norfolk southern (nsc) earnings report: q3 2015 conference ... · cleo zagrean; macquarie capital...

CompanyName:NorfolkSouthernCorpCompanyTicker:NSCSector:ServicesIndustry:T ransportat ion

EventDescription:Q32015EarningsCallMarketCapasofEventDate:24.20BPriceasofEventDate:81.32

©2014TheStreet,Inc.Al l R ightsReserved Page1of28

NorfolkSouthern(NSC)EarningsReport:Q32015ConferenceCallTranscriptThefollowingNorfolkSouthernconferencecalltookplaceonOctober28,2015,08:45AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

KatieCook;NorfolkSouthern;DirectorofIRJamesSquires;NorfolkSouthern;PresidentandCEOAlanShaw;NorfolkSouthern;EVPandChiefMarketingOfficerMarkManion;NorfolkSouthern;EVPandCOOMartaStewart;NorfolkSouthern;EVPofFinanceandCFO

OtherPart icipants

TomKim;GoldmanSachs;AnalystAllisonLandry;CreditSuisse;AnalystJohnBarnes;RBCCapitalMarkets;AnalystJasonSeidl;CowenandCompany;AnalystTomWadewitz;UBS;AnalystRobSalmon;DeutscheBank;AnalystMattTroy;NomuraSecurities;AnalystChrisWetherbee;Citigroup;AnalystScottGroup;WolfeResearch;AnalystAlexVecchio;MorganStanley;AnalystKenHoexter;BofAMerrillLynch;AnalystJustinLong;Stephens;AnalystBrandonOglenski;BarclaysCapital;AnalystBrianOssenbeck;JPMorgan;AnalystBenHartford;RobertW.Baird;AnalystJeffKauffman;BuckinghamResearchGroup;AnalystDavidVernon;Bernstein;AnalystCleoZagrean;MacquarieCapitalSecurities;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheNorfolkSouthernThirdQuarter2015Earningscall.

(OperatorInstructions)

Asareminder,thisconferenceisbeingrecorded.

It'snowmypleasuretointroduceyourhost,KatieCook,DirectorofInvestorRelationsforNorfolkSouthern.Thankyou,Ms.Cook.Youmaynowbegin.

KatieCook(DirectorofIR):




Thankyou.Goodmorning.

Beforewebegintoday'scall,Iwouldliketomentionafewitems.First,slidesofthepresentersareavailableonourwebsiteatNorfolkSouthern.comintheInvestorssection.Additionally,transcriptsanddownloadsoftoday'scallwillbepostedonourwebsite.

Pleasebeadvisedthatduringthiscallwemaymakecertainforward-lookingstatements.Theseforward-lookingstatementsaresubjecttoanumberofrisksanduncertaintiesandouractualresultsmaydiffermateriallyfromthoseprojected.PleaserefertoourannualandquarterlyreportsfiledwiththeSECforafulldiscussionofthoserisksanduncertaintiesweviewasmostimportant.

Additionally,keepinmindthatallreferencestoreportedresults,excludingcertainadjustments,thatisnon-GAAPnumbers,havebeenreconciledonourwebsiteintheInvestorssection.

NowitismypleasuretointroduceNorfolkSouthern'sChairman,PresidentandCEO,JimSquires.

JamesSquires (PresidentandCEO):

Thankyou,Katie.Goodmorning,everyoneandwelcometoNorfolkSouthern'sthirdquarter2015earningsconferencecall.WithmetodayareourChiefMarketingOfficer,AlanShaw;ourChiefOperatingOfficer,MarkManion;andourChiefFinancialOfficer,MartaStewart.

Earningsforthequarterwere$1.49pershare,whichwas17%lowerthanlastyear'srecordof$1.79pershareandincluded$0.08pershareofexpensesrelatedtorestructuringinitiatives.Theresultsalsoreflectsoftnessinthecommoditiesmarkets,mostsignificantlyincoalwhereourrevenuesweredown23%inthequarter.Alan,MarkandMartawillcoverthevariousmovingpartsofthequarterlyresultsmomentarily,butbeforedelvingintothat,letmehighlighttheprogresswemadeonsomelonger-terminitiativesduringthethirdquarter.

First,webeganrestructuringourTripleCrownServicessubsidiary.Withtherestructuring,TripleCrownwillfocusontransportingautomobilepartswhileNSwillworkwithothersupplychainpartnerstobringnon-autopartsbusinessintoourconventionalintermodalnetwork.

Second,ourheadquartersconsolidationinitiativeismostlycompletewithemployeesformerlyinRoanoke,VirginianowworkinginAtlantaorNorfolk.ThisinitiativeallowedustocombinesomefunctionswhilereducingmanagementheadcountandG&Aexpensesfromhavingthreebackofficelocations.Itwillgiveusamorecohesiveandfocusedapproach.Forexample,insalesandmarketingwhereallmanagersnotinthefieldarenowco-located.

Third,wecompletedtheacquisitionoftheDelawareandHudsonRailwayCompany'slinebetweenSunbury,PennsylvaniaandSchenectady,NewYorkfromCanadianPacificonSeptember18.ThisrelativelysmallscalebuthighlycomplementarytransactiongivesusfulloperationalcontrolofanimportantnetworksegmentandgreatlyenhancesourabilitytoservemarketsintheNortheast.Implementationhasgoneverysmoothly.

Thesethreelong-terminitiativesareinadditiontoourongoingandcontinualeffortstoimproveservice,assetutilizationandreturns.Inthatregard,I'mpleasedtoreportthatserviceimprovedinthethirdquarterandweareingoodshapemovingintothefallseasonthisyearwiththeonsetofwinterweatherjustafewmonthsaway.

AsyouwillhearfromMark,keyresourceslikecrewsandlocomotivesarereasonablywell-balancedwithdemandrightnowwhileatthesametimewearelookinghardatunderutilizedassetsinsomepartsofournetwork.




Withoutfurtherado,IwillturntheprogramovertoAlan,MarkandMarta,andwewillreturnwithsomeclosingcommentsbeforetakingyourquestions.Alan?

AlanShaw(EVPandChiefMarketingOfficer):

Thankyou,Jim,andgoodmorningtoeveryone.Weappreciateyoutakingthetimetojoinustoday.

Therearefoursignificantfactorsinfluencingour2015revenue.First,fuelsurchargesaretheprimarydriveroftherevenuedeclinewehavebeendiscussingsincethefirstquarter.Thethirdquartermarksourlargestexpectedquarterlydropinfuelsurchargerevenuewitha$255milliondecrease.

Second,lowcommoditypricesandthestrengthoftheUSdollaradverselyimpactedvolumesofcoal,steel,fracsand,crudeoilandexporttraffic.Weestimatethatalmost50%ofourrevenuebaseistiedtocommoditypricingforforeign-exchangerates.Additionally,inventorybuildshavesoftenedfreightshipmentssincethesecondquarter.Despitethesechallenges,internationalintermodal,automotiveandnaturalgasproductsallhadlargegainsinthequarter.

Third,increasedtruckcapacity,lowdieselpricesandservicelevelsreducedthepaceofhighwayconversionsin2015.WeexpecttruckcapacitytotightenwhichcoupledwithcontinuedimprovementinrailserviceandNorfolkSouthern'snetworkreachwillallowustosecureadditionaldemandmovingtorail.

Fourth,we'veemployedsolidpricingthat'sdemonstratedbygainsinourrevenueperunitexcludingfueloverallandforallthreeprimarybusinessgroups.

Weachievedthesepositiveresultsdespitethenegativemixassociatedwithdeclinesofseveralcommoditiespreviouslyreferencedinincreasedinternationalintermodal.

Nowourcontinuedfocusonpricinghasallowedustoimprovetotalrevenueperunitexcludingfueleachquarterofthisyeardespitecontinuednegativemix.

Duringcontractnegotiations,wefocusonbothpriceandthefuelsurchargeprogramforthebestoveralllong-termresultforNorfolkSouthernrecognizingthattheaveragedurationofourcontractsisinexcessofthreeyears.Wehaveemphasizedmarket-basedpriceincreasesandwillcontinuewiththisfocusreflectiveofthelong-termbenefitofrailtransportation.Thestrengthofourdiversenetworkincludingourintermodalandautomotivesystem,transferterminalsandalignmentwithourshort-linepartnersandthecustomerstheyreachgivesustheopportunitytocontinuetoprovideripeopportunitiesforgrowth.

Ourservicecontinuestoimproveandasitdoes,andasaggregatedemandstrengthenstherebynegativelyimpactingtruckingavailability,weanticipateareturntostrongdomesticintermodalconversionintandemwithpricingstrategiesthataresustainable.

Asourbusinessmixchanges,wecontinueourfocusonthebottomlinebyevaluatingournetworkforopportunitiestoincreaseearningspershare.AgoodexampleofthesestrategicstructureandeffortsisourrecentlycompletedacquisitionoftheD&HSouthLine,streamliningoperationsintheNortheastandofferingamoreservicecompetitiveproduct.Similarly,werecentlyannouncedtherestructuringofourTripleCrownsubsidiarywhichwillreducerevenuebeginninginthefourthquarterbutisexpectedtobeaccretivetoourbottomlinenextyearandallowsamoreefficientuseofcapital.

Turningtothethirdquarterresultsonslidethree,ourrevenuedeclined$310millionprimarilyduetoacombined$342milliondecreaseincoalandfuelsurchargerevenue.

Focusingonourcoalfranchise,revenuedeclinedby23%duetoadecreaseinfuelsurchargerevenuefollowedbylowerexportandutilitycoalvolumes.Utilityreductionsweredrivenbymateriallylower




naturalgaspricesthatimpactedthedispatchpositionofcoalplantsonournetwork.This,combinedwithstockpilesabovetargetlevels,ledtoa10%declineinourutilitymarketto22milliontonsaboveourpreviousguidanceof20milliontonsperquarter.

