Good morning, ladies and gentlemen, and welcome to the CSX Corporation third quarter 2013 earnings call. As a reminder, today’s call is being recorded. During this call, all participants will be in a listen-only mode. 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. Sir, you may begin.

Thank you, operator, and good morning everyone, and again welcome to CSX Corporation’s third quarter 2013 earnings presentation. The presentation material that we’ll review 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 Corporation 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’re encouraged to review the company’s disclosure in the accompanying presentation on slide two. The disclosure identifies forward-looking statements as well as risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements. In addition, let me remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts. That said, with approximately 30 analysts covering CSX, I would still ask, as a courtesy for everyone, to please limit your inquiries to one primary and one follow-up question. And 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 $0.46, up from $0.44 in the same period last year. The quarter benefited from overall revenue growth, excellent operating results, and items that are outlined in the quarterly financial report covered later in the presentation. As the energy markets continue to evolve, our business mix is increasingly favoring merchandise and intermodal movements. The team is effectively managing this change by capitalizing on the modest growth in the economy and by focusing relentlessly on safety, service improvement, and asset efficiency. These are important drivers of our foundation for long term profitable growth. In the quarter, this foundation helped our operating income and operating ratio remain strong, at $854 million and 71.5% respectively. The 31,000 employees of CSX have learned from experience that the best way to stay on track through the ups and downs in our marketplace is to focus relentlessly on the things that are in our control. As we go through today’s presentation, I think you’ll see we’re doing that very well as we focus our resources on capturing the longer term opportunity in rail transportation. We’ll begin our discussion with Clarence, who will provide a more in-depth analysis of the top line results and a forward outlook. Clarence?

Thank you, Michael, and good morning. Starting at the left side of the chart, total volume increased nearly 3% to over 1.6 loads in the quarter with mixed performance across the diverse markets we serve. Growth in the merchandise and intermodal market was partially offset by declines in coal volumes. As a result, merchandise and intermodal now combine for 82% of our volume. Moving to the right, total revenue increased $105 million to nearly $3 billion in the quarter, reflecting overall volume growth, price increase across most markets, and a $38 million year over year increase in liquidated damages. Looking at the bottom of this panel, merchandise and intermodal now combine for nearly three quarters of our overall revenue. Next, revenue per unit increased to $1,825. The impact of core pricing gains and liquidated damages was partially offset by the unfavorable mix impact related to growth in intermodal versus the decline in coal. Finally, core pricing on a same-store sales basis remains solid across nearly all markets. Recall the same-store sales are defined as shipments with the same customer, commodity, and car type, and the same origin and destination. These shipments represented 78% of CSX’s traffic base for the quarter. On this basis, all-in core pricing was 1% in the quarter, down from 1.5% in the same quarter last year, reflecting continued rate pressure in the export coal market and more modest increases in domestic coal pricing. Since we have now greater variability in both our export and domestic coal business, reflecting global market conditions and our fixed to variable contract structure, and since our merchandise and intermodal markets are becoming a larger portion of our business, we have also provided you with the same-store sales pricing for these markets on a combined basis. At the bottom of this panel,…

Well, thank you Mr. Gooden, and good morning to everyone. Allow me to be brief, since I’m happy to once again report that CSX continues to demonstrate excellence in what have been our key focus areas over the last few years: safety, customer service, and efficiency. On the chart, I’ll begin with the safety column on the left. The personal injury rate was essentially unchanged from the prior year, and the train accident rate improved 23% to 1.70. This reflects our continued commitment to keep our employees and the communities where we work safe. Moving to service, on time performance remains at record levels, reflecting the diligent efforts of our organization. Looking at the network, velocity has improved once again, and dwell is at an all-time low, which means that customers are receiving outstanding service while we continue to maximize our assets. Moving to the far right, and as a result of all these efforts, we still expect to deliver over $150 million of efficiency savings this year. Let’s talk about resource management on the next slide. The company’s improvement in operating efficiency complements the great service CSX is providing to its customers. Carloads and gross ton miles were up about 3% in the third quarter, and we absorbed this additional workload with fewer resources on a year over year basis. As you move down the chart, you can see road crew starts were nearly 3% lower as volume growth was largely incorporated onto existing trains. Additionally, the active locomotive count was 3% lower than last year, and total operations employment was down 4% in the quarter. This demonstrates our ongoing commitment to adjust resource levels to operate reliably and efficiently. Now, if I could, let me discuss one of our productivity initiatives in a bit more detail, on the…

