CSX - Q3 2013

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the CSX Corporation third quarter 2013 earnings call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode. For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation. Sir, you may begin.

David Baggs (VP of Capital Markets and Head of Investor Relations)

Thank you, Lori, and good morning, everyone. And again, welcome to CSX Corporation's third quarter 2013 earnings presentation. The presentation material that we'll review this morning, along with our quarterly financial report and our safety and service measurements, are available on our website at csx.com under the investors section. In addition, following the presentation, a webcast and podcast replay will be available on that same website. Here representing CSX this morning are Michael Ward, the company's Chairman, President, and Chief Executive Officer, Clarence Gooden, Chief Sales and Marketing Officer, Oscar Munoz, Chief Operating Officer, and Fredrik Eliasson, Chief Financial Officer. Now, before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to review the company's disclosure in the accompanying presentation on slide two.

The disclosure identifies forward-looking statements as well as risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements. In addition, let me remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts. That said, with approximately 30 analysts covering CSX, I would still ask, as a courtesy for everyone, to please limit your inquiries to one primary and one follow-up question. With that, let me turn the presentation over to CSX Corporation's Chairman, President, and Chief Executive Officer Michael Ward. Michael?

Michael Ward (Chairman, President, and CEO)

Well, thank you, David, and good morning, everyone. Last evening, CSX reported third quarter earnings per share of $0.46, up from $0.44 in the same period last year. The quarter benefited from overall revenue growth, excellent operating results, and items that are outlined in the quarterly financial report and covered later in the presentation. As the energy markets continue to evolve, our business mix is increasingly favoring merchandise and intermodal movements. The team is effectively managing this change by capitalizing on the modest growth in the economy and by focusing relentlessly on safety, service improvement, and asset efficiency. These are important drivers of our foundation for long-term profitable growth. In the quarter, this foundation helped our operating income and operating ratio remain strong at $854 million and 71.5%, respectively.

The 31,000 employees of CSX have learned from experience that the best way to stay on track through the ups and downs in our marketplace is to focus relentlessly on the things that are in our control. As we go through today's presentation, I think you'll see we're doing that very well as we focus our resources on capturing the longer-term opportunity in rail transportation. We'll begin our discussion with Clarence, who will provide a more in-depth analysis of the top-line results and a forward outlook. Clarence?

Clarence Gooden (Chief Sales and Marketing Officer)

Thank you, Michael, and good morning. Starting at the left side of the chart, total volume increased nearly 3% to over 1.6 million loads in the quarter with mixed performance across the diverse markets we serve. Growth in the merchandise and intermodal markets was partially offset by declines in coal volumes. As a result, merchandise and intermodal now combine for 82% of our volume. Moving to the right, total revenue increased $105 million to nearly $3 billion in the quarter, reflecting overall volume growth, price increases across most markets, and a $38 million year-over-year increase in liquidated damages. Looking at the bottom of this panel, merchandise and intermodal now combine for nearly three-quarters of our overall revenue. Next, revenue per unit increased to $1,825.

The impact of core pricing gains and liquidated damages was partially offset by the unfavorable mixed impact related to growth in intermodal versus the decline in coal. Finally, core pricing on a same-store sales basis remains solid across nearly all markets. Recall, the same-store sales are defined as shipments with the same customer, commodity, and car type, and the same origin and destination. These shipments represented 78% of CSX's traffic base for the quarter. On this basis, all-in core pricing was 1% in the quarter, down from 1.5% in the same quarter last year, reflecting continued rate pressure in the export coal market and more modest increases in domestic coal pricing.

Since we have now greater variability in both our export and domestic coal business, reflecting global market conditions and our fixed-to-variable contract structure, and since our merchandise and intermodal markets are becoming a larger portion of our business, we have also provided you with the same-store sales pricing for these two markets on a combined basis. At the bottom of this panel, you can see core pricing for these markets average 3% for the quarter. This is slightly down from what we've been seeing over the past several quarters, reflecting lower rail inflation, which is embedded in many of our contract escalators. A strong service product provides a solid foundation for pricing above rail inflation over the long term. We are confident in the value of our product offering and remain focused on profitable growth. Now let's look at the individual markets in more detail, starting with coal.

Coal revenue declined 9% in the quarter to $720 million. Domestic coal shipments declined 7%, impacted by lower electrical demand and high stockpiles in our service territory. Export coal volume declined 10% on softer demand for U.S. thermal and metallurgical coals due to a global oversupply of coal. Finally, total revenue per unit was down 2%, with lower export pricing more than offsetting the modest domestic pricing gains. Next, let's look at the merchandise business. Overall merchandise revenue increased 7% to over $1.7 billion. Chemicals remains the key driver for the industrial sector, growing 11% on strength in energy-related products, including crude oil, liquefied petroleum gas, and frac sand. Overall volume in the agricultural sector was slightly down. Feed grain shipments declined as a result of low inventories due to last year's severe drought. In addition, ethanol shipments declined due to lower gasoline demand and production levels.

