Good afternoon. My name is Emma and I will be your conference Operator today. At this time, I would like to welcome everyone to the Q3 2021 CSX Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-answer session. [Operator Instructions]. Thank you. Bill Slater, Head of Investor Relations. You may begin your conference.

Thank you. And good afternoon, everyone. Joining me on today's call are James Foote, President and Chief Executive Officer. Kevin Boone, Executive Vice President of Sales and Marketing. Jamie Boychuk, Executive Vice President of Operations, and Sean Pelkey, Acting Chief Financial Officer. On slide two is our forward-looking disclosure. Followed by our non-GAAP disclosure on Slide three. With that, it's my pleasure to introduce President and Chief Executive Officer James Foote.

Right. Thanks, Bill. And thank you to all who are joining us today for the call. I want to begin by thanking all of CSX 's employees for their extraordinary efforts to help our customers navigate the strained global supply chain. Across virtually every industry, there are challenges presented by extended lead times, port congestion, shortages of labor and key materials, and lack of storage capacity. While the current operating environment is challenging, we are not sitting idle. We are designing new solutions to help reduce congestion, adding container yards and drayage to keep intermodal terminals fluid. And we're investing in both people and network capacity to ensure CSX is able to reliably meet customer needs today and for years to come. In a few minutes, Kevin will go through the revenue numbers and discuss some of the steps we are taking to provide new service offerings to our customers, to help them overcome these challenges. And Jamie will provide an update of our hiring initiatives, as well as actions we are taking to keep our network fluid. So, let's first turn to the presentation and begin on slide 4 with an overview of our third quarter results. Operating income increased 26% to $1.44 billion. Earnings per share increased 34% to $0.43. And the operating ratio improved by 50 basis points to 56.4. These figures include the results of quality carriers which did not have a significant income -- impact on operating income. But increased third quarter operating ratio by approximately 250 basis points, excluding transaction and integration expenses. I'll now take it over to Kevin.

Thank you, Jim. Turning to Slide 5, third-quarter revenue increased 24% year-over-year, with growth across all major lines of business. Inclusion of quality carriers, revenue represented roughly 8% points of the total increase. Supply chain challenges, including a lack of labor and equipment continued to impact almost every market we serve, driving volatility and freight flows and uneven volumes. Merchandise revenue increased 6% on 2% lower volumes as higher revenue across all other markets was offset by declines in auto, driven by the ongoing semiconductor shortages. The industrial and construction related markets, such as metals and equipment or its products and minerals, all showed strong year-over-year volume growth. In addition, our core chemicals business grow, but was partially offset by declines in crude oil and other energy-related markets. Inter-modal revenue increased 14% on 4% higher volumes. Due to increased international shipments as a result of strong demand. Inventory replenishment, and growth in rail volumes from east coast ports. The domestic side was more challenged as multiple supply-side constraints, including container and chassis shortages, have resulted in the inability to meet the strong demand. Coal revenue increased 39% on 16% higher volumes, with growth across all end markets. Domestic coal benefited from higher utility and industrial demand, and export coal revenue increased from the combination of higher demand and higher export benchmark prices. Other revenue increased primarily due to higher intermodal storage and equipment usage due to the broader supply chain disruptions from truck driver shortages, chassis availability, and the lack of warehouse capacity. Turning to Slide 6. This is an extraordinary time as customers and global supply chain face challenges we have never experienced before. On trucks to chassis, supports to containers, lack of truck drivers, to labor challenges at the warehouse, and production facilities. We are seeing shortages everywhere.…

