and gentlemen, and welcome to the CXX Corporation Third Quarter 2018 Earnings Call. As a reminder, today's call is being For opening remarks and introduction, I would now like to turn the call over to Mr. Kevin Boone, Chief Investor Relations Officer for CSX Corporation.
Thank you, Shirley, and good afternoon, everyone. Joining me today on today's call is Jim Fudd, President and Chief Executive Officer Elaine Frank Montenegro, Chief Financial Officer and Mark Wallace, Executive Vice President, Sales and Marketing. On Slide 2 is our forward looking disclosure, followed by a non GAAP disclosure on Slide 3. With that, it is my pleasure to introduce our President and Chief Executive Officer, Jim Flynn.
Great. Thank you so much, Kevin, and thank you everyone who's done the call. We are very excited about the strong performance of the railroad. Incredible things can be done by incredible people. The CSX workforce is proving every day that they are not going to take a back seat to anyone when it comes to running a safe, customer focused and efficient railroad.
I want to give a special shout out to the operating team that positioned our assets out of harm's way in advance of the recent hurricanes and to Ricky Johnson and all the engineering folks that did an amazing job in getting us back up and running with minimal delay in the aftermath of both storms. Before moving to 3rd quarter results, I'd like to comment on a few initiatives we worked on in the Q3. First, we made changes to the organizational structure in our operating department, which pushed more real time decision making to the field. Our management team has embraced the change and I am encouraged by the early positive results and momentum it has delivered. 2nd, we announced new major initiatives at our Northwest Ohio Intermodal Terminal.
This facility functioned as a sorting facility under the previous hub and spoke strategy. We will now leverage this asset and its important strategic location as a traditional intermodal terminal drive new revenue opportunities. As part of our plan, we are working with Northpoint Development to establish a logistics park adjacent to the terminal. This logistics center will require no capital from CSX. We also announced a new haulage agreement with BNFF.
That enhances Western access to the facility. And we are working on expanding access from East Coast ports. I believe these initiatives will drive long term growth opportunities to CSX. Now let's get to the results. I said it last quarter and I'll say it again today, 2 words sum up everything.
Great performance. Nothing unusual. Again, these numbers are straightforward. EPS increased 106 percent to $1.05 versus $0.51 last year. Operating income growth of nearly 50% combined with the lower tax rate and 6% fewer outstanding shares contributed to the significant year over year increase.
Our operating ratio improved 9 70 basis points to 58.7%, a substantial improvement and a record Q3 for CSX. The operating results are highlighted by 14% top line growth, including 4% volume growth, combined with lower expenses despite much higher fuel costs. Let's turn to Slide 6. Revenue increased 14% as volume, price, fuel surcharge and supplemental revenues all contributed to positive growth this quarter. Looking at the business segments, each was impacted by positive price and fuel recovery.
Merchandise revenues grew 12% this quarter, helped somewhat by lapping some of the service issues last year. Nearly every end market saw a double digit increase with the exception of fertilizers, which was impacted by a previously disclosed customer shutdown. I am encouraged by the broad based growth across this portfolio. Coal revenues increased 14% with strength in our export business offsetting domestic utility weakness. We also saw good growth in our steel and industrial business.
In intermodal, we saw growth from both price and volume. Finally, in other revenues similar to previous quarters, we saw an increase in supplemental fees, including demurrage. On the next slide, Slide 7. Let's take a look at our safety performance. The safety of our employees is my number one priority.
You can see in these charts, we made some good progress this quarter and we need to sustain this momentum. The personal injury rate this quarter is encouraging, but we must improve our training accident rate. As I have mentioned, we have an initiative underway to drive further improvement. We had a strong turn up by employees in our recent safety survey, which is a good sign of employees involved. I will continue to prioritize safety above everything else and expect us to make further progress.
On the next slide, Slide 8, on the efficiency and service slide, train velocity and dwell both saw improvement significant improvement over last year, and they are also much better than last quarter. Velocity improved 28% and 12% improved 26% both on a year over year basis. Cars online continued to trend lower, down almost 14% year over year despite volume increasing 4%. This really shows the improved asset utilization we are achieving. And you can see our trip plan compliance.
This is a very important measure as it affects not only the railroad's operating performance, but most importantly, how we are performing from a reliability standpoint for our customers. We have seen an improvement of 26% from the Q1 to the Q3 of this year. And we just started measuring this in 20 18. While we have made good progress, there is plenty of room to improve. Now let me hand it off to Frank, who will take you through the financials and operating improvements in greater detail.
Thank you, Jim, and good afternoon, everyone. Before walking through the financials, we've got a number of questions on hurricane impacts. So let me give you a quick summary. The most significant impact from Hurricane Florence was the loss of over 5 miles of track due to numerous washouts from flooding. As a result, the majority of the financial impact capital in nature, which I'll discuss in a few moments.
In terms of the P and L, we estimate the EPS impact to be about $0.02 in the quarter, similar to Hurricane Irma in last year's Q3, with most of the impact attributed to lost or deferred revenue. With respect to last week's Hurricane Michael, given the location of the landfall and the speed of the storm, we do not expect the impact to be significant in the 4th quarter. Turning to Slide 10, I'll walk you through the summary income statement. Reported revenue was up 14% in the 3rd quarter, driven by 4% more volume and revenue per unit gains of 9% from higher fuel recoveries, favorable mix and core pricing gains as well as higher other revenue. The overall pricing environment remained strong in the quarter with healthy demand levels, tight trucking capacity, higher fuel prices and supportive export coal benchmarks, combined with an improved CSX service product.
As in the first and second quarters, pricing for merchandise and intermodal contracts that renewed in the Q3 was particularly strong. Other revenue increased year over year, reflecting the benefit of higher demerge and storage charges. We still expect other revenue to be in the $130,000,000 to $140,000,000 range for the Q4, though likely toward the higher end of that range. Moving to expenses. Total operating expenses were 2% lower in the 3rd quarter, reflecting the benefits of scheduled railroading as expenses were favorable year over year even with higher volumes, higher fuel prices and the impact of inflation.
