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. 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. 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 impact on operating income but increased third quarter operating ratio by approximately 250 basis points, excluding transaction and integration expenses.

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 percentage 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 grew, 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 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 the global supply chain face challenges we have never experienced before. From trucks to chassis, ports to containers, and a lack of truck drivers, to labor challenges at the warehouse and production facilities. We are seeing shortages everywhere. The entire CSX team has been highly focused on delivering new, innovative solutions and partnering with customers to address the supply chain challenges by driving more volume to the railroad. Across the network we have accelerated investments to create new capacity. To address the truck driver shortages, we have added 13 new overflow container yards, implemented new steel wheel options for West Coast cargo, and added Transflo sites that offer customers additional options to move their freight at a lower cost. To address the port congestion and container shortages, we have added new solutions to accelerate repositioning of containers. We utilized port deport lanes to alleviate marine terminal congestion. We are working closely with partners to utilize additional rail yards to help reduce congestion at the port. We have also been aggressively expanding our customer solutions team to further supplement the significant investments we are making in customer-facing technology. Our team is working diligently to create new solutions and options for shippers with supply chain disruptions unlikely to improve in the near term. Finally, we are starting to see early signs of customers making long-term investment decisions to reinvest in onshore production and supply chain solutions. To address these customer needs, we continue to develop and invest in new CSX select sites that offer shovel-ready CSX-served solutions to meet customer requirements. With that, I will hand it over to Jamie to discuss operations.

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 rising COVID-related costs 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. We expect the initiatives we have underway to drive fluidity 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 intermodal team for the exceptional work they're doing to accomplish these goals. These efforts are highlighted by the nearly 90% intermodal 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 hiring visibility by expanding our new hire pipeline almost 300% since July. We are also increasing intermodal headcount and supplemental labor to keep the terminals fluid and allow us to continue moving containers for our customers. While these hiring initiatives are underway, we're taking steps to increase the availability of our existing train and engine workforce. We have implemented new attendance-based initiative programs, which allows us to better utilize our existing headcount to move more freight for our customers. We're also making upgrades to our network to increase throughput and create additional capacity. We are installing more automated equipment at our hump yards. We're converting intermodal terminals to grounded facilities in order to increase capacity. And we are expanding our investment in autonomous cranes to increase intermodal terminal throughput. While we still have sufficient line of road capacity, we are strategically investing in growth by extending sidings in select locations across the network. These siding investments will allow us to continue to refine our train plan, and provide growth capacity for years to come. Every action we take is focused on network reliability, which begins and ends with running a balanced train plan to minimize delay and maximize network performance. Running a scheduled network ensures assets are in the right place at the right time. We will continue to maintain network balance and the principles of scheduled railroading as we add resources to meet current demand. These principles have allowed us to keep the intermodal network open and running well this year, and we are focused on continuing the strong performance as we enter into peak season. Turning to Slide 8. Maintaining a safe operation is the foundation of the success of any other operating goal we want to pursue, and we remain committed to being the safest railroad. In the third quarter, our personal injury rate improved sequentially, and ongoing safety initiatives also drove a decrease in injury severity. While the train accident rate increased slightly from last quarter's record results, accident rates have improved year-over-year. Our focus for the remainder of the year will be critical rule compliance and reducing human factor accidents. We are leveraging the approximate 9,000 tablets distributed to field employees to more productively deliver these messages. Not only did the tablets allow real-time communication on key safety information, but we're also able to more effectively combine electronic and in-person communications to increase the impact of our training programs and drive lasting changes in behavior that will better protect our employees.