Thank you, Kevin. As noted, our teams are working closely together to find new ways to overcome the supply chain disruptions, and provide new solutions for our customers. In addition to the ongoing supply challenges, this past quarter was further impacted by a rising COVID mark cost due to the Delta variant. At peak, we had several hundred employees marked off, including regional concentrations that required us to adjust our network plan in real-time to get customers their freight. Despite these challenges, we are able to maintain network performance compared to the prior quarter. And we expect the initiatives we have underway to drive them... fluid going forward, Kevin touched on many of the things we're doing to help reduce congestion at the ports and keep containers moving. And I want to thank my inter modal team for the exceptional work they're doing to accomplish these goals. These efforts are highlighted by the nearly 90% inter modal trip line compliance. They continue to deliver in a challenging environment. We entered the year focused on hiring. The people required to respond to the rising demand. And I'm proud of how our team has been able to think creatively and act decisively to overcome the challenges presented by the tight labor market. Over the course of the year we have redesigned our recruiting process to eliminate unnecessary steps and significantly shorten the time from application to offer. We have also implemented new recruiting tools and referral programs that are improving our application through different conversation rates and better at identifying highly qualified candidates. These efforts have successfully increased the size and frequency of our conductor classes and provided strong ongoing higher visibility by expanding our new higher pipeline, almost 300% since July. We are also increasing intermodal headcount and supplemental labor to…

Thank you, Jamie. And good afternoon. Looking at the income statement on Slide 9, operating income grew nearly $300 million or 26%. Revenue was up 24%, reflecting gains across all major markets, higher fuel prices, and the impact of quality carriers. The operating ratio of 56.4% is a third quarter record for CSX. As we focus on operating efficiently and growing the business. As a reminder, this includes an impact of approximately 250 basis points from the ongoing operations of quality. Looking below the line, interest and other expense was 16 million favorable to last year due to a lower weighted average coupon, and lower average debt balances, as well as favorable pension impacts. An income tax expense was up on higher pre -tax earnings. The effective tax rate for the quarter was 24.3%. Looking at expenses in more detail on the next slide, Total cost increased $349 million or 23% in the quarter. Including transaction-related expenses, approximately 200 million of the increase was driven by quality carriers. Higher locomotive fuel prices were also a significant factor, up about 90 million versus last year. Partially offsetting these items, real estate gains were 56 million higher. Non-fuel inflation remains steady versus last quarter at around 3%. As I mentioned last time, we have some lagging contracts that may drive higher inflation going into next year. As Jamie discussed, we continue to focus on hiring and retaining train and engine employees. While head count was roughly flat sequentially, excluding the addition of quality carriers. The conductor count was up and was offset by reductions in other areas of the business. As a result, we experienced $16 million more in hiring and retention costs versus last year. You'll note that we have renamed the prior MS&O line to purchase services and other. The…

Great. Thank you, Sean. Concluding with Slide 12, we are maintaining a full-year outlook for double-digit revenue growth before the impact from quality carriers. We expect capital expenditures to be at the top end of our initial $1.7 to $1.8 billion range due to materials cost inflation, the capacity investments we just reviewed, and the inclusion of quality carrier’s capital spending. I will conclude my remarks the same way I began. We are committed to helping our customers overcome the current supply chain challenges. And as you heard today, our entire team is aligned around this goal. And we will continue to act. We have a strong hiring pipeline, and we will hire until we have staffed the network to match demand. We expect to higher above attrition throughout the rest of this year and into next year. Economic demand remains strong and CSX will help customers capture that demand. Everything we do begins with a commitment to providing customers a high-quality service. We will build on the positive momentum from actions taken to date. We will continue putting resources in place to drive growth, and we will provide customers with creative new offerings that makes CSX a more meaningful part of the customer supply chain. Thank you, Bill.

Thank you, Jim. In the interest of time, I would ask everyone to please limit themselves to one question. With that, we will now take questions.

[Operator Instructions]. We pause for a moment to compile the Q&A roster. Your first question comes from the line of Ken Hoexter. Your line is open.

Great. Good afternoon. Congrats on some really solid results in a tough environment. Great to see. Maybe just a follow-up. Either Jim or Sean, just talking about your thoughts on pricing. I know you were running through some of the categories there. Maybe how much you can still address and some of the opportunities to catch this rising market, and obviously coal up 20%, it seems like you're touching some of that maybe even faster than thought, or there's different kind of moves, maybe just delve into the pricing outlook. Thanks.