Labor and fringe expense decreased $30,000,000 or 4% year over year as average headcount was down 8% despite 4% more volume. The smaller labor footprint spans both operating and G and A departments. On the operating side, significant year over year improvements in velocity, on time originations and arrivals and trip plan compliance led to significantly fewer active trains and crew starts, yielding a 20% improvement in train crew as measured by GTMs for active train and engine employee. Non productive recruits, an indicator of network fluidity also improved by 58%. Shifting to mechanical support labor, the active locomotive count was down 12% year over year, including an active fleet reduction of over 300 since the end of Q2.
We now have over 800 locomotives in storage. In addition to the hundreds of engines, we've sold scrapto returns since the beginning of last year. The smaller fleet along with freight car repair efficiencies helped drive an 11% year over year decrease in our mechanical craft workforce. Our G and A headcount also continues to decline as we look for every opportunity to absorb attrition. With these operational and G and A labor efficiencies, plus the contractor workforce reductions I'll discuss in a moment, we have nearly achieved the full year 2,000 total resource reduction goal we set out on
our January
call. MS and O expense was lower by 9% versus the prior year. From an operational perspective, improved service levels combined with resource and asset efficiencies also yielded MS and O savings. Material savings attributed to the smaller locomotive fleet are complemented by our decision to store units that are less reliable. The decisions we've made around storage combined with additional fleet reliability efforts drove a 34% year over year improvement in our locomotive out of service measure and further reduced costs related to materials and contracted locomotive maintenance services.
Looking at non labor costs associated with our train crews, the reduction in both road crew starts and re crews yielded lower hotel and taxi costs. Additionally, MS and O continues to benefit from our efforts to streamline contractors and consultants, particularly in our technology department. Similar to recent quarters, results benefited from line sale and real estate gains that were $52,000,000 higher than the prior year. We are continuing to monetize our surplus assets and are making good progress toward our $300,000,000 target for cumulative real estate sales through 2020, along with the potential for upside from line sale proceeds. We continue to have a strong pipeline of real estate and line sale opportunities, though the impact of these transactions will continue to be uneven from quarter to quarter year to year.
Looking at the other expense items, depreciation increased slightly due to the impact of larger net asset base. Fuel expense was up 31%, primarily due to a 27% increase in the per gallon price and increased volumes, though we were pleased to achieve record fuel efficiency in the quarter. We will drive further fuel savings through continued improvement in network fluidity and the increased utilization of fuel optimization processes and technologies. Equipment rents expense declined 18%, driven by significantly improved car cycle times as we continue to see strong year over year and sequential service improvements. Equity earnings were favorable, primarily due to the impact of the lower tax rate at our affiliates.
We still expect equity earnings of affiliates of $20,000,000 to $25,000,000 in Q4. Looking below the line, interest expense increased primarily due to the additional debt we issued earlier this year, partially offset by a lower weighted average coupon rate. Tax expense was lower in the quarter even with significantly better pretax earnings, reflecting the continued benefit of tax reform. Our effective tax rate was 22.3% in the quarter, slightly lower than prior guidance, mainly due to the settling of state tax matters. As of unique items, we expect our effective rate to be in line with prior guidance of around 24.5 percent for the Q4.
Closing out the P and L. As Jim mentioned in his opening remarks, CSX delivered operating income of nearly $1,300,000,000 3rd quarter record operating ratio of 58.7 percent and earnings per share of $1.05 Turning to the cash side of the equation on Slide 11. Year to date capital investments are lower by 15%, While we remain on track for the 3 year $4,800,000,000 capital target, we now expect 2018 capital investments of about $1,700,000,000 up from the prior target of $1,600,000,000 The incremental capital spending is being used to accelerate positive train control, fund additional investments in positive return projects and pay for repairs related to Hurricane Florence. The reduced capital intensity of the scheduled railroading model, the substantial core earnings progress detailed on the prior slide and the benefits of tax reform helped drive a 55% increase in year to date adjusted free cash flow, resulting in nearly 100% free cash flow conversion of net income. This significant improvement in free cash flow generation helped drive a nearly 50% increase in shareholder returns.
We executed $1,000,000,000 of share repurchases in the 3rd quarter and have now completed over $3,000,000,000 of the current $5,000,000,000 buyback authority and remain on pace to complete the program by the end of Q1 2019. And we have as we have stated throughout the year, the CSX Board will continue to evaluate cash deployment and shareholder returns on an annual basis. With that, let me turn it back to Jim for his closing remarks.
Great. Thanks, Frank. Turning to Slide 13 and wrapping it up on a kind of a forward looking basis. On the last quarter's call, I said we were expecting revenue growth for this year to be in the mid single digit range. We are now looking for full year growth to be 6% to 8%.
Clearly, we are doing better than we expected coming into the year. A lot of this is due to the continued strength of export coal, but all of our business groups are doing well. On the intermodal side, we have made significant strides in reengineering our franchise to get where I believe we need to be to drive sustainable profitable growth. Our customers understand what we are trying to accomplish and are engaged with us to make our intermodal product better. As I sit here today, only 8 months since our investor conference, by almost any measure, we are ahead of where I thought we would be.
This team has delivered significant value to our customers and our shareholders by running the railroad better and better every day. I am proud of what has been accomplished and encouraged about all the opportunity in front of us. Our goal of making CSX the best broad railroad in North America is clearly attainable. Turning to that, Kevin.
All right. Thank you, Jim. In the interest of trying to get to everyone, I will ask that the analysts limit themselves to one question and one follow-up if needed. Shirley, we'll now take questions. Thank you.
Thank you. Our first question comes from Allison Landry with Credit Suisse. You may ask your question.
Hi, good afternoon. Thanks for taking my question. I wanted to ask about the revenue per RTM trends this quarter. It looks like it was up a little more than 3% and for the first time you've seen since 2Q 2017. So just wanted to understand what's driving that, if it's mix, price, a combination thereof and if there's an impact that we should be thinking about or if this helps us to understand the success of PSR so far?
This is the last one, but the RTM growth that we saw in Q3 was is a combination of everything. So strong pricing environment, mix and volume. So yes, I guess the last part of your question.
