CSX Corporation (CSX) Q3 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the CSX Corporation Third Quarter 2017 Earnings Call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode. Following today's presentation we will be conducting a question-and-answer session. [Operator Instructions] For opening remarks and introduction I'd like to turn the call to Mr. David Baggs, Vice President, Treasurer, and Investor Relations Officer for CSX Corporation.

Thank you, Shirley, and good morning everyone. And on behalf of the management team here at CSX Corporation I'd like to welcome you to our quarterly earnings call, and also thank you for your interest in our company. Our presentation, our quarterly finance reports, and our press release, which conveyed our results and reaffirmed our 2017 guidance, are all available on our Web site at csx.com in the investor section. In addition, a webcast replay of this presentation will be available later today, and the 10-Q will be posted tomorrow on that same Web site. This morning, CSX is being represented by our Chief Executive Officer, Hunter Harrison; our Chief Operating Officer; Cindy Sanborn; our Chief Sales and Marketing Officer, Fredrik Eliasson; and our Chief Financial Officer, Frank Lonegro. On Slide 2 is our forward-looking disclosure. Any statements about the future made during the course of this presentation or during the question-and-answer session should be taken in the full context of this disclosure. Turning to Slide 3, is our non-GAAP disclosure. While CSX files all of our financials in accordance with U.S. GAAP, we're providing certain non-GAAP measures to give you a more wholesome understanding of the business. These measures should be taken in the full context of this disclosure and with the understanding that they are not a substitute for GAAP. Finally, with our investor conference less than two weeks away, and with close to 30 analysts covering CSX, I would encourage everyone today to limit their questions to one. With that, it is my great pleasure and privilege to introduce our President and Chief Executive Officer, Hunter Harrison. Hunter?

Thank you, David, and good morning to everyone, and thanks for joining us. As David said, we've got a lot to discuss today, and my remarks are going to be a little different than they normally might be. I'm going to allow Frank to run do the numbers, there's no use in us both doing it. And to try to give you some explanation or at least our read on the quarter, which some could characterize as mixed results. There were a lot of dynamics going on and taking place in the third quarter, which was a carryover to some degree from the second quarter, and was a challenging start. So, let me start here. I think that we went through obviously some slippage service-wise in the third quarter, which we're not proud of, which we had a listening session last week with the Surface Transportation Board, with their team members. I think some of you were present. I think there was some mixed reporting there, but I can tell you this, I've been in this business a long time, and this company is back to where it was -- it's back to where it was, and it's better, and it's climbing, and I see those issues, generally speaking, behind us, which I'm very proud of that. It reflects to some degree the resiliency of this organization, to go through what this organization has been through, and to be able to come out of an eight-nine-week, a little setback. And I didn't really – I considered initially as we went into this transaction; I didn't want to spend a lot of time reflecting that. But I do think it will to some degree add some context that this was not a failure of the model, a failure [indiscernible] railroading. Some of the historians aren't very good historians, this is not a new operating plan. This is an operating plan that's been in existence for 20 years plus. It's had a pretty good track record. In fact, I would -- it's a little hard for me to be objective, but an excellent track record. And so I think, as we reflect, it was more of an execution issue. We didn't execute at a lot of levels, and we learned that. And as a result, we had to make some, what I would describe as painful changes, that's never pleasant to do, but we had to do that. We had two derailments that were a real concern to me. One was a pretty horrific derailment on the side of a mountain that you read a lot about, that we have changed some procedures as a result, and I would say also to the local people there that we were dealing with who were extremely, extremely cooperative to our efforts trying to get that derailment under control. And then we had a -- and still I have under investigation a derailment in South Carolina that I'm convinced from a personal standpoint is clearly a case of sabotage where we had a bulldozer flipped on the track covered by [indiscernible]. And we came around, and that's not unusual in that territory to have that. And we hit the bulldozer, derailed the cars. Thankfully nobody was hurt. We've got rewards out. But those things, the derailments, the personnel changes that had to be made, I think to some degree we had reflected and understood that there's resistance to change, and we were going to have to deal with that, and we've had to in a little more difficult way than I thought it might be. But having said that, I think the most significant issue that came out here is we learned a lot about some of our people. We've made some personnel changes and we've developed some real, what I would describe as, rock stars, both in-house, from other rails, from the free market, and [indiscernible] line as well. I am very pleased that I think the organization is ready to go forward at what I might describe as breakneck speed. The operating plan that we had talked about, I think just the last week or the week before, we brought in our first dispatchers from the field, which takes us from -- we will make this first move to take us from nine offices to one here in Jacksonville. It's a big step. I think -- and these things are dynamic, and the markets change, but I think that we have pretty well settled in with the hump yard, I think we started off with 12 or wherever we were in [indiscernible], and we are down now to four, I think, core yards, which are effectively in in Selkirk, New York; and Waycross, Georgia. Also, Indianapolis Avon yard, and I guess Willard is the last one that will probably be closed soon. So that hump yard work is mostly behind us. Dispatcher work is behind us. Personnel moves are in place. The learning curve is going up. And I am as excited as I ever had been or more so about the future of the organization going forward. So I will have some more remarks at the end. At this point, let me catch my breath and let Frank help convert some of these things into our earnings results.