Thank you, Oscar, and good morning everyone. Starting to the left of the slide, revenue increased $105 million in the third quarter to $3 billion as gains in merchandise and intermodal continue to offset declines in coal. At the same time, other revenue, which included $51 million of liquidated damages in the quarter, or $38 million year over year, also contributed to the improvement. Moving to the right, relative to the third quarter of 2012, operating income was flat at $854 million. Here, higher revenue and productivity gains were offset by the cycling of last year’s SunRail gain, as well as higher incentive compensation, inflation, and volume related costs. As a result, the company’s operating ratio increased 100 basis points to 71.5%. Overall, EPS increased to $0.46 per share, up 5% versus last year, reflecting growth in net earnings and the impact of share repurchases. As we turn to the next slide, let’s briefly discuss how fuel lag impacted the quarter. On a year over year basis, the fact of the lag in our fuel surcharge program was $10 million favorable. This reflects $6 million of negative in quarter lag during the third quarter of 2013 versus $16 million of negative in quarter lag for the same period last year. Based on the current forward curve, we would expect the year over year fuel lag impact to be slightly unfavorable in the fourth quarter. Turning to the next slide, let’s review our expenses. Overall expenses increased 5% in the quarter. I’ll talk about the top three expense items in more detail on the next slide, but let me briefly speak to the bottom two on this chart. Depreciation was up 3% to $277 million, due to the increase in the net asset base. And equipment rent was down 2% to…

Well, thank you, Fredrik. Since the beginning of 2012, the CSX team has successfully overcome almost $750 million of a coal revenue loss due to the transition taking place in the energy markets. As you heard this morning, we expect that this transition will continue into next year. As it does, our focus will be the same. First, relentlessly pursuing safety, customer service, and efficiency, the things that we control the most. Our culture and systems are built for this, and it has seen us through many ups and downs in the marketplace. Second, continue to pursue opportunities in our growing merchandise and intermodal businesses. That growth is already happening as the economy continues its slow recovery. Third, continue to invest in the most promising long term growth opportunities we see, especially in our intermodal business, where we are finding that the marketplace is very receptive to our enhanced capabilities. Our third quarter results show the resiliency of this team and its ability to work through transitions while also managing to grow volumes in most of the product markets we serve. Once the transition in the energy markets is complete, we believe that the investors will appreciate the new diversity and vibrancy of our product portfolio, especially when paired with an underlying business that is strong, highly focused, and able to capitalize on opportunities in the near and long term. This team’s energy and motivation is not only fueled by the market opportunities we see now in merchandise and intermodal, but also by the ongoing belief in the long term outlook for rail transportation as population and consumption increases, American manufacturing gains competitiveness, and the global trade requires the movement of products across this country in ways that are good for the economy and the environment. That’s what we do. With that, we’ll be pleased to take your questions.

[Operator instructions.] Our first question comes from Anthony Gallo with Wells Fargo

I’m wondering if there are other markets that may lend themselves to the type of pricing flexibility that you introduced into the export coal mass market. The one that comes to mind is crude, obviously, where you’ve got differentials that can play a role in volumes. So are there other markets that lend themselves to that flexibility?

We’ve looked at a couple of the markets, but we just haven’t seen one. And crude was one that we looked at early on, and we just did not see where we had any flexibility at all to price as we do in the coal market.

And I hope this is a related question. Does the change in your coal pricing influence how liquidated damages may or may not occur next year?

It does. On the fixed variable, there would be no liquidated damages. The fixed part almost in effect is replacing the liquidated damages. All the other contracts that are in coal that are not fixed variable you could assume would have liquidated damages applicable.

Our next question comes from Ken Hoexter with Bank of America Merrill Lynch.

I guess I’ll throw another one at Clarence. On coal, you noted export coal pricing could be down next year, or as you move into fourth quarter. Can you talk about the scale necessary? I guess if you look at API, at 81-82, is it still in the money for the producers? And what kind of scale do you have to take pricing down?

I think you’ll see, in the case of the export coal, just a slight downward movement in the rates for the thermal side of the business, in the coal, particularly with that API index starting with a 7, like a 7.9 or 8.0. It’s essentially to keep our producers in the marketplace during this downturn until it ticks back up. It would only be a very slight downward movement in our rates, and you’ll see the producers having to absorb a lot of that downturn in order for them to keep their mines in production.

And then related, I guess, on domestic coal volumes, you noted that was going to be down 5% to 10% throughout this year. Are there any thoughts initially on how you look at next year? Are the plants shut that need to be shut? Or do you still look at accelerating declines on the utility side?

I think for next year the plants that are down currently today that are both have been shuttered or that are being impacted by low natural gas prices will stay in that mode as long as gas prices are down. The major impact we’ll see next year will remain in our southern utilities, where stockpiles continue to be stubbornly high, and will probably remain that way, through the midyear or beyond.

Our next question is from Brandon Oglenski with Barclays Capital.

