CSX Corporation (CSX) Q3 2012 Earnings Report, Transcript and Summary

David Baggs - Vice President of Capital Markets and Investor Relations Michael Jon Ward - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chief Executive Officer of Csx Transportation Inc and resident of Csx Transportation Inc Clarence W. Gooden - Chief Commercial Officer, Executive Vice President of Sales and Marketing, Chief Commercial Officer of Csx Transportation Inc and Executive Vice President of Csx Transportation Inc Oscar Munoz - Chief Operating Officer and Executive Vice President Fredrik J. Eliasson - Chief Financial Officer and Executive Vice President

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division William J. Greene - Morgan Stanley, Research Division Kevin Crissey - UBS Investment Bank, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division Scott H. Group - Wolfe Trahan & Co. Brandon R. Oglenski - Barclays Capital, Research Division Christian Wetherbee - Citigroup Inc, Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division Justin B. Yagerman - Deutsche Bank AG, Research Division Cherilyn Radbourne - TD Securities Equity Research Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division David Vernon - Sanford C. Bernstein & Co., LLC., Research Division John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division Salvatore Vitale - Sterne Agee & Leach Inc., Research Division Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division Peter Nesvold Donald Broughton - Avondale Partners, LLC, Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division Erin Lytollis - RBC Capital Markets, LLC, Research Division Mark A. Levin - BB&T Capital Markets, Research Division Keith Schoonmaker - Morningstar Inc., Research Division

Good morning, ladies and gentlemen, and welcome to the CSX Corporation Third Quarter 2012 Earnings Call. As a reminder, today's call is being recorded. [Operator Instructions] For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation.

Thank you, Lori, and good morning, everyone. And welcome again to CSX Corporation's third quarter 2012 earnings presentation. The presentation material that we'll be reviewing this morning, along with our quarterly financial report and our safety and service measurements, are available on our website at csx.com under the Investors section. In addition, following the presentation, a webcast and podcast replay will be available on that same website. Here representing CSX this morning are Michael Ward, the company's Chairman, President and Chief Executive Officer; Clarence Gooden, Chief Sales and Marketing Officer; Oscar Munoz, Chief Operating Officer; and Fredrik Eliasson, Chief Financial Officer. Now before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to review the company's disclosure in the accompanying presentation on Slide 2. This disclosure identifies forward-looking statements and risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements. In addition, let me also remind everyone that at the end of the presentation, we will conduct a question and answer session with the research analysts. [Operator Instructions] With that, let me turn the presentation over to CSX Corporation's Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Well thank you, David, and good morning, everyone. Last evening, CSX reported third quarter earnings per share of $0.44 versus $0.43 in the same period last year despite continued headwinds in coal and an economy that is growing more moderately. As Clarence will review in more detail, revenues were down 2% on lower volume and fuel recovery as well as an unfavorable mix that continues to be significant. At the same time, lower revenues were partially offset by the outstanding efforts of our operating team. As Oscar will discuss further, we continue to adjust to near-term market conditions while staying focused on building our capabilities for the long-term. As a result, despite substantial headwinds we saw externally, operating income declined just 3% to $854 million. In addition, our operating ratio held stable at 70.5%. And Fredrik will provide you the complete financial analysis for the quarter. Bottom line, we're encouraged by how this team is dealing with market conditions that are far from ideal. Long-term, this bodes well for what CSX will be able to accomplish when sustainable growth resumes. With that, I'll turn it over to Clarence to talk about our top line results. Clarence?

Thank you, Michael, and good morning, everyone. Turning to Slide 6, leading indicators continue to predict moderating growth for the U.S. economy for the balance of the year. Looking at the left side of the chart, projected GDP and IDP rates indicate weak growth, and discussions for many of CSX's customers support this broad assessment of the economy. On the right, the Purchasing Managers' Index registered a rating of 51.5 in September, indicating a slight expansion of U.S. manufacturing. At the same time, the Customer Inventories Index registered a rating of 49.5, indicating that respondents believe their inventories are still slightly below normal levels. Overall, transportation demand in the markets we serve was mixed in the third quarter, consistent with the broader economic environment. And now let us take a look at the overall revenue. Total third quarter revenue of nearly $2.9 billion was 2% lower compared to last year, reflecting continued headwinds in coal and a more moderate economic environment. Starting at the left of the chart, volume-related revenue had an unfavorable impact of $31 million in the quarter as volume growth in Export Coal, Automotive and Intermodal was more than offset by the significant decline in domestic coal. Moving to the right, the combined effect of rate mix was $14 million unfavorable. Here, the benefit of core pricing gains was more than offset by the unfavorable mix associated with higher Intermodal growth and declining coal volume. Finally, fuel recovery decreased $24 million in the quarter. Now let's turn to pricing. Core pricing, on a same-store sales basis, remained solid across nearly all markets. Recall that same-store sales are defined as shipments with the same customer, commodity and car type, and the same origin and destination. These shipments represent approximately 75% of CSX's traffic base. Looking at the chart, consolidated pricing, shown as the blue bars, includes all shipments. On this basis, pricing increased 1.5% in the third quarter. The sequential decline through the year has largely been driven by rate reductions in Export Coal, where pricing is impacted by changing conditions in the global market. The gold bars, which exclude Export Coal, show pricing gains of 3.7% in the quarter, exceeding rail inflation and stable with what we saw in the second quarter. Pricing was higher in the first quarter as we cycled several significant contract signings from 2011. Looking forward, the strong service product that CSX is delivering to customers and the relative value of rail transportation provides a solid foundation for pricing above rail inflation long-term. Looking next to the next slide, let's take a closer look at the volume. Total volume declined 1% in the quarter versus the same period last year, and performance across the markets we serve was mixed. Export Coal volume increased 20% year-over-year, but growth rates slowed from the pace in the first half. Both Intermodal and the industrial sector continued to see robust growth in the quarter, generally consistent with what we saw in the first half. The agriculture and construction sectors remain challenged, with these sectors declining 4% and 5%, respectively. Finally, domestic coal declined 26%, although the rate of decline moderated from what we saw in the second quarter. Now let's look at the individual markets in more detail, starting with coal. Coal revenue declined 17% to $791 million. Domestic volume declined 26% as natural gas prices remain low, leading to the continued displacement of coal at many utilities. In addition, electrical generation declined in the Eastern United States. Partially offsetting this weakness, Export Coal volume grew 20% as demand for U.S. thermal coal remains strong. Total revenue per unit declined 1% as a result of lower export rates, which more than offset core pricing gains in domestic markets. Looking ahead, Export Coal volume is expected to decline in the fourth quarter, although second half and full year volume will grow on a year-over-year basis. At the same time, domestic utility volumes are expected to face continued challenges due to lower natural gas prices, above-normal inventory levels and environmental regulations. Headwinds should begin to moderate somewhat but will continue well into 2013. Now let's look at merchandise. Overall merchandise revenue increased 3% to $1.6 billion. Automotive was a key driver in the industrial sector, growing 18% as North American light vehicle production increased 12% in the quarter. In addition, the chemicals market grew 4% with plastics, petroleum products and frac sand being the primary drivers. In the agricultural sector, corn shipments for animal feed declined as severe drought impacted harvest levels in the Midwest. A strong local crop in the Southeast, typically transported by truck to feed mills, also contributed to lower rail volume. In addition, ethanol shipments fell as a result of lower gasoline demand. Looking at revenue per unit, rates increased 3% for the overall merchandise market, with core pricing gains overcoming lower fuel recovery. For the fourth quarter, in the industrial sector, the automotive market will remain strong, although we are now cycling tougher comparables. At the same time, we continue to see growth opportunities in chemicals, particularly in commodities that support the oil and gas industry. We expect the agricultural sector to be soft, with continued weakness in ethanol shipments and lower crop yields more than offsetting increased phosphate demand. Finally, in the construction sector, aggregates, waste and salt shipments will remain challenged, while the continued recovery of housing starts from a low base will drive growth in building products. Moving to the next page, let's review Intermodal. Intermodal revenue increased 10% to $399 million. Domestic volume was up 6% and set a new third quarter record. Growth was driven by highway-to-rail conversions, the continued success of our UMAX interline container program, the addition of the new service lanes enabled by the Northwest Ohio Terminal and growth in existing business partners. International volume grew 10% as a result of successful on-boarding of the Maersk business. Total Intermodal revenue per unit increased 2%, driven primarily by core pricing gains. Looking forward, strategic investments position CSX to compete for an estimated 9 million truckloads of opportunity, which reflect shipments with a length of haul exceeding 550 miles in CSX-served markets. Terminal capacity investments in Columbus, Ohio; Charlotte; Cincinnati; Wister; and Winter Haven, combined with expanded double stack capability to Boston and Chambersburg in early 2013, will drive future growth. Let's turn to the outlook for the fourth quarter. Looking forward, we recognize the economic environment has moderated. While we expect stable or favorable conditions for 67% of our markets, we also expect an unfavorable environment for the remaining markets and an overall neutral outlook for the fourth quarter. Intermodal growth will lead the way as our strategic network investments and strong service delivery will continue to support highway-to-rail conversions. In the industrial sector, automobile and light truck production will remain strong but year-over-year comparisons become more difficult. In addition, the chemicals market will grow as our petrochemical customers benefit from low natural gas prices and we capture opportunities created by the growing domestic oil and gas industry. The overall outlook for the agricultural sector is unfavorable with the drought reducing the Midwest corn harvest and ethanol shipments impacted by lower demand and higher inventories. In the construction sector, we expect a continued recovery in demand for building materials, including lumber and panel products, while waste and aggregate shipments will remain challenged. Finally, Export Coal volumes will be weaker in the fourth quarter due to lower global demand for metallurgical coal. On the domestic front, while the decline in utility and industrial coal shipments will moderate, they will remain well below prior year levels. Based on the combination of weaker export volumes and continued significant declines in domestic coal, we expect total coal will be down sequentially from the third quarter levels and will also decline more on a year-over-year basis as well. Now I will wrap up on the next slide. Looking at the state of the economy, the indicators we follow generally point to continued expansion but at a more moderate pace. Overall, the fourth quarter volume outlook is neutral. While the outlook for 67% of our markets is neutral or favorable, we anticipate total volume will be flat year-over-year. Utility coal volume will continue to be challenged by low gas prices and high utility stockpiles. Although we expect these headwinds to moderate somewhat through the balance of the year, they will continue well into 2013. Finally, we are delivering high service levels and offering environmentally friendly solutions, which creates compelling value for our customers and will drive long-term growth. Thank you. And now we'll turn the presentation over to Oscar to review our operating results.