Thank you. And I'll take a shot at this, Kevin. I think it's clear that cost inflation over the last year, expectations have risen and our arising in the next year. And this is not surprising to our customers are facing the same cost inflation pressures that we see. and what we strive to do is be transparent around that in our conversations with customers. Fourth quarter and first quarter are heavy renewal periods for us, so we'll be having those discussions. But the exciting part though, as we get into a higher inflation environment, is really the value proposition we offer. When a customer is looking to offset some of that cost inflation, rail is just a great alternative. They shift more of their volumes over to rail. And then you add on top of that the persistent driver shortages that we're likely to see well into next year and probably the years ahead, the value proposition is there. Then on top of that, the environmental discussions that we're having increasingly with customers is really resonating with those. It's no surprise. Cost inflation is higher than what we saw last year. It will be a higher-cost inflation environment than what we probably seen in the last number of years. And we've got to have conversations with our customers around that.

I guess, just a follow-up. Any detailed thoughts on kind of the trend of pure pricing, pace of acceleration, or any level of that detail?

Well we get to touch, as I mentioned, contracts into the fourth and first 2 quarter, that's a heavy renewal period and we will continue to have those discussions. I think I will probably leave it at that.

All right. Thank you very much, guys.

Your next question comes from the line of Amit Mehrotra. Your line is unmuted.

Thank you, operator. Hi, everybody. Kevin, can you just update us on the quality carriers’ acquisition. The status of the revenue opportunity you're seeing converting some of those into chemical carloads. And just when we may see a more meaningful uplift, obviously that's a great offset to intermodal carloads [Indiscernible] growing just to [Indiscernible]it's a great idiosyncratic opportunity if you can just give us a little bit update there and then just any initial thoughts on margins or performance next year. Obviously, you've got a big pricing cycle ahead of you. Just any willingness to opine about. What the opportunities is from an OR perspective next year would be would be highly appreciated. Thanks.

Maybe I'll let Sean take the OR question, but I don't think we're giving guidance today on next year. But on the quality carriers, as you'll remember that, that really is focused on our chemical franchise and the customer reception has been overwhelmingly positive in a market where supply is constrained. Our customers were looking for more options to move their freight, and so Randy and his team combined with our Transflo team have found a number of options and we're moving freight today. Now that we're doing it in a way where it's thoughtful and calculated, and that the customer's seeing a good service on that product, and we'll continue to build momentum in the market. But I think everything that we thought before we made the acquisition is coming true. The only thing I will say is from a conquipment standpoint, obviously with things tight right now, the equipment backlog is going to take a little bit long in the next year to really ramp that up. When we think about some of the ISO tank solutions that we're contemplating out there. So other than that, everything is full speed ahead. I would say there's customers that we believe would be longer -- would take a lot longer to adopt, that have been first to adopt, which is exciting for us markets leaders in the industry, and their adoption I think is going to really set the tone for this to really take off into the market. The other thing that I think is positive is shows other partners that we have that we're capable of doing this using the Transflo solution in unique ways. And we don't always have to do it ourselves. We would love partners to continue to bring freight and through our all of our different capabilities that we have so I think that momentum is starting to be seen in the market as well.

Sean, do you want to talk about the [Indiscernible] -- Maybe you can offer guidance, but maybe another way to ask it is -- there's obviously a lag on this coal. Coal revenue are to opportunities. Just wondering, are we going to see more uplift in coal yields in the fourth quarter as you -- as some of that lag gets caught up? Just talk to us maybe about the cadence because you don't want to answer though our question next year.

Yeah, on the -- clearly on the export coal side, you've seen some favorability on the prices there. And as we've mentioned before, our prices tied to the benchmarks and you will see some favorability sequentially in the fourth quarter versus third quarter. It's a strong market. We continue to see favorability in the next year, how long it holds up at these levels that probably weren't held here. But these are extremely elevated levels that will probably carry into next year and hopefully create some favorability there. But it's a -- everybody is trying to produce more coal and we're trying to move more of it today. And at the mine, there's been some struggles here in the third quarter as you could see with some of the production hiccups that some of the producers have had. We're working through that as diligently as we can and really ramping up our ability to serve those customers.