I was asking about if this tells us something about where you are in with the success or progress of precision railroading so far?
I would say, yes. Clearly, we are doing very well. And service is excellent. The pricing environment is very, very good. Customers are moving more freight back to the railroad, and that is a trend that will continue.
Okay. Thank you for the time.
Yes, Allison, it's Jim. I mean, clearly, part of
our strategy here is to price appropriately for the service that we're providing. And to the extent that CSR gives you a better product to sell, you're going to recognize higher prices as we go forward.
Okay, perfect. That's really helpful. Thank you.
Thank you. And this question comes from Chris Wetherbee with Citi. You may ask your question.
Hey, thanks guys. Thanks for taking the question. I wanted to talk a little bit about OR expectations as we move forward. Obviously, the operating ratio has performed extremely well over the course of the last couple of quarters. I guess, Jim, as you're sitting here thinking about sort of what you're doing on the intermodal side, can you put that into context with sort of your 60 OR target that is out there?
Maybe how you think about that sort of timing of getting towards that and the sustainability of these very good margins that we're seeing. I guess I'm just trying to get a sense of sort of how far along in that progress you are. You mentioned you're ahead of what you expected to be several months ago. I don't know if there's sort of a new way to think about the opportunity set going forward.
Well, I guess, as I said, as I was trying to get to without being too specific because we're not to be too specific today anyway. 8 months ago, we put out a target, they had a 60 operating ratio in 3 years. And I think at that point in time, everybody felt we were crazy, but that couldn't be done. And now we've come in with 2 consecutive quarters in a row of it's not industry leading right there with anybody else in the industry. So and as I have said on the last few quarters, I have a little more confidence that we can hit a 60 operating ratio in 3 years when we're kind of there today.
So but in no way, shape or form is that indicative of the fact that we've grown out of opportunities. We're just, as I said, are comfortable with the reengineering steps that we've taken to date on our intermodal business. But we're holding back because we made a commitment to our customers, we wouldn't make any kind of dramatic changes until after peak season. We're holding back and we're going to be doing some more work that we've already discussed with our customers in terms of some line rationalizations, some terminal consolidations. And what we're talking about with Northwest Ohio, we're committed to growing that business, but we're going to grow that business in a logical process that is sustainable and profitable for us, all of which gives us opportunities to further reduce our operating ratio as we go forward.
So a ton of opportunity ahead of us. And so hang in there and see what we can do for you next quarter.
Okay. I appreciate it. Thanks for the color. And then just a quick follow-up on the pricing side. I know you don't give a core pricing metric anymore, but Jim, you've been helpful in terms of characterizing the price environment over the last couple of quarters.
Just wanted to get your thoughts on 3Q maybe as it stands relative to the last couple of quarters.
Yes. What we said, Chris, in our prepared remarks was that the renewals continued to be strong and certainly in comparison to a same store sales type of a measure, they continue to be elevated against that benchmark. We restructured contracts from time to time. We did have one that was a little less than we would like. But other than that one, you would have seen a sequential continued sequential increase in same store sales.
So yes, the environment is really good. The backdrop macro is really good. The service product is really good. As Jim mentioned, Mark has got his team fully engaged in driving forward and really thinking about what we're going to do in the next couple of quarters getting into 2019. The normal escalators like ALIF and RCAF and things of that nature all look pretty strong quarter over quarter.
So those are also helpful as we think about contracts that are longer term in nature. So nothing has really changed from what we told you last
quarter. Okay,
perfect. Thanks for the time. I appreciate it.
Thank you. Our next question comes from Brian Ossenbeck with JPMorgan. You may ask your question.
Hey, good afternoon. Thanks for taking my question. Jim, can you give us a little bit more context about just in general, you're not going to give too many details today, you said on the intermodal side, but just what are some of the challenges and the opportunities of making these adjustments given that CSX was a had a standalone entity in intermodal and maybe compare it to when you were at CN? And where do you think the margin profile can actually go over time? Can you get to the corporate average at CSX?
Well, I'll take that second part of your question first. I think so. My history at CN was that, that's what we did. We took it from the slowest dog to the middle of the pack. And I firmly believe that if you believe in your franchise and you believe in the quality of your product, that you can sell that as a value added service to your customers and not just as a commodity that's going to trade the marketplace based on price.
And I think based upon capacity and everything else, that's an issue with our channel partners. We bring to the trucking we bring to the trucking
industry and those people
that use Intermodal a tremendous product with a tremendous value. And we still have a long way to go to get that franchise right. Part of the process is disassembling the old independent structure of the company because it's not an independent company. It's part and parcel of the railroad. Those trains run on the railroad.
They don't run on the intermodal railroad. They run on the railroad. So all of that goes towards us building a much more efficient, highly effective and better quality product for the customers. And that's what's going to drive the growth and that's what's going to drive and increase improve the profitability of the business segment.
Okay, great. Thanks. And then, Frank, can you just give us an update on export coal for 4Q? It seems like it's running at the run rate you had mentioned last time. And if you can give us the mix of thermal and met or
at least some characteristics of that
would be helpful. Yes. So it's Mark speaking. Export coal, we believe heading into the back half of the year or back Q4 of the year is going to remain very strong. Demand is still very strong.
Benchmarks are still very strong. And so we think we are going to see continued strength in our export coal business here heading into the end of the year.
Okay. Thanks, Mark.
Thank you. Our next question comes from Amit Mehrotra with Deutsche Bank. You may ask your question.
Thanks, operator. Congrats on the very strong results. I feel like I've been saying that a lot to you guys this year. Jim, export coal has obviously just following up on the last question, obviously been highly accommodative, which has helped this year's performance as well. So as we think about walking the operating ratio from 2018 to 2019, how much of the improvement we could see will be predicated on what export coal volumes do next year, just given how much growth we've seen this year in the business.
I'm just trying to calibrate our expectations, my expectations for what the improvement could be in 2019 given maybe some of the idiosyncratic events for this year related to export coal. Thanks.