Thank you, Clarence, and good morning, everyone. Despite these economic uncertainties, I think a big part of the success we've had at CSX is constantly focusing on safety, on providing high levels of customer service, and of course, driving greater efficiency. This allows us to fulfill our commitments to all our key stakeholders. So let me start the day with the fact that CSX sent more employees home safely in this third quarter with a personal injury rate that remained near all-time best levels. At the same time, customer service remained at record levels, demonstrating our team's focus on consistently and reliably executing the operating plan. And furthermore, we sustained these high levels of safety and service with fewer resources, thereby improving asset utilization. The ability to adjust in a more dynamic environment is critical to our success and our operating strategy and it means constantly, constantly reviewing resource plans in order to prepare for a variety of different scenarios that may come in front of us. Of course, in every one of those scenarios, the goal is to maintain a safe and reliable service product, while at the same time maximizing productivity levels. Now let's review the results for the quarter starting with safety. As you know, safety is critically important in the railroad industry. And if you look at the FRA personal injury rate on the chart on the left, our employees operated more safely and produced a rate of 0.70, representing a 35% improvement year-over-year. This is a strong testament to our company's culture around safety. On the right, the FRA train accident rate, which improved 3% to 1.94, is in part a result of our employees' rigorous attention to detail and the company's commitment to remain vigilant in safeguarding the communities we serve. Now let's review on-time performance. Here on Slide 18, you can see the on-time originations on the left and on-time arrivals on the right. In addition, we've again overlaid 6- and 12-month trend lines. A reminder, the on-time results for the quarter are represented by the bars, and the technicals are represented by the 6-month moving average in black and 12-month moving average in red. You may recall that earlier in the quarter, CSX was impacted by Hurricane Isaac. The storm caused significant damage to a stretch of the railroad near New Orleans, causing outages and reroutes for several weeks. Through the tireless efforts of our employees, strong collaboration with the other railroads and a great operating plan, the impact to customers was minimal. In fact, we achieved a record high of 90% in on-time originations, and we are very near all-time highs in on-time arrivals at 80%. CSX's commitment to service is clear now more than ever and the feedback from customers remains very positive. Now looking at overall system performance on the next slide. Terminal dwell is a strong indicator of how well we are utilizing our assets. When you look at the chart on the left, you'll see dwell improved 9% to 23.2 hours and the trend lines again reflect strong momentum. Looking at the chart on the right, velocity again showed improvement, up 10% to 22.6 miles per hour. A more fluid network allows us to utilize assets more effectively and provide consistent levels of service to customers, even while the environment around us has changed. On the next slide, I'll discuss velocity by market in a bit more detail. As you can see, velocity was up across all 3 networks, as were both the 6- and 12-month trend lines. In coal, despite the continued domestic headwinds, we are driving improvements in service and efficiency. With volume down 16%, CSX adjusted plans and maximized loading to increase both train length and tons per car. Turning to Intermodal, velocity continued to reach high levels while growing volume at an 8% clip. A higher velocity in the Intermodal network gives us the ability to reach end markets more quickly and to meet or exceed customer expectations. Finally, the merchandise network also continues to perform well. With velocity up 10% to 21.6 miles per hour and terminal dwell improving 9%, we are making more of the final deliveries to customers on time and remain in a great position to drive growth in these markets. Now let's look at productivity and resource alignment on the next slide. In 2012, we have quickly adapted to the changing business environment. We have seen a significant decline in the domestic coal market along with growth and volatility in other markets, and we have responded to all 3. In doing so, we have maintained high service levels, improved productivity and proactively adjusted resources. Regarding productivity, we remain on track for a full year productivity in excess of $180 million. And in order to achieve this productivity, we have relied on several different levers. First, the service product the company is delivering for customers has driven significant improvement in car cycle times and a reduction in overtime and other associated labor costs. These results allow us to constrain rent expense, materials usage and labor cost per employee while producing a reliable service product that supports growth. In addition, through effective resource planning and execution, overtime is down significantly in the transportation, mechanical and engineering departments, driving savers to the labor line. On the fuel side, in order to achieve those savings, we've implemented a targeted locomotive shutdown program and invested in onboard technology to optimize fuel efficiency on each trip, and these initiatives are delivering results. At the same time that we are driving greater productivity, we're also adjusting resources to better align with current volume levels. As a result, there are 500 train and engine employees on furlough or retention boards. In addition, the active locomotive count has come down, commensurate with volume, as over 300 engines are now in storage. Combined, the productivity benefits we are producing and the savings associated with the resource adjustments are helping CSX maintain a strong operating ratio despite the headwinds we are currently facing. Now let's talk about -- a little bit more about these resource adjustments. The chart on the left represents the total active T&E workforce, with the blue portion of the bars representing full-time employees and the gold portion representing those employees on furlough retention boards. While utilizing the furlough retention boards result in a higher headcount than with traditional furloughs, CSX still realizes lower labor cost and retains the flexibility with its manpower to meet attrition and service demands. We have this flexibility because it's easier and quicker to bring an employee off of a retention board than the longer process of bringing an employee back from a traditional furlough. If you turn on the chart on the right, you can see active locomotives peak during the first quarter of this year. Since then, we've been storing excess power. Again, the decision to store locomotives is aimed at saving cost but not at the price of service or flexibility. So let me wrap up on the final slide. CSX's near record safety results continue to reflect the company's position as an industry leader and demonstrate our commitment to keep our employees and the communities we work in safe. Customers are experiencing service reliability at sustainably high levels. And as Clarence mentioned, strong service product drives long-term value for customers, which in turn drives growth and long-term value for you, our shareholders. As CSX delivers a superior service product for customers, the company is achieving it with improved operational efficiency. And we continue to expect to realize the productivity savings that will exceed $180 million this year. So in summary, our operational strategies support the company's goal of creating long-term value for owners. Once again, this company has demonstrated the ability to adjust to changes in the economy, thereby variable-izing our cost structure and delivering stable financial results despite a number of headwinds outside of our control. So with that, let me turn the presentation over to Fredrik to review the financials.