Exportcoaltonnageof3.5milliontonswaschallengedbyweakmacroeconomicconditions,lowbenchmarkpricesandastrongUSdollar.Whileriskinthismarketexceedsthatofutility,wecontinuetoguideto3milliontonsperquarterthrough2016.

Ourdomesticintermodalvolumedeclined5%duetonetworkservicechallenges,lowerfuelpricesandincreasedtruckcapacity.Domesticintermodalpricingremainsstronganddespiteshort-termtruckcapacityincreasesandsoftertruckspotpricing,wemaintainalong-termprojectionofcontinuedpricinggainsandconversionstorailduetothevalueoftheintermodalproductasserviceimproves.

Driveravailability,hoursofservice,electronicloggingdeviceshavepositivelyinfluencedpricingleavingshipperstolockincapacityfornextyear.Ourinternationalintermodalvolumegrewby9%duetogrowthatbothEastandWestCoastportsaswellasfreightshiftingfromtheWesttoEastCoastportstakingadvantageofournetworkreachandalignmentwithshippingpartners.

Closingwithourmerchandisemarkets,thestrongdollarandlowcommoditypriceenvironmentnegativelyimpactedsteel,fracsand,crudeoilandexportgrain.Conversely,strongconsumerspendingassistedwithgainsinautomotive,ethanol,constructionmaterialsandplastics.

Lastly,volumesofnaturalgasliquidsimprovedduetoincreasedfractionatoractivityonournetworkanddomesticgrainshipmentsgrewduetoregionalcropopportunities.

Movingintothefourthquarter,weanticipatevolumedeclinesinourcommodityandexportmarkets.Sequentially,mostofthesemarketswillremainflatcomparedtothethirdquarteralthoughsteelhasthepotentialforfurtherdeclineandexportcoalwilllikelybeclosertoourguidanceof3milliontons.ThesecontinueddeclinesincommoditypricesandtheTripleCrownrestructuringwilllowerfourth-quartervolumescomparedtolastyearwiththeyear-over-yearrateofdeclineexpectedtobesimilartothatofthethirdquarter.

Nextyear,wewillclearthenegativecompsandtheutilityfranchisewhichwasinfluencedbysignificantlyhighernaturalgaspricesandstockpilereplenishmentsin2014.Wecontinuewithourguidanceof20milliontonsofutilitycoalperquarter.Asstatedearlier,theTripleCrownrestructuringwillallowTripleCrowntofocusonitsautopartsbusinesswithNSworkingwithourshippersandchannelpartnerstoconvertasmuchoftheirbusinessaspossibletotheconventionalintermodalnetworkalthoughthefootprintofTripleCrowndiffersfromourconventionalnetwork.

AsTripleCrownprovidesadoor-to-doorretailservice,therestructureisexpectedtonegativelyimpactintermodalrevenueperunitalthoughbemodestlyaccretivetoearningsnextyear.Reducedfuelsurchargerevenuewillcontinuetobeaheadwindinthefourthquarteralthoughwewilllapthiscompafterthefirstquarterofnextyear.

Long-term,wewillcontinuetofocusonmarket-basedpricinggainswhilebetteraligningourfuelprogramswithexpenses.Despitetheheadwindsmentioned,ourcustomersunderstandthevalueofrailtransportationandasservicecontinuestoimprove,wehavetheopportunityformarket-basedpriceincreasesandtogrowourfranchise.Weexpectgrowthopportunitiesinourconsumerbasemarketsthatincludeintermodalandautomotiveaswellashousingandconstruction-relatedcommodities,ethanolandbasicchemicals.Wealsoexpecttheimpactofinventorybuildswhichwillhaveadampeningeffectinthefourthquarterwilllessenbythefirstquarterof2016.

NorfolkSouthernsitsatbothendsoftheeconomicspectrum--productionandconsumption.This




diversityhashelpedusduringeconomicdownturnsandisacontinuingstrengthofourfranchise.Today,weareseeinggrowthparticularlyinautomotiveandtheinternationalsideofintermodal.Thestrongdollarisachallengeasismacroeconomicweaknessoverseaswhichcontributestoloweraggregatedemand.Regardless,wearewellpositionedinmultiplestrategicmarketsforgrowth.

Aswemoveforwardthroughthefourthquarterandinto2016,wewillcontinuetopartnerwithourcustomerstopursuestrategicsolutionsthatcapitalizeonmarketopportunitiesthatcreateefficienciesandimprovenetworkproductivitywhilegeneratinggrowthbeneficialtothebottomline.

ThankyouforyourattentionandIwillnowturnthepresentationovertoMark.

MarkManion (EVPandCOO):

Thankyou,Alan,andgoodmorning,everyone.ThismorningIwillupdateeveryoneonouroperationwhichcontinuestotrendpositively.Specificallywe'veseenyear-over-yearaswellassequentialimprovementsinourservicecomposite,speedandterminaldwell.Whilewestillhaveworktodo,weareencouragedbytheseresults.

Butfirstlet'stakealookatoursafety.Ourreportableinjuryratiowas1.05forthefirstninemonthsof2015ascomparedto1.19forthesameperiodlastyear.Thetrainincidentsforthefirstthreequartersofthisyearwere143versus154overthesameperiodlastyear.GradecrossingaccidentsthroughSeptember2015were255downfrom286overthesameperiodin2014.

Turningtoourservicecompositeperformance,weseeservicesreturningatasteadypace.Weareoptimisticwewillcontinuetoexperienceimprovementasourresourcesarelargelyinplace.Withregardtomanpower,wehaveasufficientcrewbase.Inthethirdquarter,weaddedabout200T&Eemployees.WehavemodulatedourhiringbasedonvolumeandwenowexpectourT&Ecountinthefourthquartertobeflatwiththethirdquarter.

Withregardtolocomotives,wehaveasufficientnumberoflocomotivestohandleourbusinessandfurthermoreourlocomotiveavailabilitycontinuestoimproveduetoimprovedvelocity.Lastly,ouroperatingplaninconnectionwithournewyardexpansioninBellevue,Ohioisfullyimplementedandisbenefitingusacrossthesystem.

Turningtothenextslide,weseetrainspeedandterminaldwellareimprovingaswell.Ourspeedforthequarterimproved3%year-over-yearandourdwellhasimproved6%.Thesesystemimprovementsareimportantandit'salsoimportanttonotewehaveseensolidimprovementonourChicagotoHarrisburgline.Thislinehandlesthehighestvolumesonoursystemwithaheavyconcentrationofintermodal.Ourthirdquarterpremiumintermodalspeedforthisrouteisnearlywhatitwasin2013andrecentlythatspeedhasactuallyexceeded2013levels.

Inadditiontotheefficienciesweareseeingwithourimprovingoperation,wearecontinuingtomakestrategicreductionsassociatedwithourdecreaseincoalvolumes.WehavemademanpowerreductionsatourLambertsPointCoalPieraswellasintheCentralAppalachianandNorthernAppalachianregionwhichencompassallofoperationsnotjusttransportation.Furthermore,wecontinuetomakechangestosomeofourcoalrouteswiththemostrecentaffectedlineshighlightedonthismap.Wehavealsoreducedcapitalspendingonbranchlineswherewe'veseenlowercoalmineproduction.

Thesecontractionstoouremployeecountsandinfrastructurehavebeenaresultofourcontinualeffortstomatchourlevelofinvestmenttoachangingmarketplace.

Withthat,Iwillnowturnitovertoyou,Marta.

MartaStewart (EVPofFinanceandCFO):




Thankyou,Mark,andgoodmorning,everyone.Slide2summarizesouroperatingresultsforthethirdquarter.

AsAlanhasalreadydiscussed,the10%decreaseinrevenueswaslargelyrelatedtolowerfuelsurchargeandtolowercoalvolume.Operatingexpensesintotaldeclinedby$134millionor7%.Expensesbenefitedfromsignificantlylowerfuelpricesbutwereunfavorablyimpactedbyrestructuringcosts.Thenetresultwasan18%reductioninincomefromrailwayoperationsanda69.7operatingratioforthequarter.

Thenextslideshowsthemajorcomponentsofthe$134millionor7%decreaseinexpenses.AsIjustmentioned,fuelwastheprimarydriveroftheoverallreductionandfavorabilityinthecompensationinvestmentcategoryalsocontributedtothedecline.

Beforewegetintothedetailoftheoperatingexpenses,let'stakealookattheeffectoftherestructuringcostsonslide4.

ThefirstcolumnshowstheTripleCrownrelatedcharges.AsAlandescribed,ourTripleCrownServicessubsidiarywillbeginninginmid-Novemberbefocusedexclusivelyonitsautopartsbusiness.Therefore,thebulkoftheroadrailequipmentusedbyTripleCrownwillbesurplusatthattime.The$26millionshownasaccelerateddepreciationisthethirdquarterchargeforTripleCrownequipment.

TurningtotheRoanokeclosurecosts,theytotaled$10millioninthequarterandconsistedprimarilyofmovingandofficespaceexpenseswhicharereflectedinthematerialsandotherandinthepurchaseserviceslineitem.Thesecostsadded$37milliontothequarterandimpactedthebottomlineby$23millionor$0.08pershare.Goingforward,weexpectthesetwoitemstototal$45millioninthefourthquarterwithTripleCrownrestructuringcostsof$36millionandRoanokeofficeclosurecostsofapproximately$9million.

Nowlet'stakealookatthemajorexpenselineitems.Asshownonslidefive,fuelexpensedecreasedby$166millionor43%,themajorityofwhichwasdrivenbylowerfuelprices.