Finally, in the construction sector, building products and industrial waste increased due to high construction activity and the continued recovery in the residential housing market. Moving to the next page, let's review the intermodal business. Intermodal revenue increased 8% to $431 million. Domestic volume was up nearly 9%, setting a new quarterly CSX record, driven by growth with our existing customers and continued highway-to-rail conversions. International volume was up 3% as growth with existing customers and from new service offerings more than offset volume losses from a carrier port shift. Total intermodal revenue per unit increased 2% on core pricing gains. Finally, 90% of our intermodal traffic is now moving in lanes that are double-stack cleared, and that number will continue to grow through strategic network investments, most significantly in the Virginia Avenue Tunnel Clearance Project in Washington, D.C. Now let's turn to the outlook for the fourth quarter.

Looking forward, we expect stable to favorable conditions for 79% of our markets, and the overall volume outlook for the fourth quarter is positive. Looking at some of the key markets, agricultural is favorable, with higher year-over-year crop yields supporting mid-teens growth in grain shipments. We expect growth in chemicals as we continue to capture opportunities created by the expanding domestic oil and gas industries. Intermodal growth will continue as our strategic network investments and service reliability continue to support highway-to-rail conversions. In addition, we will be cycling the impact of Hurricane Sandy from last year's fourth quarter. Export coal is expected to grow slightly despite soft global market conditions as we are cycling weaker comparisons from last year's fourth quarter. That said, pricing levels will be lower as we continue to focus on keeping U.S. coal competitive globally.

The outlook for the automotive market is neutral, as the benefit of increased vehicle production is offset by competitive losses. Finally, domestic coal volume will decline. We will continue to expect full-year volume will be 5%-10% lower on a year-over-year basis, as we expect fourth quarter volume to decline slightly more than that range. Now I'll wrap up on the next slide. The slow, steady expansion of the U.S. economy is expected to continue, with projected fourth quarter GDP growth of 1.7%. In addition, both the ISM purchasing managers and the customer inventory indices point to continued growth. This macro environment is supportive of growth across all three merchandise sectors: industrial, agricultural, and construction. In addition, the intermodal business continues to grow at rates that well exceed the rate of the broader economy. Finally, coal headwinds are expected to persist into 2014.

Both the export and domestic coal markets are challenged due to the low demand levels and the high inventories. Thank you, and I'll turn the presentation over to Oscar to review our operating results.

Oscar Munoz (COO)

Well, thank you, Mr. Gooden, and good morning to everyone. Allow me to be brief, since I'm happy to once again report that CSX continues to demonstrate excellence in what have been our key focus areas over the last few years: safety, customer service, and efficiency. From the chart, I'll begin with the safety column on the left. The personal injury rate was essentially unchanged from the prior year, and the train accident rate improved 23% to 1.70. This reflects our continued commitment to keep our employees and the communities where we work safe. Moving to service, on-time performance remains at record levels, reflecting the diligent efforts of our organization. Looking at the network, velocities improved once again and dwell at an all-time low, which means that customers are receiving outstanding service while we continue to maximize our assets.

Moving to the far right, and as a result of all these efforts, we still expect to deliver over $150 million of efficiency savings this year. Let's talk about resource management on the next slide. The company's improvement in operating efficiency complements the great service CSX is providing to its customers. Carloads and gross ton miles were up about 3% in the third quarter, and we absorbed this additional workload with fewer resources on a year-over-year basis. As you move down the chart, you can see road crew starts were nearly 3% lower as volume growth was largely incorporated onto existing trains. Additionally, the active locomotive count was 3% lower than last year, and total operations employment was down 4% in the quarter. This demonstrates our ongoing commitment to adjust resource levels to operate reliably and efficiently.

Now, if I could, let me discuss one of our productivity initiatives in a bit more detail on the next slide. Gross ton miles per road crew start was up over 6% versus last year. Now, remember that crew costs are variable with train starts, and the improvement in this metric allows us to grow volume without significant incremental costs. Now, this ability to absorb volume with an existing train service does not happen by accident, and while it takes many departments working together to make this so, I want to thank our operations research and service planning teams, who develop sophisticated modeling tools that allow us to optimize our complex network. Field execution of this operating plan enables us to deliver this excellent service while also realizing the greater efficiencies.

Now, going forward, there's still additional capacity on existing trains, and as business grows, we'll absorb that volume whenever possible, always monitoring customer service levels closely to ensure reliable and predictable train performance. Now, let me wrap up. The safety of our employees and the communities we work in remains a primary focus for us, and we urge our employees every day to look out for and support one another in this endeavor. Service and customer satisfaction remain at high levels, and we remain committed to providing flexible solutions for our customers to enable their growth while driving improved asset utilization and, of course, long-term value for you, the shareholders. Finally, as I mentioned earlier, we remain on track to deliver our $150 million in efficiency savings this year. So with that, let me turn it back to Fredrik for his review of the financials.

