CSX - Q3 2017

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the CSX Corporation third quarter 2017 earnings call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode. Following today's presentation, we will be conducting a question-and-answer session. To ask a question, please press star followed by one. For opening remarks and introduction, I'd like to turn the call to Mr. David Banks, Vice President, Treasurer, and Investor Relations Officer for CSX Corporation.

David Baggs (VP, Treasurer, and Chief Investor Relations Officer)

Thank you, Cheryl, and good morning, everyone. On behalf of the management team here at CSX Corporation, I'd like to welcome you to our quarterly earnings call and also thank you for your interest in our company. Our presentation, our quarterly financial report, and our press release, which conveyed our results and reaffirmed our 2017 guidance, are all available on our website at csx.com in the Investor Section. In addition, a webcast replay of this presentation will be available later today, and the 10-Q will be posted tomorrow on that same website. This morning, CSX is represented by our Chief Executive Officer, Hunter Harrison; our Chief Operating Officer, Cindy Sanborn; our Chief Sales and Marketing Officer, Fredrik Eliasson; and our Chief Financial Officer, Frank Lonegro. On slide two is our forward-looking disclosure.

Any statements about th`e future made during the course of this presentation or during the question-and-answer session should be taken in the full context of this disclosure. Turning to slide three is our non-GAAP disclosure. While CSX files all of our financials in accordance with U.S. GAAP, we're providing certain non-GAAP measures to give you a more fulsome understanding of the business. These measures should be taken in the full context of this disclosure and with the understanding that they are not a substitute for GAAP. Finally, with our investor conference less than two weeks away and with close to 30 analysts covering CSX, I would encourage everyone today to limit their questions to one. With that, it is my great pleasure and privilege to introduce our President and Chief Executive Officer, Hunter Harrison. Hunter?

Hunter Harrison (CEO)

Thank you, David. Good morning, everyone, and thanks for joining us. As David said, we've got a lot to discuss today. My remarks are going to be a little different than they normally might be. I'm going to allow Frank to run through the number because there's no use in us both of them. To try to give you some explanation, or at least our read on the quarter, which some could characterize as mixed results. There were a lot of dynamics going on and taking place in the third quarter, which was a carryover to some degree from the second quarter, and with a challenging start. So let me start here.

I think that we went through, obviously, some slippage service-wise on the third quarter, which we were not proud of, which we had a listening session last week with the Surface Transportation Board with their two members. I think some of you were present. I think there were some mixed reportings there. But I can tell you this, I've been in this business a long time. And this company is back to where it was. It's back to where it was, and it's better, and it's climbing. And I see those issues, generally speaking, behind us, which I'm very proud of that. It reflects, to some degree, the resiliency of this organization to go through what this organization has been through and to be able to come out of an 8-9-week setback. And I didn't really—I had said it initially as we went into this transaction.

I didn't want to spend a lot of time reflecting back. But I do think it will, to some degree, add some context that this was not a failure of the model, a failure of precision, especially railroading. Some of the historians are very good historians. This is not a new operating plan. This is an operating plan that's been in existence for 20 years plus. It's had a pretty good track record. In fact, I would, it's a little hard for me to be objective, but an excellent track record. And so I think, as we reflect, it was more of an excuse. We didn't execute at a lot of levels. And we learned that. And as a result, we had to make some of what I would describe as painful changes. That's never pleasant to do, but we had to do that.

We had two derailments that were a real concern to me. One was a pretty horrific derailment on the Sand Patch Mountain that you read a lot about, that we have changed some procedures as a result. And I would say also that to the local people there that we were dealing with were extremely, extremely cooperative to our efforts of trying to get that derailment under control. And then we had a—we still have an investigation of a derailment in South Carolina that I'm convinced, from a personal standpoint, is clearly a case of sabotage, where we had a bulldozer put up on the track, towed by some pine sapling. And we came around—and that's not unusual in that territory to have that—and we hit the bulldozer, derailed the cars, thankfully. Thankfully, nobody was hurt. We've got rewards out.

But those things, the derailments, the personnel changes that had to be made, I think, to some degree, we had reflected and understood that there's resistance to change. We will have to deal with that. We've had to, in a little more difficult way than I thought it might be. But having said that, I think the most significant issue that came out of here is we learned a lot about some of our people. We made some personnel changes. We've developed some real, what I would describe as rock stars, both in-house, from other rails, from the free market. And so I am very pleased that I think the organization is ready to go forward at what I might describe as breakneck speed.

The operating plan that we had talked about, I think last week or the week before, we brought in our first dispatchers from the field, which takes us from—well, it was the first move to take us from 9 offices to one here in Jacksonville. It's a big step. I think, and these things are dynamic and the markets change, but I think that we have pretty well settled in with the hump yards. I think we started off with 12 or wherever we were. It was counting. And we're down now to 4, I think, core yards, which are effectively Selkirk, New York, and Waycross, Georgia. Also, Indianapolis, Avon Yard. And I guess Willard is the last one that will probably be closed soon. So that hump yard work is mostly behind us. The dispatcher work is behind us. The personnel moves are in place.

