Good afternoon, ladies and gentlemen, and welcome to the CSX Corporation Q3 2020 earnings call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode. Following the presentation, we will be conducting a question -and -answer session. To ask a question, press star and then one. For opening remarks and introduction, I would like to turn the call over to Mr. Bill Slater, Head of Investor Relations for CSX Corporation.
Thank you, and good afternoon, everyone. Joining me on today's call are 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 two is our forward-looking disclosure, followed by our non-GAAP disclosure on slide three. With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote.
Thanks, Bill, thank you to everyone for joining today's call. The last six months have truly been surreal. On last quarter's call, we discussed the largest and most rapid sequential volume declines in CSX's history. Now, just three months later, record sequential increases. Think about that. Volume declines and increases twice as steep as the largest swings we experienced in the Great Recession in a span of just a few months. Managing this historic volatility is incredibly difficult, I am extremely proud of the dedicated men and women of CSX as they continue to deliver against these challenges. Their hard work allowed us to efficiently absorb the record rebound in volumes while maintaining high level of service. This level of execution requires a commitment and coordination of the entire organization.
Throughout this period, it has been inspiring to see CSX employees band together to reassess every aspect of the business and figure out where we can be even better. We are already seeing the benefits of these efforts in this quarter's results, and will continue to do so in the years to come. Now let's go to slide five for an overview of our financial results. Second quarter EPS declined 11% to $0.96, and our operating ratio of 56.9% remained in line with last year's record results. Maintaining these record efficiency levels despite the combined headwinds from the pandemic, significantly weaker coal markets, and approximately 250 basis points of unfavorable margin impact from lower real estate gains is truly impressive. Moving to slide six, third quarter revenue declined 11% on 3% lower volumes due primarily to reduced industrial activity as a result of the pandemic.
Merchandise revenue declined 7% on 5% lower volumes, with all end markets experiencing volume declines. Intermodal revenue was flat on 7% higher volumes as growth in both domestic and international volumes from inventory restocking and a tightening truck market were mostly offset by declines in fuel surcharge revenues. Coal revenue decreased 36% on 27% lower volumes as the coal business continues to be negatively impacted by reduced electrical demand, lower industrial production, and lower global benchmark prices. Other revenue was down 12% due to lower affiliate revenue and declines in demurrage charges. Turning to slide seven, we cannot achieve any of our long-term goals without first operating safely. In the third quarter, we realized new quarterly record lows for both train accidents and personal injuries, as well as a new quarterly record for low personal injury frequency rate.
While CSX continues to lead the industry in safety metrics, we can never be satisfied if even one of our employees get injured while at work. The team is working to be even better by identifying and eliminating unsafe practices and conditions across the railroad. We continue to increase employee training and engagement with the goal of improving critical rules compliance. Turning to slide eight, our safety focus is part of CSX's broader commitment to ESG and driving positive social impact. Rail is the most sustainable mode of land transportation, we are working hard every day to further these inherent benefits and ensure CSX is the most sustainable railroad. We've made great strides in reducing our emissions and fuel consumption, including setting another fuel efficiency record this quarter by consuming only 0.93 gal of fuel per 1,000 gross ton miles.
We have also set ambitious new long-term emissions targets to continue this positive momentum. Earlier this year, we were the first U.S. Class I railroad to have an emissions reduction target approved by the Science Based Targets initiative, setting the goal of reducing emissions intensity 37% by 2030. In addition to improving our emissions profile, we are focused on helping our customers meet their own emissions reduction targets. Not only does every shipment on CSX consume 20% less fuel than it did a few years ago, but our best-in-class service product uniquely positions CSX to help customers further reduce emissions by converting freight off the highway and onto CSX without sacrificing the reliability of their supply chain.
We are honored by the recognition received today, including recently being named one of the top 20 most sustainably managed companies in the world by The Wall Street Journal, but continuously push ourselves to be even better for our employees, our customers, and the communities we serve. On slide nine, let's review our operating performance. Despite the challenges presented by record volume increases, the railroad continues to run at a high level. Plan changes enacted in the second quarter drove strong productivity gains across the system. We further balanced the network and set a new quarterly record of 93 distributed power trains per day, averaging over 100 distributed power trains per day for the last two months of the quarter. Yard productivity also improved by blocking cars further upstream, reducing touches in the yards, and finding new ways to more dynamically share work between yard and local trains.
Slide 10, these productivity gains are further highlighted, which compares current volume and asset levels against the pre-COVID levels from March 1. In total, volumes ended the third quarter above the pre-COVID levels, while asset counts were lower across the board. Looking at train starts, we are currently handling 3% more volumes with 11% fewer starts than we required on March. On a year-over-year basis, train starts were down 15% in the third quarter compared to a 3% lower volume. Additionally, since the May trough, we have grown volume twice as fast as we have increased the train starts required to serve this growth. No matter how you frame these results, the strong operating leverage highlights the durable nature of the changes made last quarter and is a testament to the team's success in taking advantage of the challenging volume environment to pull forward lasting efficiencies.
I'm sure you might have some questions for Jamie on this later in the call. Let's turn to slide 11 and our hourly trip plan performance. Carload trip plan performance of 73% and Intermodal of 87.4% slightly trailed previous quarters due primarily to the timing lag at the beginning of the quarter, when we began to step up to handle the surge in volumes. Trip plan performance improved throughout the quarter, and we exited the third quarter near 80% trip plan performance level for carload and 90% level for Intermodal. I'll now hand it over to Kevin to review the financial results.
Thank you, Jim, and good afternoon, everyone. What a year it's been so far. Just three months ago, we were reviewing second quarter results where we experienced record declines in customer business activity. We rapidly adapted and focused on driving efficiencies and structural changes that would serve us well as volumes returned. As you can see from our third quarter results, CSX was able to deliver, generating very strong operating leverage on a sequential volume increase of over 20%. As we sit here today, we are positioned for growth with a strong balance sheet and free cash flow profile. We also made the strategic decision to continue to invest in our infrastructure at levels exceeding plan as we leveraged efficiencies and took advantage of slow business activity. This will position us well to absorb future volume as growth returns.