Thank you, Oscar, and good morning, everyone. Starting to the left of the slide, revenue increased $105 million in the third quarter to $3 billion as gains in merchandise and intermodal continued to offset declines in coal. At the same time, other revenue, which included $51 million of liquidated damages in the quarter, or $38 million year-over-year, also contributed to the improvement. Moving to the right, relative to the third quarter of 2012, operating income was flat at $854 million. Here, higher revenue and productivity gains were offset by the cycling of last year's SunRail gain, as well as higher incentive compensation, inflation, and volume-related costs. As a result, the company's operating ratio increased 100 basis points to 71.5%. Overall, EPS increased to $0.46 per share, up 5% versus last year, reflecting growth in net earnings and the impact of share repurchases.

As we turn to the next slide, let's briefly discuss how fuel lag impacted the quarter. On a year-over-year basis, the effect of the lag in our fuel surcharge program was $10 million favorable. This reflects $6 million of negative in-quarter lag during the third quarter of 2013 versus $16 million of negative in-quarter lag for the same period last year. Based on the current forward curve, we would expect the year-over-year fuel lag impact to be slightly unfavorable in the fourth quarter. Turning to the next slide, let's review our expenses. Overall expenses increased 5% in the quarter. I'll talk about the top three expense items in more detail on the next slide, but let me briefly speak to the bottom two on this chart.

Depreciation was up 3% to $277 million due to the increase in the net asset base, and equipment rent was down 2% to $94 million, predominantly driven by reduction in locomotive leases. Now, let's discuss our labor and fringe, MS&O, and fuel expense in more detail on the next slide. Starting to the left, labor and fringe expense increased 5%, or $37 million versus last year. Here, the primary driver was higher incentive compensation, as labor efficiency, volume-related costs, and wage inflation all offset each other in the quarter. Looking at the fourth quarter, we currently expect headcount to remain roughly flat on a sequential basis, although, as we continue to demonstrate, we will adjust our resources to reflect the current volume levels and drive efficiency.

In addition, we expect labor inflation in the fourth quarter to continue to increase $15 million-$20 million year-over-year, and the incentive compensation headwind to be slightly less than the level we experienced in the third quarter. Moving to the right, MS&O expense increased 10%, or $51 million versus last year, driven primarily by the cycling of last year's SunRail gain and inflation. Looking at the fourth quarter, MS&O expense will continue to be impacted by the cycling of real estate gains, which, as a reminder, totaled $35 million in the fourth quarter of 2012. Lastly, fuel expense increased 3%, or $10 million versus last year, as an improvement in efficiency and price was more than offset by volume-related costs and adjustment to an interline fuel receivable, which was the primary driver of the unfavorable variance in other fuel. Now, let me wrap it up on the next slide.

In the third quarter, CSX once again displayed the benefits of a diversified portfolio business to generate record third quarter earnings per share. This was achieved by ongoing strength in our merchandise and intermodal businesses and helped by $51 million of liquidated damages in the quarter. Through the first three quarters of the year, CSX has generated nearly $2.7 billion in operating income, a 70.2% operating ratio essentially flat to last year, and earnings per share of $1.43 despite continuing coal headwinds in both the export and domestic markets. As a result of this performance, we now expect CSX to deliver 2013 earnings per share that is slightly up compared to the $179 that we delivered in 2012. We expect to do so despite the fourth quarter that is not anticipated to include any real estate gains or material liquidated damages, as I mentioned earlier.

At the same time, we will be cycling a below-the-line $57 million pre-tax gain on the sale of a non-operating property last year. With our earnings remaining strong in this evolving energy environment, we remain committed to deploying cash within a balanced framework that prioritizes investment in the business to drive long-term value creation, along with dividends and share repurchases that also provide value for our shareholders. At the same time, we continue to target an improving credit profile that balances between financial flexibility and cost of capital through a full business cycle. Looking forward to 2015, we continue to target a two-year CAGR of 10%-15% for EPS. However, due to the continuing near-term coal headwinds, especially in the export market, this target has become more challenging, and achieving this guidance will most likely not follow a linear path requiring higher growth in 2015.

Looking at the operating ratio, by continuing to focus on the things that are more within our control, safety, service, efficiency, above-inflation pricing, and profitable volume growth, CSX will continue to drive towards a high 60s operating ratio by 2015 and sustain a mid-60s operating ratio longer term. With that, let me turn the presentation back to Michael for his closing remarks.

Michael Ward (Chairman, President, and CEO)

Well, thank you, Fredrik. Since the beginning of 2012, the CSX team has successfully overcome almost $750 million in coal revenue loss due to the transition taking place in the energy markets. As you heard this morning, we expect that this transition will continue into next year. As it does, our focus will be the same. First, relentlessly pursuing safety, customer service, and efficiency, the things we control the most. Our culture and systems are built for this, and it has seen us through many ups and downs in the marketplace. Second, continue to pursue opportunities in our growing merchandise and intermodal businesses. That growth is already happening as the economy continues its slow recovery. Third, continue to invest in the most promising long-term growth opportunities we see, especially in our intermodal business, where we are finding that the marketplace is very receptive to our enhanced capabilities.