Slidesixdetailsthe$26millionor4%decreaseincompensationcosts.Bonusandstock-basedcompensationexpenseswerelowerby$51millionresultingfromthedeclineinfinancialresults.Weexpectfourth-quarterincentivecompensationwillbeabout$20millionlowerthanlastyear.

Payrateandpayrolltaxincreasesaswediscussedinthesecondquarterearningscall,begantomoderateafterJuly1andtheywereup$17millionand$9millionrespectively.Andlastly,wecontinuetorunwithasomewhathigherleveloftraineeandthatexpensewasup$6million.

Next,materialsandothercostsdecreased$3millionor1%.Materialusageprimarilyassociatedwithlocomotiveandfreightcarsdeclinedby$10million.Wealsohavelowerderailmentexpenses.However,theseitemswerepartiallyoffsetbytheaforementionedrestructuringcosts.

Asshownonslide8,depreciationexpenseincreasedby$39millionor17%duelargelytotheeffectofaccelerateddepreciationofTripleCrownassetsandalsoasaresultofourlargercapitalbase.AsJimmentioned,wecompletedtheacquisitionoftheD&Hlineduringthequarterandthisincreasedourcapitalbaseby$215million.

Turningtoslide9,purchaseservicesandrentswereup$22millionor5%reflectinghighercostsassociatedwithequipmentrents,engineeringexpensesandtheRoanokeclosure.AsnotedbyMark,velocityandterminaldwellhavecontinuedtoimproveandweexpecttheseexpensestodeclinesequentiallyinthefourthquarter.

Otherincomereflectedonslide10roseby$7millionor22%aidedby$19millioninhighergainsfrom




salesofpropertyoffsetinpartbydecreasedreturnsfromcorporate-ownedlifeinsuranceandlowercoalroyalty.

Slide11depictsourincometaxaccrualsandexpectedrate.The37.6%thirdquarterrateisinlinewithourfull-yearguidanceof37.5%.

Wrappingupourfinancialoverviewonslide12,netincomedecreasedby$107millionor19%andearningspersharewasdown$0.30or17%inclusiveofthe$0.08ofrestructuringcosts.

ThankyouandIwillnowturntheprogrambacktoJim.


Thankyou,Marta.Asyouhaveheardthismorningfurthersofteninginthecommoditiesmarketsweighedonourthirdquarterresultsandithastemperedourfourth-quarteroutlookaswell.Wenowexpectfourth-quartervolumeswilldeclineversuslastyearataratesimilartoourthirdquarterresults.

Thisyearobviouslyhasbeenachallengingone.Wedidn'tdeliverthekindofimprovementsyouandweexpectbutlookingto2016,weareconfidentthatwithareasonablystableeconomyandourownintensefocusonservicereturnsandgrowth,wearepoisedforbetterresults.

Thankyouforyourattentionandwearenowhappytotakeyourquestions.

QUESTIONS&ANSWERS

Operator :

Thankyou.(OperatorInstructions).OurfirstquestionisfromTomKimwithGoldmanSachs.

T omKim(Analyst-GoldmanSachs):

Goodmorningandthanksforyourtimehere.Obviouslythisisanencouragingsetofresultsandwe'recertainlypleasedtoseetheimprovementsonthecostside.Iwantedtoaskjustafirst-offquestionwithregardtosomeofyourcautiouscommentsaroundthenearer-termdemandoutlook.Howdowereconcilethatwithsomeoftheincreasedtrainingcostsandyourheadcountexpectationsnearer-term?


Tom,letmeansweraboutfirst.Obviouslywehavesomeshort-termheadwindsintermsofthetrendincommoditiesandbusinessconditionsgenerallyoffsetbycontinuingstrengthinsomeofourconsumermarkets.Butourstrategyisdesignedtocarryusthrougheconomiccyclesbecauseitfocusesonfundamentals.First,service;excellentservicewillallowustoincreasepricesandreducecosts.Andsecond,returnoncapitalbecauseweareaverycapitalintensivebusinessandeverydollarthatwespendmusthaverevenueandprofitgenerationpotential.Andthird,growth.Wedowanttogrowourtoplineandseeopportunitiestodosoeveninaso-soeconomy.

Wewilldothatfirstthroughpriceincreases;secondvolumegrowth,utilizingexistingassets;andthirdandonlyasnecessary,growththroughcapacityadditions.Sothatinanutshellisourstrategy.Wethinkthatwillcarryusthroughchangingbusinessconditions.

Nowlet'stalkabouttheshort-termresourcepicture.AsImentioned,weviewkeyresources,crewsandlocomotivesasessentiallyandbalancewithdemandasweseeittoday.Withthatsaid,wearegoingtobenimblewithresourcesandifbusinessconditionschangesowillourresourcestrategy.

Now,Marta,whydon'tyoutalkalittlebitaboutthespecificsaroundheadcounttrendsandother




efficiency-relatedspending?


Allright,sure.Tom,wehaveearlierguidedthatwethoughtwewouldincreaseheadcountabout1000forthefullyear.ButasMarksaid,we'renowupabout800fromthefourthquarteroflastyeartothethirdquarterofthisyear.AsMarksaid,wenowdonotthinkwearegoingtoaddthatadditional200fortheendoftheyearsowethinkwearegoingtostayflatthroughthisyear.Andlookinginto2016asJimjustdescribed,wethinkthat'stherightlevelfortheCompany.


JustonthatpointifIcouldaskmaybeabitofalonger-termquestion.Aswehavelookedthroughyourheadcountandoverallproductivity,we'veseenvolumesaffectivelypeakaround2006andvolumesevenagainstlastyear'slevelarestillbelowthatpriorpeak.Butyouroverallheadcountlevelsarestillatthe2006levels.AndIguessI'mwonderingistheresomethingstructurallythathaschangedinyourbookofbusinessthatrequiresmoreheadcountpercarloadordoesthispresentperhapsanopportunitytoimproveproductivity?

Youkindofalludedtothefactthatasvelocityincreases,youpotentiallyhaveroomtobeactuallydrivingproductivityfurther.Soifyoucouldjustmaybeelaboratealittlebitmoreaboutthelonger-termoutlookforusbecauseaswethinkaboutyourOR,wecertainlythinkandhopethatthereisopportunitytocontinuetodrivethatdown.ButoneoftheareasI'vebeenlookingatisjustonthelaborproductivitysideanditlookslikeyouhaveroomtheretoimprove.AndIjustwantedtogetyourperspectiveonhowdoIthinkaboutthelonger-termopportunitytherecarloadtoemployeeheadcount?Thankyou.


Sure.Greatlineofquestioningandweareabsolutelyfocusedonproductivityandasthenetworkvelocitycontinuestoincrease,wewillhaveopportunitiestoreduceheadcountrelativetothevolumetrend.Mark,whydon'tyoucommentonthat?


Yes,I'dbegladtoandweactuallystartedmodulatingourhiringontheT&Esideparticularlybacklastsummer.Sowe'vebeenhiringmoretoattritionlevelseversincemid-summerandanticipatethatwillcontinuetogoonagainbasedon--dependentonthebusinessvolumes.Butasourvelocitycontinuestoincrease,therearejustgreatthingsthathappenwiththat.Andasidefromthecustomerservicesidewhichisfavorablyimpactedaswell,butthosevelocityincreasesreallyhelpusonthecostsideandithelpsusreduceouremployment,ithelpsusreduceouroverallassetbase.Wewillhavetheadvantageofpickingupmorelocomotivesasaresultofthat.Ourexpensesdecreaseasourassetturnsincrease.

Andanotherthingthatweseeisre-crewsgodownandinfacttheyhavebeengoingdown.Eventhirdquarter,theyweredown--re-crewsweredown6%andwewillcontinuetoseethattrend.OurovertimewasdownontheT&Eside,notoverall,butIthinkwewillcontinuetoseefavorabletrendontheovertimepieceaswell.

Sowewillseethatinfourthquarter.Wewillcontinuetoseethatgoingintonextquarterandeventhingslikeourengineeringdepartment.Asourfluidityimproves,asourvelocityimproves,wecanbemorescheduledwithourengineeringdepartment.Theygetmoretracktime,theygetoutonthetrackwhentheyneedtobe.Theydon'taccumulatetheovertimetheyotherwisewould.Soinshort,improvedvelocityjustdrivesalotofgoodthingswhenitcomestocostreduction.





Iappreciatethatdetail.Thanksalot.

Operator :

OurnextquestionisfromthelineofAllisonLandryofCreditSuisse.

AllisonLandry(Analyst-CreditSuisse):

Goodmorning.Thanksfortakingmyquestion.First,Iwaswonderingifyoucouldtalkaboutthedeclineindomesticintermodalandparticularlyrelativetoyourmaincompetitorwhichsawa15%increaseinthebusiness.SowhatIwaswonderingisifyoucouldquantifyorhelptoframeanypotentialsharelossesthereandwhetheryouexpecttofullyrecapturethosevolumesandoverwhatperiodoftime?


Sure.Alan,whydon'tyoutakeAllison'squestiononthat?


Allison,thestoryforourdomesticintermodalfranchiseisonethatIhighlightedearlier.Ithasbeenfuel,ithasbeentruckcapacityandit'sbeenaserviceproductthatisnotconducivetoshiftstorail.That'sgoingtogetfixedandwe'realreadyseeingimprovementsinourvelocityinourintermodalandwe'restartingtoseeanuptickinourintermodalvolumes.Andonthedomesticsideandcertainlyontheinternationalside,we'veseengreatstrengththisyearwithmorevolumethroughtheEastCoastandouralliancewithourshippingpartnerswhoareaddingmorecapacityfromtheFarEasttotheEastCoastandweexpectthesamenextyear.Sowefeelverygoodaboutourintermodalfranchisegoingforwardbothdomesticallyandinternationally.