As you can see on the income statement, revenue was down 11% in the quarter as volume growth at Intermodal was offset by economic headwinds in merchandise combined with weak coal demand. While merchandise and coal markets remain challenged, revenues improved sequentially each month through the quarter. Partially offsetting the ongoing revenue headwinds, total expense was down 11% on a 3% decline in volume. Walking down the expense line items, labor and fringe was 10% lower, reflecting significant efficiency improvements and lower volume-related costs. As Jim highlighted, we took the opportunity during this pandemic to make structural changes to the train plan. As a result, crew starts were down 15% year-over-year compared to a 3% decline in volume. These improvements were made across the line of road, yard, and local train plans. Fewer crew starts results in fewer active trains.
The active locomotive count was down 14% year-over-year in the quarter. The smaller fleet, combined with fewer cars on line, fuel, and freight car repair efficiencies, helped drive a 19% reduction in the mechanical workforce. You'll recall the overtime was a key cost lever for us in the second quarter. As volumes recover, we can flex back up using overtime where it makes sense without adding headcount. Even with a small increase in overtime expense versus second quarter, we still reduced overtime year-over-year across all operating departments by a total of 15%. We were also able to maintain the significant reductions made in the second quarter to our engineering contract labor expense in our intermodal terminal workforce, even as volumes increased sequentially.
You'll note the average headcount was roughly flat versus the second quarter, as the increase in the T&E headcount was offset by the impact of our management restructuring, as well as the cycling of the emergency reserve boards from last quarter. MS&O expense decreased 7% in the third quarter despite cycling some significant prior year impacts that nets at $40 million in headwinds. These include $65 million in real estate gains as well as non-railroad asset impairment. Adjusting for these impacts, MS&O would be down 15%. With fewer active locomotives and ongoing freight car repair efficiencies, locomotive support costs were down 24%, and car material expense was 36% lower in the quarter. In addition, as volumes grow, we are absorbing it and driving efficiencies at our intermodal terminals with cost per container down over 25% year-over-year.
We are focused on reducing costs across all areas, including optimization of utility contracts to reflect current consumption levels and increase use of efficient lighting, minimizing the use of external and contracted labor where possible, and leveraging technology to reduce redundancies. These and other initiatives will continue to help control costs as volume returns. Real estate gains were minimal in the third quarter, and we continue to expect minimal sales activity in the fourth quarter. Looking beyond 2020, we continue to manage a pipeline of future properties that we will monetize when conditions are favorable. As I have mentioned before, I am also excited about additional opportunities to leverage our real estate and generate recurring revenue streams.
Fuel expense was $104 million favorable, a 47% improvement year -over -year, driven by a 36% decrease in the per gallon price, lower volume, the cycling of prior year net expense related to non-recurring state fuel tax matters, and record fuel efficiency. Ongoing fuel efficiency gains are enabled by a relentless focus on utilization of distributed power and energy management software, combined with train handling rules compliance. Looking at other expenses, depreciation increased $10 million or 3% in the quarter. Equipment rents expense increased $3 million or 4% due to higher intermodal-related equipment costs and inflation. Turning below the line, interest expense was essentially flat as higher net debt balances were mostly offset by a lower weighted average coupon. Income tax expense decreased $37 million or 14%, primarily resulting from lower pre-tax income. Closing out the income statement, CSX delivered operating income of $1.1 billion, reflecting a 56.9% operating ratio.
Turning to the cash side of the equation on slide 15. On a year-to-date basis, capital investment is roughly flat. We remain committed to investments that prioritize the safety and reliability of our core track, bridge, and signal infrastructure. We use this opportunity to negotiate better materials and outside service costs, utilize track time to drive efficiencies, and reinvest ment savings into the network to take advantage of the lower train activity levels. We have spent a lot of time evaluating our non-infrastructure-related capital and have made progress prioritizing high return projects while also eliminating projects that are no longer needed long term. Capital allocation remains a focus as we identify and prioritize investments that will drive high returns in the future.
Through the third quarter, free cash flow before dividends was $1.9 billion, down 30% versus prior year, reflecting lower operating income, also including impacts from lower proceeds from property dispositions. Free cash flow has continued to be a key focus for this team. Even in this challenging environment, free cash flow conversion on net income remains nearly 100%. Our cash and short-term investment balance remains strong, ending the quarter at $2.9 billion. As I have referenced previously, I expect this balance to normalize below $1 billion over time. As you saw with our announcement today of another $5 billion share repurchase program, we remain committed to ongoing return of capital with flexibility to remain opportunistic. With that, let me turn it back to Jim for his closing remarks.
Great. Thanks a lot, Kevin. Concluding on slide 16, we are continually assessing the pace of economic activity and will respond to the prevailing environment by delivering customers the highest levels of service and reliability in the most efficient manner. We are encouraged by the speed at which volumes recovered from the trough, particularly the strength in the intermodal market. Fourth quarter volumes to date are up year-over-year, and we all hope for continued positive economic momentum. As for capital expenditures, we still expect to be at the low end of our initial $1.6 billion-$1.7 billion range. This ability to confidently invest in our business throughout the cycle is a direct result of our industry-leading free cash flow profile and is a testament to the work done to transform this company. We also remain committed to returning excess cash flow to shareholders.
We recently affirmed this commitment by expanding our repurchase program by $5 billion, bringing our total buyback authority to more than $6 billion. We entered into this pandemic period in a position of strength and confident that CSX would emerge a stronger company. I am proud to say that by staying true to our core values of operating safely, operating efficiently, and helping our customers succeed by providing high levels of service, we are a better company today. Thank you, and I'll now turn you back to Dollar Bill.
Thank you, Jim. In the interest of time, I would ask everyone to please limit themselves to one question. With that, we will now take questions.