Our third quarter results show the resiliency of this team and its ability to work through transitions while also managing to grow volumes in most of the product markets we serve. Once the transition in the energy markets is complete, we believe that the investors will appreciate the new diversity and vibrancy of our product portfolio, especially when paired with an underlying business that is strong, highly focused, and able to capitalize on opportunities in the near and long term. This team's energy and motivation is not only fueled by the market opportunities we see now in merchandise and intermodal, but also by the ongoing belief in the long-term outlook for rail transportation as population and consumption increases. American manufacturing gains competitiveness, and the global trade requires the movement of products across this country in ways that are good for the economy and the environment. That's what we do.

With that, we'll be pleased to take your questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Anthony Gallo with Wells Fargo.

Michael Ward (Chairman, President, and CEO)

Morning, Anthony.

Anthony Gallo (Managing Director)

Hey, good morning. Congratulations.

Michael Ward (Chairman, President, and CEO)

Thank you.

Anthony Gallo (Managing Director)

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

Clarence Gooden (Chief Sales and Marketing Officer)

Anthony, this is Clarence Gooden. We've looked at a couple of the markets, but we just haven't seen one. Crude was one that we looked at early on, and we just did not see where we had any flexibility at all to price as we do in the coal market.

Anthony Gallo (Managing Director)

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

Clarence Gooden (Chief Sales and Marketing Officer)

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

Anthony Gallo (Managing Director)

Great. Thank you.

Operator (participant)

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

Michael Ward (Chairman, President, and CEO)

Morning, Ken.

Ken Hoexter (Managing Director)

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

Clarence Gooden (Chief Sales and Marketing Officer)

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

Ken Hoexter (Managing Director)

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

Clarence Gooden (Chief Sales and Marketing Officer)

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

Ken Hoexter (Managing Director)

Appreciate the insight.

Operator (participant)

Our next question is from Brandon Oglenski with Barclays Capital.

Michael Ward (Chairman, President, and CEO)

Morning, Brandon.

Brandon Oglenski (Director and Senior Equity Analyst)

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

Fredrik Eliasson (CFO)

Well, as we said, and I've said this now for a period of time, it's become more challenging because of both of what we're seeing in the export market and the fact that the utility stockpiles have not worked itself down as we had expected originally by the end of this year. The economy, though, it continues to be strong or growing at a relatively slow pace, but it's still moving forward, which is a good sign. So what we've said when we laid out the guidance was that we expect coal to be flat. As we look at 2014 and 2015, in order to get that, we'd like to get pretty close to that assumption.

Clearly, with continued strong productivity gains, a little bit stronger pricing than we have, or the economy doing a little bit better than we think, we still think there's a shot at getting to that 10%-15% CAGR. But clearly, it has to be not linear at this point based on what we're seeing in the coal markets today, which is why we think that 2015 has to probably be a little bit higher growth rate than what we're going to expect in 2014.

Brandon Oglenski (Director and Senior Equity Analyst)

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

Fredrik Eliasson (CFO)

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

Brandon Oglenski (Director and Senior Equity Analyst)

All right. Thank you.

Operator (participant)

Our next question is from Christian Wetherbee with Citi Research.

Michael Ward (Chairman, President, and CEO)

Morning, Christian.

Christian Wetherbee (Senior Research Analyst)

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

Clarence Gooden (Chief Sales and Marketing Officer)

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

Christian Wetherbee (Senior Research Analyst)

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

Clarence Gooden (Chief Sales and Marketing Officer)

They tend to be longer than a year.

Christian Wetherbee (Senior Research Analyst)

Okay.

Clarence Gooden (Chief Sales and Marketing Officer)

The expectation would be, as they renew, they would still stay longer than a year?

Christian Wetherbee (Senior Research Analyst)

Yes.

Okay. Thank you very much for the time. I appreciate it.

Operator (participant)

Our next question is from Allison Landry with Credit Suisse.

Michael Ward (Chairman, President, and CEO)

Morning, Allison.

Allison Landry (Senior Equity Research Analyst)

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

Clarence Gooden (Chief Sales and Marketing Officer)

Allison, pricing was strong for intermodal during the quarter, and it was on the domestic side. That is true.

Allison Landry (Senior Equity Research Analyst)

Okay. Am I thinking about it correctly that the domestic intermodal has a shorter length of haul than what you're moving internationally?

Clarence Gooden (Chief Sales and Marketing Officer)

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

Allison Landry (Senior Equity Research Analyst)

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

Clarence Gooden (Chief Sales and Marketing Officer)

No, not at all. In fact, the Illinois Basin coal is actually growing for us. Both Illinois Basin coal now and Powder River coal combined are accounting for nearly half of the coal burned on CSX.

Allison Landry (Senior Equity Research Analyst)

Okay. Great. Thank you very much.

Operator (participant)

Thank you. Our next question is from Justin Yagerman with Deutsche Bank.

Michael Ward (Chairman, President, and CEO)

Morning, Justin.

Justin Yagerman (Director and Senior Equity Research Analyst)

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

Oscar Munoz (COO)

Justin, thanks. I might quibble with the pretty good definition. I think we've done a great job for the team. But thanks. I think if I characterize your question as, "Can you continue to deliver productivity in sort of softer environment?" I think we've proved that we can. So the answer to that is yes. Is there more to be had? I think there is. There's a lot of opportunity in our field. If you think of our local serving areas versus our mainline road, there's an opportunity there. Our assets still could use a lot more efficiency in how they're utilized across our system. So we see lots of activity going forward. In fact, we just recently completed a review of, for instance, our next year's productivity savings.