Well, I would say it's more of the what if something happens to coal and what would the impact be on our performance going forward as opposed to I mean, it's not like we're going to add another 40% more export coal tonnage to the railroad, voila, we're getting a mid-fifty percent operating ratio. So we're assuming and have assumed during the planning process, and we'll probably based upon where we stand right now, things on a forward looking basis for export gold into 2019 look pretty good. And that will be what we'll base our plan on. And we'll continue to look for ways to become more efficient. As I said, it's much more of an issue of what would be how fast and how effectively can we pivot and react in the event something happened to the coal business.
And that's something that as of right now, that would just be speculating. But we don't need we need to maintain a healthy coal business going forward because it has a meaningful impact on it. But if something happens to the export coal markets where they soften up a little bit, we'll pivot and we'll adjust just like all good railroads all good precision scheduled railroads do.
Yes. I guess you're just going to be at 60 OR this year. I wonder if you're looking at the business, I'm sure you're looking at the business many ways, but one way you're looking at is what the underlying margins of the business are doing ex the growth we see in export coal volumes. And maybe that's the reason the 2020 target should actually be 60% given the fluid nature of those cargoes or that freight?
I mean, without commenting on your 60 number there, either this year or in 2020, When we look at the underlying business, the margins on the business segments are all improving independently, not just because export coal is having a good run.
Okay. Let me if I could just ask one quick follow-up. One of the big pieces of the cost structure that you guys have been able to leverage is obviously the number of employees and employee headcount was down another, I guess almost 8% in the quarter. As your volume guidance is going up your sorry, your revenue guidance is going up, should we expect a flatter kind of employee headcount into 2019 2020 because or will you still be able to kind of leverage that and see higher revenue and lower number of employees?
Well, we'll continue to become more and more efficient, however you want to measure it, on a GTM basis, on an RTM basis, on a carload basis. And our plan will be to continue to see a reduction in the headcount. We're not like I said, we're not in a position right now. Again, we say, January, I said we're going to take 2,000 employees out of the company this year. Year.
We already got 2,000 employees out of the company this year. Will we have a target for employee reductions, employee efficiency next year? Yes. And what that number is at the right time, we'll articulate it to you. And we will continue to become on a per unit basis more and more efficient all the time.
However, when we get to the point and again, a lot of that has to do with our the attrition rate and how we manage the expectations of our employees through this project. But when we get to the point where we need to handle the volume, we're not going to run ourselves out
of a couple of breakmen here and there
to screw up the river. So we'll pivot, we'll adjust. There are certain points on the railroad today where you need employees in one location and you have excess in another. So you're always managing your workforce appropriately, and we'll do that on a go forward basis.
You should expect obviously when the business comes in merchandise and intermodal, we've got ample capacity on trains to be able to add it with very high incremental margins. If it comes in unit train, commodity, certainly the margins there are good. If you would want us to add any additional resources we needed to be able to resources we needed to be able to handle that. But I think to Jim's point, you should expect us to continue to leverage resource efficiencies over time and our business is going to continue to grow. That was part and parcel of the framework that we laid out for you at the Investor Conference in March.
Right. Thanks for taking my question, guys. Congrats. Have a good one.
Thank you. Our next question comes from Ken Dexter with Bank of America Merrill Lynch. You may ask your question.
Hey, good afternoon. I'm going to guess that's me. It's Ken Hoexter. Hey, great job. But if we can just touch on the efficiency there, Frank or Jim, you talked about more room.
Is there more room on the equipment reductions as well? Or now that you've put all the locomotives aside and the cars, is that kind of the end of the equipment side of your efficiency gain?
We took out 3 again, we took out 300 this time this quarter. We're always again, we're at in the quarter, I don't know what the velocity, 17.8%, 17.9%, something like that. That's way behind the industry leader, way behind the industry leader. Since then, now we're up around 19%, still way behind the industry leader. As we improve velocity, as we improve throughput, as we improve all aspects of the railroad.
What does it do to create capacity, I. E. Takes out locomotives. So we'll continue to take out locomotives. We'll continue to take out railcars.
We'll continue to free up capacity across the road and in the terminals just as we as because we will drive more and more efficiency and fluidity in the network. And so therefore, again, that's how the that's why the employee count goes down, employee count goes down because we need fewer as an example, we need 30 fewer locomotives for every mile an hour, we can improve our velocity. So every 30 of that locomotives means you need fewer people to maintain the locomotives, which means you need fewer facilities to maintain the locomotives. And on and on and
on and on and on and
on and on, fewer cars online, get them offline, get them moving, fewer people to maintain the cars, fewer pieces, fewer inventory. So that's the nature of the game here, is continuing to drive throughput. And as I said, in terms of dwell, we're not the leader in dwell. We're not the leader in terms of velocity, but we will be. And as we do that, we'll free up and shed more and more assets.
That's really great detail and insight. I truly appreciate that. Frank, maybe another one. I just want to clarify something you said earlier. You said there was a contract that you didn't get what you wanted.
Excluding that, I think you said rates would have been up sequentially. Maybe if you can just kind of clarify or detail what you were saying there in terms of what was going on with rates exclude I don't know if that was including a bad contract or something?
Ken, you summarized it perfectly. Absent that one restructuring deal that we did last year, same store sales would have been up sequentially Q2 to Q3.
So that was last year. That wasn't one that just happened that is you're seeing rates deteriorate or anything?
That's correct. That's before foot before wallet.
Very important clarification. Thank you.
Obviously, we're talking merchant intermodal revenue.
And I'm still
just We just have
to learn with it.
We don't have to be asked about it.
Okay, okay. And then just a follow-up on maybe Jim, if you can detail kind of what you're doing on intermodal. I mean, you talked about holding off until after peak. But can you walk through changes? I know you mentioned you're reopening kind of or accelerating some stuff in Northwest Ohio working on the tunnel in Virginia.
What is the goal on intermodal? I don't know if there's a simple way to kind of highlight what you're doing there?
Yes. I guess the goal is, I think, we were pretty clear about last year unwinding the hub and spoke system in Northwest Ohio, where you had multiple handlings of the same container on the network, which is in a very expensive way to do that when you're going very expensive way to operate, especially when you have very short length of holes associated with that. Last year, we unwound that to a large degree and we talked about the VIC and we took 7% of the volume intermodal volumes off the company in the Q3 of last year. And to be honest, Lydia, at that point in time, we thought we had fixed the intermodal network to a large degree. What we uncovered as we went through 2018 then and began to try and build and make our terminals more effective and our trains more efficient then we were doing similar things to the hub and spoke in Northwest Ohio.