Okay.Andmyfollow-upquestiononcoal,thinkingabouttheRPUonanexfuelbasisbeingupslightlyyear-over-year,couldyoutalkaboutsomeofthedynamicstherethatpushedthattothepositivesideoftheledger?Wasitmix,wasitthelappingofratecutsontheexportsideorashifttofixed/variablecontracts?


SureAllison.Actuallywe'veexperiencednegativemixwithinourcoalfranchiseaswehada37%declineinexportwhichasyouknowtendstobelongerhaulwhichiseffectivelyaproxyforRPU.Sodespitethatwe'vegotincreasesandit'sincreasesinRPUalthoughveryslight,itisapositiveandwearegoingtoholdontothat.Butit'safunctionofourlong-termpricingstrategyinthecoalmarketsandwefeelverygoodnextyearbecausewearenotgoingtohavethatnegativecompincoalwithrespecttotheutilityfranchisethatwedidthisyear.


Okay,thankyou.

Operator :

OurnextquestionisfromthelineofJohnBarneswithRBCCapitalMarkets.

JohnBarnes (Analyst-RBCCapitalMarkets):

Afollow-upquestiononthedomesticintermodalside.Intermsoftheservicethatyouareproviding,IthinkI'mhearingyousayyou'renotinapositionyetwhereyouareofferingatrucklikeproduct.Isthat




harmingyoumoreonthelengthofhaul?Areyoustillverycompetitiveofthelongerstuffbutit'sputtingpressureontheshorterlengthofhaulwhereathigherdieselfuelratesyouwerebecomingmorecompetitive?


John,letmecommentonourdomesticintermodalstrategybrieflyandthenIwillletAlanaddressthespecificsofyourquestion.

Wecertainlydowanttogrowourdomesticintermodalbusinessandwehaveaserviceproductthatallowsustodothattoday.Canwebeevenbetterandattractevenmorefreightfromthehighway?Absolutelyandthat'sourgoal.

Nowwiththatsaid,ourgrowthstrategyindomesticintermodalisacombinationofvolumegrowthandpricing.Pricingisabsolutelycriticalinthatfranchiseasitiselsewhere.Andsoourstrategyistogrowthatbusinessaswithourotherbusinessesthroughpriceincreases,throughvolumegrowthusingexistingassetstothemaximumextentpossibleandlastthroughincreasesincapacitybutonlywherenecessary.

Alan,whataboutthespecificsofJohn'squestion?


John,toyourquestionwithrespecttoifthere'sadifferencebetweenlengthofhaulandourabilitytoretainbusinessorgrowbusinessthroughfuel,wehavenotseenthat.


Okay,allright,noworries.Intermsofnetworkrealignment,Iguessjustfromthestandpointofyouownmoreofyour--andIamthinkingmoreonthecoalexportside--youownmoreofyourassetsthere,whetheritisthecoalloadingfacilitiesandthingslikethat.Ifwearenowlookingatamorepermanentlyimpairedexportmarket,howareaggressivecanyoubeonrealigningthecostsaroundtheexportsideofthebusiness?Andaretheirassetstoshedthingsalongthoselinesthatmaybebetteralignthoseresourceswiththecurrentvolumesandthenmaybeevenalittlebitlongeroutlookwhichagainlookstobemaybeabitmoreimpaired?Thankyou.


IwillgetMarktocommentonsomeofthespecificmoveswe'vemadeinourcoalfranchisefollowinguponhiscommentary.ButletmejustsaywehavefixedassetsinourcoalnetworkaswedothroughoutourCompanyandwearelookinghardatwhichofthoseisunderutilizedandwewillcontinuetodoso.Wehavesubstantialfixedassetsdevotedtoourcoalfranchiseintheformoftracksandfreightcars.Onethingwecandoandhavedonealreadyistobeginworkingdownthesizeofourcoalcarfleetandwecanredeploylocomotives.Sothat'safungibleasset.

Thisisanotoriouslyvolatilemarket.Wedon'tbelievewehaveseenthebestdaysofexportcoal.Wethinkthatthecommoditycycleeventuallywillturnandthoseassetswillbefullydeployedagain.

Mark,talkalittlebitmoreaboutwhatwe'redoinginthecoalfields.


Yes,morecurrentday,weareactually--we'vefurloughedorareintheprocessoffurloughingabout150peopleandthatisacrossallthedepartmentsandoperationsincludingtransportationmechanicalengineering.WehaveasImentionedintheremarks,we'vegotlinesthatwehavemorerecentlyeithertakenoutofserviceorhavepulledbackontheinvestmentforthoselines.WecontinuetoscrubCentral




Appaswellasotherareasinourcoalfranchise.Butlet'salsokeepinmindthatwe'vegotareasinourcoalbusinesswherewe'vehadsomeniceactivitygoingonandcontinuetohavepromisefortheIllinoisBasincoal.

Soit'sabitofamixedbagbutwewillcontinuetoscrubthatCentralAppinordertoensurethatwearereducingourcostscommensuratewiththelevelofactivityoutthere.


Thanksforyourtime.

Operator :

OurnextquestionisfromthelineofJasonSeidlofCowen&Company.

JasonSeidl(Analyst-CowenandCompany):

Iwantedtofocusalittlebitonintermodal.Clearly,you'veadmittedyouneededtogettheservicelevelsbackupbutitseemslikethat'shappening.Sothatshouldbeagoodthingforfreightasweheadinto2016.However,longer-term,howdoyouthinkaboutinvestmentsinthatnetworkprofitabilityofthatdivisionasittakesoveralargerpercentageofthebusiness(inaudible)?


It'sgoodbusiness,it'sagrowthopportunityandithasbeenthevolumegrowthengineoftheCompanyforyears.That'slikelytocontinuegivenseculartrendsintrucking.

Withthatsaid,we'regoingtobeveryjudiciouswithourinvestmentsandmakesurethattheyarerevenueandprofitmaximizingwhichisoneofthefoundationsofourstrategy.Thatappliestothedomesticintermodalbusinessasitdoestoallotherbusinessesweoperate.

Weshouldtalkalittlebitaboutinternationalintermodal.That'sarealbrightspotrightnow.SoAlan,whydon'tyouexpandonthatalittlebit?


Soaswediscussed,ithasgrownintheuppermid-singledigitsfortheyear.Weanticipateacontinuedgrowthalongthatlevelinthenear-termfutureasmorevolumematriculatesovertotheEastCoastfromtheWestCoastandfolkswithwhomwe'vealignedareaddingcapacityintotheEastCoastanditallowsustobuildalotofrevenuedensityinourtrainssoitmakesforaveryefficientmovement.We'reexcitedaboutthatandthegrowthopportunitiesandthereturnsthatthatprovides.


IsthereanywaytoquantifyhowmuchofthatfreightthatmovedovertotheEastCoastisstickyandhowmucheitherwentbackorwillgobackafterthisyear?


Yes,someofithasdefinitelygoneback.There'sabsolutelynodoubtaboutthatbutstillEastCoastvolumesareup.AndasthePanamaCanalwidens,wearegoingtoseeevenmorelargershipshittingtheEastCoastwhicharegoingtoneedtomakemultipleportsofcalltodischargeourcargoes.Sothat'sgoingtohaveabenefitfortheportsthatweserveallupanddowntheEastCoast.





Arewegoingtoseemoreondockrailatsomeoftheportsdoyouthinkasthatbusinesscomesin?


Atleastoneoftheportshasannouncedthatandhaveastructuredplanforthat.


Okay,gentlemen,thankyouforyourtime.

Operator :

ThenextquestionisfromthelineofTomWadewitzwithUBS.

T omWadewitz (Analyst-UBS):

Goodmorning.Iwantedtoseeif--Mark,IthinkinthepastyouhavetalkedaboutproductivitytargetsandIknowwiththebigchangeinvolumethatit'sanoperatingleverageeffect.Butwhatdoyouthinkthekindofproductivitynumberisthatyoumightachievethisyearandhowwouldyouframethatopportunityfornextyearintermsofhowyouwoulddefineproductivity?Ithinkinthepastyou'vesaidsomethingaround$100million.SoIwonderifyoucouldoffersomethoughtsonthattopic.


I'lltakethatone,Tom.Weabsolutelyhaveproductivityopportunitiesaswe'vebeenthroughthismorningandasthenetworkpicksupspeed,wewillstarttothrowoffalotofproductivity.Wearealsoworkingonanumberofbusinessprocessinitiativesandcapitalutilizationinitiativesthatshouldleadtoproductivitybenefits.Allofthatshouldadduptoasizableoffsettovolumetricandinflationarypressureonourexpensesparticularlynextyearwhenoperationsarereallyhumming.


Okay.Andthenintermsofcoal,howdowethinkabout--Ithinkyoucommented,Alan,thatcoalstockpilesareabovetarget.Idon'tknowifyoucouldcommentonmaybehowfarabovetargetandwhetherthat'sthesourceofrisktoyour20milliontonsperquarterviewthatit'spossibleacouplequartersyourunbelowthattogetthestockpilesdownandthenyougetbacktothat20millionaquarter.Butsomethoughtsoncoalrelatedtostockpiles.


Yes,that'sagoodquestion,Tom.We'veactuallyseenstockpilesdecreaseinthisquartereventhoughweexceededourguidancebyabout10%.Sowhilestockpilesdohaveanimpact,itsofarhasnotnegativelyimpactedourabilitytogetourtargets.Rightnowweareestimatingthatstockpilesareabout15daysabovetarget.IwouldsayaboutfivedaysintheSouthandabout25daysintheNorth.


Okay,great.Thanksforthetime.