I'm happy to say as well that we are very much in line with the long-term guidance we've given at this early stage. So there's a lot there to be had, and there's a lot of details behind it. So I think we're going to talk here in November at one of the analyst conferences, and I think I'll be outlining some of the more specifics in that area to give you more confidence in our ability to continue to do that.

Justin Yagerman (Director and Senior Equity Research Analyst)

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

Fredrik Eliasson (CFO)

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

Justin Yagerman (Director and Senior Equity Research Analyst)

Okay. That's very helpful. Thank you very much.

Operator (participant)

Thank you. Our next question is from Thomas Kim with Goldman Sachs.

Michael Ward (Chairman, President, and CEO)

Morning, Tom.

Thomas Kim (Managing Director)

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

Fredrik Eliasson (CFO)

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

Thomas Kim (Managing Director)

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

Clarence Gooden (Chief Sales and Marketing Officer)

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

Michael Ward (Chairman, President, and CEO)

Thank you, Tom.

Operator (participant)

Our next question comes from Tom Wadewitz with JPMorgan.

Michael Ward (Chairman, President, and CEO)

Morning, Tom.

Tom Wadewitz (Senior Equity Research Analyst)

Yeah. Good morning, Michael. Wanted to, I guess, there's been a surprising lack of questions on export coal today, so I wouldn't want you guys to miss out on the export coal comments. But.

Michael Ward (Chairman, President, and CEO)

Thanks.

Tom Wadewitz (Senior Equity Research Analyst)

Let's see. You gave some thoughts on 2014 that export coal would be a source of a little bit of pressure. I'm wondering, is that on the thermal side, and is there some impact from multi-year contracts expiring where maybe some coal that wouldn't be economic in the current environment's being taken by European utilities? So maybe just how you look at the multi-year contract impact and where you would think thermal exports may shape out for how they may look in 2014. Thanks.

Clarence Gooden (Chief Sales and Marketing Officer)

Tom, the multi-year contracts are pretty much phased out, and that was mainly driven by the forward curve of the API 2 because it continued, as you're aware, to drop precipitously over the last year. So the ability to sell forward for most of our producers and our coal traders just simply hasn't been there. So we expect some pretty strong headwinds until that API 2 thermal index picks up in Europe for 2014. So it's going to be a tough year in that thermal environment for 2014. Does that answer your question?

Tom Wadewitz (Senior Equity Research Analyst)

Well, I guess I'm just trying to figure out if all of the thermal coal from Central App that's being exported is uneconomic or if the 4-million-ton level in third quarter of export thermal coal, if that's the level, it's still going to be economic at current prices or kind of where you go between that.

Clarence Gooden (Chief Sales and Marketing Officer)

It's somewhere in that area where you're describing now is about the low end of the economic level.

Tom Wadewitz (Senior Equity Research Analyst)

The level in third quarter is the low end, or is somewhere between 4 million and 0?

Clarence Gooden (Chief Sales and Marketing Officer)

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

Tom Wadewitz (Senior Equity Research Analyst)

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

Oscar Munoz (COO)

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

Tom Wadewitz (Senior Equity Research Analyst)

Okay. Great. Thanks for the time.

Operator (participant)

Our next question is from Bill Greene with Morgan Stanley.

Michael Ward (Chairman, President, and CEO)

Morning, Bill.

Bill Greene (Managing Director)

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

Clarence Gooden (Chief Sales and Marketing Officer)

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

Bill Greene (Managing Director)

Okay. So there's not sort of any real change in the competitive dynamic from your perspective?

Clarence Gooden (Chief Sales and Marketing Officer)

Right.

Bill Greene (Managing Director)

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

Clarence Gooden (Chief Sales and Marketing Officer)

Bill, I got to tell you, I think what I've seen and what our intermodal people have seen is that the hours of service law has really had a negligible impact on the trucking industry. What it has in effect done is put more regulation and has made it more expensive and more difficult for the truckers to do business with, which is another dynamic that is making intermodal a better product for the customer to use. I would attribute more of our growth success to the fact that we put a lot of emphasis on organic growth, and we had a specific program launch and put a specific sales force behind a program that we call Highway to Rail Conversions.

We've been very successful in that program this year and going out to the beneficial cargo owners along with our channel of sales partners and introducing to people who were not traditional users of the intermodal product or were fairly light users of the intermodal product what intermodal is, what its capabilities are. With the service product that our operating team is delivering for us, those combinations together have proved to be very successful for us.

Bill Greene (Managing Director)

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

Clarence Gooden (Chief Sales and Marketing Officer)

Yes. I would favor both.

Bill Greene (Managing Director)

All right. Thanks for the time, guys.

Clarence Gooden (Chief Sales and Marketing Officer)

Thanks, Bill.

Operator (participant)

Our next question is from Jeff Kauffman with Buckingham Research.

Michael Ward (Chairman, President, and CEO)

Morning, Jeff.

