CSX Q3 Earnings Call Transcript

123jump.com Staff
25 Oct, 2010
New York City

The railroad operator quarterly revenue rose 16% to nearly $2.7 billion on a 10% overall increase in volume. Net earnings in the quarter surged 43% to $414 million reflecting strong volume as well as revenue growth. Earnings per share grew to $1.08 from 73 cents per share in the prior-year quarter.

CSX Corporation ((CSX))
Q3 2010 Earnings Call Transcript
October 13, 2010, 8:30 a.m. ET

Executives

David Baggs – Assistant Vice President, Investor Relations
Michael J. Ward – Chairman, President and CEO
Clarence W. Gooden – Chief Sales and Marketing Officer
David A. Brown – Executive Vice President of CSX Transportation, Inc. and Chief Operating Officer
Oscar Munoz - Executive Vice President and Chief Financial Officer

Analysts

Scott Group – Wolfe Trahan
Kenneth Hoexter – Banc of America/Merrill Lynch
Thomas Wadewitz – JP Morgan Chase
Scott Flower – Macquarie Equities Research
William Greene – Morgan Stanley
Scott Malat – Goldman Sachs
Gary Chase – Barclays Capital
Christopher Ceraso – Credit Suisse
Robert Salmon – Deutsche Bank
John Larkin – Stifel Nicolaus
Cherilyn Radbourne – TD Newcrest
Jason Seidl – Dahlman Rose
Derek Rabe – Morgan Keegan
Walter Spracklin – RBC Capital Markets
Salvatore Vitale – Sterne, Agee & Leach
Donald Broughton – Avondale Partners
John Mims – BB&T Capital Market

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the CSX Corporation Third Quarter 2010 Earnings Conference 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 introductions I would like to turn the call over to Mr. David Baggs, Assistant Vice President, Investor Relations for CSX Corporation.

David Baggs

Thank you, Tanya. Good morning, everyone and again welcome to our third quarter earnings call. The presentation material that we''ll be reviewing this morning, along with our quarterly financial report and our safety and service measurements, are available on our website at csx.com under the investor 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; David Brown, Chief Operating Officer and Oscar Munoz, 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 company''s presentation on slide two and again, as a reminder the presentation slides are also available on our website.

This disclosure identifies forward-looking statements and risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements. In addition, let me also remind everyone that at the end of the presentation we will conduct a question-and-answer session with the research analysts. With 28 analysts covering CSX, I would ask as a courtesy to everyone to please limit your inquiries to one primary and one follow-up question.

And with that, let me turn the presentation over to CSX Corporation''s Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Michael J. Ward

Well, thank you, David. Good morning, everyone. Last evening, we were pleased to report record third quarter results, supported by an economy that continues to improve and another strong performance by our employees. Third quarter earnings per share were $1.08, up 48% from the same period last year. Revenues increased 16% to nearly $2.7 billion, with approximately two-thirds of that increase coming from higher volumes.

We adapted to higher traffic levels profitably as our employees continued to improve safety and efficiency while delivering reliable service to our customers. The combination of higher revenues and continued productivity resulted in a 39% increase in operating income from the prior period and a 490-basis point improvement in our operating ratio to 69.1, a significant milestone for the company. This continued strong performance allows us to return value to our shareholders. And we remain committed to delivering that value through a balanced approach.

You will recall that on September 29th, CSX Board of Directors announced an 8% increase in our quarterly dividend on the company''s common stock. This marked the eighth increase during the past five years.

By the end of the first quarter of 2011, we also expect to complete the repurchase of nearly $650 million worth of shares, representing the remaining balance under the $3 billion buyback plan announced in March of 2008. And finally, we are increasing our capital spending in 2010 from the previously-announced $1.7 billion to approximately $1.8 billion for projects that will create competitive advantage for our customers, efficiently grow the business, create jobs and deliver shareholder value.

The leaders with me today are proud of what CSX is accomplishing. And we are confident that we are doing the right things to create even more value for our customers and investors.

With that, let me turn it over to Clarence for an overview of our top-line performance in the quarter. Clarence?

Clarence W. Gooden

Thank you, Michael and good morning, everyone. In the third quarter of 2010, an improving economy helped almost all of the markets that we serve recover from the lows experienced during 2009. As I did during our second quarter earnings call, let me share the latest results from two key business reports.

As you can see in the chart on the left, the manufacturing sector expanded again in September as reflected in a reading of 54.4 from the Institute for Supply Management''s Manufacturing Purchasing Managers index. Recall that a reading above 50 indicates growth.

This is the 14th consecutive month that the index has reflected an expanding manufacturing sector. At the same time, inventories remain below target levels. In the chart to the right, the September ISM report on customer inventories, which assesses manufactures views of the adequacies of inventories, yielded an index score of 42.5, where a score below 50 indicates that respondents believe their customers'' inventories are too low. As the economy and our traffic levels continue to improve, we are committed to delivering a safe and reliable service product and we remain focused on capturing the value of our services.

Now, let''s look at the change in revenue for the third quarter on the next slide. CSX revenue increased 16% to nearly $2.7 billion due to volume growth, core pricing gains and the impact of higher fuel costs reflected in our fuel surcharge program. As you can see on the chart, volume increases drove $225 million of year-over-year revenue growth.