Fredrik, I wanted to come back to the 10% to 15% earnings CAGR you guys have for 2014 and 2015. It sounds like with the coal headwinds that Clarence was talking about, heading into next year, you could have maybe a little bit worse outcome than flat coal like you had been predicting before. But what are the assumptions you’re baking into 2015 that give you the confidence you’re still going to hit that CAGR in two years?

Well, as we’ve said, and I’ve said this now for a period of time, it’s become more challenging because of both what we’re seeing in the export market and the fact that the utility stockpile has not worked itself down as we had expected originally by the end of this year. The economy, though, continues to be strong, growing at a relatively slow pace, but it’s still moving forward, which is a good sign. And so what we’ve said, when we laid out the guidance, was that we expect coal to be flat. And as we look at 2014 to 2015, in order to get that, we’d like to get pretty close to that assumption. Clearly, with continued strong productivity gains, a little bit stronger pricing that we have, or the economy doing a little bit better than we think, we still think there’s a shot at getting to that 10% to 15% CAGR. But clearly it has to be not linear at this point, based on what we’re seeing in the coal markets today, which is why we think that 2015 has to probably be a little bit higher growth than what we’re going to expect in 2014.

Is that going to be growth in the merchandise segment? Or are you going to have a bigger ask on the productivity side as well?

I think as you’ve seen in the past year, one thing that you know when you lay out a plan, it really never comes to fruition exactly the way you had planned, so you’re going to have to be flexible and agile. And that’s exactly the way we execute. We focus on the things that we control, and productivity is one of the areas that we do have relatively good control, and if we also can get some help on the commercial side, both in price and additional volume, there’s still a path to get there.

Our next question is from Christian Wetherbee with Citi Research.

Maybe a question just on the utility coal contract side. I think you guys had mentioned in the past that about 20% of the book of business comes up for repricing. Clarence, maybe an update on what the uptake of the fixed and variable strategy that you’re taking has been. Or is it too early yet to determine that, because the contracts haven’t been settled?

It’s a little too early right now to determine that. As we told you in the past, the fixed variable contracts account for about 25% of our total domestic coal revenue. We’ve got about 20% of our utility contracts up for renewal this year. So depending on how that goes, by the end of the year we’ll have a better outlook on that.

And then just a follow up, as you think about the structure of maybe some of these contracts, historically we’ve tended to think about coal contracts on the longer term basis. Is it fair to assume that maybe these contracts will be of a shorter duration, as short as maybe a year? Do they get less than that? Do they get longer than that? Just kind of curious what your thoughts are there.

They tend to be longer than a year.

And the expectation would be as they renew they would still stay longer than a year?

Yes.

Our next question is from Allison Landry with Credit Suisse.

My first question was on intermodal pricing. It seems that the RPU was fairly solid, but if I think about the growth in domestic versus international, it seems that that would have a negative mix impact, which seems to imply that pricing was actually quite robust during the quarter. So I was wondering if you had any comments on that.

Pricing was strong for intermodal during the quarter, and it was on the domestic side, that is true.

And am I thinking about it correctly, that the domestic intermodal has a shorter length of hauls than what you’re moving internationally?

Not necessarily true. In fact, it could be just the exact opposite. It depends on whether or not the international traffic is originating on the West Coast and coming east to us, or originating in our East Coast ports and coming in. We’ll tend to have a longer length of haul on that traffic that we interchange from the western carriers than we do from the traffic that originates in the east. So it just depends on which direction it’s coming from and whether or not the private asset parts of it also would, on the domestic side, have a difference in the pricing.

And my follow up question, in the past you’ve talked about your coal sourcing moving more towards the Illinois Basin and interest from your southern utility base to start testing that and ultimately possibly burning that. How has this changed in light of the mild summer conditions and the lack of inventory drawdowns? Is this something that’s sort of off the table in the near term?

Our next question is from Justin Yagerman with Deutsche Bank.

Oscar, I think the question is for you. Your team’s done a pretty good job here of offsetting inflation, even with a difficult economy and mix. And what I’m kind of curious about is as we look out, if we’re looking at an environment where volumes are flat to down, can you do better than offsetting inflation, do you think? How much wood, basically is what I’m asking, is left to chop in productivity if we’re in this kind of muted growth environment?