We were doing that same kind of double and triple handling of containers in many other locations on the railroad. So we are unwinding those. We got rid of, I would say, about a third of that earlier this year before the peak. And we have another piece of business that we will unwind, rationalize the lanes, get out of doing some of this double and triple handling of containers. And that will happen at the beginning of the year after peak season.
And we'll clearly assess before we start doing that kind of stuff what the weather situation looks like and everything like that. Our goal here is to work with our customers. Our customers clearly understand what we're doing. And in a lot of cases, they have been published, not only in the media, but in various analyst reports, saying that what they're doing makes total sense. You can't be everything to everyone.
And we're asked here to win a flu ribbon for volume. We're here to win an award for being safe, customer focused and efficient and making money.
Appreciate the time, Jim. Great answers. Great insight.
Thank you. Our next question comes from Tom Wadewitz with UBS. You may ask your question.
Yes. Good evening and congratulations on the strong results. Wanted to ask a question about you've talked about this intermodal changes in service. You've previously or just now you said kind of 7 point impact to volume with what you did last year. Can you give kind of a framework of the changes you made in August this year, which you might do in Q1 next year?
Is that a bigger impact or what might be the total volume impact from those changes?
Yes. So Tom, the 2 announcements that we made, 1 late August that went into effect in mid September, had about a 2% impact on our volumes. And then the one that we announced early October, that won't take effect until early January is about 5%. So combined, it would be about the same volume impact that we announced, I guess, this time last year. So
Okay. Great. And then wanted to see if you could offer some thoughts on kind of where you're at with the sales force and getting them kind of the I guess the sales force energized and the right people in place and engagement with the customers in terms of selling for the carload customers to leverage the service and maybe convert some truck freight? And then also if you had a little more color on the BN agreement, kind of what the nature is of what you're doing with BN to Northwest Ohio? Thank you.
That's a crafty way of asking a follow-up.
Yes, I know. Sorry about that.
It's okay. So clearly, what I've been focused on here the last two and a half months has been putting together an organization that I believe that will be required going forward to sell what we believe is a truly exceptional service product. We, CSS, had a lot of people in sales and marketing over the last year and a half. Some of those people have left the organization. Some people are wearing Google hats.
Some people are doing some other things. So one of my first priorities was to truly understand what I had. We just completed a couple of weeks ago a sales meeting for every sales and marketing person in the organization, where we invited the entire senior management team with a lot of the senior operating folks to come together and explain to them what we're trying to achieve, what we're trying to do, sell service, not price, explain to them our service product, that we actually have a product now to go in and sell to the customer and we don't just throw in a place in the head and hope we have the lowest price. So we're doing a lot, and we're focusing on creating a winning culture in our sales department and they are incentivized as we've just started a sales incentive program to incent them on doing what they're supposed to do and get out and sell. So the last question?
PN. PN. That's a haulage agreement begins here at the end of the month, and we're excited for that. It's we're going to grow into this agreement with Bien, and we'll I think clearly the volumes that we will see through the end of the year will offset some of the lane rationalizations this year that I talked about. So we should see some growth in our intermodal business in Q4.
Why would you do a haul I mean, why would you do a haulage instead of some other way of getting the traffic there?
Again, let's go ahead. We're up we took 7% off and we're up 3%. So again, we're going to take off some of this business and we're going to grow the business. Hollys is an effective way for us to work together into this Northwest Ohio market. Plus, we have a long standing relationship with the BNSF because of the this is exactly what we do today into the Atlanta market, the Fairburn terminal there.
They have all from the West Coast all the way into Atlanta. So it's consistent with the way we've done business with them for years.
Right. Okay. Thank you.
Your next question comes from David Vernon with Bernstein. You may ask your question.
Hey, good afternoon, guys. Frank, I'm trying to reconcile the acceleration
in some of the demurrage fees and
the incidentals with what sounds like a railroad that's running a lot faster. How should we be thinking about the point in time when those incidental fees may start to come down as customers begin to comply? And what's really sort of driving the above trend kind of results here in the Q3 on that fee line?
Yes. Specifically to the quarter, it had more to do with the change in the in transit reserve. If you think about the year over year change in the transit times, we're much better this quarter than we were a year ago. So the beat against the guidance that we gave you was the revenue reserve adjustment. In terms of your broader comment, I think we're a little surprised that behaviors haven't changed as much as we had expected them to earlier in the year.
I think it has less to do with our service product and more to do with the fact that the trucking capacity remains tight. And we've done some changes in the policies and the rates and things that we thought would incent customers to spend the assets a
little bit more quickly. So I
think if trucking capacity loosens up at some point in time in the future, you could probably see that come down a little bit. But for the next quarter, we've guided you to that $130,000,000 to $140,000,000
range. All
right. And then maybe just kind of on a related note, the $20,000,000 step down, is this a new normal on the equipment and other rents line? Or is there something also associated with kind of the way you're setting up that haulage agreement or the in transit reserves that would affect that number as well? So you'd be just thinking about this as the right run rate on equipment and other rents?
Got you. So neither the haulage deal nor the revenue reserve adjustments have anything to do with rents. What is helping us on the rents is that the days per load for both merchandise and automotive and a little bit even on the intermodal side have gotten so much better that we're having to pay less car hire is really how it translates. I'm not we're not going to give run rates in terms of any of the various expense line items, but as our velocity continues to improve, as our dwell continues to improve, as the customers do their part of the bargain in loading and unloading, you'll continue to see days per load improve and you'll continue to see us provide efficiencies on car hire.
All right. Thanks for the clarification guys.
Thank you. Our next question comes from Brandon Oglenski with Barclays. You may ask your question.
Hey, thanks everyone. So Mark, I just want to get your perspective now heading the marketing organization sales efforts. We talked a lot last summer about CSX service, I guess, failing or at least that's what a lot of the industry pundits wanted to say. But how are customers engaging you today? And what's equation.