Thank you. We will now be conducting a question-and-answer session. Our first question is from Allison Landry with Credit Suisse. Your line is open.
Thank you. Jim, you talked about the trip plan compliance improving throughout the quarter, it sounds like it ended at least fairly close to where you were in the past few quarters. What does it take from here to get those numbers up further? Maybe specifically, if you could address on the carload side, where you think you need to be ultimately to start to chip away at the opportunity to convert the merchandise volume from the highway. Do you think this is something that could start to accrue in 2021, or is this more of a 2022 and beyond story? Thank you.
All right, Allison, that's a perfect question. Let me just say, then I'll turn it over to Jamie and Mark to follow up. In terms of trip plan compliance, this surge of volumes was a challenge, but number one, we're going to get back to where we were, and we're going to get back to where we were as quickly as we can. Then we are going to get better, and we're going to get better, and we're going to get better, and we're going to get better. Jamie can talk about some of the details associated with that.
No, absolutely. Look, as we continue to analyze the plan, and we made our changes throughout the last few months, we wanted to make sure that everything we gained with respect to our train footage and train tonnage, road starts, that we didn't lose any momentum on that side. As Jim had said, at times it was all over the place, and it was coming in different bubbles. We weren't sure exactly where it was going to end up. Working really close with Mark and his team, we were able to pull off some pretty amazing results, making some large reductions. If you take a look at just our train year-over-year, our train length is up 13%, our train tonnage is up 12%. We were able to do that with 350 less locomotives.
There's a lot of assets that we were able to pull out as we were making these changes. Really, it's about exercising our people and getting them up to speed on running a network that's a little bit different than what we were used to. Making that 18% reduction in road starts and the longer trains, heavier trains. In some areas, some of the execution wasn't perfect, maybe what we were used to at the time. If I take a look at some of the areas where we missed on our trip plans, it was only within a few hours. It wasn't like it was days. Really for us, service is all about reliability. It's really important for us to get that reliability to the customer, and we're working on it each and every day, and we'll continue to push that forward.
I'll let Mark comment on the other.
Yeah, no, it's a great question, Allison. Everything Jamie and his team are doing to continue to deliver great service for our customers is really helping us win share in the marketplace with our customers as we sit down and we open up their books and look for opportunities to gain share in lanes where maybe they haven't traditionally used rail, they've been more truck focused or in some lanes, in order for us to gain more of their wallet share. We're seeing a number of these wins even during Q2 and Q3. As the service continues to get better, and it will, we're going to find more of those opportunities. We're excited by them. We're growing a lot. We've seen a lot of good wins in forest products and metals, and even in bulk markets like ag, we're seeing some great truck conversion wins.
The team is focused on it. We're identifying them, and thanks to the service product that Jamie and his team are delivering to us, that's making those opportunities easier with those conversations with our customers.
Thank you guys for the great color.
Our next question is from Brandon Oglenski with Deutsche Bank. Your line is open.
Hey, it's actually Brandon with Barclays, unless there's been a big M&A transaction on the bank side. Jim, I just wanted to ask you, there's a narrative out there with a lot of investor focus at other railroads and what the sector's doing really well. You guys have already gone through your PSR, and if you look at your former employer, obviously some pretty big valuations north of the border. I guess, what do you want investors to measure you against the next few years to hopefully regain some of that relative valuation premium to reflect your cash flow today?
Well, we don't measure ourselves necessarily against the other railroads. I guess if they thought we've already gone through it, that's only because we're so far ahead of them right now, all they see is our taillights. Yeah, we're benchmarking against what we think are the excellent operating companies out there, and also looking at how we can continue to expand our services and help Mark out in any way he can possibly do to continue to grow our profile and grow our revenue base. That's what this company's been about since the first day I got here. You can't really sell anything until you got a good product, and we've created a fantastic and excellent product. Now we're going to continue to sell it.
Thank you, Jim.
Our next question is from Amit Mehrotra with Deutsche Bank. Your line is open.
Thanks. First of all, I'm glad Brandon is still at Barclays. I got worried there for a second. Congrats, guys. Jim, Kevin, Jamie, and everybody on the strong operating results. I was hoping you could give us maybe some high-level thoughts as we enter into 2021, specifically about the point at which you guys just have to add back costs more meaningfully, given the recovery in revenue. It's obviously pretty amazing to see close to a 20% sequential increase in revenue, then headcount be flat to down, MS&O be down pretty materially sequentially. If you can just talk about the runway on that type of performance in terms of the revenue versus cost performance and just how incremental margins can trend relative to the 80% that you guys achieved in the third quarter. Thank you.
Hey, Amit, it's Kevin here. We're not going to get into 2021 guidance at this point. When we think about-
I'm not asking for 2021 guidance.
Yeah, I got it.
For the mismatch. Okay. Yeah, go ahead.
When we think about, to your point, incremental margins, clearly what we were able to do here in the third quarter versus second quarter shows the power, the leverage we have in the model. Certainly, if we see volume increase at a good pace next year, we will have to add some headcount. That'll be a good new story. It won't be one for one. Maybe I'll let Jamie talk to that a little bit. We're preparing for that. We're preparing for growth around here. We've done a lot of things structurally. When you look at our management workforce, you look at our G&A cost, that will certainly leverage into next year. A lot of work that we accelerated next year that I would fully anticipate that we take advantage of going forward. The fortunate part is through this pandemic, we invested in our network.
We have a lot of capacity. I think that actually differentiates us in the market today from what we've heard out there. We have the ability to grow and grow if the volume's there. That's what we're all talking about right now as we look out to 2021, what that might look like, how do we resource for it. Still keeping an eye and capturing all the things that we've done over the last six to seven months and not losing those great efforts that we were able to achieve.
Yeah, go ahead. Sorry.