Jeff Kauffman (Sector Head for Transportation and Equipment Research)

Hey. Good morning, everybody. Thank you. I apologize. I missed about the first 4 or 5 minutes of the call, so I hope you didn't hit this already. Clarence, I want to ask a little bit more on coal and export pricing. If I just do the math on the revenue ton miles and tons, it looks like length of hauling coal was probably up about 3%. So all things being equal, you'd think revenue per car would end up being up something similar, but it was down almost 2%. So you got a 500 basis point differential. How much of that can be explained by mix versus, say, pricing of international shipments versus what's going on domestically?

Clarence Gooden (Chief Sales and Marketing Officer)

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

Jeff Kauffman (Sector Head for Transportation and Equipment Research)

Okay. But wasn't the domestic fixed-to-variable component net positive to yields?

Clarence Gooden (Chief Sales and Marketing Officer)

No. No. It was not.

Jeff Kauffman (Sector Head for Transportation and Equipment Research)

Okay. All right. I'll round back with you. Thank you very much.

Clarence Gooden (Chief Sales and Marketing Officer)

Thanks.

Operator (participant)

Our next question is from Scott Group with Wolfe Research.

Michael Ward (Chairman, President, and CEO)

Morning, Scott.

Scott Group (Managing Director and Senior Analyst)

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

Clarence Gooden (Chief Sales and Marketing Officer)

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

Scott Group (Managing Director and Senior Analyst)

It's tough at this point to give kind of any kind of rough forecast for millions of tons of coal for export next year?

Clarence Gooden (Chief Sales and Marketing Officer)

It is.

Scott Group (Managing Director and Senior Analyst)

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

Fredrik Eliasson (CFO)

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

Scott Group (Managing Director and Senior Analyst)

Okay. That's helpful. Thanks, guys.

Operator (participant)

Our next question is from Jason Seidl with Cowen & Company.

Michael Ward (Chairman, President, and CEO)

Morning, Jason.

Jason Seidl (Managing Director)

Good morning, guys. How are you? A couple of questions here. One, I guess I'll talk a little bit about the intermodal side. When you look at the trucking market and you look at your success in the pricing market, is there any concern that you might drive some business back to the highway? Because clearly, what we've seen on the truckload side is their lack of ability to raise pricing.

Clarence Gooden (Chief Sales and Marketing Officer)

We don't have that concern right now. No, it hasn't come up. In fact, it's just the opposite. Number one, we expect to continue this growth. And I think it's important to point out to you that, and I hope you picked up in our prepared remarks, that we'll be cycling Hurricane Sandy in the fourth quarter. So we expect to continue to see good growth throughout this year.

Jason Seidl (Managing Director)

Okay. Very good. And let me switch a little bit to sort of the crude markets. If we look at everything combined, we've seen, obviously, frac sand looking a little bit better as operators are looking to pump more sand per lateral feet. If you add up your crude business, your fracs, your tubulars, your pipe, what % of the overall business are those things combined now?

Clarence Gooden (Chief Sales and Marketing Officer)

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

Jason Seidl (Managing Director)

Okay. Well, if you guys can get that, you can shoot it to me offline. I appreciate the time as always, guys.

Clarence Gooden (Chief Sales and Marketing Officer)

Okay.

Operator (participant)

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

Michael Ward (Chairman, President, and CEO)

Morning, Ben.

Ben Hartford (Senior Equity Research Analyst)

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

Clarence Gooden (Chief Sales and Marketing Officer)

Well, it depends on, I guess, whether you're dealing in a Transcon or an Eastern move. But typically, in an Eastern move, you might see that number somewhere between 5%-10%. Transcon, you may see that number around 10%.

Ben Hartford (Senior Equity Research Analyst)

Okay. That's helpful. Then how should we think about it over the next - pick a number - 3-5 years? You guys want to continue to grow volume and raise rates and raise rates above the cost of rail inflation, obviously, with some of the pressures that we're seeing in the truck market. Should we expect that differential to continue to narrow, or are there opportunities from a productivity standpoint that allow you to keep a 5%-10% discount and continue to take share at a healthy quote? How should we think about that balance over the next period of years?

Clarence Gooden (Chief Sales and Marketing Officer)

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

Ben Hartford (Senior Equity Research Analyst)

Okay. That's helpful. Thank you.

Operator (participant)

Our next question is from David Vernon with Bernstein.

Michael Ward (Chairman, President, and CEO)

Morning, David.

David Vernon (Managing Director and Senior Analyst)

Hey. Good morning, guys. Thanks for taking the question. Oscar, a quick question for you. On the GTMs per crew start metric that you provided, what percentage of the labor costs would that productivity metric apply to?

Oscar Munoz (COO)

What percent? I'm sorry.

David Vernon (Managing Director and Senior Analyst)

So the GTMs per road crew start? Obviously, you guys are doing a lot to drive more efficiency on the road crews. What I'm trying to sense is what to get a sense for is what weighting that would have on the total labor cost in the P&L.