Thank you, Hunter, and good morning everyone. I will briefly walk you through the quarter and touch on a few fourth quarter and full-year items. And then, we will take your questions. In the early part of the quarter, as Hunter mentioned, we rolled out significant changes to the network operating plan as a result of our rapid transition to Precision Scheduled Railroading. While our service took a step back in July and August, we are pleased to report that our velocity and dwell performance in September were favorable to Q1 levels. And we expect continued improvement going forward. The changes we made to the operating plan helped drive significant train length improvements on a sequential basis. Balancing the train plan and consolidating train types drives efficiency saving through better asset and resource utilization. Cars and locomotives and service are down significantly year over year. And we are able to run our railroad and our company with fewer resources. Compared to year-end 2016 resource levels, our total workforce is lower by over 4000 FTEs, including over 1,000 contractors and consultants. Turning to slide eight, from a financial perspective, we were encouraged by the results for the third quarter. While we took a direct hit from Irma, experienced a number of significant derailments, and transitioned to a new operating plan, we made good progress toward our 2017 and longer-term goals. Jumping into the details of the income statement, revenue was up 1% year-over-year, driven primarily by core pricing gains of 3.5% all in and 2.2% excluding coal as well as 1% volume growth at higher fuel recoveries, partially offset by unfavorable fix. Total expenses were $2 million favorable with efficiency savings more than offsetting the impacts of inflation and higher fuel prices. Our quarterly financial report goes through the details of each operating expense line item. But I would like to quickly call your attention to a couple of key points. Our labor and fringe expense was down 6% on 10% fuel resources. Our MSNO was slightly unfavorable given the combined impact of several train accidents, relocation costs, and asset impairments which offset the favorable efficiency gains from better asset and resource utilization. And while fuel expense was up, the increase was driven entirely by a 19% increase in the price of diesel. Top line stability plus our relentless focus on controlling costs drove the 4% improvement in operating income, a 4 point of operating ratio improvement and 6% EPS growth, reflecting both higher earnings and the completion of our $1.5 billion share repurchase program. On slide nine, year-to-date free cash flow generation is strong at over $1.5 billion, reflecting solid top line gains, significant efficiency savings, and the reduced capital intensity of our business. Please note that our third quarter cash flow benefited from the deferral of tax payments allowed by the IRS for companies impacted the recent hurricanes. We expect to make the third and fourth quarter tax payments by year-end. Free cash flow growth has enabled increased shareholder return including the $0.2 dividend increase earlier this year plus the completion of our expanded buyback program. CSX's improved financial performance is reflected in our improving ROIC which exceeds 10% on a trailing 12 months basis and a stable debt-to-EBITDA ratio even with higher debt levels. Turning to slide 10, our fourth quarter volume outlook on a comparable [technical difficulty] basis is neutral, with nearly two-thirds of our business expected to be growing or stable year-over-year. The global benchmarks support continued strength in export coal with fourth quarter tonnage expected to be similar to what we saw in Q3. And intermodal is expected to continue to grow reflecting strong consumer sentiment, and a tighter truck market. On the other side of ledger, several markets continue to be impacted by specific headwinds, mostly notably the anticipated decline in North American light vehicle production, the evaporation of unit train shipments of crude oil, and the secular challenges of domestic utility coal. Looking forward, as our service product continues to improve and we transition to a faster, more reliable service solution for our customers we will see growth prospects across a wider spectrum of our markets. Wrapping up, on slide 11, we are on track to deliver on operating ratio around the high end of the mid-60s, with record productivity savings, EPS growth of 20% to 25%, and free cash flow of around $1.5 billion. We completed our buyback program in five short months. We look forward to seeing you at our investor conference in two weeks, and would now be delighted to take your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Ken Hoexter with Merrill Lynch. You may ask your question.