Okay. Thank you very much, appreciate the time.

Your next question comes from the line of Tom Wadewitz. Your line is unmuted.

Good afternoon. I think this is probably for you Kevin, but maybe for others also. How do you think about the impact of capacity constraints on volumes? You think intermodal would have been meaningfully stronger, do you -- how much optimism do you have as you look forward that maybe into '22 that capacity constraints get alleviated quickly, and how does that inform your perspective on growth looking to next year? Is it reasonable to expect easing of constraints and a pretty good acceleration? I guess it's primarily around your remodel, but you may have capacity constrains other areas as well. Thank you.

Hey, Tom, it's Jim. Let me take a shot. I would say yeah, we're clearly constrained. There was more business out there this quarter, there has been more business out there throughout this year that we could not handle. The primary reason for that is our inability, like everyone else in the world right now, to ramp up our workforce coming out of the steep declines of the early phases of the pandemic. And as Jamie talked about, we're now starting to see the fruits of all of our hard work for the last 9 months or more, and are beginning to bring on more people and actually deploy those people into the field so we're able to operate a little bit better. And we fully expect that that trend will continue as we go forward, unless some other crazy curve ball gets thrown at us. And being a much, much better position as we exit this year and move into next year, and hopefully be able to take advantage of what seems to be a continuation of strong demand for transportation services into 2022, I know some people are even saying 2023.

Do you think a lot of that is in your control or is it hard to have visibility given the warehouse labor, drayage labor, other pieces?

My first -- the number 1 priority is getting enough CSX employees in the training -- principally conductors on the train so we can operate more fluidly and get back to some of the performance metrics that we were putting up pre -pandemic in the end of 2019 and beginning of 2020. The fluidity, the dwell, the on-time performance, the customer service metrics that we put out there, the trip plan compliance numbers, those numbers are all down, and that's principally a result of our having an extremely difficult time getting people to come to work for us. It's taken a complete I would say reengineering of the hiring process, a complete review of everything that we do when we onboard employees for us to get to this point. This is -- this has been extremely difficult we're no different than every -- every business at least in the U.S, every business I think. Every business, every hospital, every school, everybody is struggling with the same phenomenon of trying to get people to come to work. I am confident that we have done everything we can do right now and are seeing that numbers are increasing. In terms of the number of employees that we can put into our training programs and begin to qualify them to go to work. Like I said, unless something else comes along that disrupts that process, I hope we're going to be in a lot better shape at the end of this year, the beginning of next year than we have been over the last 9 months.

Great. Thanks for the insights, Jim.

Your next question comes from the line of Justin Long.

Thanks, and good afternoon. Sean, I think you called out a few sequential headwinds to OpEx in the fourth-quarter. I believe it was incentive comp, slower gains on sale, and then some peak season expense. Any way you can put a finer point around those 3 items to just help us understand the order of magnitude here in the next quarter?

Yeah. Thanks, Justin. You got the items right; higher incentive comp, lower gains on property sales, and then just some additional costs related to the supply chain. If you put all those together, you're probably looking at about a couple of pennies over and above what we would normally see from the third quarter to the fourth quarter.

Okay. Very helpful. And then any thoughts on other revenue as well? I know it was pretty elevated and took a decent step up here sequentially X quality, but the thoughts on that into the fourth quarter and maybe in the next year?

If you look just at the pure other revenue line, not considering the tracking revenue line which should -- tracking revenue should be pretty consistent quarter-to-quarter, really the big driver, as Kevin said there, is the intermodal storage and premise use charges as well as demurrage. And that's a direct result of what's going on in the supply chain that we've been talking about here. So as things start to improve, that line -- the other revenue line will come down. But here we sit in October, we're probably in about the same place as we are -- we were in Q3. And we'll see where it goes from here.