I might quibble with the “pretty good” definition. I think we’ve done a great job for the team, but thanks. I think if I characterize your question as, can you continue to deliver productivity in sort of a softer environment, I think we’ve proved that we can. So the answer to that is yes. Is there more to be had? I think there is. There’s a lot of opportunity in our field. If you think of our local serving areas versus our main line road, there’s an opportunity there. Our assets still could use a lot more efficiency in how they’re utilized across our system. So we see lots of activity going forward. In fact, we just recently completed a review of, for instance our next year’s productivity savings, and I’m happy to say as well that we are very much in line with the long term guidance we’ve given at this early stage. So there’s a lot there to be had, and there’s a lot of detail behind it, so I think we’re going to talk here in November at one of the analyst conferences, and I think I’ll be outlining some of the more specifics in that area to give you more confidence in our ability to continue to do that.

And my follow up is I guess at least somewhat related. When I think about the growth in intermodal as a piece of the overall franchise, a question I get a lot from clients is how does core intermodal profitability compare to the rest of the total business. And obviously we know the RPU is lower, so it takes more volume to kind of create that overall revenue effect. And it would seem obvious that the incrementals are quite good. But if you could give us a quantification, especially now that you’ve got more of your network double stacked, of how you feel about core intermodal profitability as it relates to the total business, I think it would give us a good idea of how to think about profitability for the total business given how much growth has taken place here.

You answered your own question there, because if you think about what’s occurred over the last couple of years, with the double stack clearances that we’ve done, and the fact that we are continuing to make sure, as Clarence alluded to before, have solid pricing gains in that market as well, coupled with the train density that we’ve been able to build up over the last few years, the investments we’ve made there, we think that our profitability not just on the incremental basis, but on the average long term economic basis is very attractive and at par with the rest of our merchandise business, with maybe one or two exceptions. So we feel very good about our ability to not only grow that business going forward, but also make a significant amount of money on it going forward.

Our next question is from Thomas Kim with Goldman Sachs.

Just wanted to follow up with regard to the question on the 10-15% CAGR target. Could you perhaps provide a little more color in terms of the breakdown of that? What percentage do you anticipate being driven by the ongoing core pricing gains versus improvements in productivity?

One of the things we’ve said, in the previous seven or eight years or so, it’s been driven a fair amount by a lot of legacy pricing and clearly productivity as well. As we now look to the next few years, our view is that it’s going to be a little bit more balanced between all three levers. So, productivity, price, and volume. And that’s really how we’re thinking about it going forward. And clearly because some of the challenges we see on the coal side, we do expect the rest of the business to remain pretty robust during this period of time, because of some of the initiatives we have in place.

And if I could just ask a follow up question with regard to pricing, we’ve noticed in the latest quarter Q some of the companies, in particular some of the brokerages, are starting to face a little bit of pressure with regard to the pricing environment coming from shippers showing reluctance to pay higher freight rates. And I’m just wondering to what extent are you beginning to see any concerns with your ability to raise pricing, and particularly, let’s say, in the intermodal side, where there are ongoing pressures within the retail environment, with their own ambitions to be pushing up their margins by cutting costs.

We think we offer a good product, a good value. We think our fundamental economics are good. We think that the environmental aspects of the product that we offer are pretty good. As always, you get pushback from many of your client base on price increases, but we’ve been able to get those increases in the marketplace. And as you can see, in the same-store sales results that we had today, we had a 3% year over year improvement in our same-store sales pricing. And that compares with last year on the same comparison basis of 3.3%. Most of the difference there has been the difference in what the escalators were for inflation. So we feel pretty solid about being able to get above the inflation pricing going forward here in the next quarters, as we move forward.

Our next question comes from Tom Wadewitz with JPMorgan.

I guess there have been a surprising lack of questions on export coal today, so I wouldn’t want you guys to miss out on the export coal comments. You gave some thoughts on 2014, that export coal would be a source of a little bit of pressure. I’m wondering, is that on the thermal side? And is there some impact from multiyear contracts expiring where maybe some coal that wouldn’t be economic in the current environment being taken by European utilities? So maybe just how you look at the multiyear contract impact, and where you would think thermal exports may look in 2014.

The multiyear contracts are pretty much phased out. And that was mainly driven by the forward curve of the API2, because it continued, as you’re aware, to drop precipitously over the last year. And so the ability to sell forward for most of our producers and our coal traders just simply hasn’t been there. So we expect some pretty strong headwinds until that API2 thermal index picks up in Europe for 2014. So it’s going to be a tough year in that thermal environment for 2014. Does that answer your question?

Somewhere in that area where you’re describing now is about the low end of the economic level.

The level in third quarter is the low end? Or is it somewhere between 4 million and zero?

The level in the third quarter is the low end of the economic level.

And I guess if I can get kind of a second topic in quick, Oscar, obviously you’re doing a great job on productivity. The performance is strong there. Can you give a quick insight on your train length in merchandise and intermodal? You said there’s productivity there. And what that looks like relative to what capacity would be?