As Kevin noted, we've got a network that we can still bring on 20% - 30%. We're quite comfortable with continuing to bring on business as we move forward. Look at the plan. The plan itself is running well. We continue to analyze it. We continue to execute, and we'll analyze and execute and continue to work very close with Mark's team with all new business opportunities that are out there. We've got a number of locomotives in storage that we can pull out. We are going to be doing some hiring. We have got some hiring classes out there with some T&E employees, and I think it's important that we stay ahead of what we see coming forward, as well as working very close with our union groups and making sure that we're hand in hand with supplying the service that we said we would.
Look, I've said it time and time again, and I think we've proved it. We don't bring on assets unless they earn their keep and we sweat them. That's what we're going to continue to do, is to stick on the same model that we've been working towards.
Is the comment on 20%-30% volume growth a CapEx comment in terms of not needing to add CapEx? Is that also a comment about not needing to add a significant amount of OpEx? Yeah, go ahead.
Look, on the CapEx side, we've got a great plant out there. We've got long sidings, we've got double track, we've got a good main line, we've got good yards. Yeah, absolutely, we can continue to absorb business on our main line as Mark and his team brings it on.
Okay. Thank you very much.
Next question is from Ken Hoexter with Bank of America Merrill Lynch. Your line is open.
Great. Good afternoon, congrats on the really strong results. Great to see. Maybe, I don't know, Jim or Mark, if you could talk a little bit about pricing, what you're seeing in the marketplace. Obviously, competitors focused on, in region, focused on yielding up, yet you still seem to be taking share. Maybe you can talk us through a little bit, because obviously with the down 8% on a revenue per car, it's tough to see on the mix impacts overall. You can talk a bit about what's going on in pricing and business wins.
Sure, Ken. Hope you're doing well. Let's peel back the onion here on the different markets. Merchandise RPU down 2%. Fuel surcharge was a 3% headwind this quarter to that. Intermodal RPU down 6%, fuel surcharge 4%, and coal RPU down 12%. Fuel surcharge was a 3% headwind. The rest, obviously, the delta there, mix and price for coal, most of that was due to price just given some of the export benchmarks that we saw and the softness in the domestic utility markets. Obviously, mix continued to play an overall driver of RPU this quarter, like it always does. There was negative mix overall. We saw that in metals and equipment, and chemicals. There was positive mix in some, like coal, export coal, with favorability due to the thermal exports declining faster than the met exports.
Minerals also saw some larger declines in shorter haul northern aggregate business. That was just basically given some of the budget cuts and some of the project cuts because of COVID-19. Mix is always a bit of an issue for us, as you know. We're probably, Ken, going to see the continued 7%-8% gap between volume and revenue going forward into the Q4. I would expect that to sequentially improve into Q1 and beyond. Pricing. Our pricing philosophy has not changed, and price continues to be a main focus for the team as we deliver on sustainable and profitable growth. We're partnering with our customers to create solutions to help them grow and price to the value of the service product that Jim and his team are delivering. I've said it before, and I'll say it again, we're not sacrificing price for volume.
Wonderful. Appreciate the thoughts. Thanks, Mark.
Our next question is from Tom Wadewitz with UBS. Your line is open.
Yeah, great. Thanks. Good afternoon. Mark, I've got, I guess, questions for you or a question, if you will. I guess you've had kind of two different dynamics where the consumer and retail side has been super strong and trucking intermodal tight and industrial has been kind of slower rebounding. What's your thought on industrial? Are you optimistic that you're seeing signs of that picking up? What is the customer seeing in the industrial side? Are they seeing a lot of tightness in truck that really encourages conversion to rail, or are they not seeing such a tight market, given that the industrial side maybe hasn't improved like the retail and consumer side? Thank you.
Yeah. It's a great question. We are seeing, obviously, the tight truck market out there. Things are on the intermodal side. Clearly, capacity has been constrained as replenishments have been going on. There's been some driver shortages in several markets like Southern California, Chicago, et cetera. We have seen some good pickup in some truck conversions with our intermodal business, as Jim highlighted, and our intermodal trip plan performance has been quite good. Our service has been quite good. We're happy with that, and I think that'll continue. Obviously, the consumer is still very, very strong. We expect a robust peak season around Thanksgiving time, is usually when we see that e-commerce peak, to Christmas time. We expect that to be very strong. Actually, it has been strong through the pandemic, just as people have been staying at home and ordering stuff online.
We expect it to pick up even more robustly going forward as we approach Thanksgiving. Looking for that to continue through Christmas. Overall intermodal, we are quite happy with the business and speaking with our customers, we expect that to continue deep into Q1. A good sign there. I think, on the merchandise side, on the industrial side, the tighter truck market obviously has allowed us to sit down with our customers, have different conversations. They're looking in these tight times now when their business levels are down to save some cost. Obviously, transportation cost for them is a significant headwind. As we all know, the 12%-15% discount that rail offers, given with our good service product, has allowed us to go and sit down with our customers, and they can't get trucks. Truck market is tight.
The spot rates are up. We are seeing conversions there. We hope that continues and hopefully that traffic that comes to us remains sticky, even post as things do improve and the truck market eases up a little bit. If we're able to show the power of rail and keep performing like we know we can, hopefully a lot of that traffic will stick on CSX going forward.
Great. Thank you.
The next question is from Scott Group with Wolfe Research. Your line is open.
Hey, thanks. Afternoon, guys. Kevin, on the MS&O costs, I know they're lumpy, but anything unusual or one-time issue in this quarter? Any thoughts on how to think about MS&O in the fourth quarter, up or down? I was just wondering, with the buyback, any thoughts on timing? Are you guys considering an ASR, and does this change your leverage targets in any way? Thank you.
Yeah. Let's start with the MS&O. No, I wouldn't call anything extraordinarily unusual in the third quarter. Usually what's unusual or what the analysts like yourself like to call out is the real estate, which was almost de minimis in the quarter, so nothing there. Obviously, we had a year-over-year headwind when you look at real estate gains. We had some significant gains last year and didn't have that this year. When we look to fourth quarter, we always have seasonality. This is around a number of areas in our business. When I look at engineering, the extra cost related to the winter, the capital teams, once they go on the vacations, start to hit OE expense. We have G&A seasonality in the fourth quarter.