Thank you, Oscar, and good morning, everyone. Looking at the top of this slide, revenue was down 2%. Expenses were down by the same percentage, driven in part by productivity gains and resource adjustments made in response to changing market conditions while maintaining high levels of customer service. As a result, third quarter operating income was $854 million, down 3% versus the prior year. Looking below the line, interest expense and other income were essentially flat year-over-year, and income taxes were $266 million in the quarter for an effective tax rate of 36.9%. Finally, EPS was $0.44, an improvement of 2% reflecting the impact of our share repurchase program. Turning to the next slide, let's discuss the impact of fuel lag. On a year-over-year basis, the third quarter fuel surcharge lag impact was $32 million unfavorable. Looking at the chart, lag fuel prices are shown by the yellow line while un-lag fuel prices are shown by the blue line. In this quarter, fuel prices were increasing over the course of the quarter, resulting in $16 million in negative in-quarter lag. Conversely, in the third quarter of 2011, fuel prices were declining, resulting in $16 million of favorable in-quarter lag. The combination of the 2 is a $32 million year-over-year negative impact. Turning to the next slide, let's discuss expenses in more detail. Overall expenses were down 2% in the quarter as we began to cycle resource investments made in the second half of last year. I'll talk about the top 3 expense items in more detail on the next few slides, but let me briefly speak to the last 2 on the chart. Depreciation was up 7% to $268 million due to the increase in the net asset base. This is in line with our previous estimates and is expected to increase a few million dollars sequentially in the fourth quarter. Equipment rents were up 1% to $96 million, as strong volume increases in Automotive and Intermodal, plus inflation and more leased locomotives, were almost entirely absorbed by improved cycle times. Turning to Slide 28. Labor and fringe expense was down 1% versus last year, or $11 million. Looking at the chart on the left, headcount, which includes employees on retention boards, was up 2% versus last year but down 1% sequentially. This is roughly in line with our prior guidance, which was for headcount to remain relatively constant. Moving to the table on the right, you may recall that CSX took a charge in the third quarter last year for labor-related cost associated with a facility closure. We are now cycling this charge in the current quarter, resulting in a favorable impact of $14 million. Improvements in network efficiency reduced crew overtime costs by $7 million, driven by reductions in overtime hours and relief crews. Moving down the table, labor inflation was up $7 million, slightly favorable to our expectations. While core wage inflation was above 3%, lower cost on health and welfare programs, as well as the impact of lower railroad unemployment tax rate, continued to provide favorability. Rounding out the table, other costs were $3 million higher, driven by $8 million in incentive compensation favorability that was more than offset by various other non-recurring items, none of which are material in and of themselves. Looking at the fourth quarter, headcounts to continue to be relatively constant, though as we have demonstrated once again this year, we will adjust accordingly as business conditions warrant. In addition, we expect that labor inflation will remain modest, in line or slightly higher than what we experienced this quarter. Finally, we now expect incentive compensation to be lower year-over-year in the fourth quarter. Turning to Slide 29. MS&O expense decreased 7% or $37 million versus last year. In the third quarter, CSX recognized a $30 million deferred gain related to the company's sale of property in November of last year to the State of Florida. While CSX will recognize a similar gain in the fourth quarter of this year, the year-over-year favorable comparison will be lower since the company first recognized a $14 million gain from this sale in the fourth quarter of last year. As Oscar discussed earlier, continuing improvements in our safety performance have reduced personal injuries and train derailments. As a result, adjustments to casualty reserves generated $18 million in cost savings for casualty, loss and damage. Moving down the table, volume-related expenses increased $8 million, primarily reflecting terminal-related costs associated with our growing Intermodal, Export Coal and Automotive businesses. Finally, inflation and other cost increased $3 million this quarter. Moving to the next slide, let's discuss the impact of fuel. Total fuel cost decreased 4% or $15 million versus last year. Looking at the table to the right, fuel efficiency was favorable by $8 million, reflecting a 2% year-over-year improvement in gallons consumed per gross ton mile. Lower volume reduced fuel expenses by $7 million, with gross ton miles down 2%. Next, as shown in the chart on the left, CSX's average cost per gallon for locomotive fuel increased to $3.16, up 1% versus last year. This increase in fuel price accounted for $3 million of the overall increase in fuel expense, as seen on the table on the right. Finally, non-locomotive fuel expense was $3 million lower. Turning to Slide 31. CSX remains committed to an improving investment-grade profile, and all key credit measures improved during the third quarter. This improving credit profile supports the company's commitment to a balanced approach for deploying capital to shareholders. As a key driver of long-term value, capital investments is the first priority of our balanced approach. For 2012, CSX remains on target to invest $2.25 billion. Longer term, our core capital investment target is 16% to 17% of revenue plus the additional investment required for PTC. Our second priority is dividends, and the company continues to target a payout ratio of 30% to 35% of trailing-12-months earnings measured after each year's first quarter. As a result, the dividend was increased 17% and became effective with the second quarter payment earlier this year. Finally, we expect to fund future share purchases primarily through free cash flow. With $200 million of share repurchased in the third quarter, there is about $234 million remaining under the current program which we expect to complete by the end of this year. Now let me wrap up on the next slide. Recapping the third quarter, cost reductions helped mitigate the effects of fuel lag and coal headwinds. Automotive and Intermodal growth partially offset declines in coal volume while safety, service and productivity remained at or near record levels. For the full year, CSX is still expecting modest earnings growth and margin expansion. However, with a weaker Export Coal outlook and a moderating economy, the fourth quarter outlook has become more challenging. Longer term, achieving a 65% operating ratio by 2015 will be challenging as well. This target is based on stabilizing utility coal volumes next year and Export Coal remaining in a 40-plus-ton million range over the long-term. By maintaining an outstanding service product, CSX can drive inflation plus pricing long-term, as well as long -- as volume growth and productivity gains that can keep us on the path towards 65%. Finally, as we deliver outstanding financial results for investors, CSX remains committed to a balanced approach in deploying cash, which includes capital investments to drive long-term value as well as dividends and share repurchases that provide immediate returns for shareholders. With that, let me turn the presentation back to Michael for his closing remarks.