Also, the combined effect of rate and mix accounted for $114 million of the increase, reflecting yield gains across all markets as we continue to sell the value of rail transportation.

Finally, as you look further to the right, the impact of higher fuel costs increased our fuel recovery $38 million in the quarter.

Let''s turn to the next slide and take a closer look at volume growth over the last few quarters. Total volume of 1.6 million units was up 10% versus the same period last year. As you will recall, the U.S. economy began growing again in the third quarter of 2009, and despite the tougher year-over-year comparison, overall volume growth in the third quarter remained strong.

You can also see on the chart that total car loads also grew sequentially versus the second quarter despite what is normally a lower volume quarter due to seasonality. Finally, as you will see in the slides later in my discussion, each of the major markets grew versus the prior year.

Now, turning to slide 10, revenue per unit increased by 6%, driven by price and increased fuel recovery, which were partially offset by mix changes. The largest component of the increase, same-store sales pricing, increased 6.6%. Recall that same-store sales are identified as shipments with the same customer, commodity and car type and the same margin and destination. These shipments represent approximately 75% of our total traffic base.

In addition, increased fuel recovery accounted for approximately one-fourth of the change in revenue per unit. In addition, you will notice the higher revenue per unit in 2008 that resulted from much higher fuel prices than exist today.

Finally, partially offsetting these two drivers was the effect of mix changes that resulted from strong growth in lower revenue per unit intermodal traffic and the continued impact from terminating a prior interline intermodal agreement. Our improvements continue to reflect the unique value CSX is providing to our customers, as well as the relative value of rail transportation.

Looking forward, we continue to expect core price increases to exceed rail inflation on a sustainable basis. And now let''s take a look at each of the major markets that we serve starting with coal.

Coal had third quarter revenue of $835 million, up 23% versus 2009. Revenue per unit increased on improvement in yield, higher fuel recovery and positive mix. Volume also increased 3%, driven by several factors.

First, export coal grew year over year as demand was strong for U.S. metallurgical coal to Asia and Europe. Second, in the industrial sector North American metallurgical coal, coke and iron ore volumes grew on stronger steel production, yet domestic utility demand remained lower year over year due to above-normal utility stockpiles. These stockpile levels continued to moderate from their peak in 2009 helped by an increase in burn levels. Electrical generation increased nearly 9% for CSX served territories during the quarter.

Turning to the next slide, let''s look at the merchandise market. Merchandise had a third quarter revenue of over $1.4 billion, up 15% versus 2009, driven by a 7% increase in volume and 8% higher revenue per unit. As I discuss the quarter''s results, let me provide you with a brief overview on this slide followed by more detailed discussion on the slide that follows.

First, we achieved growth in the agricultural sector, primarily driven by increased shipments of feed, fertilizers and ethanol. Next, the industrial sector experienced significant growth due to increased auto sales and the improving economy. And finally, the housing and construction-related markets remain challenged when compared to historical levels.

Now, turning to the next slide, let''s look at each of these sectors in a little more detail. The merchandise market showed growth across all three sectors, with the agricultural sector, fertilizer inventory replacement continued in the third quarter. Feed grains and wheat shipments also improved, as improved global demand lead to new opportunities. Finally, ethanol volumes grew 5% during the quarter on increased consumption.

Within the industrial sector, the 54% growth in the automotive revenue was the primary driver of the 23% overall improvement in revenue. This increase in auto production, as well as pipe and plate shipments for energy infrastructure drove the growth in metal shipments.

Lastly, in the chemicals market, plastics and chemical intermediates grew on a greater need for autos and consumer goods, while petroleum products and industrial sand markets also experienced gains in volume. Finally, within the housing and construction sector, forest product volumes continued to be affected by weakness in construction and paper-related markets.

In our emerging markets, while shipments of aggregates were flat, volume growth was driven primarily by new shipments of limestone and cement.

Now, turning to our intermodal results, intermodal had third-quarter revenue of $318 million, up 6% versus 2009, driven by a 19% increase in volume, which was partially offset by an 11% decline in revenue per unit. International volumes grew again this quarter, up 43% due to U.S. inventory replenishments and early pre-holiday shipping, as well as new volumes from international customers we gained because of our strong portfolio of service and network offerings.

As a result of this strong growth, international volumes represented half of CSX intermodal shipments for the quarter. Total domestic volumes grew 2% year over year.

During the quarter, we saw strong highway freight conversions across the majority of our domestic customer base. However, we did experience a significant year-over-year decline in one of our largest private asset customers. Without the impact from that one customer, the domestic market would have grown at a double-digit rate in the third quarter, consistent with the growth we have seen earlier this year.

Turning to revenue per unit, while intermodal secured price increases in both its core business and had slightly higher fuel recoveries, this was more than offset by the impact on the revenue per unit associated with the termination of a prior purchase transportation agreement, which I discussed in detail last quarter. Going forward, you should expect to continue seeing the revenue-per-unit mix impact for the next two quarters before we begin cycling this event in the second quarter this year.

Now, let''s turn to the next slide and discuss our fourth-quarter outlook. Looking forward, we expect the ongoing economic recovery to continue driving growth. The chart that you see on the left is based on our outlook for line haul revenue on a comparable basis, which excludes the impact from fuel recovery.