From our perspective, velocity is up, but how do we really measure that from a customer service perspective?
Well, I've been spending a lot of time recently with customers. As Jim talked about, I think last quarter, my number one priority was to get out there and sort of reestablish some relationships with some of these customers. And I've been doing that, I hope you have been home very much. But clearly, they have they are witnessing the service product that we told them that was coming. They were not too happy with us last fall, but we told them to we were going to improve and we have improved and they are witnessing that every day.
Clearly, they want to keep doing business with CSX. They don't want to move more freight to rail and to CSX rather than truck, and they're doing that. We see evidence of that, especially like our Forest Products business and our Metals business. You'll see those double digit growth in volumes in Q3. That is us winning back share that those customers had to move to truck last year or earlier in the year because our service levels weren't where they should have been.
And visiting a lot of those customers and they want to use us. And as we continue to get better and continue to improve, more and more of that freight is coming back to CSX. And you'll continue to see that more in space in Q4 and going forward.
I mean,
I guess, in that context then, can you just remind us the long term volume outlook you guys provided back in February? I think it was across merchandise and intermodal and whether maybe that could prove ultimately conservative?
Yes. We did not give you volume guidance. We gave you revenue guidance.
Yes, sorry, revenue.
Yes, we're putting together our plans for 2019. And as Jim mentioned, we'll provide some more color on that when we get on the January call.
All right. Thank you.
Thank you. Our next question comes from Scott Group with Wolfe Research. You may ask your question.
Hey, thanks. Good afternoon, guys. So Frank, can you give us maybe a little bit of guidance on real estate gains and headcount for the 4th quarter? And then big picture, I think at the Analyst Day over the 3 year plan, you talked about a 6,000 reduction in headcount. Is that still the right long term number to use?
So in terms of the year, what Jim talked about in terms of guidance is we put out the 2,000 total workforce number and we're essentially there. I think we'll continue to look for opportunities in Q4 to reduce that further. We'll certainly have a number internally for 2019 and beyond whether or not we share that, we'll certainly we'll talk about that as we prepare for the January call, but we're going to continue even with the volume increases that we believe will come on. We're going to continue to look for labor efficiencies. You should expect that to be part of how we continue to drive operating leverage going forward.
In terms of your real estate and line In the quarter In the quarter, when you think about the split there, the gains were $43,000,000 on line sales and $10,000,000 on real estate. The line sales there are probably a little bit heavier on the gain side than they will be in the future. And part of the reason for that is one of the things that we characterize as a line sale a lease conversion. So you see more gain on that one than you would in a normal line sale. So we're off to a strong start.
We got a big pipeline. Q4 will depend on whether or not we see the things closing at the end of the year. There's always nuances around whether something closes in December or January. If it closes in December, we'll have a good Q4.
Okay. I guess that's helpful. And then Mark for you as truckload spot pricing has softened a little bit, is that having any impact in terms of your pricing discussions as you look out to 2019 pricing?
Well, I'm not going to get into 2019 pricing, because it's having zero impact on where we are today.
All right. Thank you, guys.
Thanks, Scott.
Thank you. Our next question comes from Justin Long with Stephens. You may ask your question.
Thanks and congrats on the quarter. So Jim, maybe to start with one for you. I know you've made some changes in your coal team. I believe you've said that you're thinking big as it relates to changes that you're contemplating for that business. Could you expand on where you stand as it relates to any structural changes you're assessing for the coal franchise and what some of those options could look like?
I guess the correct answer is we are always looking at what's the best way for us to be structured and are there more efficient arrangements, structures, enterprise structures, whatever it is in order to maximize value. But we certainly don't have anything like that on the on the horizon or near term? I'll let Mark follow-up on the other part of your question. Yes.
Just as I think about you may have seen recently, we just hired a new Vice President of Coal, Sean Yates. Sean was a former energy trader, former coal customer, brilliant guy. And he's coming into this role. He's been here about 30 days. And he's got lots of ideas.
And so as we think about our domestic coal business and the future of export, John is bringing a lot of innovative ways and look forward him helping us go forward with our coal business.
Okay, great. And secondly, this one is probably for Frank. On CapEx, you mentioned that you pulled forward some of your spending on PTC. I just wanted to ask what drove that decision? And going forward, any change to your expectation on total CapEx for PTC or operating expense for PTC in the future?
Yes. Got you. Good question. So no change in the overall guidance for the full PTC project. We've been saying $2,400,000,000 completed project for a number of years now.
We're still on that trajectory. We're at about $2,200,000,000 now. The decision that Jim made was if it's going to be a safer railroad, let's go ahead and do everything we can
to get it done more quickly.
The team is fully engaged in doing that. We'll still need the extension and plan to submit our request for the extension in the next couple of months, but we're making great progress there. No change in the PTC OpEx outlook. It's very consistent with what we've told you in prior quarters. And yes, the overall $4,800,000,000 CapEx over 3 years is still fully intact.
Okay, great. I appreciate the time.
Thank you.
Thank you. Our next question comes from Matt Russell with Goldman Sachs. You may ask your question.
Yes. Just following up on CapEx. You also referenced there was a piece of the increase this year associated with hurricane relief. So should we just assume that's a very small piece of it if the overall budget of $4,800,000,000 is still intact for the next 3 years?
Yes. It's going to be somewhere for Hurricane Florence in the $20 ish million range. And PTC, obviously, we're pulling some of that forward. And then we've got some other high return projects that we have approved in the last couple of months. Obviously, with Ed, Mark and Jim, they've got some ideas of things that can help us be more effective and more efficient and we're implementing those with some additional capital.
Understood.
Okay. And then back to the other revenue line, is there a normalized run rate that you think about whether we get there in 2019 or not when you eventually do start to see those demurrage fees and customer behavior change? And what is that? And do you think that you can offset a big portion of that with improved efficiency on the network?