Great. Good morning.

Good morning, Ken.

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

I think it's just about immediately. Well, that shippers who are out there, they are trying to get the bargain, best bargain they can get. And the safety for that, the competitive service at a competitive price [indiscernible] the business. This is not the old days of some kind of relationship sales. This is about who's got the best product, who's got the lowest price. We think we're going to be there. And so we think this speaks in our market share, and I'm not a big advocate of the market share data and accuracies [ph] that it reflects, but not to dwell on that, I'm convinced of this, all you’ve got to do is get our service where we know it can be, where it is relative [ph] to improved to, and then have a competitive price out there, and you'll have your fair share of the business.

Great. Thank you.

Thank you. Our next question comes from Brandon Oglenski with Barclays. Your line is open; you may ask your question.

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

Yes, I can share this when we get back from the hearing with the Surface Transportation Board. We had three customers that we were having to embargo because they couldn't accept the shipments that were delayed. And now we are accused to be in a violation where we got [indiscernible] 60 cars on hand, and you take five plus weeks to unload them, you know, there’s two sides of the story, [technical difficulty] change and the resistance that people give to you. I have talked about that moving from a proxy side into a change is not the greatest environment, so we had some resistance. And look, I don't want to -- I'm not trying to point a finger to anyone, you know, some of our best railroaders, hardest workers, you know some of our labor union people, the last time I talked about that I was going to finger at them, I am not finger at them. The first tranche of people that left the organization were high percentage of management people. So I'm not pointing the fingers. Collectively, as a team, we didn't get the job done. And as a result of that, we made some personnel changes, we had some -- well, I'll just be frank; we had some embarrassing situations that we had to deal with and we dealt with them. Are they hard to deal with? Yes, they're hard to deal with. We’ve had some – at one of our major gateways, we had a case where some people falsified records on car movements, so they wouldn't be criticized about cars being delayed. We can’t tolerate this, and so, we've got maybe a little ahead of ourselves on the hump yard closures, , maybe I am pushing too hard. But I think we've learned all the lessons there are to be learned. We've seen what we can do the last 6,8, 10 weeks. I think Cindy and her team have done a stellar job of recovering and putting us back where we need to be, and it's going to get even better. I mean that's the encouraging thing. And so, if you can just get out from under the anecdotal, and if you were there in some of those hearings last week, the hearings weren't about CSX service. In my view, the hearings were about more political issues of reciprocal [ph] switching and open access, and some of those things. Now look, we're ready to participate in that dialog, but let's call a spade a spade. We had -- I participated in that session. I think there were 10 or 11 customers -- specific customers that testified. We had more positive responses from customers that weren't there at home. And some of the surveys that are going on out there, I don’t put a lot of faith in, and if you look at what they're looking at, and then how many people are actually giving honest, frank feedback in discussing -- I guess the bottom line, there's no hurdle out there going forward that we can't get over.

Thank you.

Shirley?

Thank you. Our next question comes from Brian Ossenbeck with JP Morgan. Your line is open. Go ahead with your question.

Hi, good morning. Thanks for taking my question. So just touching on intermodal markets and the strategy, you were seeing some reports on Northwest Ohio's role in intermodal network, maybe some service offerings begin adjusted. So as you move past the initial stage of design with the hump yards and the flat switching. Is it the hub and spoke design for your intermodal something you're also considering to rework? And what does that have -- or what implications are there for Ohio and also the Carolina Connecter that was planned for North Carolina. Thank you.

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

Okay, thank you.

Thank you. Your next question comes from Chris Wetherbee with Citigroup. You may ask your question.

Hi, thanks. Good morning. I know you highlighted sort of what the derailments cost you specifically in the quarter. But I was wondering if you could maybe help us understand a little bit sort of how the service ran through the model and sort of what the expenses related specifically to that, and maybe a little bit of weather? Just wanted to kind of contextualize how much of the operating ratio improvement you could've gotten in addition to what you did if you had a sort of cleaner quarter.