The learning curve is going up. I'm as excited as I ever have been, or more so, about the future of the organization going forward. I'll have some more remarks at the end. At this point, let me catch my breath and let Frank convert some of these things into our earnings results.

Frank Lonegro (EVP and CFO)

Thank you, Hunter. Good morning, everyone. I'll briefly walk you through the quarter and touch on a few fourth quarter and full-year items, and then we'll take your questions. In the early part of the quarter, as Hunter mentioned, we rolled out significant changes to the network operating plan as a result of our rapid transition to Precision Scheduled Railroading. While our service took a step back in July and August, we're pleased to report that our velocity and dwell performance in September were favorable to Q1 levels, and we expect continued improvement going forward. The changes we made to the operating plan helped drive significant train length improvements on a sequential basis. Balancing the train plan and consolidating train types drives efficiency savings through better asset and resource utilization.

Cars and locomotives in service are down significantly year-over-year, and we are able to run our railroad and our company with fewer resources. Compared to year-end 2016 resource levels, our total workforce is lower by over 4,000 FTEs, including over 1,000 contractors and consultants. Turning to slide 8, from a financial perspective, we were encouraged by the results for the third quarter. While we took a direct hit from Irma, experienced a number of significant derailments, and transitioned to a new operating plan, we made good progress toward our 2017 and longer-term goals. Jumping into the details of the income statement, revenue was up 1% year-over-year, driven primarily by core pricing gains of 3.5% all in and 2.2% excluding coal, as well as 1% volume growth and higher fuel recoveries, partially offset by unfavorable mix.

Total expenses were $2 million favorable, with efficiency savings more than offsetting the impacts of inflation and higher fuel prices. Our quarterly financial report goes through the details of each operating expense line item, but I'd like to quickly call your attention to a couple of key points. Our labor and fringe expense was down 6% on 10% fewer resources. Our MS&O expense was slightly unfavorable, given the combined impact of several train accidents, relocation costs, and asset impairments, which offset the favorable efficiency gains from better asset and resource utilization. And while fuel expense was up, the increase was driven entirely by a 19% increase in the price of diesel.

Top-line stability, plus our relentless focus on controlling costs, drove a 4% improvement in operating income, a full point of operating ratio improvement, and 6% EPS growth, reflecting both higher earnings and the completion of our $1.5 billion share repurchase program. On slide nine, our year-to-date free cash flow generation is strong at over $1.5 billion, reflecting solid top-line gains, significant efficiency savings, and the reduced capital intensity of our business. Please note that our third quarter cash flow benefited from the deferral of tax payments allowed by the IRS for companies impacted by the recent hurricanes. We expect to make the third and fourth quarter tax payments by year-end. Free cash flow growth has enabled increased shareholder returns, including the $0.02 dividend increase earlier this year, plus the completion of our expanded buyback program.

CSX's improved financial performance is reflected in our improving ROIC, which now exceeds 10% on a trailing 12-month basis, and a stable debt-to-EBITDA ratio, even with higher debt levels. Turning to slide 10, our fourth quarter volume outlook on a comparable 13-week basis is neutral, with nearly two-thirds of our business expected to be growing or stable year-over-year. The global benchmarks support continued strength in export coal, with fourth quarter tonnage expected to be similar to what we saw in Q3. Intermodal is expected to continue to grow, reflecting strong consumer sentiment and a tighter truck market. On the other side of the ledger, several markets continue to be impacted by specific headwinds, most notably the anticipated decline in North American light vehicle production, the evaporation of unit train shipments of crude oil, and the secular challenges of domestic utility coal.

Looking forward, as our service product continues to improve and we transition to a faster, more reliable service solution for our customers, we will see growth prospects across a wider spectrum of our markets. Wrapping up on slide 11, we are on track to deliver an operating ratio around the high end of the mid-60s, record productivity savings, EPS growth of 20%-25%, and free cash flow of around $1.5 billion. We completed our buyback program in five short months. Look forward to seeing you at our investor conference in two weeks and would now be delighted to take your questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one. To withdraw your question, you may press star followed by two. Again, press star followed by one to ask a question. One moment, please, for our first question. Our first question comes from Ken Hoexter with Merrill Lynch. He may ask your question.

Ken Hoexter (Managing Director)

Great. Good morning. Hunter, maybe you can talk a little bit about your thoughts on kind of share loss and your ability to regain that given some of the service issues. Do you see that you've kind of lost some share, and would it be permanent and tougher to win back in that case, or as you get the service improved, do you think that starts to shift back?