Operator :

OurnextquestionisfromthelineofRobSalmonwithDeutscheBank.

RobSalmon (Analyst-DeutscheBank):

Anotheronehereoncoal.Itlookslikethetonspercarincreasedsignificantlyinthethirdquarterupto




about112.Canyougiveusasensewhat'sdrivingthat?Hasthisbeentheresultofchangesinthenetworkoristhismerelybusinessmixbecausewehaven'tbeenatthislevelforalongtime?


Wearealwaysfocusedontonspercar.Sointhecoalnetwork,wearepaidbytons.Soanytimewecanimprovetherevenuedensityonacoaltrain,it'sverybeneficialforus.

Oneofthefactorsthatimpactedtheimprovementintonspercarimmediatelyinthethirdquarterwasacontinueddeclineinexportvolume.Metallurgicalvolumetotheportstypicallyhasalowertonspercarthanutilityvolume.


Gotit.Iguessweshouldbethinkingaboutsomethingaroundtheselevelslookingforwardgivensomeofthechallengesthatareimpactingtheexportbookofbusiness?


Totheextentmixstaysthesame,yes.Totheextentthatwe'recontinuingtoworkwithourproducerstogettheoptimumloadlevelonthenumberofcorespertrain,thenwewillimprovetheprofitabilityoftheindividualtrains.


Thanks,that'sreallyhelpful.Iguessturningitoverbacktointermodalaswellasthepricing,we'vebeenhearingalotabouttruckcapacityhavingloosenedupwhichhasnegativelyimpactedtheoverallspotmarketfromapricingperspective.ObviouslywithNorfolk,weareseeingbetterserviceacrossthenetworkwiththevelocityhavingtickeduphereaswellastheservicecompositeimproved.Buthowconfidentareyouthatwecanseefurtherimprovementinpriceorjustmaintainingthelevelofpricinglookingouttonextyeargivenatoughvolumeenvironmentoutsideofthecoalfranchiseaswellassomeweakertruckpricingthatweareseeinginthemarketplace?


Canyouclarify?Areyouaskingaboutpricinginintermodaloroverall?


Justoverallpricingjustgivenwhatweareseeinginthetruckingmarketplacewithcapacityhavingloosenedupsomewhatoffsetbyserviceimprovement.Howareyouguysthinkingabouttheabilitytomaintaincurrentpricingorpotentiallyimproveitaswelookforward?


Wefeelgoodaboutitandwefeelgoodaboutwhatwe'veaccomplishedsofarrecognizingwehaveroomtogrow.OurRPUexfuelhasgrowneachquarterofthisyearandourcustomersaretakingalong-termviewofthisandtheyarerecognizingthelong-termvalueoftherailtransportationandfranklywhenserviceisbacktowherewewantittobeandwe'remakinggreatstridestogetthere,thenintermodalisaveryeasysellevenwithatighteningbetweenthetruckmarketandintermodalpricing.

Lastly,I'lladdthatwearetakingalong-termviewofthis.AndasJimtalkedabout,wearegoingtogrowviapriceandwearegoingtogrowviautilizingexistingcapacity.Andthenanyadditionalinvestmentthatwe'drequireisgoingtohavetogenerateanacceptablelevelofreturn.





Serviceledpriceincreasesareakeycomponentofourstrategyandthatappliestoourdomesticintermodalsegmentaswellasallothersegmentsofourbusiness.


Rob,asyouknow,stockpricinghasgonedowninthetruckingindustrybutcontractpricingisstillupyear-over-year.Nowithasmoderatedbutitisstillupbecauseshippersareconcernedaboutlong-termtruckcapacity.Sothatcertainlyplaysintothethesisforthevalueofrailtransportation.


Thanks.Iappreciatethethoughts.

Operator :

OurnextquestionisfromthelineofMattTroyfromNomuraSecurities.

MattT roy(Analyst-NomuraSecurities):

Thanksandgoodmorning,everybody.Ijustwantedtoaskaboutcoalspecificallyrelatedtoyour20milliontonperquarterrunrategoingforwardguidance.Itwouldimplysomethingflattishtowhatyousawin2015alittlebitmoreoptimisticthantheotherrailroads.Justwonderingifyoucouldhelpusmaybefromabottomsupperspectivehowyougetthere,howmuchofthatmightbeundercontractbecauseIamcontrastingitwithsomeprettydirecommentaryfromCONSOLandPeabodyandothercoalcompaniesyesterdayandearlierintheweekabouttheoutlookfordomesticcoal.

SoI'mjustwondering,beitmixshift,beitcertaincontractsyou'vesecured,howyouareconfidentthatthecoalvolumesat20millionperquarterwillbeflattishin2016.Somehelptherewouldbegreat.


Ifyouthinkaboutthecurrentnaturalgasenvironment,mostoftheconversionsfromcoaltogashavealreadyoccurred--wouldhavealreadyoccurred.NaturalgasIknowrightnowiscloseto$2permillionBTU,butthefuturescurvefornextyearisabout$2.65onaverage,whichisprettysimilartowherewewerein2012.Sowecanmodelourvolumesattheplantsandunitsthatweserveversus2012.

Wealsoknowthatmostofthenear-termenvironmentalheadwindsassociatedwithMATS.Wehavealreadybeenimpactedbythat,sothat'snotgoingtobeaheadwindgoingforward.Nowlongertermthecleancoalplantwillpotentiallyhaveanimpactandweareworkingwithourcustomerstotrytocompletelyunderstandthatandrunscenarioswithinourownplanninghorizon.Butthrough2016basedonourconversationswithourcustomersandmodelinghowtheirplantsperformin2012,wefeelgoodaboutourvolumesof20milliontonsperquarter.


Understood.Iguessmyfollow-upwouldbeifyoucouldprovide--TripleCrownhashadaninterestingevolutionundertheNorfolkumbrella.Ifyoucouldjustrefreshusintermsoftherationalefortherestructuring,thefocusonautopartsandyourcommentarywasinterestingonhowitwouldbemildlyaccretivenextyear.

CouldyoujusthelpusgetfromwherethethoughtprocesswasonTripleCrownsayayearortwoagotowhythisrestructuringmakessenseandtacticallywhat'sgoingtodrivethataccretionorefficiencyorproductivityrelativetothoseassets?Thanks.





ThestrategyinvolvesfocusingTripleCrownonwhatTripleCrowndoesbestandthatistransportautopartsandre-channelingwithothersupplychainpartners,non-autopartsbusinessintotheconventionalintermodalnetworkwherethosecustomersandthatvolumecanenjoymaximumefficiencies.


You'llrecallTripleCrownwasoriginallyanauto-partsnetwork.


Rightsothisisjustafteralittlebitofscopecreep,itisjustdoublingdownonthecorecompetencyofthebusiness(multiplespeakers).


Andit'sgoingtoimproveourcapitalutilizationbyre-channelingasmuchoftheotherbusiness,the[FreightAllKinds]intoourexistingintermodalnetworkwherewealreadyhavethecapacity.


Understood.Thankyouforthetime.

Operator :

OurnextquestionisfromthelineofChrisWetherbeewithCitigroup.

ChrisWetherbee (Analyst-Citigroup):

Thanks.Goodmorning.Wantedto--Ithinkinthepastyouhaverecentlytalkedaboutpotentiallyvolumeincreasesin2016.IguessIjustwantedtogetasenseinlightofwhatyourviewisonthefourthquarterandsomeofthechallengesshorter-terminthebusinesshowshouldwethinkaboutthat?Isyourthinkingchangingatall?Obviouslyyouhavegiventheviewoncoal.Ijustwanttogetasensetherestofthebusinesshowyouthinkaboutitfor2016asthesetupisrightnow.


Absolutely.Westillfeelverygoodabout2016.Ourvolumesyeartodatearedown1.2%inanenvironmentwherewehavehad20%declinesinourutilitycoalfranchise,35%declinesinourexportcoalfranchiseandwehaven'tbeenabletoattracthighwayconversionstoourintermodalnetwork.Wearegoingtoclearallofthatnextyear.

Thereissomeunderlyinggrowthininternationalintermodal.Wehavetalkedabouttheautomotivefranchiseisdoingverywellforus.Consumergoodsaredoingwell.Soonceweclearsomeoftheseveryvisiblecompsorheadwindsintonextyear,thenyouaregoingtoseeweareallgoingtoseethebenefitsoftheunderlyinggrowthinsomeoftheseothermarkets.


Okay,that'shelpful.Asafollow-upjustswitchingtothepricingside,youmentionedearlierthefocusonfuelsurchargeadjustmentsamhavingtoworkthroughthebookofbusinessasitcomesupforrenewal.Ifyoucouldjustgiveusanupdateonhowthatprocesshasbeenplayingout,receptivityofcustomerswhichI'mguessingisnevergreattoarateincreaseandpotentiallyasurchargeinthere.ButIwanttogetasensewhataretheputsandtakesanddoyouhavetogiveitallinpricinginordertogetthefuelsurchargeandhowyouprioritizethose?





Chris,youbreakupagreatpoint.Weprioritizethepricefirstandwealwayswill.Sowearenotgoingtogiveuponpricejusttoshifttoanotherfuelsurchargeprogram.Overtimewearegoingtobeworkingwithourcustomerstoalignourfuelsurchargeprogrammorecloselywithexpensesandalsoimportantlytakethevolatilityoutofit.It'salotmoredifficulttodointhisenvironmentwheretheWTI-basedfuelsurchargewhichisonabout50%ofourbusinessisoutofthemoney.


Andtheprogresstothat,it'ssortofamultiyeareffortismyguess?


Correctanditwillcertainlybebenefitedasoilpricesincrease.


Fairenough.Thanksforthetime.Iappreciateit.