Our year-over-year fourth quarter revenue outlook is favorable in nine of our 10 markets and neutral in one. In coal, we expect the strength in both the industrial sector and in exports to continue in the fourth quarter, with export tonnage still expected at about 30 million tons for the year.

Utility demand in the fourth quarter is also expected to be favorable year-over-year. In our merchandise markets, we expect growth during the fourth quarter across two of the three sectors that we serve.

Within the agricultural sector, volume growth is expected to continue, being driven by increased shipments of fertilizer, feed, and ethanol. Within the industrial sector, volume growth should continue to be driven by increased metals and chemical shipments.

Finally, the housing and construction sector is expected to continue to show softness related to slow growth in the new housing starts and infrastructure development projects. In addition, movements of military shipments is expected to slow year-over-year. These are the primary drivers in our neutral outlook for emerging markets.

Our intermodal revenue outlook is favorable after adjusting for the impact of terminating our prior interline agreement. Beyond the impact of that agreement, we see opportunities for continued volume and price growth in both our international and domestic lines of intermodal business.

We expect the pace of imports to remain strong, expect to see continued strength in our rail asset domestic market segment from over-the-road freight conversions in the fourth quarter. And consistent with our market-by-market outlook, U.S. industrial production is expected to grow 4.9% for the fourth quarter of 2010.

That said, our network is well positioned to handle the volume growth, as we have handled these higher volumes in the past. And we are well prepared to continue providing the service reliability required by our customers. At the same time, we continue working closely with our customers to develop new business opportunities and we are making significant investments in our network, such as the national gateway initiative.

As you can see in the map on the right side of this chart, our year-to-date industrial development efforts have resulted in 83 new announcements or expansions across our network. Given what we are accomplishing, we remain confident that CSX stands out as a compelling value for customers, especially as they seek transportation providers that also offer environmental solutions.

Thank you. And now, let me turn the presentation over to David to review our operating results.

David A. Brown

Thank you, Clarence and good morning, everyone. As we have said before, leadership, discipline and execution continue to be the foundation of our company''s strong operational and financial performance. During the third quarter, our operating team once again drove improved safety results, solid productivity and consistent network performance.

We delivered another quarter of year-over-year improvement in FRA personal injury and train accident frequency, as we continue to be a leader in one of the nation''s safest industries. Productivity gains contributed to record financial results, including the operating ratio, which as Michael mentioned, improved 490-basis points to a record 69.1%. Finally, our network remained fluid and key service measurements remained stable.

Now, let''s look at some of the details. Slide 18 shows third-quarter FRA personal injury and train accident rates over the last four years. In the third quarter, the personal injury rate improved 8% versus the prior year to 1.06. This marks the sixth consecutive quarter that we have registered year-over-year improvement.

Looking at train accidents, the third quarter frequency rate improved 13% to 2.25. This quarter''s excellent safety results were achieved through effective leadership and a sustained effort by all of our employees. While we are pleased with this progress, we hold ourselves mutually accountable for continuous improvement and our goal for personal injuries and train accidents is zero.

Now, let''s look at our service improvement on slide 19. Overall, the network ran well during the quarter. On the left side of the chart, on-time originations and arrivals both declined year-over-year but remained within the ranges experienced over the last several years. And they continued to support efficient and reliable train operations for our customers.

On the right side of the chart, train velocity fell slightly and dwell increased modestly, but the network remained stable as volumes continued to build in the quarter. Although overall performance is solid, we are focused on taking service reliability to even higher levels for our customers.

Moving to slide 20, let''s look at crew resource levels. This chart shows the year-over-year change in volume and crew starts and reflects the operating leverage evident in our quarterly financial results. Here, the 10% volume increase in the third quarter is reflected in the gold bar on the chart.

Moving down the chart, road, local and yard crew starts did increase in the quarter, but at a rate below the volume increase. When feasible, incremental volume was added to existing trains using available capacity and avoiding additional crew starts.

As a result, total crew starts increased 6%, which is below the 10% increase in volume. This operating leverage was particularly evident in our intermodal road starts where a 19% year-over-year increase in volume was handled with just a 10% increase in crew starts.

Moving to slide 21, let''s look at resource versus historic levels. This chart shows the number of active train and engine employees and locomotives deployed in the third quarter over the last five years. Resources have increased to support higher business levels in the quarter. However, you can also see that they both remain well below the peak levels of 2006.

As Clarence mentioned earlier, we have handled higher volumes in the past and we clearly have room to grow. As the volume continues to build, we will take advantage of opportunities to drive further productivity while at the same time managing resources closely to meet customer needs.

Let''s move to slide 22 and look at the record operating ratio improvement, driven in part by effective resource management and productivity. Slide 22 shows the continuous improvement in our third-quarter operating ratio over the last five years, ending with the record level achieved in 2010.

This improvement is partially driven by effective management of resources as volume returned to our network that we discussed earlier. In addition, we continued to rely on our cross-functional process improvement teams to maintain and deliver a pipeline of productivity initiatives.

We have also been successful in leveraging technology to drive productivity gains. In 2010 alone, we have installed automation technology in nearly 20 yard locations. Lastly, our total service integration or TSI initiative, that we have talked about periodically continues to drive efficiencies in unit train length.

As we progress our newer TSI car load phase, we will drive efficiencies in our local operations while providing customers with first and last mile service improvements. Let''s take a look at some of the areas where we have invested in our network to gain efficiencies in 2010 on slide 23.