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. We are focusing 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 carriers. 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. 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 headcount 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 base expenses are identical to the prior MS&O category, but the new description better reflects the costs in this line post-acquisition. Increased costs on this line reflected the addition of quality carriers, as well as higher intermodal terminal and locomotive expenses. Depreciation was up on a higher asset base that also includes the acquisition impact. Finally, we're proud to report another all-time record for fuel efficiency in the quarter. This reflects continued focus and investment by CSX, demonstrating our commitment to sustainability and the ongoing environmental advantage of rail. Looking into the fourth quarter, we typically see a seasonal increase in operating expenses due to weather, lower capitalized labor, as well as holidays and vacations; that trend should continue this year. In addition to expected headwinds from higher incentive compensation and lower sequential gains on property sales in the fourth quarter, peak-season expenses are also likely to be higher than normal as a result of ongoing supply chain disruptions. Now, turning to cash flow on Slide 11. With operating income up 34% on a year-to-date basis, free cash flow before dividends this year is $2.9 billion, up nearly 50%. Free cash flow conversion on net income is exceeding 100% year-to-date, and we expect it to remain near this level on a full-year basis. The company's cash balance of $2.2 billion is beginning to normalize. The lower balance reflects the acquisition in the quarter and a step-up in distributions to shareholders. We expect cash to continue to normalize over time. After fully funding capital investments in our core infrastructure, year-to-date shareholder returns have exceeded $2.9 billion, including approximately $2.3 billion in buybacks and over $600 million in dividends. We will continue to be balanced and opportunistic in our buyback approach, and we remain committed to returning excess cash to our shareholders. With that, let me turn it back to Jim, for his closing remarks.

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 hire 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 make 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.

We will now take questions. Your first question comes from Ken Hoexter. You may proceed.

Great. Good afternoon. Congrats on some really solid results in a tough environment. It's 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 is up 20%. It seems like you're touching some of that maybe even faster than thought, or there are different kinds 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 are rising in the next year. This is not surprising to our customers who are facing the same cost inflation pressures that we see. What we strive to do is be transparent around that in our conversations with customers. The 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 have 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 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 two quarters. 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. 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 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 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, 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 customers are seeing a good service on that product, and we'll continue to build momentum in the market. I think everything that we thought before we made the acquisition is coming true. The only thing I will say is from an equipment standpoint, obviously with things tight right now, the equipment backlog is going to take a little longer 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 are customers that we believe 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 in the market. The other thing that I think is positive is it 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 through all of our different capabilities that we have, so I think that momentum is starting to be seen in the market as well.

Sean, can you discuss the OR question? Perhaps you could provide some guidance. There's clearly a delay in coal revenue opportunities. I'm curious if we can expect an increase in coal yields in the fourth quarter as that delay is resolved. Could you share your thoughts on the timing, as you may prefer not to address the OR question for next year?

On the export coal side, we've observed some favorable price movements. As we've indicated previously, our prices are linked to the benchmarks, and we anticipate sequential improvement in the fourth quarter compared to the third quarter. It's a strong market, and we expect this trend to continue into next year, although it's uncertain how long these elevated levels will remain. These prices are significantly high and should carry into next year, possibly creating favorable conditions. However, many are trying to produce more coal, and we are working to increase our output as well. In the mine, we faced challenges in the third quarter, evidenced by production issues experienced by several producers. We're addressing these challenges with determination and are focused on enhancing our capacity to meet customer demands.

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? Do you think intermodal would have been meaningfully stronger? 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 intermodal, but you may have capacity constraints in 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 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. As Jamie talked about, we're now starting to see the fruits of all of our hard work for the last nine 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. We fully expect that trend will continue as we go forward, unless some other crazy curveball gets thrown at us. We expect to be in a 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, and other pieces?

My top priority is to ensure we have enough CSX employees in training, primarily conductors, to operate more effectively and return to the performance metrics we achieved before the pandemic at the end of 2019 and the beginning of 2020. Metrics such as fluidity, dwell time, on-time performance, customer service, and trip plan compliance have all declined, mainly because we are facing significant challenges in attracting employees to work with us. This situation has required us to completely reengineer our hiring process and thoroughly review our onboarding procedures to make progress. This has been extremely challenging. Like many businesses in the U.S., we are all struggling with the difficulties of attracting workers. However, I am optimistic that we have done everything possible and are beginning to see an increase in the number of employees entering our training programs and qualifying to work. Barring any further disruptions, I believe we will be in a much better position by the end of this year and at the start of next year compared to the last nine months.