I would expect some year-over-year improvement in MS&O into the fourth quarter when you exclude the real estate from last year there. We'll see an uptick in MS&O sequentially, but still year-over-year improvement, excluding the real estate gains from last year. What was the follow-up question?
Just about the buyback and timing and leverage targets, all that.
Yeah. I think we're going to evaluate the buyback program. Jim and I talk closely. I think as we get more visibility in the markets here, as we get more clarity around the pandemic and the implications there, clearly $2.9 billion of cash is not what we need to operate our business. I'd expect that to trend down into next year. You could expect us to be back in the market.
Thank you.
Our next question is from Brian Ossenbeck with JP Morgan. Your line is open.
Hey, good afternoon. Thanks for taking the question. Kevin, one more for you. How are you viewing the opportunities in the land portfolio with gains pretty much minimal here through the rest of the year, and begin to elaborate on some of those recurring revenue streams that you're evaluating? As you look at this book of business, are there more ways to grow in the future and convert traffic off the highway with maybe leveraging some of that land for the industrial development projects?
Absolutely. We're in great conversations. I actually just had the opportunity to hire a new head of our real estate group. I'm very excited about what she's going to drive here at the company. She's hit the ground running here the last few weeks. She's working really closely with Mark's team on the industrial development side and identifying areas where we might be able to locate, whether it's warehousing, other opportunities, whether it's us investing in those assets or partnering with others that know how to do it. That's a great opportunity for us. In terms of the real estate sales, I mentioned it on my prepared remarks, we have a great pipeline. These things we're going to sell when the time is right, when we can maximize value. There's still a robust pipeline. It'll probably be lumpy from here.
I'm pretty excited about what we have in store over the next few years there. These things tend to take time to get to the close, we're working pretty hard on that area. Just on the recurring revenue side, it's something that I've asked the team to really focus on over the next six months, whether it's electronic billboards, whether it's more fiber, anything we can do to leverage our real estate portfolio. These are great opportunities, once you sign these contracts, they continue. You get revenue every year after year. We're one of the largest landowners in the Eastern U.S. We should leverage that as much as we can, I've challenged the team to go out and do that, and I think they're doing a good job so far.
Got it. Thanks, Kevin. Appreciate the update on that.
Next question is from Chris Wetherbee with Citi. Your line is open.
Hey, thanks. Good afternoon, guys. On slide 10, you have an interesting chart on operating leverage. It really shows how much the resources have flattened out even as volume has continued to improve, kind of coming out of August and into September and October. Conceptually, is there a point with volume growth that you feel like there will be a step function higher in some of these resources? Can you continue to maintain? Do you feel like you have capacity with the resources that are operating right now, even as volumes are kind of ticking up, Jim, as you mentioned here in the fourth quarter?
Well, clearly, it's a two-part question, which I think Jamie answered a second ago. We've got a ton of capacity and availability to bring on more business from a physical infrastructure perspective without spending any capital to do that. You're not going to grow the business forever without having to add additional employees, mainly because we have tons of locomotives in storage and all of that. The question is with your operating performance, when do you get to the point where your train length gets to the point where it's long enough or heavy enough where you need to split that train? When you split that train, you need to have the additional employees to utilize in order to be able to operate it. We're moving into a new level now.
What you've seen over the last few years and what was highlighted in great detail in the last few months is today we can do things from a staffing perspective that railroads in the past couldn't do. Listen, I've been doing this a long time. If you'd had this kind of traffic surge across the rail network in North America four or five years ago, we would be now talking about gridlock across all the major cities in the country, and we wouldn't be doing anything. Now, with the common mindset of how you run a railroad, we're able to respond, we're able to pivot. We are nimble. We can add capacity. We can shrink capacity. We can right-size our business, and we can do that much more effectively and much more logically and thoughtfully.
God, I hope we get to the day sooner the better, but we've got to start hiring more and more people because the business is growing and growing and growing, and Mark's just knocking them out of the park every single day. In the meantime, we're not going to add back assets, as Jamie said, when we don't need them. The minute we do, and we talk about that around here five times a day, the minute we do, we'll put them on so we can move the freight.
Okay. Got it. Thank you.
The next question is from Bascome Majors with Susquehanna. Your line is open.
Yes. Thanks for taking my question. Kevin, I want to go back to an earlier question. Can you refresh us on your comfort level with leverage, given some of the uncertainty on either tax policy, economy, et cetera? With that buyback, what are the guardrails at the upper ends that you're watching for to perhaps tap the brakes once you start buying stock again?
Look, as I talked about, we have $3 billion of cash on our balance sheet. I've got to get through that before we ever even would think about leverage. Plus, we're generating significant amount of cash at this point. When you look at the algorithm that we can create with that, and it's quite compelling where we are on a leverage standpoint, we're in a great position. We didn't go under stress during this significant decline in the second quarter. We had access to capital, which is what we always want to have with our strong investment grade rating. That's important. You want to be at a point where you can always have the ability to be opportunistic. I think where we are today allows for that flexibility. If the opportunity arises, we can react and leverage the opportunity when it's there.
I think we're quite comfortable today with where we are.
Thank you.
Our next question is from Justin Long with Stephens. Your line's open.
Thanks, and good afternoon. Headed into this year, you had talked about some irregular year-over-year headwinds. Kevin, I know you had called out D&A, lower gains on sale, real estate sales, other revenue. I know you're not giving guidance on 2021, but just from a high level, are there any unique items like that that we should be modeling? Or do you think next year is more of a clean year where we should see the underlying operating leverage of the business play out?