The gold markers on this map indicate areas where we have invested in line and yard capacity to improve fluidity at key points in our network. The green marker and highlighted portion of our network represents the newly-opened Liberty Corridor freightway.

As announced last week, this major public-private partnership enables double-stack intermodal freight to flow from the Port of New York and New Jersey to inland destinations. The project will increase train capacity, improve service levels and expedite freight flows to and from inland ports. It will also help keep thousands of trucks off crowded highways each year.

The blue markers indicate yard locations where we have implemented automation technology in 2010, as I referenced in the previous slide. This technology, including remote control operations and automated switches, drove further productivity in the quarter. As we prepare to handle future growth, we will continue to invest in projects like these that support capacity, fluidity, and productivity.

Now, let''s wrap up on slide 24. Looking forward, we will build on our safety performance as we pursue our ultimate goal of zero injuries and accidents. We will continue to drive productivity, control cost and manage resource levels closely as volumes grow.

Finally, the network will remain stable, fluid and efficient while providing more reliable service for our customers. Our employees continue to hold each other mutually accountable for providing reliable service, safely and efficiently, which delivers value to both our customers and our shareholders.

Now, let me turn the presentation over to Oscar to review the financials.

Oscar Munoz

Thank you, Mr. Brown and good morning. Let''s start with an overview of the quarter''s results, starting at the top of slide 26. As Clarence discussed earlier, revenue improved 16% to nearly $2.7 billion. This, coupled with the continued strong cost management David and the operating team delivered, yielded a 39% increase in operating income for a record $825 million.

As you look below the line, interest expense was favorable by $9 million, primarily the result of lower average debt balances and income taxes were $288 million in the quarter, mostly the result of higher earnings. Now, while our normal effective tax rate is approximately 38%, this quarter''s rate was about 41% due to a $22 million income tax charge, which is described in more detail in the quarterly financial report.

All in, we finished the quarter with a reported EPS of $1.08, an improvement of 48% versus last year. So with that as background let''s review our expenses in more detail, starting with labor. Labor expense increased 12%, or $78 million from last year. As mentioned in previous calls, CSX and the rail industry continued to face wage and healthcare costs that are well above inflation.

The impact for CSX in this quarter was $34 million. The second driver was an increase in incentive compensation of $30 million, driven by our strong earnings performance this year. You may recall that this program is available to management employees and a portion of our union workforce that have performance-based agreements.

Finally, we also incurred $14 million in costs associated with ongoing rules-based training, overtime and new hire training and development. Going forward, we expect headcount to increase by about 1% to 2% in the fourth quarter as we continue to hire ahead of attrition and support further volume growth.

Moving to slide 28, MS&O expenses increased 2%, or $9 million versus last year. If you look at the table on the right, the largest driver relates to the inland transportation costs, which were favorable by $44 million. As Clarence reminded us earlier, this relates to the termination of a prior intermodal interline agreement and results of a quarterly reduction in revenue as well as a corresponding reduction in operating expense.

Going forward, you should expect to continue to see this impact for the next couple of quarters and we''ll begin to cycle this event in the second quarter of 2011. The second driver in MS&O was a $24 million increase in volume-related expenses.

And additionally, we are cycling about $18 million of prior-year gain, including the settlement of legal disputes and favorable credit resolutions. Finally, there was an additional $11 million of other items, which we do not expect to repeat.

Moving to slide 29, total fuel cost increased $56 million or 25% versus last year. Look at the table on the right, increased fuel prices accounted for $34 million of the year-over-year change, as CSX''s average cost per gallon climbed to $2.17, an increase of about 15%.

Higher volume accounted for $15 million of incremental expense and non-locomotive fuel expense -- non-locomotive fuel increased by an additional $3 million. The chart to the left highlights fuel efficiency as measured by gallons per thousand gross ton miles. You can see fuel efficiency decreased 2%, which translates to a $4 million expense increase for the quarter.

Now, if we look to the next slide we''ll review the remaining expenses. Beginning with depreciation, these costs increased $5 million year-over-year, as a net increase in our asset base was partially offset by lower depreciation rates from the life studies completed in the fourth quarter of 2009.

Moving to rent, expenses declined $2 million. Here the higher costs associated with volume were more than offset by improved utilization of our fleet and the reduction of some long-term freight car leases.

Now, that we''ve reviewed our expense items in detail, I''d like to provide an update on dividends and share repurchase as we move to slide 31. With the increased earnings and an improving financial position, we remain committed to balanced deployment of cash for our shareowners.

As Michael mentioned earlier, we recently announced an increase in our quarterly dividend to $0.26 per share effective with the fourth quarter payout. This is the eighth increase in our dividend since 2005 and represents a 35% compounded annual growth rate over the five-year period. Also like to update you on our share repurchase program.

During the third quarter, we repurchased an additional $300 million or about 5.7 million shares of our common stock. For the year, we''ve repurchased over $1.1 billion or more than 21 million shares. Going forward, we expect to complete the current share repurchase program, which is nearly $650 million remaining under our existing authority by the end of the first quarter of 2011.

Now, let''s talk a little bit about CapEx. As mentioned earlier, we expect our 2010 capital spending to increase from $1.7 billion to approximately $1.8 billion. These incremental investments leverage an improving economy and position CSX for long-term growth. This new capital is focused on strategic investments in support of our strong growth in our intermodal business and investment in our rolling stock, which helped further drive productivity.