Hi, Chris; Frank. Yes, we obviously experienced some transitional issues in the first part of the quarter as we transitioned into operating plan over the July 4th holiday. And as you know, any time you've got a network-related set of changes to target quantify the dollar impact of that you do see on the revenue side the impacts of that transition really muted the top line growth if you compare us to our peers. We probably left some demand on the ground. We probably saw some temporal shifts of business to either truck or to other rails. We do expect, as you heard Hunter say in his opening, we do expect that to come back pretty quickly. And then on the expense side, any time your network is a little sluggish you're going to see higher overtime, re-crews, fuel car hire that nature, but not something that we're able to put a pinpoint type of an estimate. But it certainly did impact us both from an operating income and operating ratio perspective in the quarter.

Okay.

Thank you. Your next question comes from Tom Wadewitz with UBS. You may ask your question.

Yes, good morning. Hunter, I know you've commented some on the -- kind of the network and how it's running. I wondered if you could give a bit more perspective in terms of is the car load schedule pretty much stable at this point? How would you think about the trajectory? I don't want to be overly focused on the metrics, velocity and dwell and so forth. But sometimes they help to see how the network is running. So is it stable at this point? Would you expect to see further momentum build, that the metrics improve and costs fall out further. Just kind of where you're at in terms of the network and the trajectory today?

Sure. Tom, we have not completed -- if you remember back a little bit from our early experiences with installing these trip plans, that effort is not complete. Now we're much further along that I thought we'd be, but I would think that we're probably 85% there. And I think that by mid-year '18, it will have everything fully in place with the plans. And that means that the plans to some degree will be upgraded where it's required and necessary and the market is asking for it. As we develop the ability with our train speed and dwell time, our dwell time is, as we speak today, as I look at the [indiscernible] board, it is down to about 10 to 12 hours, which is pretty impressive overall. Our productivity cars per hour has improved even more so, which even further shows the ability we have, so the train speed, the true velocity has picked up pretty significantly. So I guess what it does is it looks and says, the scouting report we did, we have even more [technical difficulty] than now that we're going to kind of be able to produce the results that have been talked about over the next four year. Now the timing within that four-year time frame might adjust a little bit up or down. But I think that -- I won’t get ahead of myself for a couple of weeks. I just think that the opportunities are very bright going forward.

Okay, great. Thank you for the response.

Thank you. Your next question comes from Allison Landry with Credit Suisse. Your line is open; you may ask your question.

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

No, I don't think so. I think that the only one little caveat I would put there is this, look, this model in my view will work here as well as work -- or has worked anywhere and even more so. I do think that potentially maybe we learned a little bit that even here the personnel and the execution and the selection of people is even more important. And so, I think we are kind of fine-tuning that a little bit. If you look at -- I'm not - I don't say this critically; people think of all different ways, but we have a lot of people, a lot of operating supervisors that were hired have got seven to eight years of experience off the campus, put in the operating world as Assistant Train Master, and that's asking a whole lot of them to be able to do that. And so, I think we are going back to do some retraining. We started back again last two weeks ago I think, Hunter Camp, [indiscernible] the Board asked me about Hunter Camp, and I said, "You know, I am just not sure -- I'm going to have time to do this." And I learned it quickly. And they quickly told me you don't have time not to do it. And so, we had the first four sessions, I believe, they were a knockout success. And so, I guess the main thing Allison is the view of the personnel -- I think we talked about this term, but I think we’ve got a lot of internal talent that's covered up with mud, and I think we've taken a hose, washed some people down, and we found some rock stars here. So, that's very encouraging.

Okay. Thank you.

Your next question comes from Amit Mehrotra with Deutsche Bank. Your line is open. You may ask your question.

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

Well, look, I'm not 45years old anymore. I wish I was, for a lot of reasons, but I cannot -- I have been a few years and probably not for me to say, but I mean hands-on. But I've written a lot of books and papers and case studies, and so forth. I receive a lot of correspondence from people trying to understand even more concepts. I think our team starts to get it. And I think one thing that we talked about with the camp was this, I'm not as much as I would like to be able to, I'm not able to get to everybody myself individually to sit with them, but I can hopefully be expecting that I am developing the cycles. Let's say, look this makes sense, this is not just some stone up on the wall, this has got a lot to it to make sense and it will work, and they will buy into it now, and so I need to be able to do that more so through my team and [indiscernible] team and lieutenants, they maybe have done in the past and maybe I should have done it more in the past, but if I can do it myself, I did it myself, and I didn't bring them in the fold. So, if you say I have to optimize it, maybe didn’t optimize it, but I did this, we are going to get -- we'll get to the same type results. They might like to look a little different, but the results are going to be there.