Yeah, we'll obviously get more into that on the next call here. Depreciation would be a similar headwind to what we have right now. I would also point out our depreciation relative to our CapEx is probably the smallest gap in the industry right there. Probably not the step up that we saw this year on the depreciation side, and we don't have any significant life study that created a headwind this year. Real estate taxes will continue to be a headwind in the next year, probably around the same level it was, maybe a little bit less of a headwind going into next year. Inflation, we think inflation remains relatively modest. No significant pickup there, which is good. Outside of that, as we get into it on the next call, we'll highlight any other things that come up.
Okay. Based on your comment about D&A being pretty close to CapEx, it sounds like your expectation for 100% free cash flow conversion isn't going to change in the near term.
We are very focused on our free cash flow conversion.
Okay. I'll leave it at that. Thanks for the time.
Our next question is from David Ross with Stifel. Your line is open.
Hey. Good morning, gentlemen. A lot of good stuff to talk about, but I wanted to talk about one of the lingering pains in terms of coal. What's the latest on inventory levels and outlook? I think, Kevin, you had recent comments at an industry conference about maybe getting flat to up comps in 2021. Any more color on coal would be helpful.
Yeah, sure, David. Want to just stick to domestic coal, or are you interested in export as well?
Give it all to me.
All right, perfect. Let's start with domestic. It's the largest part of our coal business. The stockpiles right now, to your question, are at or below averages, both in the North and in the South. We have seen a good summer for burn. It was kind of hot in both the North and in the South, so the stockpiles did diminish a bit. Gas prices, nat gas prices, we saw them creep up to $2.50 or so. They came back down. They're back up to the mid to high $2s. We like to see them above $2.80 to really the economics work for the utilities to really start to burn more coal. I'm really encouraged by sort of the November contract and the forward curve into 2021, as we see it above $3 bucks, which is quite encouraging.
Hopefully, that continues, and we can expect to move more coal going into the new year and in Q4, in the back half of Q4. On the export side, start with met. Met right now is it's actually about 75% of our export portfolio. It used to be about 60%. It was about 60/40, 65/35, but now it's about 75% met, 25% thermal. Most of that met is going to Europe, about 55%, 30% to Asia. The benchmarks, as you know, have been challenged. We saw some restocking in the quarter in India and Brazil. Unfortunately, the Chinese quotas on Australian coal have been a headwind, as that's keeping the benchmark prices low, and it's offsetting some of the outputs for our U.S. coal. We've had some issues there, coupled with monsoon season and obviously, the COVID situation has really impacted industrial production worldwide.
Mostly, the met side of the business has really been a price story more than a volume story. Different on the thermal side. It's really been a volume story. Our thermal coal, about 75% of that thermal coal goes to Asia, mostly India, but some to Morocco as well. No longer any coal going to Europe, which used to be a big outlet for us, but we have no thermal coal going to Europe these days. API2 has been a headwind. It was under $60 for the quarter. India, the COVID situation in India has really impacted a lot of the volumes there. However, things are picking up, and we should see some increased volumes in the fourth quarter, and we'll see what happens as the COVID situation plays itself out going into next year.
At the beginning of the year, we provided some guidance on our export coal. We said we were going to be somewhere around low 30s million tons for 2020. My best guess right now is we'll be right at 30 million tons for the year.
That's helpful around the world color. Thank you very much.
Yep, no problem.
Our next question is from Jordan Alliger with Goldman Sachs. Your line is open.
Hi. Yeah, I know you've talked about sort of the lasting efficiencies and the structural changes. Maybe I missed it a little. I was wondering if you could perhaps give some further examples of what some of these changes are that has allowed metrics such as cars processed per hour do so well or even, frankly, just keeping headcount flat while volumes sort of surge here sequentially. I know you talked about the structural changes. I'm assuming it has to do with the operating plan and things along those lines. To the extent you can provide some additional color around that would be great.
Sure. Thanks for the question, Jordan. I guess some of the easiest ways I can put it is we're constantly analyzing the plan. This is, you think about the cars switched per man-hour. I go out with a number of my team members, and we take a look at different terminals, and we question what we do and how we do it and change the way we do things. Just because that's the way it's always been done doesn't mean that's how you do it. Those are kind of the guidelines when you think of scheduled railroading. Some yards you may have switched cars one way. We've been able to find different ways of switching cars that made them more efficient. I mean, that's an ongoing process that we're always going through.
When you think about a network as complicated as CSX can be, we have got hundreds of terminals and yards and different areas where we switch boxcars. We probably have some of the greatest opportunity to make those changes and continue to make those changes as we move forward. When you think about the service plan with respect to growing our train size, well, we said it earlier that we were blessed when we got here three and a half years ago that we have a plant that was built beyond what it needed to be, and it wasn't necessarily being run in a PSR method. We have been able to increase our train sizes, move traffic better. When you think about our train miles, we've reduced our train miles significantly just by moving traffic in a better pattern.
As we continue to find those opportunities, and they're still out there, we still find them each and every day. The team is evolving every day with respect to how our plan works and how schedule railroading continues to develop those different efficiencies. There's more and more opportunities as we continue forward to find those opportunities to move things better, quicker, and more reliable for our customer.
Thank you for the color.
Our next question is from Jon Chappell with Evercore ISI. Your line is open.
Thank you. Good afternoon, everyone. Hey, I know you spend a lot of time on the sustainable operations, and you have this slide, you added the ESG recognition. Mark, as you're talking to customers, and when we think about this, is this just a nice to have for us right now, maybe some investors open up a new investor base? Is this really starting to move the needle in your conversations with customers as it relates to their total freight wallet, or are those conversations still just service price?
Excellent question. No, I think ESG has really gone from a talking point to having a real-world impact now, especially with our customers. Several of our customers in several negotiations, sitting down and really peeling back and showing them everything that we have done at CSX over the last number of years. We've been a leader in this ESG space for a very long time, and as Jim said in his opening remarks, we're very proud of our leadership position there and being recognized by The Wall Street Journal and other Dow Jones Sustainability Index and others. We're opening up having those discussions with customers and showing them that. Clearly, our safety performance is a big discussion there as well.