Okay. I appreciate the time. Thanks.

Your next question comes from the line of Scott Group. Your line is open.

Hey, thanks. Afternoon, guys. Just back on headcount. If you can get all the people that you'd like to get, I guess, 2 thoughts. One, how much -- it sounds like you want to be above attrition directionally. What kind of percentage increases in headcount are you thinking about, and is there a way to think about if you add back 5% to headcount, what do you think that means to volume growth and things like that? Do you still think you can grow volume in excess of headcount? Just to understand the spreads there, and thanks. Thank you.

Yes, Scott. So, what we're looking on a sequential basis is modest increases in headcount, right? We're bringing on -- trying to fill classes of 40 every week and then getting those folks trained up and out into the field. So, you're not going to see dramatic increases in headcount. I think it's also fair to assume that we've got capacity still on our existing trains and capacity on the network, so we are hiring for growth, but it's not -- it doesn't need to be one for one.

Okay. So, I didn't -- I probably didn't ask it so well, but do you think next year is a year where you could grow volume and excess of headcount?

I don't see any reason why that wouldn't be the target.

Okay. Thank you, guys. Appreciate it.

Thank you.

Your next question comes from the line of Brian Oglenski. Your line is open.

Hey guys, it's Brandon. I just want to ask a quick one about the fourth quarter cost commentary. I guess, I don't know if it was already asked, but does that mean that's going to be hard to show OR implemented in the near-term. Then I guess longer-term if I could sneak a two-part question. Kevin, what are some the structural things that you think you can leverage with the headcount, building off of Scott's question there?

Yeah. Just on the OR question, we -- we're not going to give OR guidance, but I think it's fair to assume sequentially, given some of the cost pressures as well as just the normal seasonality, we'll probably see an OR that's a little bit higher in the fourth quarter than the third quarter.

Brandon, I guess the question was, what can we do with more headcount? The team is going to --

Yeah, strategically.

Strategically, we're going to move a lot more freight. When we talk to customers right now, they 're are looking for capacity, and they're trying to offset a lot of cost inflation too. The environment couldn't be any better for us to go out and sell the product we have. So, we're going to move more freight and we're going to get more wallet share with the customer. It's a perfect environment for us.

All right, thanks, Kevin. Thanks, Sean.

Your next line comes from the question -- your next question comes from the line of Brian Ossenbeck. Your line is open.

Hi, thanks for taking the question. Jamie just wanted to ask if bigger picture question about just capacity and interplay with the regulators in DC. See what your peers put out there later this week and next week. But it looks like you have some obviously, a lot of capacity solutions here that you're ramping up on your own. Do you think you need additional help on that for some of your supply chain partners, and maybe some perspective on what you can do on your own versus where you need help with? And then just contrasting that with obviously the big other revenue you just mentioned, clearly the demurrage is a cost everybody at this point, but there have been some fairly pointed comments out of the STB about growing and focusing maybe less on OR than on growth. So maybe you can address all that in terms of adding capacity if need help. And what the regulators you think will take away from all this? Thank you.

I think Kevin did a very good job of outlining all of the activities that we've been undertaking here over the last 6 months or so to do on our own without any prodding to improve and increase capacity. We were way ahead of the curve. The -- Chicago, the biggest terminal for us in terms of intermodal capacity, expanding our 59th Street facility, we bought that property two years ago. We had it -- we had another yard right down the street, which was ready to go, cranes available. So, we've always tried to be somewhat visionary in trying to determine where the growth would be and make sure that we were properly positioned. Some of these new initiatives, like Kevin talked about moving traffic inland from Savannah into a facility in Atlanta, we had a yard available there, wasn't an intermodal yard, we created an intermodal yard. And so, we're taking the steps that we think are appropriate and necessary in order to make sure that our railroad continues to operate more fluid and provide better service all the time. That's always been the case, it will always be the case, and that's -- whether that's mainline track that moves merchandise, business, or whatever it is, we're always being thoughtful in our planning process to make sure that we have the capacity available to handle a traffic growth as it comes on. The lucky fact is that we over the last 4 years, by changing the methodologies we use to run the railroad, have freed up an enormous amount of capacity across the rail network, just simply by running the trains on a more reliable and efficient manner. And so, we don't need to make big, big, big investments in the railroad in order to handle future growth.…

Understood. Thanks, Jim, and if I could sneak one quick one in, all the stuff on Page 6, do you think that would be permanent going into the future of these things you had pulled forward from prior plans, or do you think this is more of a case of reacting to what we see here? Thank you.