Well, thank you, Fredrik. In this economic environment, aside from all the measures we examined this morning, we think it's important to continually challenge ourselves with 3 key questions: First, are we providing our customers with a service product that is valuable and will drive long-term growth? The answer is yes. As you heard this morning in fact, our employees are driving service at record levels. That service makes a real contribution to our customers' ability to thrive in the competitive near-term environment while continuing to gain their confidence for a future that will be more prosperous. Service is the foundation for growth and provides CSX the ability to price its product to reflect the relative value it provides customers. Second, how well are we managing the things that are most in our control? I believe our productivity and resource alignment speaks volumes here. In a year when the economy has moderated and the headwinds in coal are significant, CSX continues to produce strong financial results. The $180 million in productivity savings that is being produced this year represents a strong commitment by the team to continually achieve shareholder value in any environment. It also reflects just how nimble we are, the focus of our team and the extraordinary capability for improvement that our employees bring to work every day. Third, while managing through tough near-term times, are we staying focused on what we know to be a more prosperous long term? Here, again, the answer is yes. Most transportation planners continue to expect a significant increase in demand for transportation in the United States, and we know that our public highway system is already at capacity in many places. CSX offers what is, in effect, a privately funded highway that serves about 2/3 of the population and even a greater share of consumption. The very things we've done to better safety, service and productivity in this tough economy makes us even more prepared to meet significantly higher demands for our service in the future. And we continue to invest to prepare our network for that eventuality. As shareholders investing in CSX's future, you rightfully expect management to deliver results even in difficult economic times, and we want you to know that we are highly committed to doing so. Likewise, as we face important decisions in the upcoming election, I know you will join me in urging both sides to work together to foster a business environment that creates as much certainty as possible and is conducive for long-term growth. CSX and the freight rail industry are providing our nation's businesses with a great competitive advantage. Your company has achieved outstanding results throughout the recession and the slow recovery, and I especially believe that what we are doing now will lead to significant value creation long-term. With that, we'll take your questions.

[Operator Instructions] Our first question comes from Tom Wadewitz with JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Wanted to get a sense of how you're looking at the Export Coal market for 2013. I know that's probably kind of a limited visibility type of question. But how much of your thermal exports would be locked in where you'd have some visibility to 2013? And how much of the overall export tonnage would be something that essentially is not on committed contract for 2013?

Tom, this is Clarence. Most of the contracts for 2013 are not committed at this time. The market is very volatile, as you're aware, in both the thermal and in the metallurgical markets, particularly given the volatility in China. So we'll start most of the thermal discussions here in the next 30 to 60 days to try to get those contracts put in place at the first of the year. The met is trending more and more to quarterly negotiations. And we'll start -- a lot of those really won't start until end of first quarter next year. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. So how -- I don't know if this is for -- I suppose for the broader team or for Michael. If you look to 2013 and the economy doesn't show much of a pickup and the kind of overall coal is maybe a modest headwind, maybe not quite as much as this year, what do you think the key areas are where you might be able to drive operating ratio -- material operating ratio improvement and earnings? What would you really look to drive that in 2013 if you don't get help from coal or you don't get help from the economy?

Tom, 2 things. I think one, we obviously are going to continue to produce the kind of productivity that Oscar and his team have produced this year. And that's always going to be one of our key value creators. But if you exclude coal, our business will be up 4% to 5% this year. And if you count all the other markets, Tom, that's probably double what the economy is growing. So we believe that we can continue with this great service we're providing to grow at a faster rate than the economy as well. So I think those 2 will be very helpful in value creation. Fredrik, do you have something you want to add to that?

No. I think we're going to continue to pull the levers, Tom, that we've pulled in the past, including inflation plus pricing, driving productivity and then solid volume growth. Obviously, we -- it's a difficult coal environment, but that's something we've been dealing with for an extended period of time now, going back all the way to 2006, and we've been able to produce very solid financial results during this period.

The next question is from Bill Greene with Morgan Stanley.

Can I just ask one sort of clarification on the long-term target of 65%? You say based on stabilization in utility coal. Is that over the time period through 2015 relative to 2012 levels? Or -- because you mentioned that it's going to go down in '13 likely in the -- we're not going to get to easy comps until we get further into the year.

I think what we have said at this point, Bill, is that we will -- what we expect is we're going to have this overhang with us into 2013. And at that point, we expect to stabilize. We're not counting on a significant recovery. Exactly where it needs to be is obviously difficult to pinpoint, but we're not banking on a significant recovery from the levels that we're seeing this year.

And based on the levels that we saw this year, should we expect to see liquidated damages? Does that have any benefit this quarter?

We had liquidated damages this quarter year-over-year that was about $6 million. And we don't expect anything for the fourth quarter, as most of the contracts really come up at the end of the year. We are going to see some next year. It's a little too early to tell exactly what it's going to be, but we will update you on that as we see them.

All right. And then just last question. Clarence, can you remind us, in the third quarter as you look out to '13 now, how much of the business do you have visibility on pricing? How much is usually locked in by this point for next year?

Bill, we have about 75% right now locked in for next year, 25% to go.

And it's at inflation plus, presumably.

Yes. Over the long-term, we think we'll be right at the inflation plus pricing.

The next question is from Kevin Crissey with UBS.

Maybe this is for Fredrik. I guess, it relates to liquidated damages in Q3. The other revenue line, in addition, has some other elements to it, I believe, and it was up pretty sharply, more than we would've expected, in Q3. Is that a good run rate going forward, x the $6 million you talked about in liquidated damages?

Yes, we had liquidated damage. We also had some volume incentive refunds, adjustments that were positive. And some of the other line items in other revenue were all favorable this quarter. I think the best way to look at it's probably a run rate that was similar to what we saw the first 2 quarters versus what we saw here in the third quarter.

Our next question is from Ken Hoexter with BNY Mellon [ph].

Bank of America Merrill Lynch. You talked about a bunch of yards, Clarence. Was that -- can you run down the list? And are those expansion? Or are those new yards? Can you talk about the percent capacity increase that those yards will provide for your Intermodal segment?