I can tell you, one of the major contracts that came up for bid this year, one of the big factors that really won us the business was around ESG and safety. Jamie and I spent a lot of time with this customer talking about these things, and it's having a real impact. I would tell you also, as customers look, and especially some of the big shippers out there, retail shippers, as they look to their efficiency targets and their emission targets, taking trucks off the highway, given all the efficiencies that Jim talked about, are real. If they can move more traffic on CSX and take trucks off the highway, that clearly leads to them achieving a lot of their efficiency metrics. Real-world impact, real-world negotiations, and it's paying off specifically in many deals that we've looked at this year.
That's great to hear. Thanks for the insights, Mark.
Absolutely.
Next question is from David Vernon with Bernstein. Your line is open.
Hey, guys. Thanks for taking the time. Mark, I wanted to talk a little bit about intermodal, and what you see in the pipeline over the next three years that's going to put you guys in less of a position to maybe take what the truck market gives you and more of a position to maybe improve the product, either at an infrastructure level, a channel level. As you think about what you guys are investing in, the intermodal side, what is it that's in the pipeline that you're excited about that's going to get you maybe a little bit better than market growth in that market?
Yep. Let me talk about the market, and then I'll ask Jamie to talk about some of the efficiencies that they're working on in the terminals because his group has the intermodal terminals. Listen, we really like, we love the intermodal business. We think there's a lot of growth, and as I've said before, I think this intermodal space is one where we can continue to grow faster than the economy repeatedly every year. We're doing a lot of different things, working on a lot of new, different products with customers, looking to take more share off the highway, really talk about the benefits of intermodal. We have a lot of customers out there, and we're working with them and the different shippers on the benefits of converting that freight.
E-commerce is obviously having a very big impact on our business, we like that business, and we think it's going to continue to grow here in the future. We're thinking differently about things that we need to do going forward and position ourselves to capture a lot of that e-commerce growth in the future. Jamie, do you want to talk about the efficiencies in the terminals?
Our terminals, again, we've got terminals that were, I think, probably overbuilt for the time when they were built, and we're actually getting to utilize them to a maximum. I've got an unbelievable intermodal team led by Marcelo Estrada and Scott Movshin and their team. They've been able to, over a number of years here, put automated cranes and technology with XGate, allowing truck drivers to flow freely in and out of our terminals, giving us opportunities to use GPS cranes to operate autonomously in some areas. We've been able to bring our dwell times down over the past couple of years from up over 24, 26 hours down to 15 to 14 hours in some circumstances of origin dwell.
That's significant. When you turn your traffic over in these terminals, you gain space, you're able to handle more, and the traffic volume that's come our way, we haven't hit a bottleneck. We're definitely inviting more and more to come through the gate and looking forward to it.
Our next question comes from Ravi Shanker with Morgan Stanley. Your line is open.
Thanks. Good evening, everyone. Kevin, maybe just to start off with you. You obviously have the high quality problem of apparently having more cash than you know what to do with. Maybe you can share some of your thoughts on the M&A environment. You've seen some of your peers kind of make investments in infrastructure assets, both rail related and adjacent. Do you have any opportunities out there on this? Do you expect to move on that anytime soon? Jim, maybe as a follow-up on the ESG question, obviously very exciting and very encouraging to see that come up so much. Do you get the sense that shippers are looking to move from truck to rail on a structural basis, or are they seeing rail as somewhat of a stopgap until we get to electrified trucks?
I'm trying to figure out how do you make these ESG gains sticky?
Let me answer your second question first. Absolutely. It's a significant change when major customers, users of the logistics supply chain globally, begin to make public commitments to reducing their carbon footprint. To be able to walk in the door and say, "I can help you do that. In fact, I might even be able to make you get to your targets about a decade early because I'm 75% cleaner than all these trucks you got running around out there, and I'm just as reliable." The good news was, we couldn't do that if there was ESG 10 years ago or whatever. We weren't reliable enough. You wouldn't be able to have this kind of conversation.
The timing of our service offering coming together with a real, not just PR, but a real commitment globally to people to want to be able to do this is creating a lot of opportunity for us in all lines of our business. We want to be as environmentally responsible as we can be. To the extent we move coal, people don't like that. To the extent that we can be a huge player in other lines of business and be a facilitator for improvements from a climate perspective, that's great news for us.
I'll let Kevin follow up a little bit, but on the M&A issue, we've got a tremendous amount of-- As I said earlier, I can't remember what the reason for the question was, but from an M&A perspective as it relates to rail, to the extent that we now have a common focus and a common purpose across the rail network as individual entities, it is opening up great opportunities for us to work together to further become more effective and efficient as we interchange traffic with one another, as we do business with one another, as we understand our systems and we exchange information with one another better than we did before, all with the sole purpose of being able to grow the business on a network basis.
It creates the capabilities for the individual companies to achieve a lot of the benefits and the synergies that before everybody thought, well, the only way you can do that is go out and spend $200 billion to buy some other railroad. No, we don't look like it. We're much smarter than that, than what we used to be. We're eagerly pursuing all of those kinds of opportunities today with the sole purpose because it makes us better competitors individually as individual railroad companies and as an industry.
Yeah, to add to that, Ravi, I think you're right in terms of our cash position today. We're in a position of strength. Gives us a lot of opportunity, first, to invest in our business. It's been exciting as we've gone through our capital program, and we're still going through that for next year and the years ahead. We're finding some really good opportunities on some really high return investments. That's going to be the first priority for our cash going forward. As we sit here today, I would point out we just finished a quarter where, if you look at it, intermodal for the first time contributed the most to our revenue profile, and coal was the least in our history.
On a percentage of our revenue, coal was the least it's ever been, and intermodal has been the best, and we did a 56.9%. Here we are in a position of strength. It gives us a lot of opportunity to invest in our railroad, and we'll look at anything that will strengthen our franchise over the next few years. I'm excited about looking at those opportunities and driving value for us.