Operator :

OurnextquestioncomesfromthelineofScottGroupwithWolfeResearch.

Scott Group(Analyst-WolfeResearch):

Thanks.Goodmorning,guys.Justfirstthingrealquick,MartaorAlan,didyouguysgiveacompositemixnumberonthequarter?


AreyoureferringtothetrendinmixinoverallRPU?


Yes.


Okay,sowhatisthechangeattributabletomixintotalRPU?


It'saslightnegativeoverallandthat'sbecauseexportcoalwentdownslightly.Anditisalmostflat.


Okay,thankyou.Intermsofcoalagain,therewasaprettynicesequentialincreaseincoalyields.Canyouhelpusexplainthat,Alan?I'mnotsureifthere'sanyliquidateddamagesinthereorifthat'smixandthenjusthowtothinkaboutthatgoingforwardonasequentialbasisforcoalyields?


Certainlywehavehadnegativemixassociatedwithexportandsothathasbeenanimpact.WehavehadmoreutilitiesSouthvolumewhichtendstobealongerhaulforusandsothathasproppeduptheutilityyield.





WithyourcommentsaboutstockpilesintheSouthbeingclosertotargetthantheNorth,wouldyouexpectthatmixtoSouthernutilitiestocontinue?


WefeelgoodaboutourSouthernutilityfranchisegoingforward.TheNorthissittingfranklyrightonourMarcellusnaturalgasplaysospotnaturalgaspricesareverylow,evenbelowtheHenryhubpublishednumbers.SotheopportunityexistsforagreaterpercentageofnewSouthandnewNorthgoingforwardthanwe'vehadinthepast.


Okay.Andthenjustlastthing,Iwanttogobacktotheheadcountquestionfromearlier.SowehaveseenalltheotherrailsimplementsomeprettymeaningfulheadcountreductionsandIknowyourheadcountwasupsequentially.Icertainlyunderstandyourservicemetricsweren'tanddidn'timproveasquicklyassomeoftheothers.Butnowthattheserviceisimproving,IguessI'mnotsurewhyyoudon'thaveanopportunitytotakeoutagoodamountofheadcountlikewehaveseenalltheotherrailsdoastheirservicescaughtup.


Well,asMarkmentioned,wehaveasmallopportunity--maybethesizeyou'retalkingabout,abigopportunity--wehadasmallopportunityandwetookitincrementally.Inthefourthquarter,wethinkwearegoingtobeflat.Really,Scott,whatwearelookingatin2016intermsofproductivityisnotsomuch--becauseaswesaidwe'veguidedtowardslevelheadcountnextyearsoit'snotsomuchtheheadcountbutit'sthecostofthoseindividuals.

Sohepointedtothefactthatwehavecostsnowsuchasre-crewsandovertimethingslikethat,lackoftracktimebecauseoftheconsistentvelocity.Soit'sthepriceperhourifyouwillthatwethinkiswherewearegoingtogetthemostproductivitynextyear.Aswe'vesaidacoupleoftimes,webelieveabsentasignificantdeclineinvolumewhichwedonotforeseenowthatwethinktheheadcountlevelwhereweareatnowinthethirdquarterisagoodrunratefor2016.


AndMarta,youthinkthatyoucouldseesavingsonaperemployeebasisevenwithhigherincentivecompnextyear?


Higherincentivecomp,I'mlookingatseparately.Sothisyear'sincentivecompisdown.Assumingfinancialresultsarebetternextyear,thatwillbeup.Soabsentthethingsthatarestand-alonelikeincentivecompandpensionandpost-retirementbenefitsandthatsortofthing,theactualcashcosttotheemployeeperpersonwethinkwillgodownnextyear.


Okay.Allright,thankyou.

Operator :

OurnextquestionisfromthelineofAlexVecchiowithMorganStanley.




AlexVecchio (Analyst-MorganStanley):

Thanksforthetime.Ihatetobeatadeadhorsebutjustbacktotheresourcetopic,specificallyforthefourthquarteryouguysareexpectingtotalvolumestobedownabout3%inlinewiththethirdquarterwhichwouldimplysequentiallyaboutdown4%yetyouarenotexpectingtoreducetheheadcount.Canyoujustspeakalittlebitmorespecificallytothefourthquarteritselfandwhythecarloadsaregoingtocomedownbuttheheadcountyoudon'texpectto?


Listen,wearegoingtobenimblewithourresourcestrategyandIsaidthatearlierandifweseevolumesdeterioratebeyondwherewethinktheyareheaded,thenwecertainlywillbeginaddressingthelaborsideoftheresourceequation.Butwearealsofocusedonmaintainingandimprovingserviceandthatrequiresacertainlevelofemployment.Moreover,wethinkwecameintothisalittlebitleanerthanothersandthereforewehavealittlebitlesstoshift.


Iwillalsoaddthatthereisalwaysasequentialfourthquarterdeclineinvolumeassociatedwithholidays.Sowhilethatdoesn'timpacttheyear-over-yearcomps,youarepreparingatsequentialandsothatdoeshaveanimpact.


Okay,that'shelpful.Jim,backtotheservicelevels,Ithinkafewquartersagoyouweretalkingaboutexpectingthemtogetbacktoquoteunquotenormalbytheendoftheyearandtheycertainlyhaveshownimprovementrecentlyhere.Butitlooksalittlebitstillawaysawayfromthe2012,2013levelsintermsofthemetricsweseeonthetrainspeedanddwell.

Canyoumaybetalkto--doyoustillexpecttheservicetogettothenormalizedlevelsbytheendofthisyearormaybeitmighttakealittlebitlongerintonextyearatthispoint?


Youareright.Wehaven'tmadethekindofprogresswesaidwewouldmakeonserviceasmeasuredbynetworkvelocityanddwell,themetricsyouseeorinternally.Butwehavemadesubstantialprogressandweareinalotbetterconditionnowthanwewereayearago.Usingourinternalmetrics,ourcompositemetricismorethan10percentagepointsabovewhereitwaslastyearatthistimeandtrendingwellversusadownwardtrendlastyear.Sowefeelverygoodaboutwhereweareintermsofourserviceandourintermodalpremiumtrainsarerunningextremelywell.Thenetworkisinoverallmuchbettershape.

Westillhaveawaystogoandwewillcontinuetopushonthatcompositemetricandgetvelocityuptoo.Sothat'sourstrategy.It'stakingalittlebitlongerforustogettherethanwehadthoughtbutwearewellonourway.


Okay.Thatmakessense.JustlastlyahousekeepingquestionhereforMarta.Ithinkyouhadmentionedearlierinthecallyouexpectedpurchaseservicesandrentexpensetobedownsequentiallyinthefourthquarter.Iwaswonderingmaybeifyoucouldmaybegiveusalittlebitmorequantificationofhowmuchyouexpectthosebuckets--thatbuckettobedownsequentially.


Wellwedon'tgiveguidanceonspecificdollaramountsbutwhatIwillsayiswehadalittle--twothings




mentionedthereiswehadsomeservicerelatedcostsinpurchaseservicesbecausewedidn'tquitegetthevelocitywehadhopedforthequarter.Sowehadthatinpurchaseservicesandinequipmentrentstothetuneprobablyofabout$6million,$5millionor$6millioninadditiontotheservicerelatedcostswehadincompensationandbenefits.

AndtheotheritemisaftertheNovember15or18TripleCrownchangeover,theTripleCrowndraycostsareinthatlineitem.Sotheywillasabusinesstransitionsovertointermodal,thedraypartcostswillbeinpurchaseservices.


Okay,that'shelpful.Thankyouforthetime.

Operator :

OurnextquestioniscomingfromthelineofKenHoexterwithBankofAmerica.

KenHoexter (Analyst-BofAMerrillLynch):

Great.Goodmorning.Iknowit'sbeenalongcall.Jim,congratsonthechairmanshipandMark,goodluckinyourupcomingretirement.

Justmaybesomeclarificationonacouplecoalcomments.Alan,youtalkedaboutclearingthedeck.Ijustwanttoclarifytoyouranswerbefore,doyouhaveanymore[MATSorCSAPR]closingsthataremandatedin2016?Andthenisthe3millionrunratewhatyouarelookingforontheexportside?Iknowyoukeptmentioningthe20milliononthedomestic.Areyoulookingatthe3milliontoholdthrough2016ontheexportside?


We'vegotaboutoneortwoplants,smallerplantsthatwillbeimpactedbymatssoit'snotgoingtohavethatmuchofamaterialimpactonwhatwearedoinginourcoalfranchisenextyear.

Ontheexportside,yes,wearecontinuingtoguideto3milliontonsaquarteralthoughI'lltellyouthathasmorerisksassociatedwithitthanutilityguidance.Andweare,asIknowyouare,wearewatchingtheworldwideindicesandthespotmarketforputtingsoncokingcoalisnowdowninthelow80spermetricton.


Okay.Soevenwiththepriceswhichdoesn'treallymakesensetoship,youarestillthoughtsarethatitkindofholdsattheselevels?Aretherecontractsthatlockthatin?Ijustwanttogetsomeideaofwhatlevelofconfidenceyouhaveinthatoristhatjustanaggressiveorconservativeview?


Towhichareyouspeaking?


Tothe3milliontonoutlookontheexportside.


Thathasdownsiderisktoit.





Okay.Lastly,Jim,juststeppingbackandtherebeenalotofquestionsonemployeeandheadcountandefficiency.Yourlastsentencethatyoukindofnotedthatyoucameintothisabitleanerthanothersinthedownturn.Maybejustgetyourthoughtsinternallyontheoperatingratioat69.7,finallymovingbelow70butnowtheindustryhasmovedfaraheadthatyourpeersarenowover500basispointsbetterinthethirdquarter.Younowhavethreecarriersatorbelow60.