With these investments, we will be able to more effectively serve the growing needs of our customers, improve efficiency and drive earnings growth and margin expansion. As such, we expect these investments to generate significant returns well above our cost of capital.

Now to wrap up, for the quarter, we continue to see growth in nearly all markets. The underlying fundamentals of our business remain positive and they are evident in the double-digit volume growth that we delivered this quarter. Our operating team effectively handled this growth while maintaining service levels. And we will continue to bring back surplus resources to handle the additional growth.

Overall, we continue to produce solid results and are committed to our balanced approach of cash deployment. CSX''s third quarter financial performance demonstrates our sustained focus on delivering value for our customers and our shareowners.

Finally, and as a reminder, CSX follows a 52/53 fiscal reporting calendar. To maintain this type of reporting calendar every fifth or sixth year, an extra week is included in the fourth quarter. 2010 is such a year and therefore we will report the quarter on 14 weeks of activity and the fiscal year on a 53-week basis.

The effect of this is to include an additional week so the year will end on December 31st. This extra week is during the holiday period and is historically one of the lowest from both a volume and a revenue perspective.

So with that let me turn the presentation back over to Michael.

Michael J. Ward

Thank you, Oscar. Over the past several years CSX employees have been sharply focused on serving customers while delivering strong financial results for our shareholders. As our markets continue to rebound, we''re sticking to our game plan and our excellent results in the third quarter reflect that commitment.

We see even greater opportunity for CSX as the country relies more and more on environmentally-friendly railroads to handle its freight. Just last month, the Federal Railway Administration highlighted the incredible efficiencies freight railroads have produced since the Staggers Act was enacted 30 years ago and the savings that have been passed on to shippers.

Not surprisingly, hundreds of transportation experts and stakeholders who were consulted for the FRA report concluded that the freight system must not be harmed as a national rail policy is implemented. 30 years ago, freight railroads were bankrupt and lacked the investment to operate safely, efficiently or reliably.

Today, they''re healthy enterprises that are investing record levels of capital into their networks, helping drive the nation''s economic recovery and employing more than 150,000 people with excellent pay and benefits. Our customers and their customers have been the real winners, as average adjusted rail rates have declined by half since the passage of the Staggers Act in 1980.

In today''s economy, the nation should embrace these benefits. Policy makers should make certain that future legislative and regulatory actions do not in any way recreate the dysfunction of the pre-staggers years. We are committed to working to maintain a balanced regulatory environment that lets us create competitive advantage for our customers, good jobs for hard-working Americans and value for our shareholders.

A steady improvement in the economy will give us an even greater opportunity to demonstrate outstanding results and to further deploy our capital to enhance our network and reward shareholders. We believe CSX delivers terrific value for investors. We provide a critical service to a wide range of customers. We have a culture and a track record of results and we are ideally positioned in a growing marketplace.

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

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Ed Wolfe of Wolfe Trahan.

Michael J. Ward

Good morning Ed.

Scott Group – Wolfe Trahan

Hey, morning, guys. It''s Scott Group for Ed.

Michael J. Ward

Hi, Scott.

Scott Group – Wolfe Trahan

First, Clarence, wanted to ask about export coal. You talked about 30 million tons of coal for the year. At this point, what are you thinking about for 2011? Do you think it''s up or down from that and wondering if you think the coal that you sent to China this year and Asia, is that sustainable into 2011?

Clarence W. Gooden

Well, Scott, good morning and thank you for the question. We''re not prepared today to give guidance for 2011. Our export market is still strong. We''re on track, as we said, to reach the 30 million tons. The coal volume levels this year are in line. We are in the process now of putting together that 2011 plan. And as that comes more clear, we''ll give you that information.

Scott Group – Wolfe Trahan

Okay. And then Clarence, you talked about an early peak season in intermodal. Are you seeing signs of an early end to peak season or do you think we stay strong through fourth quarter? And then separately, with the domestic intermodal, the lost contract, can you talk about the magnitude of that and then the timing for when that grandfathers?

Clarence W. Gooden

Well, the first question there, on our peak intermodal season, we actually saw it start at a traditional timeframe this year. It started in August, stayed strong in September. It continues strong in October and traditionally, Scott, as you know, it tails off towards Thanksgiving and then our premium intermodal services start to kick in for their fall peak from Thanksgiving into Christmas.

So we see that moving along those lines very well. As you know, we don''t give particular information out on a single customer other than in this case to say that absent that -- excuse me -- customer''s decline, we would have been in double digits in our domestic intermodal growth.

Michael J. Ward

Thank you, Scott.

Scott Group – Wolfe Trahan

All right. Thanks for the time, guys.

Operator

Ken Hoexter of Banc of America/Merrill Lynch.

Michael J. Ward

Good morning, Ken.

Kenneth Hoexter – Banc of America/Merrill Lynch

Hi, good morning. Great job on the incremental margin, so let me dig into that a little bit because I know, Oscar, last quarter you''d talked about how strong you thought you were going to see that continue through the end of the year. So when you think about the capacity you have on the side line, how do you think about that as you bring on equipment?