We’ve got, as you can imagine, plenty of capacity, probably 20-25% in some of those markets. And again, we’re waiting for the volume to come back to fill those. The train side is actually increasing a little bit, but be careful with that, because higher capacity cars, intermodal double stacking, all of that’s affecting those lengths. So mix does affect that a little bit. But overall, on both merchandise and across our system, all train lengths have improved quarter over quarter.

Our next question is from Bill Greene of Morgan Stanley.

I don’t know who I should address this to, so we’ll say Clarence or Michael. In the press release, and even in the slides, you don’t reference as much as you have in the past competitive losses. And I’m curious if that is a reflection of lapping some of those losses, or does it feel like the dynamics in the market are sort of improving from a competitive standpoint?

I think the main reason is we’ve lapped most of the ones that we’ve already had. We had earlier the automotive loss that you saw in there, and we had the port shift, which really wasn’t a competitive loss. Business has just shifted ports. We have a lot of puts and takes here all the time. We lose some business, we gain some business, and so that’s what you’re seeing a reflection of.

Okay, so there’s not sort of any real change in the competitive dynamic from your perspective?

Right.

And then secondly, Clarence, when you look at the growth rate you’ve just delivered on domestic intermodal, how much of that would you attribute to these new hours of service rules? Could folks even move their business yet to a rail? Or does that take a little bit longer?

Bill, I’ve got to tell you, I think what I’ve seen, and what our intermodal people have seen, is that the hours of service law has really had negligible impact on the trucking industry. What it has in effect done is put more regulation, and has made it more expensive and more difficult for the truckers to do business with, which is another dynamic that is making intermodal a better product for the customer to use. I would attribute more of our growth success to the fact that we put a lot of emphasis on organic growth and we had a specific program launch, and put a specific sales force behind a program that we call highway to rail conversions. So we’ve been very successful in that program this year, and going out to the beneficial cargo owners, along with our channel of sales partners and introducing to people who are not traditional users of the intermodal product, or were fairly light users of the intermodal product, what intermodal is, what its capabilities are, and what the service product that our operating team is delivering for us, those combinations together have proved to be very successful for us.

Yeah, it’s very impressive. Would you favor growth or price going forward on intermodal? Because 9% is a lot of growth.

Yes. I would favor both. [laughter]

Our next question is from Jeff Kauffman with Buckingham Research.

Clarence, I want to ask a little bit more on coal and export pricing. If I just do the math on the revenue ton miles and tons, it looks like length of haul in coal was probably up about 3%. So all things being equal, you’d think revenue per car would end up being up something similar, but it was down almost 2%. So you’ve got a 500 basis point differential. How much of that can be explained by mix versus, say, pricing of international shipments, versus what’s going on domestically?

I would say there are two major factors that occurred there. One was what we had described both last quarter and this quarter, and that’s the fixed variable component that’s in the domestic part of our coal, and a principal driver, then, would be the rates and the export coal.

But wasn’t the domestic variable component net positive to yields?

No. It was not.

Our next question is from Scott Group with Wolfe Research.

Clarence, just one more on export coal. Can you give us a sense, how much business at this point is on contract, or contracted for 2014? And do you think that’s a meaningful number, or at this point of the year do you just not have a lot on contract yet for the next year?

It’s not a meaningful number, and at this point, we don’t have much under contract for next year. And with everybody playing coy right now, it’s going to be difficult for us to know that number really right up until the end of the year.

So it’s tough at this point to give kind of any kind of rough forecast for millions of tons of coal for export this year.

It is.

And the second question, the new breakout of merchandise and intermodal pricing, that’s very helpful. Can you just give us some historical context here? That 3% and 3.3% you got last year, how would that compare with four or five years ago? Are we seeing better pricing there now, because the service is getting better? Or is that the pricing is getting a little bit tougher there, just because it’s kind of later in the pricing story and you had some legacy in merchandise and intermodal as well? Just on the historical context on that 3% would be helpful.

And maybe I’ll take this one, just having looked at it not that long ago. Clearly, as I said earlier in my remarks, pricing going forward is not going to be as big of a portion as it’s been over the last decade or so, because of legacy pricing, merchandise adjustment. Some of the other markets were probably higher back then. But at the run rate that we’ve seen here this year, and what we saw last year, was really impacted predominantly by what Clarence outlined before, the change in the escalators in our contract, as they’ve come down, as rail inflation has come down. But I would say the last few years have been pretty stable in those markets.

Our next question is from Jason Seidl with Cowen & Company. Jason Seidl - Cowen & Company: A couple of questions here. One, I guess I’ll talk a little bit about the intermodal side. When you look at the trucking market, and you look at your success in the pricing market, is there any concern that you might drive some business back to the highway? Because clearly what we’ve seen on the truckload side is their lack of ability to raise pricing.