Great. Thank you.
Our next question is from Walter Spracklin with RBC Capital. Your line is open.
Thanks very much. Good afternoon, everyone. I want to turn, Mark, if I could, to ask you about volume visibility. I know when the pandemic really hit in March, that visibility tightened up quite a bit and was difficult to see directionally which way volumes were going other than down in the early period. Jim, you mentioned obviously the big rebound. Mark, when you look at and speak to your customers now, how would you characterize that visibility? I know you touched a little bit on coal. You touched on intermodal with some of the opportunities there. Can you go through a few of the others and just directionally indicate whether that visibility is improving as you go into 2021, or is it really a coin toss here as to which direction it goes on a broad segment-by-segment basis?
Thanks, Walter. Great question. I think clearly the visibility we had when the bottom fell out in Q2 when the economy shut down, they didn't send notes to us or emails to us saying "We're closing." It was kind of overnight, things just tanked. As things are coming back, our job has been, and even while the pandemic was going on and the sales and marketing team were working from home, we made it a priority to stay close to our customers, check in on Zoom and Teams and all the fancy video conferencing technology. Everyone had laptops and computers at home and phones, and we made it a priority for them to stay close and really figure out to the best of what they could tell us, and then we could relay that information to Jamie and team. It was a challenge for them to even know.
Things were so dynamic. Things were changing so rapidly. It was very tough to pinpoint. When the volumes came back, it was a snap back, literally within days and weeks, and so it was very hard. Our auto business was effectively, you'd open up the morning revenue report, and it was zeros. A week later, boom, the plants are reopening, and they said, "We're going to one shift probably for a month, and then we'll tell you when we're going to go to two." A couple of days later, they say, "Oops, we're going to two or three right away." It was like, "What." We had to react pretty quickly to that, and it was a challenge. Two weeks ago, we had our fifth customer engagement forum.
Usually, customers come here to Jacksonville for a day or so where we talk to them about what's going on in their markets and their business and share ideas. We did this by Zoom meeting, and we spend a lot of time, Jim was there, and myself and Jamie, and really listening to a lot of their questions and their views on what they think is going to happen, likely to happen. I would say, most are cautiously optimistic as we head into the back half of Q4 and into 2021. There's visibility in some markets, and clearly intermodal, we know what's happening there, and we've got some pretty good visibility.
We talk to our channel partners in the ports and our international steamship lines, and clearly they're seeing a lot of strength in those markets, and the best visibility they have now is we see continued strength and replenishment beyond Chinese New Year and deep into Q1, as I said earlier. From that perspective, good. Coal, I talked about a little bit earlier and won't rehash that, but clearly markets are dynamic there, and we'll see what happens with natural gas domestically, but the world markets clearly have an impact on our export business. For merchandise, a lot of people are watching what's going on. There still remains many risks, right? The pandemic, what's going to happen with the pandemic? There's other geopolitical factors that we're monitoring extremely closely. The election that's coming up in a couple of weeks, government stimulus.
As I said, the effects of the pandemic and on their workers, and everyone's watching that. We're heading into the fall and into the winter, and people are concerned if the cases spike again, will they be able to continue producing? The health of the overall economy and what's that going to look like as we head into the end of the year and into next year. Visibility is murky. It's been a challenging year, probably something that none of us have ever seen in our careers before. Our job is to continue to stay close and provide as much clarity as we can to Jamie and the team so that we're prepared to handle the freight when it comes back.
Okay. That's great color. Appreciate it, Mark.
Our last question is from Jason Seidl with Cowen. Your line is open.
Thank you, operator, and guys, appreciate the opportunity to bat clean up here. Jim, you mentioned something that intrigued me. You mentioned about railroads now working more together than they have in the past. I was wondering if you can give us some examples of what you guys are doing now, and also, do you see more of that in the future as some of your other partners go more through the life cycle of PSR?
Sure. Well, yeah, Jamie might be able to jump in with a little bit. Exactly. Again, you basically have or have had a group of individuals that worked together for years and years and years and built this model that more efficiently and effectively and reliably runs a railroad company. They are now, in one way, shape, or another, having a significant influence on how those companies operate. We think of ourselves obviously as standalone entities, but we want to work together from an industry perspective so that we can grow the business. It's not about forcing unnatural gateways to move traffic farther and out of route, so maybe you can make an extra $12.50 per car by hauling something 500 miles longer.
At the end of the day, when you have business practices like that, you drive all business off the rail and it moves by truck. At the end of the day, with a narrow focus like that, you shrink and shrink and shrink and shrink and shrink and cut and cut and cut and shrink and shrink. We're all about growing the business and to grow the business by working together as a network. 50% of the business originates on somebody else or terminates on somebody else, so I'm not an island. I think that's the MO going forward. It's not a foreign concept when you talk to the other railroad executives, whether it's me, whether it's Jamie, or it's Mark, or whether it's anybody else in the organization.
There's a much greater sense of urgency and a much greater focus on customer service than I think there has been in the past. Hopefully that not only continues, but hopefully we begin to get better and better and better at that so we can become more relevant in the transportation marketplace and grow what today, the overall share of our transportation spend is very, very small. We want to get bigger.
I think Jim nailed it down. When you have a partner that thinks like you and acts like you, it sure makes it a whole lot easier to do business with them. Always have we had issues over the years with interchange points. Traffic would get locked up there. Customers didn't have visibility between railroad and railroad. As we continue to have partners around us who are getting better and better at what they do, it makes a big difference for our customers, and it helps to grow the industry. It's exciting to work with some of the Western roads who are really starting to come around and work with us, and of course, the Canadians know the game, so it makes a big difference when we can all flow together.
I appreciate the color and time as always, gentlemen. Thank you.
This does conclude today's teleconference. Thank you for your participation on today's call, and you may now disconnect your lines.