And I guess I head there because it looked like on one of the slides that Dave was talking about, it looked like you''re starting to get some lower fuel efficiency, is that because you''re adding some lower efficient locomotives? If you can just talk a little bit about the incrementals? Thanks.

Oscar Munoz

Okay. Ken, first on the fuel efficiency, that is correct. It''s a little bit of the old equipment coming on board but let me answer the broader question of incremental margin and whether that continues. The answer is absolutely, unequivocally, yes. And we''ll be able to maintain that strong over the near-term and we''ll provide a longer-term view early next year but again, a strong showing for us.

Kenneth Hoexter – Banc of America/Merrill Lynch

Okay. And then if you think about, -- I guess maybe more to Mr. Brown, on the service side, it looked like your numbers were starting to come in because the volumes were increasing. At what point does that start to concern you in terms of what Oscar''s talking about on the incremental margins continuing? Where should we looking at and saying, okay, well the volumes are driving that but we got to start getting concerned because there''s more congestion?

David A. Brown

Yeah. Thank you, Ken. That''s really not at the level we are today a concern. We feel like we''re in a solid range in terms of those measurements and our performance overall. So as we see volume come back, we''re -- at this point, it''s really the level where we see it a very sustainable and high level of service.

Michael J. Ward

Thank you, Ken.

Operator

Tom Wadewitz of JPMC, you may ask your question.

Michael J. Ward

Good morning, Tom.

Thomas Wadewitz – JP Morgan Chase

Yeah. Good morning. Strong results and I guess, I wanted to get your view in terms of insights on pricing for next year. I know you''ve maintained this inflation-plus view. But I don''t know if you can compare what you''re seeing in contracts to what you would have seen the last couple years or any additional insight in terms of what the contract re-pricing looks like at this point for 2011?

Clarence W. Gooden

Tom, this is Clarence. We expect the economy to have good to slow steady growth in 2011 and we expect our pricing will remain above rail inflation.

Thomas Wadewitz – JP Morgan Chase

Okay. Perhaps, a question on a different topic, you said you don''t want to give guidance on export coal, can you directionally talk about utility coal in 2011. If you''re at target stockpiles now is there a pretty good chance that you see some growth in utility volumes as you look to 2011?

Clarence W. Gooden

Well, Tom, we''re -- again, we''re in the process of putting together the 2011 plan at a very high level. Stockpiles will begin to build in the shoulder period as we go -- as we''re going through now. Having said that, it''s going to be weather dependent on what happens in 2011 and we hope for a cold winter.

Thomas Wadewitz – JP Morgan Chase

Okay. Great. Thanks for the time.

Operator

Scott Flower of Macquarie Equities Research, you may ask your question.

Michael J. Ward

Good morning, Scott.

Scott Flower – Macquarie Equities Research

Good morning, Michael. Just -- and maybe this is one for Clarence and following up to Tom''s question. Stockpiles have come off their peak from ‘09 but still if you look over the last several years in aggregate, they''re still at fairly high levels versus what they were mid decade. And obviously, you have more granularity into what you think your customers'' stockpiles are. How do your customers view what the right level of stockpiles are? So although they''re down from ‘09 that seemed to be a zenith level and I''m just wondering how do they view what''s the right level of stockpiles?

Clarence W. Gooden

Scott, it varies from utility to utility based upon their philosophy is the first point. The second point in there is that if you look at where the stockpiles are currently, they''re really at about 2008, late 2007 levels. And the third factor that comes in is the contractual commitments that the utilities have to take and to receive coal.

Scott Flower – Macquarie Equities Research

Okay. But I just -- what I was wondering is do they think ‘07, ‘08 is the right level, or is earlier the right level? I''m just trying to get a sense as do they want a higher level of inventory than where they''ve been perhaps the middle part of the last decade?

Clarence W. Gooden

I think that the answer would be that by large the broad base of them would be like a higher level of inventory that it had in the middle of the decade.

Scott Flower – Macquarie Equities Research

Okay. And then very -- one quick very follow up is I know you don''t talk about specific customers but the blip with that one asset base, has that worked its way through or is that going to continue in the fourth quarter?

Clarence W. Gooden

It could be possibly in the early part of the fourth quarter before it fully cycles itself.

Scott Flower – Macquarie Equities Research

Okay. Great. Thanks very much.

Clarence W. Gooden

Thank you.

Operator

Bill Greene of Morgan Stanley, you may ask your question.

William Greene – Morgan Stanley

Oscar, back in 2008, I think you said at the investor day you''d get to some 70% OR. We''re there and we''re talking about strong incremental margin from here, so how do we think about a sustainable margin level as you look out a few years? How much better can it get?

David A. Brown

Well, we''re always trying to build on our great results, as you know and this quarter is certainly consistent with that. And so in the near-term, we''ll continue to focus on the fundamentals that have been driving us and we''re not going to really project too much of a ratio. But having said that, longer term, this railroad can and will operate below 70% on a consistent basis.

William Greene – Morgan Stanley

Okay. Thanks. Clarence, just a couple of clarifications on pricing. Can you remind us, at this point in the year, I think you usually have a fair amount of the business locked in already, is that the case this year? And I have in my notes that you did still have a little bit of legacy repricing but has that all been taken care of now or is there anything left?

Clarence W. Gooden

Bill, it''s a very negligible number on legacy pricing left and most of that''s in out years, 2012, 2013. And we have about 75% of our pricing for next year locked up at this point, which is about typical for this time of the year.