Oscar Munoz (COO)

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

David Vernon (Managing Director and Senior Analyst)

Great. Thank you. And then, Fredrik, with the commentary on pricing maybe getting a little bit slow, a little bit weaker than it has been in the last decade, does that start to change the way you guys think about CapEx a little bit going forward?

Fredrik Eliasson (CFO)

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

David Vernon (Managing Director and Senior Analyst)

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

Fredrik Eliasson (CFO)

No. I mean, nothing has really changed. What we're saying, we had a lot of legacy pricing that we have opportunities to reprice early on in this kind of rail renaissance cycle. Over the last few years, there hasn't been a lot of legacy pricing opportunities anymore. We continue to push inflation plus pricing, just not at the same degree as we've seen before. Nothing there is changing going forward from what we've seen the last few years.

David Vernon (Managing Director and Senior Analyst)

Okay. Great. Thank you.

Operator (participant)

Our next question is from John Larkin with Stifel Nicolaus.

Michael Ward (Chairman, President, and CEO)

Morning, John.

John Larkin (Managing Director)

Hey. Good morning, gentlemen. Thanks for taking my question. I wanted to dig a little bit into the terrific growth you've had on domestic intermodal. Could you break that down between Local East and Transcon? Is the Local East really driving that, or are you still seeing growth with connecting traffic from the west?

Clarence Gooden (Chief Sales and Marketing Officer)

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

John Larkin (Managing Director)

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

Clarence Gooden (Chief Sales and Marketing Officer)

That's right. We just had a study updated this past quarter that we had done several years ago, as a matter of fact. We've got 9 million addressable loads in the East over 550 miles that we still haven't touched as an industry that could possibly be converted to intermodal.

John Larkin (Managing Director)

All right. That's very helpful. That's all I had.

Operator (participant)

Thank you. Our next question is from Matthew Troy with Susquehanna International.

Michael Ward (Chairman, President, and CEO)

Morning, Matthew.

Matthew Troy (Director)

Good morning, Michael. Question for you, if I could. It seems if I look at the long-term spectrum, last 10 years, next 10 years, the railroads have kind of subtly shifted from, let's call it, victor to victim in coal. Yet you accomplish a lot in terms of U.S. infrastructure. I'm just wondering, the dialogue in Washington for the last several years has been focused around reregulatory risk.

I'd love to hear your thoughts about, one, your dialogue in Washington now about what the railroads provide and how they seem to be somewhat collateral damage of the current administration's war on coal, but more importantly, how you and the other railroads may be posturing in Washington to demonstrate what you do provide, both from an infrastructure perspective and a reinvestment perspective, on a long-term basis.

Michael Ward (Chairman, President, and CEO)

Well, when we visit with the legislators, Matthew, the one thing that they really do appreciate is the private capital we bring to the infrastructure of the United States. I mean, clearly, we have huge challenges with our infrastructure. Quite frankly, all the rails have been investing 16%-17%. They've realized that's valuable, helps relieve highway congestion and some of the burden there. So they're very supportive of the fact that we're making more. And I think the fact that we're making more but investing more is an equation that, for them, makes really good sense. On the issue of coal, clearly, we knew that there was going to be some issues come 2015. Natural gas, obviously, accelerated that with the low prices.

The one thing I read in the journal today, though, that you might find of interest, the Supreme Court has agreed to take up the issue of EPA expanding the SO2 from mobile sources to stationary sources, which I think could be a very interesting twist because, quite frankly, the law doesn't allow them to do the stationary sources in the manner that they are doing so. So we're really pleased that the Supreme Court has taken that up. But clearly, this administration doesn't favor the use of coal. I think, personally, that we're going to find it's going to be part of the mix longer term. If you look at the nuclear plants that are being built, they're already being delayed into late in this decade, maybe even next decade.

So I think over time - and this is my own personal view - we'll find coal will, once again, have a role. But it's going to be a tough few years here with this administration's war on coal.

Matthew Troy (Director)

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

Michael Ward (Chairman, President, and CEO)

Well, Matthew, we've looked at what is in place up now to 2015. There probably won't be much impact to us because the plants that will be impacted have already been impacted either by shutting down or by the impact of natural gas itself. Now, the proposed EPA requirements that may or may not go into effect for the existing power plants, we have really taken a look at that because, as you're probably aware better than I am, that'll be litigated before any impact of that occurs. I don't think they're even going to have proposals on existing plants till the middle of 2014 and putting it in place in the middle of 2015. It's certainly far out and not even know where they're planning on that.

Matthew Troy (Director)

All right. I look forward to talking about that in 2017. Thank you. All right.

Operator (participant)

Our next question is from Walter Spracklin with RBC.

Michael Ward (Chairman, President, and CEO)

Good morning, Walter.

Walter Spracklin (Managing Director and Equity Research Analyst)

Good morning. So I just wanted to cover off a little bit on the guidance, perhaps, for you, Fredrik. When I look at what your 10%-15% encompasses, I guess it's off the $1.79 as a starting point, or it could be off 2013. You can clarify. But essentially, what I've seen in 2013 is a fair degree of kind of SunRail gains, tax benefits, liquidated damages, which you add up, it probably equates to anywhere from kind of $0.06-$0.09 lift on your earnings this year. I'm curious just to see how you kind of make up for that next year. In other words, what I was hearing is that we're not going to see anywhere near the same benefit from those kind of more lumpy or one-time items.