We don’t have that concern right now. No, it hasn’t come up. In fact, it’s just the opposite. Number one, we expect to continue this growth, and I hope you picked up in our prepared remarks that we’ll be cycling Hurricane Sandy in the fourth quarter. So we expect to continue to see good growth throughout this year. Jason Seidl - Cowen & Company : And let me switch a little bit to the crude markets. If we look at everything combined, you know, we’ve seen obviously frack looking a little bit better as operators are looking to pump more sand per lateral foot. If you add up your crude business, your fracks, your tubulars, your pipe, what percent of the overall business are those things combined now?

I don’t have that number in front of me, but it’s a relatively small number compared to our overall business.

Our next question comes from Ben Hartford with Robert W. Baird.

Clarence or Oscar, I’m looking for some context in terms of what the differential between a like-for-like domestic intermodal move is relative to truck. I assume it’s still at a discount, but I also understand that the difference has narrowed from that 10% to 15% discount that we had experienced over the past several years. Could you provide what it would be today, the discount, domestic intermodal relative to truck?

Well, it depends on, I guess, whether you’re dealing in transcon or in eastern move. But typically in an eastern move you might see that number somewhere between 5% and 10%. Transcon, you may see that number around 10%.

And then how should we think about it over the next three to five years? You guys want to continue to grow volume and raise rates, and raise rates above the cost of rail in inflation, obviously with some of the pressures that we’re seeing in the truck market. Should we expect that differential to continue to narrow? Or are there opportunities from a productivity standpoint that allow you to keep a 5% to 10% discount and continue to take share? How should we think about that balance over the next period of years?

I would think of it two ways. Number one, a truck is always going to be a more direct form of transportation, a higher premium, than it is going to be in intermodal moves, simply by the sheer nature and design of the vehicle itself and what you’re doing. What we’re trying to do is stay focused on the bottom line contribution and the profitability of that move. So we’ll probably, for the foreseeable future, carry a discount against the the truck itself. But our focus is going to be on improving the contribution to the bottom line of that intermodal move.

Our next question is from David Vernon of Bernstein.

Oscar, a quick question for you. On the GTMs per road crew start metric that you provided, what percentage of the labor costs would that productivity metric apply to? Obviously you guys are doing a lot to drive more efficiency on the road crews. What I’m trying to get a sense for is what weighting that would have on the total labor cost in the P&L.

Oh, golly. I don’t have that number in front of me. Labor is our biggest line item, and of course operations is the biggest. So probably a third maybe?

And then Fredrik, with the commentary on pricing may be getting a little bit weaker than it has been in the last decade, does that start to change the way you think about capex a little bit going forward?

No, I think that, once again, the focus from our perspective has always been the bottom line. And we’re going to continue to push inflation plus pricing. Nothing has really changed there. But we do think, and we’re seeing now, there’s an opportunity to grow volume in a more meaningful way than we have over the last decade. And as we grow volume, there’s going to continue to be a need to reinvest in our business and expand facilities. So the guidance we have out there of 16% to 17% of core capital as a percentage of revenue, we still think that’s the right place to be.

Okay, but am I hearing you correctly in the sort of a little bit less pricing than maybe we saw over the last decade?

No, nothing has really changed. What we’re saying is we had a lot of legacy pricing that we had opportunities to reprice early on in this kind of rail [Renaissance] cycle. And over the last few years there hasn’t been a lot of legacy pricing opportunities anymore, so we’ve continued to push inflation plus pricing, just not at the same degree as we’ve seen before. Nothing there is changing going forward from what we’ve seen in the last few years.

Our next question is from John Larkin with Stifel Nicolaus.

I wanted to dig a little bit into the terrific growth you’ve had on domestic intermodal. Could you break that down between local east and transcon? Is the local east really driving that, or are you still seeing a growth with connecting traffic from the west?

I don’t have that number in front of me, and I’m doing this strictly from memory, so I’ll be directionally correct. I’m doing it from memory of the last review I had with our intermodal people. But the growth will tend to have been more in the east than in the transcon.

And your sense is that that growth has many years ahead of it in terms of capturing share from the highway, even though the price discount is only 5% to 10%? I guess that 5% to 10% discount does not include the differential in fuel surcharge, is that right?

That’s right, and we just had a study updated this past quarter that we had done last year, as a matter of fact, and we’ve got 9 million addressable loads in the east, over 550 miles, that we still haven’t touched as an industry, that could possibly be converted to intermodal.

Our next question is from Matthew Troy with Susquehanna International.