Yes. In the case of Columbus, Ohio, we've more than doubled the capacity of the Columbus terminal. It was on the existing footprint that we expanded, and the same was true at Charlotte. In fact, this was the third phase of 3 phases that we're planning for Charlotte. Wister is a new facility, expanded facility, but you might as well say it's new because it was from the ground up. It'll be in operation late this year, early next quarter. It was part of the New England strategy in which we double-stack cleared into New England and then expanded the Wister terminal and got out of Boston's Beacon Park. The facility at Cincinnati expansion was ended at current. And the existing facility that was there, it's almost double the size of that facility. And Winter Haven is part of the new terminals that we're building as a result of the SunRail purchase. That's located just south of Lakenham [ph], Florida. It's on U.S. Highway 60, which transverses the southern state of -- southern part of Florida from Tampa over to West Palm Beach.

And the percentage increase that -- is this like a step function on these yards? Or is this just incremental?

It would be a step function, because in most cases it's significantly increasing the capacity, both in terms of physical capacity as well as in terms of the technology that we're employing in those terminals to increase the productivity and the lift capabilities.

Okay. And then just my follow-up on pricing. If you look at pure pricing on Export Coal, the contracts you mentioned moved to quarterly. Does that lead to pressure on other contracts as you start downshifting on some of those contracts? Can you kind of walk us through the mentality of how you value in [ph] in some of those negotiations as you start bringing some contracts down?

As it relates to Export Coal? Scott H. Group - Wolfe Trahan & Co.: No, I just mean in terms of when we look back in the early part of the decade, the kind of the coal contracts led the pricing on the way up. We've gotten a lot of questions on, does this lead it to be more volatile in terms of pricing relative to your inflation plus target?

No, I would say that in the case of the export market, what you'll find is that our rates will move directionally with what the coal prices do. So if coal prices go up, our rates go up; if they go down, our rates go down, but not at the same rate that the coal rates go up. So we'll go up a little less than the coal price will and we'll go down a little less than the coal price will. In our utility contracts going forward, that's just a totally separate environment, and as we go more to fixed and variable, those prices will tend to rise higher. And then to the third part of the question was most of that pricing that you saw in the first part of the decade was legacy contracts that we were able to reprice under the rail renaissance.

Our next question is from Scott Group with Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So on the coal side, Clarence, you talked about the met exports softening here. Are you saying that the met pricing that you're getting softened as well at this point? Or is that more something that you think happens in 2013? Maybe just talk about the overall pricing strategy on the export side, both met and steam, as you look out to next year. And do you focus a little bit more on keeping volume and giving up some price, or how do you think about that balance for next year?

Well, as we said just then, Scott, to Ken, the met prices are going to move with the market. So think about it like this: 18 months ago, metallurgical coal was strike price, Queensland was about $320 a ton. Today, the strike price is about $170 a ton, which means it's selling at less than that, and so our rates have been adjusted accordingly. We still make very good money on the volumes that we move. So the volumes that we can move and move profitably, we will protect with rates. Those that we cannot move profitably, then we won't protect that rate when it gets too low. And so that's essentially how the mets are being priced. The thermal that we're moving this year was actually signed on a forward curve 2 years ago, so it has had little impact in our movements this year as a result of that. Scott H. Group - Wolfe Trahan & Co.: How do the forwards look for next year's pricing on the steam export?

Steam forwards on API-2 index, the steam prices are about $94 a ton as of about 2 days ago on the forward-looking curve, and that's not as strong as it was 1 year ago or 2 years ago. So it has weakened to some extent in Europe. Scott H. Group - Wolfe Trahan & Co.: Okay. And then last thing if I can, Clarence. The 3.7 pricing x coal, so x Export Coal, we haven't gotten that level of breakout before. Can you give us just a sense on how that 3.7 compares with what it would have looked like last year or 2 years ago? I'm just trying to get a sense of the pricing x coal, if that environment is changing. Now that we're through the legacy contracts, is this kind of the new normal?

I think -- Scott, I think we provided pretty good transparency here in terms of giving the first 3 quarters of the year. I think you know that in the past, we've used that slide in the overall pricing and clearly, you know that in the beginning of this rail renaissance period, we had a lot of legacy contract that kept pricing a little bit higher level. So I think that's the best barometer we can provide you. This is something we think is important for people to understand, that the core pricing of our sales and marketing team is continuing to do inflation plus pricing, but it is a different market in the Export Coal side, which is why we're providing this breakout that we're doing now.

Next question is from Brandon Oglenski with Barclays.

If I can just come back to Tom's initial question here. Now I think what a lot of us are asking ourselves is, with the coal headwind in '13, feels like a similar outcome, maybe not as bad as in '12, but where you get productivity. But it just didn't drive a lot of OR improvement this year. Should we be thinking just modest targets on OR improvement for '13 and really have to wait for coal to stabilize where you can really drive those gains to get to your 65 target?

I think that you have to -- we've kind of outlined the different profit levers that we have, and clearly, in an environment where coal is declining, it is going to be more difficult to provide a meaningful margin expansion. I think, based on the fact that our visibility into the Export Coal market is relatively limited, it is hard to see right now what it's going to do next year. If it's stronger, we will do better; if it's weaker, we will do less. But the other drivers that we have, inflation plus pricing, as Michael said earlier, we're going to -- we've grown our volumes up 4% this year, our non-coal business is still there, productivity is still there, we're putting a service product in front of our customer that is better than probably in recent memory or longer. And so we're doing the things that we can control the most very well and then we're going to have to adjust to whatever market environment we have and therefore, the operating ratio improvement would be reflective of that.

Well, maybe if I can follow up with that. Oscar, what type of leverage do you think you can get outside of these bulk networks? So in merchandise and in Intermodal where you're seeing the growth, is there a lot of spare capacity that you're anticipating can be utilized better as we look forward into '13?

Yes, we certainly do have excess capacity. And with regards to the future, let me tell just a quick story. You may not have heard of our TSI carload initiative, but in essence, it's implementing what you have seen in our operating metrics as a kind of a more rapid car cycle. What we're doing now is in some cases, sort of contrarian to what you might think, we're actually servicing customers more frequently and with shorter trains in some instances to, a, increase the customer commitment that we want, but it's also improving a lot of our labor costs. So to your question, the next sort of step function in there is maintaining that great service and good car cycle, but doing it with a lengthening train length. And that's where kind of the next level of productivity will really, really benefit us.

Our next question is from Chris Wetherbee with Citi.

Maybe a question just on the -- just to make sure, I want to understand the coal outlook when you put together the utility side and the export side for the fourth quarter. Clarence, did you mention that year-over-year we should see a lower number than what we saw in the third quarter? I just want to get a sense of kind of how we should be thinking about that cumulatively for the fourth quarter.

Yes, that's correct Chris. From a percentage standpoint, it moderates, so there's less...

The utility does.

Utility does. Less decline than you saw in the third quarter. However, in terms of absolute tons handled, it also goes down on a year-over-year basis in the fourth quarter.

Total tons handled both export and utility.

No, utility.

Okay. Just utility. Okay.

Export Coal will exceed the 40 million tons that we exceeded last year, but due to the volatility in it, we're just not sure how much at this time, but it will be another record year, third record year in a row for CSX in export tonnage.

But it will moderate some of the export in the fourth quarter, right?

It will and the second half will still be...

Year-over-year up.

Year-over-year up.