Hunter Harrison (CEO)

I think it's shifting back immediately. Shippers are out there trying to get the best bargain they can get. And as soon as you provide a competitive service at a competitive price, your name's back in the hat and you're going to rewin the business. This is not the old days of some kind of relationship sales. This is about who's got the best product, who's got the lowest price. We think we're going to be there. And so anything that speaks to market share, I'm not a big advocate of the market share data and accuracy of what it reflects. But not to dwell on that, I'm convinced of this. All you got to do is get our service where we know it can be, where there's move to and improve to, and have a competitive price out there, and you'll have your fair share of the business plus.

Ken Hoexter (Managing Director)

Great. Thank you.

Operator (participant)

Thank you. And this question comes from Brandon Oglenski with Barclays. Your line is open. You may ask your question.

Brandon Oglenski (Director and Senior Equity Analyst)

Hey, good morning, everyone, and thanks for letting me ask a question. So Hunter, I mean, we've heard all the anecdotal evidence from the shippers about what went wrong and how service deteriorated on your network. But maybe can you just give us a little bit deeper lessons learned through this process and why you feel that the organization is now in place to deliver better results coming forward?

Hunter Harrison (CEO)

Yeah, sure. I can share some things. I can share them when we got back from the hearing with the Surface Transportation Board. We had three customers that we were having to embargo because they couldn't accept the shipments that we were alleged delaying. And now we're accused of being in violation, where we got one ship that's got 60 cars on hand that it can't take in five-plus weeks to unload them. There's two sides to this story. Now, look, we knew going in that there was going to be significant change here. I talked about significant change and the resistance that people give to it. I talked about that going from a proxy fight into a change is not the greatest environment. So we had some resistance. And look, I don't want to—I'm not trying to point a finger at anyone.

Some of our best railroaders, hardest workers, some of our union people took it the last time when I talked about that I was pointing the finger at them. I'm not pointing the finger at them. The first non-contract people that left the organization were half the percentage of management people. So I'm not pointing the finger. Collectively, as a team, we didn't get the job done. As a result of that, we made some personnel changes. We had some, well, I'll just be frank. We had some embarrassing situations that we had to deal with, and we dealt with them. Are they hard to deal with? Yes, they're hard to deal with. We had some, at one of our major gateways, we had a case where some people lost 5 records on car movements so they wouldn't be criticized by the cars being delayed. We can't tolerate that.

We got maybe a little ahead of ourselves on the hump yard closures. Maybe I was pushing too hard. I think we've learned all the lessons that there are to be learned. We've seen what we can do. The last 6, 8, 10 weeks, I think Cindy and her team have done a stellar job of recovering and putting us back where we need to be. It's going to get even better. I mean, that's the encouraging thing. If you can just get out from under the anecdotal, and if you were there at some of those hearings last week, the hearings weren't about CSX service in my view. The hearings were about more political issues of reciprocal switching and open access and some of those things. Now, look, we're ready to participate in that dialogue, but let's call it pay as paid.

We had, I think, I counted that day. I participated in that session. I think there were 10 or 11 customer-specific customers that testified. We had more positive responses from customers that weren't there at home. And some of the, quote, surveys that are going on out there are, I don't put a lot of faith in them. If you look at what they're looking at and how many people are actually giving honest, frank feedback and discussion, I guess the bottom line, there's no hurdle out there going forward if we can't get over it.

Brandon Oglenski (Director and Senior Equity Analyst)

Thank you.

David Baggs (VP, Treasurer, and Chief Investor Relations Officer)

Charlie?

Operator (participant)

Thank you. This question comes from Brian Ossenbeck with J.P. Morgan. Your line is open. Go ahead with your question.

Brian Ossenbeck (Senior Analyst)

Hey, good morning. Thanks for taking my question. So just touching on intermodal markets and the strategy, we're seeing some reports on Northwest Ohio's role in the intermodal network, maybe some service offerings being adjusted. So as you move past the initial stage of design with the hump yards and flat switching, is the hub-and-spoke design for intermodal something you're also considering to rework? And what does that have—what implications are there for Ohio and also the Carolina Connector that was planned for North Carolina? Thank you.

Hunter Harrison (CEO)

Yeah, thanks. Thank you. This is the answer in two words. Number one, we've got an investor conference coming up in two weeks now that we will talk thoroughly about that and other issues. But at the same time, I could answer that like I'm going to answer several other questions. Everything we're doing is under review. Now, I can't tell you what the outcome is going to be. We don't go in there and look at an issue and have an answer. We go in there to look and develop an answer. So we'll see what it brings.

Brian Ossenbeck (Senior Analyst)

Okay. Thank you.

Hunter Harrison (CEO)

Yes.

Operator (participant)

Thank you. This question comes from Chris Wetherbee with Citi. You may ask your question.

Chris Wetherbee (Senior Research Analyst)

Hey, thanks. Good morning. I know you highlighted sort of what the derailments cost you specifically in the quarter, but I was wondering if you could maybe help us understand a little bit sort of how the service ran through the model and sort of what the expenses related specifically to that and maybe a little bit of weather? Just wanted to kind of contextualize how much of the operating ratio improvement you could have gotten in addition to what you did if you had a sort of cleaner quarter.