Yes. We really haven't gotten to the
point where we're willing to give a long term guide on that particular line. Just to give you some color, if you looked at it on a year over year basis, about 3 quarters of the year over year increase is demurrage, incidental, storage fees, etcetera, on both the carload and the intermodal lines, and about a quarter of it is that in transit reserve that I mentioned earlier. Certainly, if we are spinning the railroad faster and faster, you're going to see an offsetting decrease in your rents line because car hire is going to be low.
Understood. Very helpful. Thank you.
Thank you. Our next question comes from Walter Spracklin with RBC. You may ask your question.
Yes. Thanks very much. Good afternoon, everyone. Just starting on the volume or the revenue guidance, when we were asking you last quarter about the kind of trend there, you're a little reluctant to give any change to your formal guidance based on some of the uncertainty in coal. And I'm just wondering if with this change, is it that you've gotten some more visibility on coal?
Or is it that the rest of the non coal business is just ramping up that even with your current outlook on coal, you felt in a position to be able to increase your guidance?
Walter, great to talk to you. I think from the very beginning, each quarter, I've said, we were going to be I think in January, we're going to be a titch better than slightly up. And then in the next quarter, I said we're going to be a titch better than slightly up, which kind of got us to, like I said, the 5% range. We've said many, many times and now we're going up, hey, 6 to 8, let's call it 7. So we're going from 5 to 7 or 5.5 to 7.
Clearly, at the beginning of the year, I think everybody expected that export gold was going to tail off at the midpoint of the year. And it has stayed strong and it continues to stay strong. So yes, I mean, when we have that big of a piece of our business that has each has not declined, but necessarily growing not necessarily growing more than we expected. It's just everybody said it was going to drop off, and it happened. So that's had a big part in the change in our outlook.
Plus, as I said in my at the very beginning, all of our business units are growing. The economy is very, very strong. All of our customers are very optimistic about the outlook. Forest products, pulp board, paper, lumber, metals, you name it, plastics. Mark can probably add.
He's talked to all the customer market, so I want some more comments, could have some more color.
Yes. I mean, I think we can talk about export coal and the strength of export coal all day long, but what's really pleasing me these days is just the strength of our service product. Our customers are taking notice and we're gaining market share and growing this volume on the merchandise side. We'll start to lose sight of that. We're doing really, really well in merchandise.
We're doing good in intermodal. We announced 7% lane rationalizations at the end of last year and we're growing intermodal. And so things are healthy out there. People want to do business with CSX. And somebody said north of the border, last quarter, it's a good time to be in the rail business, but I think it's even better time to be in CSX right now.
That's great. And similar vein here, Jim, on your operating ratio target of 60, 2 years ahead of schedule. You said it came in better than you expected. What area would you say really blew out the lights in terms of what you're expecting at the beginning of the year and what actually happened here 3 quarters through?
Well, just across the board, I think we're just doing it's not just one thing that suddenly was like, oh, wow, look at this. It's across the board. It was a massive reengineering of CSX. And the question was not in my mind, as I said at the beginning, about a year ago or a little less than a year ago. It was not that this company couldn't get to a 60 operating ratio.
It was a question of when. And so yes, there has been from as Mark just talked about, major, major changes on the revenue side of the business, restructuring that side of the business, getting rid of the intermodal stand alone business. I mean, it's a whole new management team, really bright, energetic people. And then you go down into the operating side of the business in every facet. And just I mean, in every measurement that we have out there in terms of velocity flow, train delays, crew utilization.
We get down into the I'm sure you heard
us talk about our
tax, Fred talked about tax and hotel expense. We got people around here that are probably accounting how many cups we're using, because we are constantly focusing on improving the way we run the business. And in every area, we are doing better, faster than I think all of us thought we could do.
I just want to clarify what we heard from Mark there in September. It's not that you've hit 60, now you're done. My impression for Mark was there's still early days of implementing precision railroad. So if you hit 60, there's still plenty more
to go. Is that a fair assessment?
Mark is a Canadian. So he's so he thinks in hockey terms. And so Mark is still in the 1st period. I think in baseball terms and we're in the early innings. Got it.
Okay. We have a lot of improvement to do, a lot of things to get done. And yes, there's no I don't know where this whole idea came, but all of a sudden you hit a number and everybody says, oh, we pivot. We've been I certainly have I've been working really, really hard here to grow this business since the day I walked in the store. And how do we how do you grow the business by running a better railroad, simple as that.
It's not like, oh, forget the customer, now with the customer, just focus on the ripping out costs. It's not what Precision Schedule is about. And that's not the way we've run the business since the day I walked in here.
Okay. Thanks for the color. Appreciate it.
Thank you. Our next question comes from Ravi Shanker with Morgan Stanley. You may ask your question.
Thanks. Good evening, guys. Just a couple left here. Your service levels have improved significantly, obviously, since this time last year. Can you just remind us kind of what level of STB supervision still exists and kind of when that will left kind of given that you guys have proven that last year's issues no longer exist?
No. I think we might be the only one. One. When they last when the SUV said, and that was in March, I believe, that said that we no longer had to make weekly calls with the STB. And what I in my using my words took us off a watch list, they put everybody else on the watch list.
And I know that a few other railroads are still live today. So we're by far not if not the best one of the best running railroads. And so there's no reason whatsoever that we would be under any kind of payer supervision.
Got it. Understood. And just speaking of other railroads, can you just give us a little color on this lawsuit that you filed versus your regional peer about access to the Port of Virginia?
Sure. What it is, it's kind of a corporate governance issue where CSX and NS jointly own this 3rd party entity that provides switching access to the Port of Virginia. And over time, over all the things in the railroad business, it evolves over time into the situation where we are we have a minority representation on company, which used to be fifty-fifty. And we don't feel we are being provided the appropriate access to the terminals in Virginia. And we believe that, that's as a result of the other guys' disproportionate ownership.
So we're going to defend ourselves in court, simple as that.
Got it. And if you guys do see a favorable resolution there, does that result in kind of more coal volumes or better pricing? I don't know how do we see that in the numbers?
Access to the intermodal terminals
in Virginia, a bit in that.
Got it. Thank you so much. Thank
you. Our next question comes from Bascome Majors with Susquehanna Financial Group. You may ask your question.