Okay. I was -- I thought I had heard you say it was going to be weaker on a percentage basis. So I shouldn't just think that the 16% decline on total coal in the third quarter, it will be a larger negative number in the fourth quarter. That's not what you're saying.

It is what we're saying. So year-over-year, the fourth quarter would probably be the most challenging quarter, even though utility coal volumes would probably moderate as Clarence has said. Because we expect Export Coal to be down year-over-year, the total between the 2 is going to make the fourth quarter probably the most challenging quarter of the year in terms of year-over-year volume, total coal.

Okay. That's very helpful. And then maybe switching gears onto the productivity side. Oscar, obviously it looks like you're on target to the 180-plus that you said last quarter. Just want to get a rough sense of kind of the line of sight onto that for the fourth quarter. Is there a possibility of potential upside there? What are the challenges that you see facing you for reaching that goal in the fourth quarter?

No challenges, I think we're well on path to the 180-plus. We talked about sort of a pro-rata delivery. I think we're ahead of that game, given the market outlook that you've seen. We have a great sense of where the future's headed in the near term and have taken the appropriate action. And so, we're probably ahead of the game and so we'll expect a probably $20 million to $30 million number in the fourth quarter, but more on the high-end given again the outlook. So well on path with a great deal of confidence.

Our next question is from Chris Ceraso with Credit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: So you've responded to the lower price of the commodity in the export markets for coal, but as we look forward, as contracts start to roll over in domestic, what's your expectation about maintaining price there? And maybe as a follow-up on that, you mentioned 75% of your contracts for '13 are already locked in. Does that include any thermal coal contracts that have turned over or will be turning over?

Chris, on the thermal contracts, as we mentioned earlier, it's we're in the process of negotiating most of those for the export side of the business in 2013. So that answer would be no. On the utility side, going forward, I think there's 2 factors there. One is we're going to price to the market, and number two is that as less coal is shipped and coal itself becomes more variable than fixed, then the cost of handling that goes up. And so our rates will have to reflect those increased costs going forward, and so we feel very positive about being able to make those recoveries going forward. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then just a follow-up on stockpiles. Can you give us an update of where they are and then maybe how you think about what normal stockpiles are given the lower volumes and given the change in coal's role in the dispatch curve?

In the Northeast, the stockpiles are running between 60 and 62 days, which is about 30 to 32 days above normal. In the Southeast, this data is according to PIRA, the stockpiles are running between 120 and 124 days and that's a normal 60 days, so about 60, 64 days above normal. And what was the last part of your question? Christopher J. Ceraso - Crédit Suisse AG, Research Division: Well, just have you thought about redefining what normal is given that there's a lower burn rate and that coal has become more of the swing fuel instead of the baseload?

We are looking at it. We have some outside parties helping us to look at that also, because what has happened in the near term here with these low natural gas prices is gas has become more of the baseload and coal more of the variable load that's going in. So I just don't know right now.

The next question is from Justin Yagerman with Deutsche Bank.

A few questions here. In looking at your utility book, was curious how much of that is actually rolling in 2013. And if you previewed with those customers some of the thoughts that you've shared with investors around a more flexible service and how you price for that on a tiered basis and whether or not you've gotten any feedback on that as you've marketed that idea.

Most of our utility contracts that come up for renewal in 2013 actually come up for renewal in late 2013.

And what percentage is that of the book, Clarence?

That's going to be somewhere in the neighborhood of 20-plus percent, okay? Number two is yes, we have begun discussions with utilities about the nature of taking coal. Now here's the feedback from the utilities: "We've seen low gas prices before. So what we're not going to let ourselves do is get locked in to 1 fuel source versus the other. We're going to dispatch according to the economics, but we recognize the fact that we have to protect the coal." So they're willing to enter into discussions with us on, how can we best price that and protect a certain amount of that coal? And then what do we do when there's peaks and spikes? And those discussions are ongoing.

Is it fair to say that because of that, these will be shorter duration contracts most likely?

I don't know, is the truth on that.

Okay. And, Clarence, quick question. You didn't give a breakout, I don't -- or I didn't hear it, of thermal versus met in the quarter in terms of export. Do you have that?

Yes, 60-40 in favor of met.

Okay. And when I think about the thermal side, how out of the money is $94 on the API-2 right now? And then when I think about what that means for volumes as you go into these contracts right now, how realistic is it that you could see flat to up volumes next year in thermal given where you are on the API-2 right now?

Well, $94 is going to put us on the margin. If we had to make the contract going forward today, there is some overcapacity, as you could imagine, in the coal market on a global basis. It's really too volatile and too soon to tell. We'll know a heck of a lot more, Justin, on that question in the first quarter, as we can see how this thing is moving and what's happening to the economy in Europe, and what kind of weather they have in Europe this winter.

Okay. And last one. Fredrik, you guys got this 65 OR target, it sounds like there is a lot in flux when it comes to coal right now, and honestly, you guys put this target out there before we saw nat gas prices collapse. Why stick with it here? I mean, where is the confidence coming from in terms of line of sight if you've got so much variability. I get the productivity gains and I understand, in the merchandise business, the growth beyond GDP, but it will be hard to push the ball that far forward if coal is going to be a headwind both on export and on utility, at least for the near-term foreseeable future. And none of us have a crystal ball, so who knows what happens 2 or 3 years out? Why stick with this number here?

Well, you hit on it. First of all, it is 3 years out. And when we issued the guidance, we had appropriately put in a fairly sizable contingency to deal with stuff along the way and obviously, stuff happened with utility coal. And we've been pretty transparent that as that happened and has occurred throughout the year, we have said that it's going to be more challenging. And clearly based on where we are today, it's going to be more back-end-loaded than we thought originally to get there. But that is what this organization is rallying around and as we look at things right now, if we execute extremely well all the different parameters we have, we still think we can get there, but a lot of things has to go right. We're going to go through our normal strategic plan process here this spring and review that with the board, and if there's additional color to be provided at that point, we will do that. But right now, that's just the goal that unifies this organization. This is the goal that we have the incentives rallying around and right now, we still feel we have line of sight towards it.

Our next question is from Cherilyn Radbourne with TD Securities.

Just wanted to ask you a question in terms of resource levels, the furloughs, the retention boards and the locomotives that you've got parked. Are you happy where you are based on the business outlook as it stands? Or is there more to go there?

Michael closed his comments, Cherilyn -- this is Oscar -- with 3 questions. Do we believe a strong service product drives long-term growth? Are we managing the things that we can? Are we investing in the right things in the future? And so you have to take all those 3 questions into account when you answer that question. And so we are not yet confident there. There's a lot of uncertainty out there. What we're building, because of that uncertainty, is the ability to recover and move quickly. For instance, as we put locomotives down, historically, the time to put them down and bring them back up has taken us quite a long time. Our efforts with -- inside our team is to sort of accelerate that process so it becomes less of a variable for us. So no, we are not. It is a constantly moving and dynamic business. We have to be flexible to it and we will continue to moderate the different scenarios, as I've spoken earlier, and manage accordingly.

Okay. If I could ask a question on Intermodal. I did notice that from a carload standpoint, you were up 8% year-over-year, but the RTMs were up 19%. So I was just wondering if you could speak about what's going on there in terms of mix impacts.