Doyoustepbackandkindofthinkaboutsomethingneedstobeoverhauledorcompletelychangedinthewayyou'vebeenoperatingtoadjustthatoperatingratio?Justasthepeersaremoving,itlookslikefartherawayonthatmetric,justwhatdoyouthinkneedstobedone?


WellIthinkwe'regoingtomakealotofprogressontheoperatingratioandwehavetheabilitytolowertheoperatingratiosignificantlyandweareconfidentthatwecandothat.

DoIthinkwearegoingtoposta53operatingrationextyear?Probablynot.Hatsofftothosewhoareatthatpointalready.Butwiththatsaid,wehavealotofprogressthatwecanmakeonouroperatingratio.Wearekeenlyawareofwherewestandinthepeercomparisonsandwearedeterminedtoimproveourperformancebothintermsofloweroperatingratioandhigherearnings.


Okay.Soyoudon'tstepbackasnowintheChairmanCEOroleandsaywowweneedtoeithergutprogramsoroverhaulsomething?IseethissteponTripleCrownbutthere'snothingthatyouseeneedstobeoverhauledtoreallymakefundamentalchangestogetthatlower?


Nothingisoffthetableandwearehavingfar-rangingstrategicdiscussionsinsidetheCompanyrightnow.Sowecouldcertainlyentertaindifferentapproachestosizingourassetbaserelativetoourrevenueandincomegenerationpotential.That'sastrategythattakesawhiletodeployanddeservescarefulconsiderationbecauseanystrategythatstartshivingoffsignificantportionsoftheassetbaseentailstheriskofrevenueloss.

SoweneedtobeverythoughtfulaboutthatbutcertainlyweareopeninternallyandtalkingaboutdifferentwaystorunthisCompanyandaredeterminedasIsaidtoreducetheoperatingratioandgrowourprofits.


IsthereacertainlevelofORiftheindustryapproachesthatyoufeararemoreregulatoryinsideoroverhang?


Welllook,theindustry'sviewandIthinkit'stherightviewisweneedtogeneratesubstantialprofitsandreturnsinordertojustifyreinvestment.Weareaverycapitalintensivebusiness.Wehavemajorreinvestmentneedsandtheonlywaythat'sgoingtohappenisifwegenerateadequatereturns.Sothat'sourfocus.Ithinkit'sacompellingargumentintheregulatoryarena.Don'tcapourreturnsotherwiseyouwillseereinvestmentdeclineandIdon'tthinkanybodywantsthat.





Jim,Iappreciatethetimeandinsight.Thankyou,guys.

Operator :

OurnextquestioncomesfromthelineofJustinLongwithStephens.

Just inLong (Analyst-Stephens):

Iwantedtostartmaybefollowinguponthatlastquestion.IwantedtoaskaboutCapEx.Itsoundslikethereareseveralareaswhereyouareimprovingcapitalefficiency.Sowiththatinmind,howdoyouexpectyourCapExtotrendnextyear?IsthereanopportunityonanabsolutedollarbasisforCapExtobedownin2016?


Absolutely.NowbearinmindthatCapExin2015includestheD&Hacquisitionatoraround$200million.Sobarringsomemoretransactionnextyear,thatwouldcomeoffCapExandwedobelievewehaveroomtobringCapExdownbeyondeventhatcomponent.Soyes,lookforsomewhatlowercapitalspendingnextyearfromus.


Anyinitialorderofmagnitudethatyouarethinkingaboutorisitstilltooearly?


Well,Iwillsaythis,itisearlyandwehaven'tcompletedourcapitalbudgetfor2016yetbutinmyviewthekindsofcapitalspendingthatwe'vebeenputtinguprelativetorevenueorcashflowisnotsomethingwewanttocontinuetodoandwedoseeaneedtobringCapExdownrelativetosalesandrelativetocashflow.That'sourplanstartingnextyear.


Okay,great.Maybeasmysecondone,Iwantedtoaskanotheroneonpricing.Soaswelookinto2016,doyouthinkthemagnitudeofcorepriceincreaseswilllooksimilartowhatyou'veexperiencedthisyearorwithuncertaintyintheindustrialeconomy,doyouseedownsiderisktothecurrentpricingenvironment?


Priceincreasesareakeycomponentofourstrategy.Weabsolutelyintendtoincreaseourpricingcommensuratewiththevalueoftheproductthatweareofferinginthemarketplace.Sotherewillbenoletupintermsofouremphasisonpriceincreasesasadriverofrevenueandprofitgrowth.


Okay.Iwillleaveitatthat.Thanksforthetime.

Operator :

OurnextquestionisfromthelineofBrandonOglenskiwithBarclays.

BrandonOglenski(Analyst-BarclaysCapital):

Goodmorning,everyone.IknowithasbeenaverylongcallsoI'mjustgoingtokeepittoone.But,Jim,itiskindofalongthelinesofwhatKenwasjustdiscussingwithyouhere.Iknowyou'retalkingaboutOR




improvementbutitjustfeelslikemaybeyourfranchiseisalittlebitmoreleveredtohighercommodityprices.Previouslyyoubookedsomeprofitsinyourfuelrevenuewhichhaveobviouslygoneaway.Youhavehistoricallymadealotofmoneyinthecoalmarkets.Coalhasgonefrom30%ofyourrevenuenowdownto17%.Iknowyouthinkthatthingsaregoingtobestablebutnaturalgaspricesareevenlowerthisyear.

Sohowdowejustputallthistogether?Ifnaturalgasstayshere,ifwedon'tgetareboundinfuelprices,howdoyouaggressivelyattacktheORwithsomeofthoseheadwinds?

SpeakingtotheCapExsideoreventheassetsideorrestructuring,whynotgetmoreaggressiveonrestructuringthecoalnetwork?Againitisdownsignificantlyfromwhereitwaseventhreeorfouryearsago.


Youareright;weareacommoditieshauler.SoyouheardAlansay50%ofourloadsarecommodities-basedandsoitdefinitelyismorechallenginginthiscommoditiesenvironment.Butthatdoesn'tmeanwedon'thaveanyopportunities.WearegoingtocontinuetopushonrevenuegrowthasAlanwentthrough.Fortunatelywehaveaprettydiversifiedfranchiseleveredtocommoditiesasitis.Westillhaveotheropportunitiestogrow.Wearegoingtopushonthose.Wearegoingtobeveryjudiciouswithourspending.Wearegoingtowatchourcapitalvery,verycarefullyandfocusonagainserviceimprovements,returnoncapitalandgoodgrowth.

BrandonOglenski(Analyst-BarclaysCapital):

Okay,thankyou.

Operator :

ThenextquestioncomesfromthelineofBrianOssenbeckwithJPMorgan.

BrianOssenbeck(Analyst-JPMorgan):

Goodmorningandthanksformakingsometimehereattheend.Iknowit'sbeenaprettylongcall.Myquestionisbasicallythecoalnetworkrationalization.Ifyoucanjustgivealittlebitmorecontextof--obviouslyitbeengoingonfor18monthsorso--300mileshasbeentakenoutofserviceorrestricted.Canyoujustgiveusasenseofhowmuchofthenetworkhasbeenanalyzedatthispoint?

Youmentionedthelaborsavingsobviouslytakingsomeassetsbutyouarestillabandoningthem.SoIamassumingyou'regoingtohavetohavesomemaintenanceexpensewiththat.Soifyoucantrytoquantifythatforus,thatwouldbehelpfulandalsohowyouapproachthatingeneral?Isthisisaproactivetypeofanalysiswhereyougetoutaheadofvolumecutsoryoujusttakeitastheminesstarttoslowdown?


ItisaproactiveapproachandIwouldcharacterizewhatwehavedoneasagoodstart.Therearemaybeotheropportunitiesaswell.Weareveryactivelyanalyzingallopportunitiestorationalizeourassetbaseparticularlyinthecoalnetworkandtheremaybeotherrationalizationopportunitiesahead.

Butbythesametoken,wedowanttoretaintheabilitytohandlecoalvolumewhichwethinkwewillgarnerinthefuture.Sowearenotthrowinginthetowelonourcoalbusiness.Wearegoingtocontinuetobeacoalhaulernowandinthefutureandwewanttomakesurewehavetheassetsonhandtodothat.





Okay.Justaquickfollow-up,isthereanysenseyoucangiveusintermsofhowmuchthenetworkhasbeenlookedatthispointintimeandanysavingsruleofthumbpermiletakenoutthatyouareabletorealize?


We'vefocuseduptothispointontheCentralAppnetworkinparticularasMarkwentthrough.Thesavingswillbemeaningfulandwe'llseethosebothintermsofexpensesavingsandcapitalvoidance.


Okay,thanksforyourtime.

Operator :

OurnextquestioncomesfromthelineofBenHartfordwithRobertW.Baird.

BenHartf ord (Analyst-RobertW.Baird):

Goodmorning.RealquickontheTripleCrowntransition,canyougiveanupdateonthetransitionofthenon-autobusiness?IknowthatwearecominguptowardtheNovember15servicecutfirst.Andthensecond,whatwasthelogicinkeepingtheautopartsbusinessintact?


Well,I'lltakethelastpartofthatbecausethatgoestothestrategicrationaletothetransaction.IwillletAlantalkaboutwhat'shappeningintermsoftherechanneling.

TripleCrownstartedoutasanautopartshaulerandthatiswheretheyreallyexcel.Thetechnologythatwewillcontinuetodeployinthatserviceworksreally,reallywellinthelaneswheretheywillcontinuetohaultheautoparts.Sothatistheirforteandwemadethedecisiontokeepthemgoinginthatareawhilelookingtorechanneltheotherfreight.Alan?