Michael, a question for you if I could. It seems if I look at the long term spectrum the last 10 years, next 10 years, the railroads have kind of subtly shifted from, let’s call it, victor to victim in coal. Yet you accomplish a lot in terms of U.S. infrastructure. I’m just wondering, the dialog in Washington for the last several years has been focused around reregulatory risk. I’d love to hear your thoughts about one, your dialog in Washington now about what the railroads provide and how they seem to be somewhat collateral damage of the current administration’s war on coal, but more importantly how you and the other railroads may be posturing in Washington to demonstrate what you do provide, both from an infrastructure perspective and a reinvestment perspective, on a long term basis.

Well, when we visit with the legislators, the one thing that they really do appreciate is the private capital we bring to the infrastructure of the United States. Clearly, we have huge challenges with our infrastructure, and quite frankly all the rails have been investing 16-17%. They’ve realized that’s valuable, helps relieve highway congestion and some of the burden there. So they’re very supportive of the fact that we’re making more. And I think the fact that we’re making more but investing more is an equation that for them makes really good sense. On the issue of coal, clearly we knew that there was going to be some issues come 2015. Natural gas obviously accelerated that with the low prices. And one thing I read in the Journal today, though, that you might find of interest, the Supreme Court has agreed to take up the issue of EPA expanding the SO2 from mobile sources to stationary sources, which I think could be a very interesting twist. Because quite frankly, the law doesn’t allow them to do the stationary sources in the manner that they are doing so. So we’re really pleased that the Supreme Court has taken that up. But clearly, this administration doesn’t favor the use of coal. I think personally that we’re going to find it’s going to be part of the mix longer term. If you look at the nuclear plants that are being built, they’re already being delayed into late in this decade, maybe even next decade. So I think over time - and this is my own personal view - we’ll find coal will once again have a role. But it’s going to be a tough few years here with this administration’s war on coal.

And I appreciate that. My follow up would be then to either you or to Clarence. You obviously have the 2015 regulations. To what extent have you modeled out, or can you help us just understand, what your current haulage base, or tonnage base, what those regulations may mean in terms of some of the utility closures, and what that might mean from a tonnage or carload perspective when they go into effect.

Well, we’ve looked at what is in place now up to 2015, and there probably won’t be much impact to us, because the plants that would be impacted have already been impacted, either by shutting down or by the impact of natural gas itself. Now, the proposed EPA requirements that may or may not go into effect for the existing power plants, we haven’t really taken a look at that, because as you’re probably aware better than I am, that will be litigated before any impact of that occurs.

But I don’t think they’re even going to propose rules on existing [unintelligible] until the middle of ’14, and putting them in place in the middle of ’15. So it’s certainly far out, and we don’t even know whether they’re planning on that.

Our next question is from Walter Spracklin with RBC.

I just wanted to cover a little bit on the guidance, so perhaps for you, Fredrik. When I look at what your 10% to 15% encompasses, I guess it’s off the $1.79 as a starting point, or it could be off 2013. You can clarify. But essentially what I’ve seen in 2013 is a fair degree of kind of SunRail gains, tax benefits, liquidated damages, which you add up, it probably equates to anywhere from kind of a $0.06 to $0.09 lift on your earnings this year. I’m curious just to see how you kind of make up for that next year. In other words, what I was hearing was that we’re not going to see anywhere near the same benefit from those kind of more lumpy or one-time items. So I guess you’re indicating you’ll be able to make up for that and still achieve, over the course of two years, CAGR of 10% to 15%. So without ramping significantly other items to get to that, I guess where I’m going is to offset that $0.06 to $0.09, I’d have to ramp quite significantly your pricing or volume or your expense savings to get to a 10% to 15% CAGR. And perhaps you could give me a little bit of sense where perhaps my math is wrong, or my starting points, or there’s something I might be missing on our assumptions going forward.

First of all, it is off the 2013 base, and not the 2012 base. And it is a two-year CAGR. And you’re absolutely right that because of the fact that we have received some additional one-time benefits that perhaps we did not anticipate originally, we have made the two-year CAGR a little bit more difficult as the base for this year has come up. But that is incorporated into our statement around the fact that it’s become more challenging. And so once again, as we look to the next two years, it is a two-year CAGR. It is going to mean that at some point, in order to get there, coal is going to have to come back. And as we have outlined, we think that’s going to be more in 2015 versus 2014. And so overall, I would say that those two assumptions, the economy is going to be growing, albeit at a slow pace, is still something we feel good about, but the coal assumption obviously is still challenging.

So to paraphrase, you need coal to come back to hit those targets in 2015?

I think right now we’ve said that in ’15 we need some help on coal again. It doesn’t mean that we need it all the way back, because in any plan you also have opportunities to do better in other areas of your business, including pricing, productivity, the economy coming back a little bit faster than we would have expected. But clearly some help on the coal side from where currently seeing it is probably something that is required.