Yes, Cherilyn, this is Clarence. We've looked at that several ways internally. We think there's 2 factors that could potentially be driving that. The first one is our customers are making a concentrated effort to reduce the number of empty miles that they're hauling the containers. So I mean it's a normal process. It's what's to be expected. But secondly is the mix of what we're actually exporting and importing and the weight that's in those containers. So for example, in some of the businesses that we're doing now where we are exporting some grain products, some DDGs overseas, they tend to be denser and heavier type commodities.

Our next question is from Ben Hartford with Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: I guess, Oscar, can you talk a little bit about services? Obviously very strong here in 2012. To what extent has better -- maybe better-than-expected service -- maybe you could talk about how service has trended relative to your expectations and how meaningful that is in driving above this $180 million annual savings threshold this year. And does this improved level of service allow a line of sight to something greater than the $130 million to $140 million in annual savings that you had talked about a year ago when you were talking about that 65 OR target?

Great. I will stay out of the guidance business on that front, but you've laid it out very well. Better service is indeed cheaper for us and that has been the key focus across the different technology and process teams that we've done, execution and great leadership out there. Your question is about whether the services exceed our expectations. I mean, it's near an all-time record level, so I guess, ostensibly, you could say yes. But it is the new norm for us. Our customers are expecting that and that's what we're focusing on.

Our next question is from Jason Seidl with Dahlman Rose. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: A couple of quick questions. One, since -- I won't beat coal to death too much here, but since you guys are talking about the expenses, in the MS&O line you said it was going to continue on some of the benefits into 4Q. Should we consider that's going to be ongoing onto '13 as well? Or is that going to dissipate after 4Q?

On the MS&O line, clarify the question just so I understand. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Yes. And I'm sorry for that. On the MS&O line, you said that you expected another benefit in 4Q, but moderating, I think, somewhat from 3Q. Do you expect that to also continue into 2013?

You're referring to our SunRail gain? Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Yes.

Yes. So what we have said on the SunRail gain is that we are expecting a similar amount, that we saw here in the third quarter, in the fourth quarter as well, but the year-over-year comparison [indiscernible] as we have started recognizing the gain last year at a tune of $14 million. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: And that is going to be done for the gain after 4Q.

Yes, so right now, we have recognized to date about $83 million and the total gain is $160 million, so there's $77 million left. And so a similar amount in -- as we had here in the third quarter will be in the fourth quarter, so you'll have about $50 million or so left to be recognized in '13 and beyond. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Okay. Very, very helpful. Last one is on pricing overall. If you look sort of x utility coal, it has moderated somewhat. Clarence, how much of that is due to just of sort of a weaker economic environment and it lowers your ability to grab price? And how much of it is due to sort of just lower inflationary cost plus pricing.

I'd say there's a third factor. Most of it in the utility coal is due to the legacy pricing over time. As we started out in the first 2 or 3, 4 years around 2004, '05 and '06 with a lot of legacy contracts that we could renew, then in the subsequent years, we had a second shot at those, and now you're seeing a more normal pricing in those areas. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: So it's almost like your golf score, and the ability to get it lower and lower and lower becomes harder and harder and harder the better you get.

Well, that would not be true of my golf score, but it would be true...

Our next question is from David Vernon with Bernstein. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: So with the mix and weight changes that are going on in the Intermodal business, Clarence, the 2% gain in RPU, how much of that is -- would you consider core price versus mix, weight or length of haul change?

I would consider most of it core price. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: So the longer haul or the heavier weight stuff isn't -- you're not getting any benefit out of that. Or the shift from international to domestic, you're not getting an RPU lift from that, or...

Where we have -- where we do have mix and longer length of haul, yes, we're getting more money for that, but on the weight basis, we're not because we're charging by the unit, not by the weight. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Okay. So -- but the 2% gain is mostly price in Intermodal.

Yes. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: And how heavily is the Intermodal business weighted in that same-store sales x Export Coal number.

Now that, I don't know.

I think that we provide pretty good transparency in what we've done here in this -- by breaking out Export Coal. I think that's the appropriate level. What we're trying to get across is to make sure people understand that overall pricing continues to be in line with what we've said previously and it's an inflation plus level. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Okay. Great. And then just one last technical question. On Slide 7, the fuel recovery number down 24, is that fuel surcharge revenue down 24? Am I reading that right?

Yes.

Our next question is from John Larkin with Stifel, Nicolaus. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: On the Intermodal side, can you remind us what the international Intermodal volume would be year-over-year and the overall Intermodal volume would be year-over-year x the Maersk win, which I think it the anniversaries on 1/1/2013?

The international volume on a year-over-year basis, John, have been essentially flat. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And the total?

I don't have it broken down by total. I've got what the domestic increases are. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, are there any other customers that find the Northwest Ohio hub as attractive as apparently Maersk did? Are you on the verge of any additional market share capture as a result of that strategy, which is quite a bit different than brand access strategy?

Well, I think we mentioned a couple of earnings releases ago that one of the principal reasons Hyundai chose CSX was because of the advantages that Northwest Ohio has given us. We have gotten, in the past year since the terminal has been opened, rave reviews from all of our customers about the facility. It's living up to all the things that we had promised that it would live up to, and based on that, we think that we've got us about where we're going to be in the market share side on the north, and we're going to be able to retain the market share. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Given that, that's worked so well, is there any reason to think that it might be worth taking a look at perhaps putting together a similar hub, perhaps somewhere in the Southeast, that would give you the same sort of flexibility that you now have in the Midwest?

Well, John, we're looking at all kind of opportunities in the Southeast as the network gets more complex, so I just don't know right this minute.

Next question is from Jeff Kauffman with Sterne Agee. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Sal Vitale on for Jeff Kauffman. Just a quick question. You mentioned softening global demand for metallurgical Export Coal in 4Q. How quickly do you think that we can see the effect of the new steel projects in China as a result of the recently announced stimulus measures there? We've already seen -- started to see rising Chinese iron ore prices and steel prices in response. How quickly do you think that can take effect?

Well, I'm not sure I know the answer to that and I'll tell you the reason I say that. As of last week, there's a lot of unsold coal that's off the coast of China in vessels right now. So the Chinese are playing a cat and mouse game of "I'll wait until the prices go down and I'll buy." As soon as that backlog is worked off and assuming with the new regime changes in Beijing that they continue to stimulate the economy, then you could see that sometime in the first to second quarter.

The next question is from Anthony Gallo with Wells Fargo.

I was hoping you could talk a little bit about agriculture for 2013, and I'm thinking about it in the context of what your business has historically seen following the type of drought that we had this year. I suspect increased planting drives fertilizer, et cetera, but can you put a little color around what '13 could look like following the type of drought we had this year.

Well, here's our view. On the ag side of the business, you won't see any significant upswing in shipments until the late third quarter and fourth quarter of next year, because we literally got to plant the crop and grow it. Second factor is you will see, as far as the Eastern roads go, this will not be true of West, you will see less exports, grains moving to export. Historically, for our mix of business, we're about 40% feed, 40% ethanol and 20% export. So you will see less of that. A lesser impact could come in the ethanol market as energy credits are used in lieu of production while prices of corn are as high as they are on a per-bushel basis. We do believe that in the next planting season here, that the crop will -- the farmers and the market itself will adapt for this and will have heavy plantings. Our Phosphates & Fertilizer shipments are staying reasonably robust. As a result of the drought, there is some belief that there's nutrients still in the soil. We'll know more about that in the first quarter as the spring planting and spring fertilizing comes in. Did that help?