Great. Thanks for the insights, Jim.

Your next question comes from the line of Justin Long. Your line is open.

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 expenses. Any way you can put a finer point around those three 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 compensation, 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 excluding quality, but the thoughts on that into the fourth quarter and maybe into the next year?

If you focus solely on the other revenue line without factoring in the tracking revenue line, which should remain fairly steady from quarter to quarter, the main contributors, as Kevin mentioned, are the intermodal storage and premise use charges, along with demurrage. This is a direct consequence of the ongoing supply chain issues we have been discussing. As conditions begin to improve, that other revenue line will decrease. However, as we currently stand in October, we are likely in a similar position as we were in Q3. We'll see how it develops 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 two thoughts. One, 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.

Yes, Scott. What we're looking at on a sequential basis is modest increases in headcount. We are aiming to fill classes of 40 every week and then getting those individuals trained and ready for the field. Therefore, you won't see dramatic increases in headcount. It's reasonable to assume that we still have capacity on our existing trains and within our network. We are hiring for growth, but it doesn't need to be a one-to-one ratio.

Okay. So, I may not have asked it very clearly, but do you think next year could be a year where you can increase volume beyond the increase in 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 Brandon 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 it's going to be hard to show OR improvement in the near term? Then I guess longer-term if I could sneak a two-part question. Kevin, what are some of the structural things that you think you can leverage with the headcount, building off of Scott's question there?

We're not going to provide guidance on OR, but it's reasonable to expect that, considering some cost pressures and normal seasonality, the OR will likely be a bit higher in the fourth quarter compared to the third quarter.

Brandon, regarding the question about what we can achieve with additional headcount, the team plans to strategically move significantly more freight. Currently, customers are seeking capacity and attempting to counterbalance rising costs. The conditions are ideal for us to promote our product. Therefore, we will increase the volume of freight movement and capture a larger share of our customers' spending. It's a prime opportunity for us.

All right, thanks, Kevin. Thanks, Sean.

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 a 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? 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 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 needed help and what the regulators you think will take away from all this? Thank you.

I believe Kevin did an excellent job of describing the various efforts we've undertaken over the past six months to enhance and expand our capacity independently. We were proactive in our approach. In Chicago, which is our largest terminal for intermodal capacity, we are expanding our 59th Street facility, a property we acquired two years ago. We had another yard nearby that was ready, equipped with cranes. We've consistently aimed to be forward-thinking in identifying areas for growth and ensuring we are well-positioned. One of the new initiatives, as Kevin mentioned, involves relocating traffic from Savannah to a facility in Atlanta, where we established an intermodal yard, despite it not being designated as one initially. We are taking necessary actions to ensure our railroad operates smoothly and delivers better service consistently. This commitment has been unwavering, whether pertaining to mainline tracks that facilitate commercial transport or other operations; we always carefully consider our planning processes to ensure we have the capacity to manage traffic growth as it arises. Fortunately, over the past four years, we have optimized our railroad operations, liberating a substantial amount of capacity across the rail network simply by improving the reliability and efficiency of our train operations. We do not need to make massive investments in the railroad to accommodate future growth; we have locomotives in storage, ready to be deployed. I had anticipated, during a year-end conference call in January, that we would proceed with hiring. Given that at that time about 300 of our trainees and service employees were sidelined due to COVID, I thought we would proceed as we always have and hire 500 employees, expecting that 300 would return. However, I was caught off guard when I learned that many potential hires would be disinclined to work for us. Moreover, when we reached out to previously furloughed workers to return after a significant drop in traffic, many chose to move on to new opportunities and lifestyles. This situation is not exclusive to us at CSX; it is an unexpected challenge affecting the entire supply chain, whether in trucking or shipping or any related field. Everyone is grappling with this new reality. We have had to rethink our strategies, but as always, we have adapted to the circumstances. This adaptability gives us confidence that we will be better positioned as we advance this year and into the next. I don't require government assistance to know how to proceed; I merely hope that the government does not implement measures that complicate matters further.