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

Thank you. Our next question comes from Ravi Shankar with Morgan Stanley. Your line is open. You may ask your question.

Thanks. Good morning everyone. Hunter, in your slides, you pointed out that the, that the 4Q outlet has about 50% of your end markets of the favorable outlook versus I think those 66% last quarter. Not the still anyways under from the Analyst Day but just broadly speaking as you kind of look at your long term or an efficiency targets for CSX, how much do kind of end markets feature or kind of how much of role do they play and actually hitting that and end markets are slowing, what's the offset to that? Thanks.

Hi, Ravi, it's Frank. Obviously we'll share lot more with you in a couple of weeks when we get to the Investor conference, the top line growth is certainly part of the future but on a proportional basis I would tell you that the expense lines really important to the future and if you go back and you look at what Hunter has done at CN and CP that's an important part of the future and making sure that we drive productivity saving the upper ratio lower but we certainly are focused on growing the top line as well.

Yes, let me just give you outlook; I will just give you preview or segway here into their market to the Analyst Day. Gone through [indiscernible] wisdom, the results that we've achieved so-called those turnaround, well first of all, we weren't sensitive to the market which was wrong with improve revenue at opening places, but we were successful net, net in all three places and so like did, there is not in end markets that's stopped with the bottom line approach is here. We have never -- we have always gone into right wrong, we always gone into in everyone of the turnaround with the strength that concerned approach from the other illustrations, my life is always that we went there and they had a growth there of 11%. I didn't see it and I didn't understand it but they frankly did it. We had 3%. So, we had 3% on the bottom line they did with top line they got 11% that when all said and done our operating the ratio was 24 year per with four points then their number so but you have been implied with these numbers all you want the bottom line to bottom line.

Great, thank you.

Thanks.

Thank you. Our next question comes from Ben Hartford with Baird. Your line is open. You may ask your question.

Hi, good morning everyone. Just in the contact center everything you talked about with regard to the cadence of the operating plan want us to pull through when do you think you would be able to extract value in the former price from the service that you build into the network obviously as we're looking to 18 truckload capacity is tightened up away more favorable pricing environment is result of that across the market but when do you expect to be able to realize extracting value in the former price at CSX from these changes is that 1920 backend-loaded type of process.

I think it's are in my view is more of a -- what the competition does, yes. Competition is adversely tough and if the competition does price and improve their service, it will have impact on us, so we can ignore, but not solve it, if you think -- what do you think is going to happen, I think that we will start to see 1918, okay necessarily to a degree that maybe we describe, but I think in 19', we will start to make nice reasonable pickups of price relatively service and that as we continue that and move into 20' and beyond. We will be rewarded for that good service and profit. I mean, when -- if you got a good service or better, I think we will have better in the future, okay and you have the low cost carrier, you got a lot of average, you go after you get the same service level, okay if your cost is higher about 10%, it's tough, it's damn tough. I don't think this organization has the ability to try and do that, but I think we would be able [indiscernible] or whatever I will tell you that markets that I even built a lot, but that's just kind of an additional thought if you will.

That's helpful. Thank you.

My next question comes from Cherilyn Radbourne with TD Securities. You may ask your question.

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

Yes, this is Fredrik. I think we saw impact on all our markets in the third quarter from the challenge and of course also the hurricane impact of Irma, so I mean I think it was pretty wide spread, but it's hard to pinpoint clearly we had benefit of onboarding two new customers intermodal space and also continue to see opportunities to convert things off the highway system as the market has tightened and so we feel good about where it is and I think you are already seeing as Hunter alluded to you as Hunter - as service now return and it is much stronger you are seeing the kind of weaker number that comes out, that indicates that we are back and the customers are coming back to us very rapidly.