Second question is on pricing. When I consider your inflation plus objective, and perhaps [unintelligible], we’ve seen that kind of core 3% ex coal coming in, albeit ticking down, as you mentioned, due to increased flexibility or legacy contracts or what have you, when I look out at next year, and we lapped enough of the coal contracts, which are bringing overall core pricing down to the 1% level, such that we can go back to some normal run rate of inflation plus for next year. Or do we still see some negative impact from lapping perhaps early year coal contracts that is still going to run us below that inflation plus pricing overall for next year?

Well, I think that the additional rate adjustments that we made here in the third quarter to keep the use producers in business and us maximizing the value of our export portfolio is going to be with us into 2014 and well into 2014. And obviously we also will see what the fixed variable contracts will do also. If, for example, the domestic business picks up a little bit, you will see some impact on that all in pricing number as well that will be negative. So that’s what we’ve broken out here, the merchandise intermodal business, because that’s the truest indication of what same-store pricing will do. And that’s what we’re focused on right now to keep that above rail inflation.

Our next question is from Justin Long with Stephens.

You referenced some of the excess capacity you have in the network earlier, and I would imagine, if you continue to rebuild density in the non-coal businesses, these volumes are coming back at pretty favorable incremental margins. I also know that’s getting masked by what’s happening in the coal business. So I was wondering if you could give any insight into what non-coal incremental margins look like today, and also how we should think about that metric as we go forward.

Well, we’ve said this repeatedly. Obviously incremental margins, as you add volume onto an existing train network, is very attractive. And as we continue to grow that business - we grew 5% here in the non-coal business in the third quarter - you will have some train starts. So it’s not like a step function change. You will have some train start increases. But clearly the incremental margin is very attractive. But we do look at everything from a long term economic perspective. That’s how we measure profitability. That’s how we look at things over a longer period of time. But one of the reasons why we’ve been able to hold up as well as we have with this significant change in our coal business is because of the fact that the incremental margin in the intermodal network, and in our merchandise business, is very attractive.

And as a follow up, as I think about capex for the next year or so, I was wondering if you could comment on your railcar equipment needs, and any areas that might be pressing in terms of either replacement or growth.

I think we are comfortable with, as I said earlier, the 16% to 17% of revenue. We have long term plans that we’re executing against. We are in a good place in terms of our railcars reinvestment cycle. We will bring some additional locomotives on next year, probably not so many in 2015. But we do also have some assets stored, so we feel we’re in a good place with equipment, even if the economy comes back a little bit faster than we might current be expecting.

Our next question is from Donald Broughton with Avondale Partners.

Most of the good questions have been taken, so I’ll ask something rather esoteric. I was looking at a difference in complexion in your operating statistics, and we continue to see train speeds improve, dwell times come down. Obviously all good performance metrics, for which you’re to be applauded. But there’s some disparities when I look at some of the different terminals. Some of the terminals have been rather static in their dwell times, and others have had remarkable improvements, example being Louisville. Did you get a different yard master? Did you change technology? Or is there a change in mix? What’s driving the disparities in the change in dwell time between the different terminals?

I think there’s a degree of movement and mix, and so something like a Louisville has got a lot of the auto business going through it. And so as I mentioned before, we have an operational design team that’s constantly looking at it. And in fact, we’re in the process of making some investments with another railroad, the LIRC, to actually understand the choke points we have interest in that area, and be able to relieve them. And so it is purely a function of, as our train movements go from place to place, we’ll always have these little choke points, how you react and recover from them is the critical area. And for that particular place in Louisville for instance, we have a very specific solution for it. But thanks for noticing.

Our final question will come from Keith Schoonmaker with Morningstar.

A question for Oscar, probably. Oscar, the 6% gain in GTM per road crew seems like a pretty large increment. You had mentioned greater double stacking and slightly longer trains, but does this improvement stem mostly from a mix that might be richer in longer hauls, or were there some other levers that you pulled to accomplish this?

It’s a combination. So certainly longer hauls are part of the mix. There’s a lot of difficult planning and work, and a lot of technology that’s been involved recently. We have items like trip optimizer, dynamic train planning, and a host of other areas that actually affect that. And at the end of the day, the operating train plan is the one that has to be developed efficiently to get those things. So it’s not just about a longer haul movement.

And Oscar, was this a step change unique to this period? Or do you think this sort of gain, maybe not in this great an increment, but is this going to be more routine?

You know, like everything else, as the team continues to work and collaborate closely, and as well the use of all these tools, it’s a nice slow and gradual ramp up. And we hit our mark very nicely this quarter.

Well, thank you everyone for your attention and your interest, and we’ll see you again next quarter.