Frank Lonegro (EVP and CFO)

Hey, Chris, Frank. Yeah, we obviously experienced some transitional issues in the first part of the quarter as we transitioned to a new operating plan over the July 4th holiday. As you know, anytime you've got a network-related set of changes, it's hard to quantify the dollar impacts of that. You do see on the revenue side the impacts of that transition really muted the top-line growth if you compare us to our peers. We probably left some demand on the ground. We probably saw some temporal shifts of business to either truck or to other rails. We do expect, as you heard Hunter say in his opening, we do expect that to come back pretty quickly. Then on the expense side, anytime your network's a little sluggish, you're going to see higher overtime, recruits, fuel, car hire, of that nature.

But not something that we're able to put a pinpoint type of an estimate. But it certainly did impact us both from an operating income and operating ratio perspective in the quarter.

Chris Wetherbee (Senior Research Analyst)

Okay.

Operator (participant)

Thank you. This question comes from Tom Wadewitz with UBS. You may ask your question.

Tom Wadewitz (Senior Equity Research Analyst)

Yeah, good morning. Hunter, I know you've commented some on the kind of the network and how it's running. Wondered if you could give a bit more perspective in terms of, is the car load schedule pretty much stable at this point? How would you think about the trajectory? I don't want to be overly focused on the metrics, velocity, and dwell and so forth, but sometimes they help us see how the network's running. So is it stable at this point? Would you expect to see further momentum build, that the metrics improve and costs fall out further? Just kind of where you at in terms of the network and the trajectory today.

Hunter Harrison (CEO)

Sure. Tom, we have not completed, if you remember back a little bit to our other experiences with installing these trip plans, that effort is not complete. Now, we're much further along than I thought we would be. But I would think that by the—that we're probably 85% there. And I think that by mid-year 2018, it will be have everything fully in place with the plans. And that means that the plan, to some degree, will be upgraded where it's required or necessary and the market is asking for it as we develop the ability with our point train speed and dwell time. Our dwell time is, as we speak today, as I looked at the morning report, is down to about 10 or 12 hours, which is pretty impressive.

Overall, our productivity, cars per hour, is improved even more so, which is even further shows the ability we have. So the train speed, the true velocity has picked up pretty significantly. So I guess what it does is it looks and says, "The scouting report we did, we have even more confidence in now that we're going to kind of be able to produce the results that have been talked about over the next, quote, four years." Now, the timing within that four-year time frame might adjust a little bit up or down. But I think that I don't want to get ahead of myself for a couple of weeks. I just think that the opportunities are very bright going forward.

Tom Wadewitz (Senior Equity Research Analyst)

Okay. Great. Thank you for the response.

Hunter Harrison (CEO)

Sure.

Operator (participant)

Thank you. And this question comes from Allison Landry with Credit Suisse. Your line is open. You may ask your question.

Allison Landry (Senior Equity Research Analyst)

Thanks, Scott. Excuse me. Good morning. Hunter, I wanted to ask if you thought the customer and employee response to the changes that you're implementing and the resulting dislocation, has that led you to rethink any of the elements of precision railroading as it applies to the CSX network? And is there anything that you need to do differently or that we should be thinking about for CSX relative to what we observed at CP or CN?

Hunter Harrison (CEO)

No, I don't think so. I think that the only one little caveat I'd put there is, look, this model, in my view, will work here as well as it'll work or has worked anywhere and even more so. I do think that potentially, maybe we learned a little bit, that even here, the personnel and the execution and the selection of those people is even more important. And so I think we're kind of fine-tuning that a little bit. If you look at - and I don't say this critically. People see the world different ways. But we have a lot of people, a lot of operating supervisors that were hired and got seven or eight years' experience off the campus, put in an operating world as assistant trainmaster. And that's asking a whole lot of them to be able to do that.

And so I think we're going back to do some retraining. We started back again last 2 weeks ago, I think, with Hunter Camp. Shame on Hunter. But I had a session with the board, and the board asked me about Hunter Camps. And I said, "I'm just not sure I'm going to have time to do that." And I learned quickly, and they quickly told me, "You don't have time not to do it." And so we had the first 4 sessions, I believe. They were knockout success. And so I guess the main thing, Allison, is the view of personnel. I think we—I talked about this term mud. I think we got a lot of internal talent that was covered up with mud. And I think we've taken a hold, forced the people down, and we need to find some rock stars here. So that's very encouraging.

Allison Landry (Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. This question comes from Amit Mehrotra from Deutsche Bank. Your line is open. You may ask your question.

Amit Mehrotra (Director of U.S. Transportation and Shipping)

Thanks. Good morning. Hunter, I guess there's really no one that implements precision railroading as quickly or as effectively as you. There is a feeling that your ability to do this has been in large part due to the hands-on nature of your involvement and sort of walking the track, so to speak. If you could just talk about that in the context of the turnaround at CSX in terms of your ability or inability to spend time with the rank and file and drive change at a grassroots level to the extent you have in the past and previous turnaround. Any insight there, I think, would be helpful. Thank you.