I think we're -- what we're doing is we're responding the situation, that's simple as that. We can think, we can plan, we can do all kinds of things. Unfortunately, I think we've had more black swan events in the last 2 years than most people would experience in a lifetime. So, as I said, what's the next thing? I am -- I started off my remarks telling -- saying how proud I was of our employees. All of this going on, all of these challenges, all of these changes, all of these demands, all of these people saying first of all Jesus, you know, the entire supply chain issue was as a result of the railroads. Oh my God, the railroads screwed this thing up. Then as time went on, everybody figured out it's not really the railroads. We don't own the warehouses where this stuff goes, we don't have the trucks to bring it there. If I need to buy a truck and bring it there, I'll bring it there and I'll put the box in the warehouse parking lot, going to be somebody else's problem. But most of the issues associated with everything that is talked about, the railroads are doing an extremely good job. Their employees have been critical of workers throughout the entire pandemic have been out there working, and not been home in the basement, have been complying with all the requirements and making sure that the economy keeps growing. And so, the railroad guys, not just CSX, but could be entire railroad industry's been an up phenomenal job under unbelievably difficult circumstances.

Thank you, Jim. Appreciate it.

Our next question comes from the line of Chris Wetherbee. Your line is open.

Thanks, afternoon, guys. Jim, I think you mentioned on the call that the quality impact was more than 200 basis points on the operating ratio, and so I guess it sort of struck me that you guys are running sort of the core rail business at an operating ratio I really haven't seen before. And I guess in the context, and I understand the pricing environment, particularly on the assessorial side is certainly elevated, and that probably has some impact on how we should be thinking about operating ratio. But maybe big picture as we think forward. You are growing volume arguably better than your peers, pricing is going to be a cycle here for a period of time, and you're talking about bringing some folks back, but service is good. Can we talk a little bit about maybe we need to think about a new way to think about OR over the long run? I guess I just want to make sure I understand what this business is capable of in terms of incremental margins and the ability to take on some of these new freights and these new opportunities, what seems to be very, very good margins going forward.

Yup, you did the math, and yeah, that was excluding some of the transaction costs and some other things too. So, it's pretty simple math. Yeah, the railroad is running efficiently. When we stretch, as we've always said this a million, million times. This is not about all OR, this is not about how low can we go, how many heads can we take out. When we run the railroad good, when we stretch, like we're doing right now, and the reason we're stretching is because we're trying every single hour of every single day to move our customers' freight. And when you do that, and you've focused on getting it there as quickly as you can and efficiently as you can. It results in unfortunately not a perfect service product, but a very good service product in difficult times. You do it efficiently. And as a result of that, the score adds up that's says you got a low operating ratio, but that's not the goal that's just a result. And so yes, we run up a pretty good number. I would've preferred to do a lot more business as we said, we could have. And we try to do every single day, we try to move more freight. Kevin is out there right now, constantly trying to figure out how you can provide solutions to our customers. Our goal here is to move more freight. That's what we do. We move freight, and the more freight we move, the more revenue you pour in the top, the more efficiently you operate is simple is that, it's just math. So, think about what they -- think about, you want to worry about what the operating ratio was? Think about what the operating ratio could be for the railroad industry if they were able to grow more than it's historically grown. Then you can start talking about what the operating ratios might be, stop thinking about how much cost you can take out.

Okay. That's helpful color, thanks very much. Appreciate it.

Your next question comes from the line of Bascome Majors. Your line is open.