Hi, Cherilyn; Frank, I will just add a little bit on the hurricane to make sure that it can be [indiscernible] for folks probably about $0.02 in the quarter, most that being top line or a lot of that was [technical difficulty] there we had some plan shutdown in the Southeast or in some cases a couple of them -- in one particular case a couple of weeks, so as you think about the transition impact service side, you also have to remember we also had hurricane in the middle of that.

Good.

Some cost in the third quarter, which are part of that $0.02, the [indiscernible] and over time, everybody was pulling over time, we have some third-party contractors in there and we probably have a little bit of trickle over a cost into the fourth quarter, single digit millions when invoice is coming in October. But I just want to make sure, we dimensionalize that for everybody.

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

Thank you. Our next question comes from Scott Group with Wolfe Research. Your line is open. You may ask your question.

Hi, thanks. Good morning guys. So why don't you ask coal yield spell, I think 7% sequentially, how much of that is sort of the mix of net and thermal and export and how much of that maybe is from just lower net export pricing? And then, if I can just ask as Hunter, we had a noisy third quarter. So can you maybe calibrate headcount and operating ratio expectations for the fourth quarter?

Scott, you are breaking the rules; one question.

So, let me tell you the first part in terms of the coal, it's clearly the second quarter was a very strong quarter as you saw on the indexes and so that certainly helped the net deals and yes there is a little bit of a mix change as well because the thermal market, the export market has gone stronger. So I think you are losing both of them and both of them are my drivers of that.

On the operating ratio, Scott; Hunter could chime in on the headcount, but in terms of the operating ratio I mean year-to-date were 66.7, Q4 will be better than Q3 obviously and you know, what our guidance is and you can get pretty close on Q4.

Yes, and in fact the headcount number is I think projecting year-end will be 4500.

Yes on a year-to-date basis full year against where we ended 2016 total headcount in that 4500 range you heard, let's talk about the 4000, I think the number at the end of Q3 was like 4200 and that's again that's all and that's management union plus contractors and consultants.

I guess the only other thing I will ask is we'll talk at the Analyst Meeting, there has been a lot of noise and a lot of things happening but I'm not sure that they would fourth quarter is going to reflect, I think if you this is the long story in fourth quarter and it's the long story exciting and if you are sitting there on your seat waiting for fourth quarter results, you might fall off your chair for results.

Next question?

Next question comes from Jeff Kauffman of Aegis Capital; you may ask your question.

Thank you very much. Just a quick merchant or group question on auto, I think a lot of us were surprised to see an 18 auto SAR in the most recent months and we've heard stories that maybe 0.5 million cars plus might have been lost and the strong impacts of Houston and a little more in Florida, could we be underestimating auto and if there is a rebound or secularly, we've talked about how autos. The outlook is not right but I was really surprised by the most recent monthly SAR and I'm just talking some folks in Texas and they were saying a lot of autos need to be replaced.

Yes I think that's a good question, we certainly have seen a fair amount of inventory drawdown and because it's back to kind of a more normalized level layer year-over-year, which hasn't benefit previously in the year, so that's a good sign. I think production numbers for next year indicates about 200,000 more vehicles, they were seeing this year. So I think there is some - there could be an opportunity there. I certainly know that our automotive network is running well and within a merchandize network and so we are seeing some pretty strong and write now we will see ultimately how much of a impact it has but it certainly has been helpful.

Okay. That's my one. See you guys in few weeks. Thanks.

Well, the one number I thought here today that was in fact get your attention is that. I think certainly general motor is selling a steady old car 24% of the cars. The rest of the other type vehicles, so now I just talk about SUVs and the whole thing, it's one thing but if you talk about cars there is great slippage, which the implication start to be for that car [technical difficulty] if it's a new models and et cetera, but that's gets specifically not the case.

Thank you, Hunter.

Our next question comes from David Vernon with Bernstein. Your line is open. You may ask your question.

Hi, good morning guys. Thanks for taking the time. Fredrik, maybe a question for you on the long-term in a motor dynamic, if you look at the business, the RPU today is kind of where it was in the 2005 timeframe, volumes have been grown quite a bit. As we look out of the next five or ten years, should we be expecting more of a volume growth story in intermodal or a little bit of pricing as well and what should drive the change in that market dynamic?