Hunter Harrison (CEO)

Well, look, I'm not 45 years old anymore. I wish I was for a lot of reasons. But I've been accused, and it's probably not for me to say, but being hands-on. But I've written a lot of books and papers and case studies and so forth. I receive a lot of correspondence from people trying to understand even more of the concepts. I think our team starts to get it. And I think one of the things that we talked about with the camp was this. I'm not as much as I'd like to be able to. I'm not going to be able to get to everybody myself individually to sit back with them. But I can, hopefully, be effective by developing disciples that say, "Look, this makes sense. This is not just some thrown up on the wall. This has got a lot to it. It makes sense.

It'll work." And they buy into it. And so I need to be able to do that more so through my team and our exercise team and lieutenants than maybe I've done in the past. And maybe I should have done more in the past. But if I could do it myself, I did it myself. And I didn't bring them in the fold. So if you say, "I had to optimize this," maybe, "I hadn't optimized it, but I did this," we're going to get to the same type of results. They might like to book it a little different, but the results are going to be there.

Amit Mehrotra (Director of U.S. Transportation and Shipping)

Got it. Okay. That's very helpful. Thank you very much for answering my questions.

Operator (participant)

Thank you. And this question comes from Ravi Shanker with Morgan Stanley. Your line is open. You may ask your question.

Ravi Shanker (Managing Director)

Thanks. Morning, everyone. Hunter, in your slides, you pointed out that the Q4 outlook has about 50% of your end markets with a favorable outlook versus, I think it was 66% the last quarter. Not to steal any of your thunder from the analyst data, but just broadly speaking, as you kind of look at your long-term or efficiency targets for CSX, how much do kind of end markets feature or kind of how much of a role do they play in actually hitting that? And if end markets are slowing, what's the offset to that? Thanks.

Frank Lonegro (EVP and CFO)

Hey, Ravi, it's Frank. Obviously, we'll share a lot more with you in a couple of weeks when we get to the investor conference. The top-line growth is certainly part of the future. But on a proportional basis, I would tell you that the expense lines are really important to the future. And if you go back and you look at what Hunter has done at CN and CP, that's an important part of the future, making sure that we drive productivity savings and the operating ratio lower. But we certainly are focused on growing the top line as well.

Hunter Harrison (CEO)

Yeah. Let me just give you, I'll just use a little preview or segue here into the market, to the analyst data. Contrary to conventional wisdom, the results that we achieved at the so-called other three turnarounds, well, first of all, we weren't sensitive to the market, which was wrong. We grew revenue at all three places. But we were successful net-net at all three places. And so I'll tell you this. There's nothing in the end markets that will stop what the bottom-line approach is here. We have always gone into, right or wrong, we've always gone into, in every one of these turnarounds, with an extremely conservative approach from the other administration's my last employer. Okay? We went there, and they had a growth curve of 11%. I couldn't see it, and I didn't understand it. And very frankly, I didn't believe it. We had 3%.

So we had 3% on the bottom line. They had on the top line, they had 11%. Okay? When it was all said and done, our operating ratio was 20 points lower with 4 points than their numbers. So look, you can play with these numbers all you want. The bottom line is the bottom line.

Ravi Shanker (Managing Director)

Great. Thank you.

Hunter Harrison (CEO)

Thanks.

Operator (participant)

Thank you. And this question comes from Ben Hartford with Baird. Your line is open. You may ask your question.

Ben Hartford (Senior Equity Research Analyst)

Hey, good morning, everyone. Just in the context of everything that you've talked about with regard to the cadence of the operating plan and when it should pull through, when do you think you'll be able to extract value in the form of price from the service that you'll build into the network? Obviously, as we look into 2018, truckload capacity's tightened up, probably a more favorable pricing environment as a result of that across the market. But when do you expect to be able to realize extracting value in the form of price at CSX from these changes? Is that more of a 2019-2020 back-end loaded type thought process?

Hunter Harrison (CEO)

I think it's more, in my view, it's more of what the competition does. Competition is, it's tough. And if the competition cuts price and improves their service, it'll have impact on us that we can't ignore. But my thought is, if you say, "Well, what do you think's going to happen?" I think that we will start to see not in 2018, okay, necessarily to the degree that maybe we described. But I think in 2019, we'll start to make nice, reasonable pickups of price relative to service. And then as we continue that and move into 2020 and beyond, we'll be rewarded for that good service and price. I mean, if you've got as good a service or better, I think we'll have better in the future. Okay? And you're the low-cost carrier. You've got a lot of leverage. You go out there, you've got the same service level.

Okay? But your cost is higher by 10%. It's tough. It's damn tough. I think this organization has the ability to grind through that. But I think it would be a little bit bold on my part to sit here and spend a month or whatever and try to tell you about markets that I hadn't dealt a lot with. But that's just kind of my conventional thoughts, if you will.