Yes. Thanks for taking my question. Jim, as you alluded to earlier, you've been talking about hiring to support growth since January. Certainly, doubled down that on that in July and it's been a big topic today. But at this point, it doesn't feel like our U.S. competitors are talking as much about labor and some of the challenges there that they're having as you are today. And maybe why that's a messaging difference rather than a fundamental difference. You've got a letter from the STB on Monday, about CSX service specifically. So, can you help us understand, is there something different with your situation with labor versus your other public peers in the U.S.? Is it the messaging difference, just anything to help us unscramble this would be helpful? Thank you.

Yeah well, I'm trying to unscramble it for myself, and I've said from the very beginning of this year, that we had a challenge in terms of hiring. We needed to hire, I thought we would be able to hire like we always had. We aren't able to hire like we always did, and we've said that now for 3 quarters. You have my metrics as reported to the STB in terms of all of the railroads, whether it'd be velocity, whether it'd be dwell, my service metrics are continuing to lead in most areas. So, the railroad here is still running better than most. During that period of time, where we were finding out that a lot of people wanted to make career choices and leave the Company that we hadn't expected, we were having the difficulties that everybody else was having during that period of time. We were the epicenter of the world in terms of the pandemic here in Jacksonville. So, I think we got probably hit during that period of time a little more severely the states of Florida, Georgia, Alabama, Louisiana, Tennessee, Mississippi have had a little rougher time, and I'm not calling out any reasons why that might be, that's just the facts. And so, while we have been saying publicly, we are hiring as fast, aggressively anyone right now that will want to come and work here during the midst of the worst of the pandemic in the world ongoing in our service territory. And yeah, guess what? I got a letter. Well, the STB takes in complaints from customers and they relay them to me. They will respond, they're just doing a job, we will respond. I found it a little unfortunate that under the circumstances of everything we're doing based upon what our overall service metrics show our performance to be based upon how the STB measures us in terms of how we operate, that we got the letter. But I'm a big boy, I've been around. We'll deal with it, we'll respond, we'll work with the regulator and our customers to try and address the -- any customer issues. The letter is posted. If you can figure out who the customer is that's having a problem from the letter, I don't know why they just don't call me. I tell every customer I meet, I give them my business card, I give them my cellphone number. I say if you've got an issue, give me a call. And Jamie Boychuk 's the same way. So, I wish they just call me if there is a challenge.

Thanks for the candid response, Jim.

Your next call comes from the line of Jon Chappell. Your line is open.

Good afternoon. We kept -- theme of the earnings season's been pricing power, and obviously there's things like accessorial that are helping intermodal, but your whole core business has been kind of reset a bit higher on the revenue per carload front. So, the question is, what's the stickiness of some of these pricing increases that have gone in, and where is the total portfolio set on a contractual basis as we think about maybe the ability to push pricing higher this quarter too?

Look, gotten a couple of pricing questions already, and I am going to stick to the scripts for the most part, it's a discussion we're having with our customers. We’re being transparent around the cost pressures that we face that we expect to cover those costs. We also want to talk about volume growth with our customers, wallet share, and all those other things. We do have parts of our business that you are well aware of, coal, which moves with the benchmark prices. we have seen some favorability there. We participate when our customers are participating at a good market. And obviously when those markets come down, we participate on the other side as well. Intermodal businesses, some other parts of our business are tied directly to inflation metrics, and those have moved up. And so, we'll see some favorability in those parts of our business that are tied to that end of season. Those will continue to probably flow through into the fourth quarter and in the next year. So, we'll have some momentum there. And then obviously, this is probably our expectations for inflation in the next year or higher than the previous year, last year. And so, we'll have those discussions and price -- price accordingly. I'll probably leave it at that.

Thanks, Kevin.

Your next question comes from the line of Jason Seidl. Your line is open.