Weareworkingwithourchannelpartners.IwillreiteratewhatIsaidbeforebecauseIdon'twantexpectationstogettoohighisthatalmostonpurposetheTripleCrownnetworkdidnotoverlaytheconventionalnetwork.Soitdoesn'tnecessarilyoperateinthesamelanes.Soit'sgoingtobedifficulttomatriculateabunchofthebusinessovertoourconventionalnetworkbutit'sstillaccretivetoearningsanditstillrepresentsanimprovementtocapitalutilization.

BenHartf ord (Analyst-RobertW.Baird):

Appreciatethetime.

Operator :

OurnextquestionisfromthelineofJeffKauffmanwithBuckinghamResearch.

Jef f Kauf fman (Analyst-BuckinghamResearchGroup):

Congratulationsinatoughenvironment.MostofmyquestionshavebeenansweredbutletmecomebacktoMartaoncapitalspendandfreecash.IthinkitwasyouJimthatsaidthatyoucouldseeCapExlowernextyear.Youwanttogetbacktoamorenormalizedspend.IncludingD&H,whatarewe




lookingatintermsofCapExthisyearandhowdoyouthinkaboutCapExsayoveratwo-,three-yearperiodlonger-term?Wheredoyouthinkitshouldbe?


IwouldliketorespondtoyourfreecashflowpointfirstandI'llletMartatalkaboutthetrendincapitalspending.

Ourfreecashflowhasbeensomewhatsubduedthisyearandwearegoingtoturnthataroundnextyearaswell.Theformulaforthatobviouslyinvolveshighernetincome,bonusdepreciationifthatoccurs.It'stheabsenceoftheD&Htransactionaffectingcapitalexpendituresandit'sasomewhatlowernon-D&HrelatedCapEx.Soallofthatgivesyoumuchmorerobustfreecashflowwebelievenextyear.


Withregardtoourcapitalprogram,atthebeginningoftheyear,weannounceda$2.4billioncapitalprogram.Whenthevolumesdidn'tcomeinexactlywithwhatwehadbeenforecasting,welowereditbyabout5%or$130millionandthenofcoursethisyearwehavethe$215millionthatJimdescribed.Sogoingforwardyoushouldthinkaboutlevelsmoreliketheoriginal$2.4billionminusthe$130millionandit'sjustthatwethinktheabsolutenumberin2016willbelowerthanthatnormalizedlevelthisyear.


Allright.Andjusttofollowuponthat,youhaveincreasedthesharebuybackthisyear.Withthestockdownattheselevels,isthereabetteruseoffreecashaftercapitalspendingthansharesrightnow?


Wecertainlyhavetodeploybothborrowingcapacity,cashonhand,andfreecashflowforsharebuybacksthisyearandweseegoodvalueonourshares.Wewillcontinuetouseexcessfreecashflowoverandaboveourdividendandavailableborrowingcapacityforthatpurposeinthefuture.


Allright,well,congratulations,guys.Thankyou.

Operator :

OurnextquestionisfromthelineofDavidVernonwithBernsteinResearch.

DavidVernon (Analyst-Bernstein):

Goodmorning,guys,andthanksformakingtimehere.JustkindofthinkingbroadbrushherewithaheadwindsthatmightbewiththeTripleCrownbusinessmigratingoffandobviouslytheexportcoaldeclinenextyear,wouldyouexpectvolumeoveralltobepositiveornegativecominginto2016offof2015?


Westillhavethepotentialforgrowthnextyear.Ithinkit'sgoingtobemoretargetedtowardsthesecondhalfoftheyear.


Somoreflattishmaybeupalittle?





Yes.


Inaggregate.AndIguessMarta,asaquestionforyouintermsofthatlowerrateofvolumegrowthnextyear,doyouthinkthatthatlackofvolumedrivenproductivitymayoffsetsomeofyourabilitytorecovertheefficiencyledcostsortheefficiencyadded--theinefficiencyaddedcostsofthelastcouplequartersandsomeofthethingsaroundTripleCrown?


Wellwewilldefinitelybepushingoffefficiencynextyear.TripleCrownisgoingtobeoneofthereasonshow.AsAlansaid,themovesthatmoveontheintermodalnetworkshouldbemoreefficientthantheshorterroadrailtrainswewererunningsomeofthisyear.


Itjustseemsliketheoperatingincomedeclinerelativetothe3%declineinRTMsisprettysignificantfromavolumeleveragestandpointwhichwouldseemtoindicatethatifyouhadgottenaflattervolumeyournextyearmightbetoughertogetsomeofthatleveragetofallthroughorsomeoftheefficiencysavingstofallthrow.AmIthinkingaboutthatrightoristhere--doyouthinkthere'sgoingtobeastrongprospectfororganicearningsgrowthinaflatvolumeyear?


Wellonethingtorememberfornextyearisthisyearthusfarwehavehadallthreequarterssofarwehavehadservice-relatedexpensesandsomeweather-relatedexpensesinthefirstquarterbuttheycumulativelytotalabout$82million.Soyear-over-year,wedon'texpectthosetorecurin2016sothatwillbeginourproductivityimprovementthatweexpecttoincreaseonthat.


Okay,thanks.

Operator :

OurnextquestioncomesfromthelineofCleoZagreanwithMacquarie.

CleoZagrean (Analyst-MacquarieCapitalSecurities):

Goodmorningandthankyouforyourtime.Myfirstquestionrelatestocoalroyalties.Wehaveseenthemcontributeabout$0.04thisquarter.Whenaretheyupforrenewalandpleasereminduswhethertheyrelatemoretodomesticutilitycoalorotherareasaswell?Thankyou.


Itvariesbycontractwithrespecttothedurationbutmuchofourcoalroyaltiesisassociatedwithmetallurgicalcoal.


I'msorry?





Muchofourcoalroyaltiesisassociatedwithmetallurgicalcoal.


Metallurgical,okay.Allrightandthenmysecondquestioncomesbacktofuelsurchargesversuscoalprice.You'vecommentedonthiscallandrecentothercallsthatyourcustomershavebeenunwillingtogiveupfuelsavingswithoutavalueexchangeintermsofcoalpriceandonyourendyousaidyouareunwillingtodothat.Isitbestforustomodelcoalpriceincreasesoffsetbysomenegativemixandthenleavesurchargesunchangedinto2017astheforwardcurvesuggests?Thankyou.


Model--canyousaythatpointabout--didyoumention2017?


Yes,inthesensethatonthecurrentforwardcurvesyoursurchargeprogramsareoutofthemoneyforsomeyearsout.Soifrightnowthatchangeisnotoccurringandyouaresayingyouareneedingfuelpricestogohigherforthattohappen,shouldweassumethatthereisnochangeonthefuelsurchargeandjustmodelcorepriceincreases?


Okay,Igetyourpoint.Yes,itwillbeeasiertoaccomplishthisifWTIpricesgoupbutitalsogivesustheopportunitytopushprice.


Okay.Andyourfeedbackfromcustomerssofar,canyoutellusalittlebitaboutthat?


Which-


Whatyoucustomer-


Canyouhelpmeunderstand,Cleo.


It'sabouthowdiscussionsaregoingintermsofgettingcorepricebecauseinmyunderstandingthatconversationisstilltoughasyouaretryingtogetcorebuttheydon'twanttogiveupthefuel.Sohowisthatallnettingout?


That'sagoodpoint.Negotiationswithcustomers,werespecttothat.Pricearealwaystoughbuttheydorecognizethelong-termvalueofrailtransportation.Thereisapauserightnowindemandinsomecommoditymarkets.Jimtalkedabouthow50%ofourrevenuesaretiedtocommodityorforeignexchange.That'sashort-termpause.Inventorydrawdownswebelievewillbecompletebytheendofthisyearandshippersaretryingtolineupcapacityfor2016and2017whichiswhyyouseeinthetruckingmarketspotpricesdecliningbutcontractpricesstillmovingupalthoughmoderating.





Okay.Isittruethatatthistimeofyearyouarealreadystartingtodiscussthebookforintermodalfornextyear?Howisthatgoinggivenyourimprovementinserviceintermsofsettinguppricesfornextyear?Thankyouverymuchforyourtime.


Intermsoffillingupwhat,Cleo?


Thebook.


Thebook.Intermsof(multiplespeakers).


Thebook,yes,thereisa--ourintermodalcontractsaren'tnecessarilyattheendoftheyearsowealwayshaveamixofcontractswhetherit'scommodityorcustomerbase,theyareupthroughouttheyear.Socertainlywearediscussingcontractsfortheremainderofthisyearandnextyearandwearepushingpriceandthelong-termvalueofrailtransportation.


Thankyou.Iappreciateyourtime.


AndCleo,ifIcouldmentiononemorethingonthefuelsurchargerevenueyouaskedaboutformodelingfornextyear,don'tforgetthatinthefirstquarterofthisyearwestillhadasomewhatelevatedlevelbecausethemonthofJanuarybenefitedfromthelagwhenoilpriceswerehigher.Soeachquarterofthisyearyou'veseendecliningabsolutenumbersoffuelsurchargerevenue.Weexpectthattocontinueandhavedecliningfuelsurchargerevenueinthefourthquarter.Ijustwantedtoputthatoutthereforwhenyouaremodeling2016.


Thankyou,Marta.

Operator :

Thankyou.Thisconcludesthequestion-and-answersession.IwillnowturnthecallbackovertoMr.JimSquiresforclosingcomments.


Wellthankyou,everyone.Weappreciateallyourexcellentquestionsandwewilltalktoyouagainnextquarter.

Operator :

Ladiesandgentlemen,thankyouforyourparticipation.Thisdoesconcludetoday'steleconference.Youmaydisconnectyourlinesatthistime,andhaveawonderfulday.




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