So I guess you're indicating you'll be able to make up for that and still achieve, over the course of two years, CAGR of 10-15. So without ramping significantly other items to get to that I mean, I guess where I'm going is to offset that $0.06-$0.09. I'd have to ramp quite significantly your pricing, your volume, your expense savings to get to a 10%-15% CAGR. And perhaps you could give me a little bit of sense where perhaps my math is wrong on my starting points here, or there's something I might be missing on our assumptions going forward.

Fredrik Eliasson (CFO)

Yeah. So first of all, it is off the 2013 base and not the 2012 base. It is a 2-year CAGR. And you're absolutely right that because of the fact that we have received some additional one-time benefits that perhaps we did not anticipate originally, we have made the 2-year CAGR a little bit more difficult as the base for this year has come up. But that is incorporated into our statement around the fact that it's become more challenging. So once again, as we look to the next 2 years, it is a 2-year CAGR. It is going to mean that at some point, in order to get there, coal is going to have to come back. And as we have outlined, we think that's going to be more in 2015 versus 2014.

And so overall, I would say that those two assumptions, the economy is going to be growing, albeit at a slow pace, is still something we feel good about. But the coal assumption, obviously, is still challenging. So to paraphrase, you need coal to come back to hit those targets in 2015? I think right now, we've said that in 2015, we need some help on coal again. It doesn't mean that we need it all the way back because in any plan, you also have opportunities to do better in other areas of your business, including pricing, productivity, the economy coming back a little bit faster than we would have expected. But clearly, some help on the coal side from what we're currently seeing it is probably something that is required.

Walter Spracklin (Managing Director and Equity Research Analyst)

Okay. Fair enough. Second question here is on pricing.

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

Fredrik Eliasson (CFO)

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

Walter Spracklin (Managing Director and Equity Research Analyst)

Okay. Got it. That's all my questions. Thanks very much, guys.

Operator (participant)

Our next question is from Justin Long with Stephens.

Michael Ward (Chairman, President, and CEO)

Morning, Justin.

Justin Long (Managing Director)

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

Michael Ward (Chairman, President, and CEO)

You're very far away. Repeat the end of that question again. The last time I'm hearing you.

Justin Long (Managing Director)

Sorry. It was on incremental margins in the non-coal business and what you're seeing today and how you're thinking about that metric as we go forward.

Michael Ward (Chairman, President, and CEO)

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

One of the reasons why we've been able to hold up as well as we have with this significant change in our coal business is because of the fact that the incremental margin in the intermodal network and in our merchandise business is very attractive. Thank you. As a follow-up, as I think about CapEx for the next year or so, I was wondering if you could comment on your railcar equipment needs and any areas that might be pressing in terms of either replacement or growth. I think we are comfortable with, as I said earlier, the 16%-17% of revenue. We have long-term plans that we're executing against. We are in a good place in terms of our railcars reinvestment cycle. Locomotives, we will bring some additional locomotives on next year, probably not so many in 2015.

But we do also have some assets stored. So we feel we're in a good place with equipment, even if the economy comes back a little bit faster than we might currently be expecting. Okay. Great. I appreciate the time.

Operator (participant)

Our next question is from Donald Broughton with Avondale Partners.

Michael Ward (Chairman, President, and CEO)

Morning, Donald.

Donald Broughton (Managing Director and Chief Market Strategist)

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

Michael Ward (Chairman, President, and CEO)

I think there's a degree of movement in mix.

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

Donald Broughton (Managing Director and Chief Market Strategist)

Thank you.

Our final question will come from Keith Schoonmaker with Morningstar.

Morning, Keith.

Keith Schoonmaker (Director of Industrial Equity Research and Equity Analyst)

Good morning. Question for Oscar, probably.

Oscar, the 6% gain in GTM per road crew seems like a pretty large increment. You've mentioned greater double stacking and slightly longer trains. But does this improvement stem mostly from a mix that might be richer in longer hauls? Or were there some other levers that you pulled to accomplish this? It's a combination. Certainly, longer hauls are part of the mix. There's a lot of difficult planning and work and a lot of technology that has been involved recently. We have items like Trip Optimizer, Dynamic Train Planning, and a host of other areas that actually affect that. And at the end of the day, the operating train plan is the one that has to be developed efficiently to get those things. So it's not just about a longer haul movement. And Oscar, was this a step change unique to this period?

Or do you think this sort of gain may be not in as great an increment? But is this going to be more routine?

Oscar Munoz (COO)

Yeah. You know what? Like everything else, as the team continues to work and collaborate closely and allow the use of all these tools, it's a nice, slow, and gradual ramp-up. And we hit our mark very nicely this quarter.

Keith Schoonmaker (Director of Industrial Equity Research and Equity Analyst)

Great. Thank you.

Michael Ward (Chairman, President, and CEO)

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

Operator (participant)

This concludes today's teleconference. Thank you for your participation in today's call.