Ben Hartford (Senior Equity Research Analyst)

That's helpful. Thank you.

Operator (participant)

Thank you. This question comes from Cherilyn Radbourne with TD Securities. You may ask your question.

Cherilyn Radbourne (Managing Director of Equity Research)

Thanks very much, and good morning. In looking at your volumes in the third quarter, I'm curious which segments you think were most impacted by some of the challenges that you encountered during the quarter. In particular, how much you think the intermodal network was impacted, particularly as you were onboarding a new international intermodal customer during the quarter?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Yeah. I mean, this is Fredrik. I think we saw impact on all our markets in the third quarter from the challenge and, of course, also the hurricane impact of Irma. So I mean, I think it was pretty widespread. And so it's hard to pinpoint clearly. We had the benefit of onboarding 2 new customers in the modal space and also continued to see opportunities to convert things off the highway system as the market has tightened. And so we feel good about where it is. And I think you're already seeing, as Hunter alluded to, as service now has returned and is much stronger, you're seeing the kind of the weekly numbers that come out that indicate that we're back and the customers are coming back to us very rapidly.

Frank Lonegro (EVP and CFO)

Hey, Cherilyn, Frank, I'll just add a little bit on the hurricane to make sure that it can be dimensionalized for folks. Probably about $0.02 in the quarter, most of that being top line. A lot of that was informed through the fact that we had some plant shutdown in the southeast for, in some cases, a couple of days, and in one particular case, a couple of weeks. So as you think about the transition impact on the service side, you have to remember we also had the hurricane in the middle of that. And then there were some costs in the third quarter, which are part of that $0.02. We had 8,000 trees down in Indy. And overtime, everybody was pulling overtime. We had some third-party contractors in there.

And then we probably have a little bit of trickle-over of cost into the fourth quarter, $1-$9 million when invoices come in in October. But I just want to make sure we dimensionalize that for everybody.

Cherilyn Radbourne (Managing Director of Equity Research)

That's helpful. And that's my one. Thank you.

Operator (participant)

Thank you. And this question comes from Scott Group with Wolfe Research. Your line is open. You may ask your question.

Scott Group (Managing Director)

Hey. Thanks. Morning, guys. So wanted to ask, coal yields fell, I think, 7% sequentially. How much of that is sort of the mix of met and thermal and export, and how much of that maybe is from just lower net export pricing? And then if I can just also ask Hunter, we had a noisy third quarter. Just can you help maybe calibrate headcount and operating ratio expectations for the fourth quarter?

David Baggs (VP, Treasurer, and Chief Investor Relations Officer)

God, you're breaking the rules. One question.

Fredrik Eliasson (Chief Sales and Marketing Officer)

So let me take the first part of it in terms of the coal yields. Clearly, the second quarter was a very strong quarter, as you saw on the indexes. And so that certainly helped the net yields. And yes, there's a little bit of a mixed change as well because the thermal market, export market has gotten stronger. So I think you alluded to both of them, and both of them are drivers of that.

Frank Lonegro (EVP and CFO)

On the operating ratio, Scott, Hunter can chime in on the headcount. But in terms of the operating ratio, I mean, year-to-date, we're at 66.7%. Q4 will be better than Q3, obviously. And you know where our guidance is, so you can get pretty close on Q4.

Hunter Harrison (CEO)

Yeah. I mean, in fact, the headcount number is, I think, the projection year-end will be 4,500.

Frank Lonegro (EVP and CFO)

Yeah. On a year-to-date basis, full year against where we ended 2016, total headcount in that 4,500 range, you heard us talk about over 4,000. I think the number at the end of Q3 was like 4,200. And again, that's all in this management union plus contractors and consultants.

Hunter Harrison (CEO)

I guess the only other thing I'd add, and we'll talk about it at the analyst meeting, there's been a lot of noise and a lot of things happening that I'm not sure exactly what fourth quarter is going to reflect. I think this is a longer story than fourth quarter. The long story is exciting. If you're sitting there on the edge of your seat waiting for fourth quarter results, you might fall off your chair for a result.

David Baggs (VP, Treasurer, and Chief Investor Relations Officer)

Next question.

Operator (participant)

Thank you. This question comes from Jeff Kauffman with Aegis Capital. You may ask your question.

Jeff Kauffman (Investment Analyst)

Thank you very much. Just a quick merchant or group question on auto. I think a lot of us were surprised to see a 2018 auto start in the most recent month. And we've heard stories that maybe 500,000 cars plus might have been lost in the storm impacts in Houston and a little more in Florida. Could we be underestimating auto if there was a rebound? I know secularly, we've talked about how auto's the outlook's just not great. But I was really surprised by the most recent monthly SAR. And I was just talking to some folks in Texas, and they were saying a lot of autos need to be replaced.