Thank you, Operator. Afternoon, gentlemen, and congratulations on that impressive OR. I wanted to drill down a little bit on a comment you made about some on-shoring production due to supply chain issues. Is that a one-off customer? Is this a trend you're seeing? And then also, are you having customers coming to you telling you that they might change sort of how they run their inventories in the future?

Absolutely. There's -- I can think of multiple industries right now. And you've seen some announcements from some large producers out there that are making incremental investments and U.S. production. I think they're looking at the volatility and how much -- how costly it is to get freight from overseas. Labor is less of a component in some of these production facilities than it's ever been, so that labor differential moving in here to U.S. this doesn't matter as much. It's more about having availability to the inventory and the onshore phenomenon I hope has legs here. We're seeing early signs of that. You've seen some big announcements, I hope we'll see some further announcements coming forward. And we talked about this with the energy renaissance here a number of years ago, when we had cheap energy with gas and oil, and fracking, had that not never materialized, I think this time, in my opinion, could be different. I think all the things are starting to align for our customers and others to reconsider where they want to have production, and more balanced that they don't run into the same issues that they 're having currently.

And in terms of total inventories carried, are you seeing a change there as well?

I certainly think there's more -- customers are reevaluating forward positioning inventory levels. We're having those discussions around our Transflo products. So, they don't need next-day shipping or things like that, their forward positioning, those things so they can make sure that their production facilities remain up and running. That's very, very important. So, all of these factors are, I think, playing into investments that we'll see customer to make over the next couple of years.

Kevin, I appreciate the color. And gentlemen, thanks for the time as always.

Your next question comes from the line of Ben Nolan. Your line is open.

Hey, thanks, guys. I appreciate you filling me in here. I guess I wanted to -- we talked a lot about labor and some of the issues that are impacting there. But just thinking about maybe the opportunity to actually get a little bit more volume through. And specifically, we talked about coal, but curious what your customers are talking about with respect to further ramp up there. And also, on the intermodal side, we've seen some of the steamships diverting cargoes away from Savannah, for instance, to get into Jacksonville or other places on the east coast trying to fit more -- more volume through the system. But I guess the question is, how capable are you of accommodating some of these things?

[Indiscernible] You see in the East Coast ports outgrow the West Coast ports for the net -- last number of years. That's going to continue to ongoing. Savannah is making significant investments. All the ports that we operate into our making investments to be able to handle that. We're well-positioned, whether it's Savannah, Charleston, Jacksonville Tampa, all of those locations are areas where we have the ability to serve. So, we're ready to take on that volume. We made some investments. Our intermodal network, continues to be the best network in the East operationally. There is no question around that. You just look at the service metrics, look at the growth we've been able to handle that better than anybody else. And we'll continue to leverage that product into the market.

Sure. So, there's not -- there is no near-term inhabitant to being able to get more volume through some of the network then I guess, is the question.

We talked about all the capacity. Clearly we have the rail capacity, we're well-positioned with all of the ports, and again, it's not just the international steamship companies that are coming, there's plastics, imports, exports, there's a lot of merchandise business, old business that we move through these ports as well, so yeah, we're working with them through the transload facilities, either our own facilities are partnering with people who are building big, big, big transload facilities on the -- along the coast, to be able to handle the capacity, and we clearly, as I said earlier, have 30% boom on the railroad to handle the traffic without making any more big investments.

All right. Thanks a lot, guys.

Our next question comes from the line of Jeff Kauffman. Your line is open.

Hey. Thanks for squeezing me in, and congratulations. Just some questions for Kevin. I'm trying to get used to my model with quality carriers out here. Your non-locomotive fuel expense was up about 38 million year-on-year. How much of that was attributable to the inclusion of quality?

Just a little over 20 million.

Okay. And just one other net, the depreciation that was up about 19 million sequentially. About how much of that would've been attributable to quality?

Jeff, it's Sean again. Yeah, about half of that is related to quality. We'll see that impact carry forward.

Okay. That's all I have. Congratulations. Terrific quarter. Thank you.

There are no further questions at this time, and this concludes today's conference call. Thank you for attending. You may now disconnect.