William Greene – Morgan Stanley

Okay. Thank you.

Michael J. Ward

Thank you.

Operator

Scott Malat of Goldman Sachs, you may ask your question.

Michael J. Ward

Good morning, Scott.

Scott Malat – Goldman Sachs

Good morning. Thanks. I just wanted to -- you gave a very good positive outlook for coal, I just wanted to understand natural gas substitution impacts. As nat gas prices have come down, it seems like electricity demand is up so maybe that helps you out and maybe won''t be as much of an impact as you seen before, but wanted your comment on that?

Clarence W. Gooden

Well, in the fourth quarter, we don''t expect it to have a lot of material impact on what our utility coal is going to be, again, because of the contractual commitments that our utilities have as well as the fact that the burn in our region is up. Having said that, going forward it''s going to be weather dependent on how much natural gas will replace the base load coal.

Scott Malat – Goldman Sachs

Right. But at these prices, you don''t -- are we at the point now where it starts to have an effect or does it have to go lower from here?

Clarence W. Gooden

We''re at a point now where it will have some impact.

Scott Malat – Goldman Sachs

Okay. Thanks and then just another question, I had on CapEx. Just if you can give a little more specifics, anything you can give us on the intermodal investments you found that are incremental and then maybe something on the number of locomotives you expect to purchase, that would be helpful? Thanks.

Oscar Munoz

It''s Oscar, Scott. On the intermodal side, it''s sort of broad-based investment from facilities and yard expansions, some technology, some containers. So it''s across those areas. We are not purchasing any new locomotives this year, 2010. We will purchase about 50 of them next year.

Scott Malat – Goldman Sachs

Okay. Thanks. Very helpful.

Operator

Gary Chase of Barclays Global, you may ask your question.

Michael J. Ward

Good morning, Gary.

Gary Chase – Barclays Capital

Good morning, everybody. If I can ask Oscar or David or maybe some combination to maybe just step back and walk us conceptually through what you think is enabling you to generate the cost outcomes that seem to be coming during the course of this year? And I think more importantly to me, there''s -- the question I have is it really contingent on further volume gains or might we think even in a flattish volume environment that the kinds of productivity initiatives you''re describing could actually drive unit costs down and you could relative to inflation, without having incremental volume on the network?

Oscar Munoz

Okay. That was a lot of questions there. So let me stick with the broad-based question which is what is contributing to our strong cost management. Is that fair?

Gary Chase – Barclays Capital

Yeah. I mean, just what''s the conceptual driver? Outside the mix in the line items, what is it broadly that''s enabling you to generate this outcome?

Oscar Munoz

It is and this will sound trite but it is a growing and great culture around running a great sound, efficient and safe business and we''ve been doing that for a long period of time. And starting with Tony and continuing with Dave Brown, the culture around this cross-functional initiatives that David Brown mentioned in his talk, the levels of work that are going on to find areas of efficiency and asset utilization, along with productivity are just throughout our entire system. And they are finding a ton of places to go find costs and that just continues every day and it''s just a culture that we have. And that''s something that''s new over the last few years for this company. That''s the fundamental driver.

Gary Chase – Barclays Capital

As I hear you describe that though, Oscar, it just kind of occurs to me that that doesn''t necessarily require volume growth, is that a fair statement? So if volumes are not that impressive might we think you could continue to drive unit costs down?

Oscar Munoz

Well, Gary, I would point to 2009 where our volumes were down 15% and we got not only our normal productivity but additional extraordinary productivity. So I think we''ve shown that in a down period we can drive the productivity and in an up period we can drive the productivity and we will continue to do so. And then even as a further reminder, back to 2008 before the financial meltdown, we gave you guidance of sub 70% by the end of 2010. And we said then very specifically that it was not necessarily predicated on lots of volume growth.

And so yeah, it''s certainly part of the equation and we love to have it and we love to grow our business organically. But cost management and the culture is all about being efficient and productive regardless.

Gary Chase – Barclays Capital

Appreciate it, guys.

Michael J. Ward

Thank you.

Operator

Chris Ceraso of Credit Suisse, you may ask your question.

Michael J. Ward

Good morning, Chris.

Christopher Ceraso – Credit Suisse

Thank you. Good morning. First, the intermodal business was one where you did see very strong incremental margins. Can you give us a feel for how much extra capacity you have left in that network in particular?

Michael J. Ward

Yes. Well, Chris, we are seeing that as we bring on additional business there we still want to stick with about 15% to 20% more additional capacity available for productivity in our existing train network. And we''re seeing that we can absorb these additional volumes very easily.

Christopher Ceraso – Credit Suisse

Okay. And then maybe a little bit longer term, you did mention that in the near-term, you expect about a 1% to 2% increase in headcount but if you look out over the next three years or so, what''s the expected attrition rate and how many of those, maybe as a percentage, do you have to replace? Can you replace less than 100% because you improve productivity, you take advantage of technology and so forth that we can net shrink the headcount over the next few years?

Michael J. Ward

I would think if we look out a little bit, as you know, in our industry at age 60 with 30 years of service one can retire and many of our employees choose that option. So we expect probably attrition in the 6% to 7% range over the next several years. And obviously, we''ll have to hire some of that back but not fully because Dave''s going to continue to improve productivity and find better ways to run.