Yes, good afternoon. It's very clear that the network is running really well right now. Can you give us an update on where you are in the process of perhaps naming a permanent COO and sort of what you guys and the Board want to see before you're comfortable making that decision?
So Chief Operating Officer, COO? Yes, Chief Operating Officer. Yes, it's not on my radar at all. I got an extremely solid team right now that Mark in just 1 quarter has done. I knew he's doing an extremely good job and he's not even better than I expected.
And Mr. Harris is overseeing the operating function where we have great talent. And so I'm very, very comfortable with the way the company is structured today. And now that is not to say that we are not always cognizant of the fact and myself as a member of the Board of Directors need to make sure that we're doing the appropriate due diligence on succession planning. And so that's all part of this process that we're going through and putting in.
Again, Ed is working really hard to develop and we have an extremely talented group of individuals on the operating side of the business. And now on Mark's leadership, we have really a stellar group of people in the sales side of the business. So along with Frank and the finance people, Diana and Nathan, the other executive leadership team earlier, we are rock solid. People go like, hey, you're going to hire somebody. We're not going to hire There's nobody else that is better than we are.
Now are we going to find who can be the future leader of the company? Yes. And hopefully, we can that comes from inside. And so that's what we're working on to develop.
Thank you for the detailed response there. Just one more really high level, then I'll pass it on. But I mean, if you look back to the last two quarters, CSX earned more than the prior regime did in its best full year. And it looks like you're going to end this year pretty close to the margin target you laid out this spring for 2020. I mean, and you said you're exceeding your own expectations, not just ours here.
I mean, all good news, but clearly the pace that you're on this year can't continue forever. I mean, how do you think about and what do you consider when managing sort of investor expectations going forward? And you keep talking to January kind of more on January. Are we going to hear a comprehensive revisit of the long term plan there given the progress you've made? Or is it going to be more about here's how we're looking for 2019?
Again, we're not planning on doing another Investor Day to reboot sort of the thing. There is no need to. We've got we have we are nowhere near the finish line here. We've got a lot of opportunity ahead of us. And we'll kind of try and give we will try to give you as much visibility towards that as we're comfortable doing at the end of the year.
Thank you for the time.
Yes.
Thank you. Our next question comes from Cherilyn Radbourne with TD Securities. You may ask your question.
Thanks very much and good afternoon. I wanted to ask about trip plan compliance because that strikes me as more of a customer facing operating metric. And I think you indicated last quarter that trip plan compliance is around 60%. So I was just wondering if you could update us on that metric this quarter and talk about what the upper limit is. In other words, I assume that 100% is impractical, but what's best in class on trip compliance?
Trip plan compliance, I mean, yes, I mean, it's a critical component. It does 2 things. It measures how well the railroad is running. It measures reliability, because when we fail, the car is not going to get there when we said it was going to get there, simple as that. So when we say we're at 60 5% of the cars met their trip plans, that means that 30%, 35% of them didn't.
In 30%, 35% of them, we said they were going to be there by Thursday at 11 o'clock. So that number gives a huge end. And then when we miss, not only do we disappoint the customer and not have a delivery when we said we were going to do, we then have to go back and we have to handle that car again. That means we had if we missed it, we have to handle it again. And therefore, there's where the dual costs come in.
So that's why this measure is so significant because it shows that, hey, you didn't need to do it 2 or 3 times to get it there on time and you got it there on time. So the customer was happy and we did it in the most efficient manner and that's why trip plan compliance is so critical. If we're at 60% if we were at 60%, 65%, we're at the end of the first quarter, we're up 28% or whatever number was, I said 26% improved from there. So if I do the mid-70s the high 70s kind of range right now. And we need to get that number obviously, we want to get that number to 100.
What's reasonable in this kind of a business, we've got all kinds of things that go bump in the night and you have a problem occasionally. But it's not 75, it's closer to 95. And we'll get there and we'll get there as quickly as we possibly can. And if we continue to see these 10 sequentially every quarter, 10% improvement in that metric, then that's going to show how well we're doing.
Great. That's helpful. Very quickly, just wondered if you could update us on domestic coal stockpiles post the end of the summer.
They're low in the South. And so the predominance of our coal, domestic coal, utility coal, is for the south and the stockpiles are low heading into the winter here. So that's a good story for Q4 for us. And I think this is probably one of the quarters that I've seen in a long time that I think our domestic utility goal is actually going to be up in the quarter. So
Thank you. That's all from me.
Thank you. Our final question comes from Ben Hartford with Robert W. Baird. You may ask your question.
Thanks. Jim, just come back to the beginning of the call. When you made a comment about train accident rates needing to improve, just looking for some perspective, your experience here relative to PSR implementation at your prior rails. Is it is the issue now just constructive dissatisfaction as it relates to safety and turn accident specifically? Has it been weather?
Or is it something else that you see kind of specific to this experience that perhaps is causing that to operate on a lag, if it's fair to characterize it as that metric operating on a bit of a lag? Some perspective there would be helpful. Thanks.
In terms of the implementation of scheduled railroading and its intent on safety, If you look at the PS railroads that have implemented the PSR, they've always been the safest, whether it was Canadian National and then Canadian Pacific. So the it is and so it's not related to what that we've changed some kind of an operating practice and it results in an issue. The vast majority of those incidents are extremely small isolated incidents that take place in one of our yards. And they normally involve an engineering defect where something happens to the track structure, whether it's a and they're all basically derailments. I mean, there's a few banging, one car gets banging into another.
But on train accidents, it's mostly a derailment caused by an engineering situation or a human mistake. And so obviously, we can work on the engineering end of that, which we are aggressively to make sure that our infrastructure and everything is up to speed in our yards to avoid that. And then secondarily, work with our employees to make sure they understand what the rules are and make sure that they don't. Don't do something that causes the car to go on the ground, simple as that.
Okay. That's helpful. Thank you.
All right. That wraps up our call. Jim, do you have any thoughts?
No. Thank you so much for your interest as always. And we'll be back to talk to you at the end of the year and try to give you a little flavor for what the future looks like. Thank you so much. All right.
Thanks, everyone.
This concludes today's teleconference. Thank you for your participation in today's call. You may disconnect your lines.