Fredrik Eliasson (Chief Sales and Marketing Officer)

Yeah. And I think that's a good question that we certainly have seen a fair amount of inventory drawdown because it's back to kind of a more normalized level here year over year, which hasn't been the picture previously in the year. So that's a good sign. I think the production numbers for next year indicate about 200,000 more vehicles than we're seeing this year. So I think there could be an opportunity there. I certainly know that our automotive network is running well within our merchandise network. And so we're seeing some pretty strong demand right now. We'll see ultimately how much of an impact it has, but it certainly has been helpful.

Jeff Kauffman (Investment Analyst)

All right. That's my one. We'll see you guys in a few weeks. Thanks.

Hunter Harrison (CEO)

Well, the one number I saw the other day that would, in fact, get your attention is that I think it said that General Motors, as we speak, is selling their sales of 24% of them cars and the rest of the other type vehicles. So now, I just talked about SUVs and the whole thing. It's one thing, but if you're talking about cars, there's great slippage, which the implications start to be for that car type and dries and dies and do they fit the new models and that type of thing. But that could be an opportunity.

Jeff Kauffman (Investment Analyst)

Thank you, Hunter.

Operator (participant)

Thank you. This question comes from David Vernon with Bernstein. Your line is open. You may ask your question.

David Vernon (Managing Director and Senior Analyst)

Hey. Good morning, guys. Thanks for taking the time. Fredrik, maybe a question for you on the long-term intermodal dynamic. If you look at the business, the RPU today is kind of where it was in the 2005 timeframe. The volumes have been growing quite a bit. As we look out over the next 5 or 10 years, should we be expecting more of a volume growth story in intermodal or a little bit of pricing as well? What should drive the change in that market dynamic?

Fredrik Eliasson (Chief Sales and Marketing Officer)

I think consistently with what Frank said earlier, we will address many of these questions specifically about intermodal as part of the analyst conference. Clearly, we think there's an opportunity here to continue to convert traffic off the highway system. And it's going to come in the form of either price or volume, depending on where the market is, how tight the market is, and what the service offerings are. But nothing has fundamentally changed in the premise that you've seen over the last decade where we've been able to convert at a pace of about 5%-7% a year on average. And as we look forward, we see no difference. As we implement this operating model, we think we should have an even better chance of doing that.

David Vernon (Managing Director and Senior Analyst)

But as far as kind of the rate of volume take versus share take, I mean, in the long run, the RPUs are still running kind of where they were a decade ago. Should we expect that as the market tightens, that you'll be able to get a little bit more pricing power, or is this going to remain a competitive market where it's going to be more volume?

Fredrik Eliasson (Chief Sales and Marketing Officer)

I think we should have better pricing power as well as we continue to improve the service product. And one of the things with intermodal, obviously, as we continue to drive train length and other productivity initiatives, while the top line might not have reflected what you've seen in some other markets, the bottom line has, as we have really seen a significant increase in train length, terminal productivity, double stack clearance, etc. And we are not just in intermodal, but across all markets, very, very focused on making sure that every car loaded unit pays for itself. And that's going to be the continued focus as well.

David Vernon (Managing Director and Senior Analyst)

All right. Thanks for the time.

Operator (participant)

Thank you. And this question comes from John Larkin with Stifel. Your line is open. You may ask your question.

John Larkin (Managing Director of Research)

Hey. Good morning, and thanks for taking my question. Just wanted to dig into the utility coal volumes, which took quite a haircut year-over-year. Where do those stockpiles stand, and when do you think that'll stabilize? And we'll see perhaps more stability in utility coal volumes.

Fredrik Eliasson (Chief Sales and Marketing Officer)

Yeah. So I think if we think about the fourth quarter, I would say that we're going to be overall in domestic coal, roughly flat with what we saw here in the third quarter, is probably the best expectation. In terms of the actual stockpiles, I would say at this point, the stockpiles in the north are probably a bit higher than we would like to see. But in the south, they're probably a little bit below. So it gives us an opportunity to replenish some of those in the south, which is usually a longer length of haul and higher revenue because of the length of haul. In addition to that, just to remind you, at the beginning of the year, we had a very short haul business contract that we lost in utility coal that we indicated, I think, about 6 million tons or so.

That's been with us for the full year, and will be with us in the fourth quarter as well. Beyond that, I think we're seeing a market that is in pretty good shape. Clearly, the summer was not helpful, but we are still seeing natural gas prices around $3, which is very helpful. I'd like to have it even higher, but it's certainly more helpful than what we saw them last spring.

John Larkin (Managing Director of Research)

Thank you very much.

Operator (participant)

Thank you. And this question comes from Bascome Majors with Susquehanna. You may ask your question.

Bascome Majors (Senior Equity Research Analyst)

Yes. So from your longer-term shareholders, succession planning is a pretty important issue here as the situation is really very different from CP, where you really had an heir appearing a few months into the job. So Hunter, I was curious if you could comment a little bit on the timeline for the board deciding who's going to lead CSX after you retire and any signposts that we as investors should watch for on this front along the way?