Very helpful.

The next question is from Pete Nesvold with Jefferies & Company.

So my operational questions have been answered. On the financial side maybe, thinking about the dividend rolling forward to 2Q, as well as share repurchases, which will be exhausted by the end of this calendar year. Understanding that both of those are board decisions, I'm interested in hearing management's perspective on each of those. I mean, you're at 31% payout right now last 4 quarters. Arguably we're probably looking at flattish type earnings, maybe slightly down 4Q and 1Q. It would still leave some headroom -- there is headroom still to the higher end of your payout range. So when you think about increasing the dividend -- well let me ask, is it about seeing earnings growth year-over-year in 2Q? Is that sort of the primary catalyst for raising the dividend? Or do you like to continually raise the dividend each year? And then separately, you've been shrinking the share count by about 15 million shares each year. If we are in for sort of a flattish earnings period here for a bit, what's the appetite to reload and to continue to shrink the share count at roughly that level?

Well, let me start with the share repurchase program question. So you know that we have about 234 million left of the current program and that's our #1 priority right now, to complete that by the end of the year. As we get into our plan process and review with the board for next year, we'll see what sort of free cash flow levels we have. At that point, we'll size that program appropriately. We have said publicly that predominantly it should be funded by free cash flow, but we also can use some balance sheet capacity if we think that's appropriate. But predominantly free cash flow, so that -- so when we get to the first quarter, we'll have an update and a view of that. On the dividend side, I think we've been very transparent. Between 30%, 35%, that is what we're going to target going forward. I think we will see what the fourth and the first quarter does in terms of earnings and based on that, we will size it accordingly but the parameters between 30% and 35% is really the key driver.

Your next question is from Donald Broughton with Avondale Partners.

As cars on the line are down over 7%, almost 8%, can you give us some color on what the complexion of the cars you put into the storage, how many of them and what classification?

Yes, Donald, it's Oscar. Many of the cars in storage kind of older gondolas for the metals and coal business, as well as some covered hoppers, and some of these are just in storage simply due to the normal seasonality. And again, back to an earlier point, these are stored in strategic places where, when we need them, we can pull them back in the service very quickly.

The next question is from Matthew Troy with Susquehanna.

Going back to the golf analogy before. This is starting to feel like a five-hour round. Let me just ask essential questions. RCAF is a primary metric of rail inflation but has been limited in its application in recent years. Just wondering what percentage of your contract base of your book of business is tied to RCAF. And how should we look at that as a directional indication of rail inflation as we try and determine what rail inflation plus actually might mean? What are your assumptions there?

Well, RCAF represents about 1/3 -- RCAF less fuel represents about 1/3 of our business. We look at -- we use Global Insight's forecasting to look at what we think RCAF is going to be on a forward-looking basis.

And over time, RCAF seems to be gravitating between somewhere between 3% and 4%. I think that's a good proxy for our inflation plus pricing comments as well.

The next question is from Walter Spracklin with RBC Capital.

This Erin Lytollis in for Walter. Just a quick question for you on the Domestic Intermodal side. You've previously identified about 9 million units of truckload conversion opportunity in the Eastern markets. Can you give us some color on what your targets are and your timelines are for converting this traffic?

Well, we are meeting with our customers now and the beneficial cargo owners on a regular basis. We have some models that we can run that shows which of that business is conducive to being converted over to Intermodal. We do that along with our truckload partners and our IMCs as well, and so we're targeting to turn as much of it as quickly we can, to be honest with you.

Our next question is from Mark Levin with BB&T Capital Markets. Mark A. Levin - BB&T Capital Markets, Research Division: Just a big picture question. As you kind of think about the utility market going forward, obviously seeing massive declines in central Appalachia, particularly on the steam side, Clarence, as you kind of think about what central Ap steam production looks like over the next couple of years relative to your sort of market sort of stabilization, I mean, how do you kind of -- how do you reconcile the 2? Because it seems like just given the cost structure in Central Ap, unless natural gas prices get a massive, massive surge, that the production decline, particularly on the thermal side, is going to continue. And then related to that point, the Illinois Basin, what type of growth should we expect out of the Illinois Basin to maybe offset some of that steam decline in cap?

Well, I think you'll continue to see declines in Central Appalachian production. You've seen it over years. It's forecasted by a lot of the coal companies that it will, in fact, decline. As my colleague, Oscar Munoz, can attest to here, there is great growth that's occurring in the Illinois Basin. That growth is both as the result of the high BTU content and the fact that the power plants are scrubbed, number two. Number two, it's a lower cost coal, which makes it at a lower price point versus natural gas and so we think that, that for us would bode positive, as well as Northern Appalachian coal, which is serving a lot, both of our export markets and serving our utility markets there. Did that answer you? Mark A. Levin - BB&T Capital Markets, Research Division: Well, as you kind of think about the mix in a couple of years. Illinois Basin today, versus cap today and then maybe in a couple of years, how could you see that mix changing on the steam side?

I would see it heavily weighted towards Illinois Basin. Mark A. Levin - BB&T Capital Markets, Research Division: And enough to offset -- do you think enough to offset the potential decline in cap steam over the next couple of years?

Well, I don't -- the problem that I'm having with answering that question is what's going to determine the steam is going to be what the utility burns. And so, whether -- if you're sitting in our shoes, whether it comes out of Illinois Basin or cap basin, we just want to haul it.

Our final question will come from Keith Schoonmaker with Morningstar.

A service question for you. On-time originations and arrivals improved pretty impressively, 25% to 30%. I'm sure this is due in part to Oscar's arrival as COO, but also were there easy comps or simply lower congestion in the coal system? What drove such dramatic improvement?

I think it has nothing to do with me, I suspect. We have a great team out there. I think it's the additional resources that we geared up for last year. I think one of the things we got caught up is not having quite enough and so we've adequately resourced around that. Our operating plan has been running very smoothly. Certainly, you mentioned kind of lower volumes, but again, as Michael has mentioned and Clarence has mentioned, our overall volume growth this quarter was actually fairly robust absent the coal business. And so, lower volumes is not necessarily a big factor in that. It is around execution and the performance of our team.

And maybe one more quick one. Oscar, you mentioned I think in your remarks, locomotive fuel management tools. Can you comment on how broadly you've rolled out travel selection, position guidance software. And is this a pretty material lever on further reducing fuel expense?

It is a material and will be an increasingly more material lever. We are in the genesis of that, so we're probably maybe 1/6 of the way in as to where we want to be. The tool's called Trip Optimizer and it's an neat tool that has been helpful. You saw some of the fuel efficiency in Fred's presentation and that will continue.

Any thoughts on nat gas as a viable locomotive fuel?

It's an exciting concept. Most of the locomotive manufacturers are actively working it. There's some pilot tests being done within the rail industry. Outside of rail, a lot of the heavy industry out there is putting that new technology into action. We will be very open and very flexible in understanding the merits and sort of pivot accordingly when the time is right.

Well, thank you all for attending the conference today and we'll see you in another quarter.

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