At this time, I'll turn the call over to the speakers for closing remarks.

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E. Hunter Harrison, CSX Corporation - CEO, President and Director [86]

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Well, thanks very much. I hope that we were able to fill in some blanks and -- but at the same time not get ahead of ourselves with our Analyst Day coming up, which we're -- the group here is working very hard on. There are some questions before the organization that you have framed very well for us, and those are things that we will be looking at and try to be responsive to. And look forward to seeing you then. Thanks.

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Operator [87]

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This does conclude today's telephone conference. Thank you for your participation in today's call, and you may disconnect your lines at this time.