Hunter Harrison (CEO)

Well, I'd say that's something that the board is very sensitive to and has me and others working on. And it's not something that we're ignoring. And I'm hopeful that maybe we could give you more insight at the analyst meeting, but I'm not sure of that. Okay. But all I can say is this. I understand what you're saying. We share your concerns. I share your concerns, both as CEO and as shareholder. And it's something that we will, until we receive an answer, we will stay on top of and glad to weigh in.

Operator (participant)

Thank you. You're ready for the next question. That comes from Jason Seidl with Cowen and Company. You may ask your question.

Jason Seidl (Managing Director)

Hey. Thank you. Frank, real quick, when you talked a little bit about what the hurricane cost you in the quarter, you did a good job of parsing it out for us. Can you talk a little bit about potential rebuilding that you might benefit from in 4Q and maybe even possibly beyond?

Frank Lonegro (EVP and CFO)

Sure. And let Fredrik chime in as well. But obviously, as Florida rebuilds, as Texas rebuilds, there can certainly be end markets that can benefit from additional volumes and types of products that we ultimately haul. So yeah, I mean, I think there's certainly some possibility of some demand uptick. It really depends on how quickly folks are able to rebuild in those areas. But anything that helps the end markets is ultimately going to help CSX.

Fredrik Eliasson (Chief Sales and Marketing Officer)

I agree. And I mean, I think we're seeing also the impact on the trucking market itself that allows us to participate in some moves that we otherwise wouldn't and also continue to convert things over to intermodal solution, including, of course, building products. And we talked earlier about vehicles being replenished. So I think there's some opportunities out there for us to capture.

Jason Seidl (Managing Director)

Are you seeing that occur right now, Fredrik?

Fredrik Eliasson (Chief Sales and Marketing Officer)

I'm clearly seeing the truck market tightening. We're certainly seeing that. I think it's a little bit early to see in terms of building products, but we have certainly seen some of the vehicle opportunities just based on the need to replenish or see what inventory levels are and how quickly they've come down. So it's been very helpful.

Jason Seidl (Managing Director)

Okay. That's my one. Thanks for the time, as always.

Operator (participant)

Thank you. And this question comes from Walter Spracklin with RBC. Your line is open. You may ask your question.

Walter Spracklin (Director and Equity Research Analyst)

Thanks very much. Good morning, everyone. So my question's on free cash flow for Frank and the buyback that's coming from it. You noted in your guidance, you've got $1.5 billion guidance, but you're kind of there already and three quarters in, and you've made quite a move on your buyback here this quarter. So are we just being conservative on this? And are you expecting kind of flat free cash flow for the back half? And how should we look at your share buyback momentum as a result of that free cash flow going forward?

Frank Lonegro (EVP and CFO)

Sure. Well, on the last part of your question, we'll certainly have some more information for you as we get to the investor conference on shareholder returns and capital allocation in a couple of weeks. In terms of the free cash flow, obviously, we had a nice benefit in the third quarter by deferring the tax payment, and we'll make good on those payments in December. So the fourth quarter is generally a lighter free cash flow quarter. But at the same time, if we're already at $1.5-$6 billion, even if you look at the fourth quarter, if I were a betting man, I'd take the over.

Walter Spracklin (Director and Equity Research Analyst)

Okay. Thank you very much.

Operator (participant)

Thank you. This question comes from Justin Long with Stephens. You may ask your question.

Justin Long (Managing Director of Equity Research)

Thanks. Good morning. I wanted to ask about export coal since it's recently held up a bit better than expected. Do you have any early thoughts about the export coal market in 2018? Just looking longer term, as you think about the structural positioning of your network, how are you thinking about the role export coal will play?

Fredrik Eliasson (Chief Sales and Marketing Officer)

We will certainly cover that as part of our investor conference. We feel we're very well positioned strategically in terms of our ability to reach the port, both on the East Coast and in the Gulf. And we think we have an excellent service product and good reach into some of the key export players. So we feel good about it. We feel good about where we are here for the remaining of this year. And obviously, where the forward curve seems to be right now, it's a good opportunity for the U.S. producers to participate next year as well. But we'll give you more color as we get to the investor conference.

Justin Long (Managing Director of Equity Research)

Okay. Great. Thank you.

Operator (participant)

Thank you. This does conclude today's question and answer session. At this time, I'll turn the call over to the speakers for closing remarks.

Hunter Harrison (CEO)

Well, thanks very much. I hope that we were able to fill in some blanks and, at the same time, not get ahead of ourselves with our analyst day coming up, which the group here is working very hard on. There are some questions before the organization that you have framed very well for us. And those are things that we will be looking at and try to be responsive to. And look forward to seeing you there. Thanks.

Operator (participant)

Thank you. This does conclude today's teleconference. Thank you for your participation in today's call. You may disconnect your lines at this time.