Maybe I think as just the way Frank said earlier, we will address many of these questions specifically as part of the analyst conference. Clearly we think there is an opportunity to continue to convert traffic off the highway system and it's going to come in the form of either price or volume depending over the market is, how tight the market is and what the service offerings are but nothing has fundamentally changed in the premise that you see in over last decades, where we've been able to convert at a pace of 5% to 7% a year on average and as we look forward, we see no difference as we implement this operating model, we think we should have an even better chance of doing that.

As far as the rate of volume take versus share take, I mean in the long run the RPUs are still running kind of where they were a decade ago, should we expect that as a market I tell you exactly we will be able to get a little bit more price and power? Does this remain a competitive market where it's going to be more volume?

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

All right, thanks for the time.

Thanks. Your next question comes from John Larkin with Stifel. Your line is open. You may ask your question.

Hi, good morning and thanks for taking my question. Just wanted to dig into the utility coal volumes which took quite a haircut year-over-year, where do those stockpile stand? And when do you think that will stabilize? We will see perhaps more and more stability in utility coal volumes?

Yes, I think as we think about the fourth quarter, I would say that we are going to be overall in domestic coal roughly flat. What we saw here in the third quarter is probably the best expectation. In terms of actual stockpile, I would say at this point, the stockpile in the North are probably higher than we would like to see. But in the south, they are probably little bit below. So it gives an opportunity to replenish some of those in the South, which is usually a longer length of haul high revenue because of the length of haul. In addition to that just to remind you, at the beginning of the year, we had a very short haul business contract that we lost in utility coal. We indicated I think about 6 million tons are so and that's been with us for the full year and will be with us in the fourth quarter as well. But beyond that, I think we are seeing a market that is in pretty good safe. Clearly the summer was not helpful, but we are still seeing natural gas prices around three which is much –-- very helpful -- like that we are in the higher, but it's certainly more helpful than what we saw in the last spring.

Thank you very much.

Thank you. Your next question comes from Bascome Majors with Susquehanna. You may ask your question.

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

Well, I am -- that is something that the Board is very sensitive to, and as me and other working on -- and not something to worry, no worry, and I am hopeful that maybe we could give you more insight. Again, it's me but I am not sure, okay. But all I can say is this -- I am saying what you are saying. We share your concerns. I share your concerns both as CEO and a shareholder. And it's something that we will -- until we receive an answer, we will stay on top of [technical difficulty] in grand way.

Thanks. Are you ready for the next question? That comes from Jason Seidl with Cowen and Company. You may ask your question.

Hey, thank you. Frank, real quick, when you talked a little bit about what the hurricane cost you in the quarter, you did a good job of parsing it off. Can you talk a little bit about potential rebuilding that you might benefit from in Q4 and maybe even possibly beyond?

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

I agree. And I mean I think we are also the impact on the trucking market itself. It allows us to participate in some of those that we -- otherwise, we wouldn't and also covert things [indiscernible] model solution and of course building products. And we talked earlier about vehicles being replenished. So I think there are some opportunities out there for us to capture.

And are you seeing that occur right now, Fredrik?

I am clearing seeing that the truck market tightening. We're certainly seeing that. I think it's little bit early to see in terms of building products. But we have certainly seen some of the vehicle opportunities just based on the need to replant or see what inventory levels are and how quickly that come down. So that's been very helpful.

Okay, that's my one. Thanks for your time as always.

Thanks. Your next question comes from Walter Spracklin with RBC. Your line is open. You may ask your question.

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

Sure. On your -- the last part of your question, we'll certainly have some more information for you as we get to the investor conference on shareholders returns and capital allocation in a couple of weeks. In terms of the free cash flow, obviously we had a nice benefit in the third quarter by deferring the tax payment. And we will make good on those payments in December. So the fourth quarter is generally a lighter free cash flow quarter. But at the same time we are already at 1.56 billion even if you look at the fourth quarter if I were betting then I'll take the over.

Okay. Thank you very much.

Thanks. Your next question comes from Justin Long Stephens. You may ask your question.

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

We will certainly cover that as part of our investor conference. We feel we are very well-positioned strategically in terms of our ability to reach the port both on East Coast and in the gulf. And we think we have an excellent service, product, and good facility [technical difficulty] key export players. We feel good about it. We feel good about where we are for the remaining of this year. And obviously where the forward curve seems to be right now, it's a good opportunity for the U.S. producer to participate next year as well. But, we will give you more color as we get to the investor conference.

Okay, great. Thank you.

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

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

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