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 or are these things you had pulled forward from prior plans, or do you think this is more a case of reacting to what we see here? Thank you.

I believe we are responding to the situation, and that is straightforward. We can think, plan, and take various actions, but unfortunately, we've encountered more unexpected challenges in the past two years than most people face in a lifetime. So, what's next? I started my comments by expressing how proud I am of our employees. With all the challenges, changes, and demands we've faced, many initially blamed the entire supply chain issue on the railroads. However, over time, it became clear that the problem was not solely the railroads. We don't own the warehouses for these goods or have trucks to transport them. If I need to acquire a truck to deliver it, I'll do so, and if I have to leave the box in the warehouse parking lot, that becomes someone else's issue. Most of the issues being discussed reflect that the railroads have performed exceptionally well. Their employees have been critical workers throughout the pandemic, actively engaged rather than staying home, adhering to all requirements, and helping ensure the economy continues to grow. The entire railroad industry, not just CSX, has done an outstanding job under incredibly challenging 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. In the context, and I understand the pricing environment, particularly on the accessorial 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 yes, 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 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 well, and 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. When you do that, and you focus on getting it there as quickly as you can and efficiently as you can, and 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, the numbers say 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 have preferred to do a lot more business as we said we could have. 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, and the more efficiently you operate, it's as simple as that; it's just math. So, think 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, you doubled down 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 than 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, and 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 three quarters. You have my metrics as reported to the STB in terms of all of the railroads. Whether it be velocity or 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 found 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 probably got hit during that period of time a little more severely than some other areas. The states of Florida, Georgia, Alabama, Louisiana, Tennessee, Mississippi had a little rougher time, and I'm not calling out any reasons why that might be, that's just the facts. While we have been saying publicly, we are hiring as fast and aggressively as 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 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.

Thanks for the candid response, Jim.

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

Good afternoon. The focus of this earnings season has been on pricing power. While factors like accessorial services are benefiting intermodal, our core business has experienced an upward reset in revenue per carload. The question arises regarding the durability of the recent pricing increases and how our overall portfolio stands on a contractual basis as we consider the potential for further price increases this quarter.

Look, we've 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. Obviously, when those markets come down, we participate on the other side as well. The intermodal businesses, some other parts of our business are tied directly to inflation metrics, and those have moved up. We will see some favorability in those parts of our business that are tied to that through seasonality. Those will continue to probably flow through into the fourth quarter and into the next year. So, we'll have some momentum there. And then obviously, this is probably our expectation for inflation in the next year or higher than the previous year, last year. We will have those discussions and 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 are 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 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 the U.S. 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. 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 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 balance 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 reevaluating forward positioning inventory levels. We're having those discussions around our Transflo products. They don't need next-day shipping or things like that; their forward positioning of those things is important to ensure 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 customers 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.

Thank you for the information. I wanted to discuss the labor issues we've been looking at, but also consider the potential for increasing volume. Specifically, we've had conversations about coal, and I'm interested in what your customers are saying about their plans to boost production. Additionally, on the intermodal front, we've noticed that some steamships are rerouting cargo from Savannah to Jacksonville or other locations on the east coast in an effort to move more volume through the system. My question is, how well can you accommodate these changes?

You see in the East Coast ports outgrow the West Coast ports for the last number of years. That's going to continue to be ongoing. Savannah is making significant investments. All the ports that we operate into are making investments to be able to handle that. We're well-positioned, whether it's Savannah, Charleston, Jacksonville, or 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. The question is whether there is any immediate limitation to increasing the volume through the network.

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, and we're working with them through the transload facilities, either our own facilities or partnering with people who are building big, big, big transload facilities 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 additional big investments.

All right. Thanks a lot, guys.

Your 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 have been attributable to quality?

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.