So we''re going to have strong attrition, do some strong hiring. This year actually we''re going to end up hiring about 2,000 people to replace that attrition and next year we may be more in the range of 3,000. So we do have a changing workforce.

Christopher Ceraso – Credit Suisse

Okay. Thank you.

Operator

Justin Yagerman of Deutsche Bank, you may ask your question.

Robert Salmon – Deutsche Bank

Hey, thanks. Good morning. This is Rob on for Justin.

Michael J. Ward

Good morning, Rob.

Robert Salmon – Deutsche Bank

One of the things which jumped out to us was the increased CapEx to $1.8 billion. Could you give us a sense if we can read more into your decision to increase CapEx by $100 million and if this is any implications on the rail regulatory backdrop? I know Michael had alluded to the regulatory environment briefly in his prepared comments and we''re also curious what else you''re hearing right now.

Michael J. Ward

Well, Rob, I think if we look at it obviously we''re very pleased with the results here and as you know, we continue to have our balanced approach. We took up our dividend. We''re increasing our buybacks or completing our buybacks really and we think investing in the business is pretty important. So we''ve told the policy makers all along as we make more we''ll invest more because we think there''s a great future for our industry and for our company and we have had the cash flows to support it.

On the broader aspect around potential regulation, we really do believe that policy makers are going to understand the importance of the railroads to this economy because if we are, in effect, hindered in our ability to invest we''re going to stop building. It will stop job creation, it will be negative for the environment and really take away the competitive edge some American companies have because we do have the best freight system in the world -- freight rail system in the world.

So we think when it''s all said and done the policy makers will understand that. So this is just consistent with what we''ve been doing all along, which is as we earn more we invest more and we return to our shareholders.

Robert Salmon – Deutsche Bank

Thanks. That''s definitely helpful on that side. Shifting gears to intermodal, certainly we''ve got the headwind from the contract change but looking sequentially from Q2, the intermodal yields to decline modestly. I think this is primarily a business mix thing given the increase in international car loads. Could you give us a sense how you balance the pricing improvement and -- on international with kind of getting longer-term volume visibility?

Clarence W. Gooden

Let me make sure, I understand the question correctly. It''s how do we balance what now?

Robert Salmon – Deutsche Bank

I guess, how are you guys balancing the longer-term volume visibility that you guys can get with getting new international contracts versus looking near-term to the pricing improvement and how do you guys balance those two dynamics?

Clarence W. Gooden

Well, first off, we were able this year to get pricing in both our international business as well as in our core business and what we look at with the longer-term contracts in our international traffic is the overall value it can bring only to ourselves but to our customers.

And with the network improvements, that we''re making in our infrastructure, the National Gateway, for example, being one, our Northwest Ohio terminal facility, which we''ll have completed in the first quarter of next year, is giving us opportunities to get into markets that are very profitable to us, very attractive to us. And the density that''s being created there has produced very strong economic results for us. So the bottom line I guess, Rob, is we feel very positive about the direction our intermodal''s moving in.

Michael J. Ward

Thank you.

Operator

John Larkin of Stifel Nicolaus, you may ask your question.

Michael J. Ward

Good morning, John.

John Larkin – Stifel Nicolaus

Yes, good morning, gentlemen. Wanted to get a little more color on your thinking regarding the potential for public policy here. A couple weeks ago Senator Rockefeller held a hearing and continued to suggest that he was going to push for a legislative adjustment here. If he couldn''t get it done in this congress he was going to push again in the next congress and sort of the suggestion was that if a legislative remedy wasn''t possible, he was going to suggest that perhaps the STB commissioners, lead by President Obama''s appointee, Dan Elliott, would perhaps make some of these changes administratively within the STB. Is that a real worry? Is that something that the STB has the potential to do in terms of addressing issues like paper barriers, bottlenecks, terminal access, reciprocal switching, those sorts of complicated competitive issues?

Michael J. Ward

Well John, on the -- to address both issues, on the legislative side, we continue to be willing to work with Senator Rockefeller and the senate commerce committee to see if there''s a bill that''s possible that allows some of those desires to be met and still allows us to earn sufficient returns to continue to invest and Senator Rockefeller himself has said he realized the importance of the rails making enough to make those investments for long term.

So we''re still in a position as an industry where we''re willing to engage in that dialogue and it probably will continue next year in the next congress. On the regulatory side, I think we''ve seen over the last several years that the STB has been very balanced in how they work through these issues. As you know, there''ve been a number of rate cases where their mediation process has worked extremely well in resolving some of these issues where the railroads and their customers have different points of view.

Obviously, they have the ability to look at issues like competitive access and exemptions and those sorts of things. I think Chairman Elliott did indicate that he would consider doing some of that next year. We do need to remember, though, that the legislation, that the Staggers Act, one of the key components is to ensure the revenue adequacy of the railroads. So that''s going to have to be the overall drop -- backdrop in which those deliberations are made. And I think obviously we''ll be very well as an industry to make inputs into any proceeding that Chairman Elliott would initiate.

John Larkin – Stifel Nicolaus

Thanks for that answer. Just one follow on keeping with the theme of government interference, if that''s the right word. The PTC mandate, I''ve gotten the impression from some of the equipment manufactures that they are not there yet with respect to fleshing out the complete plan in terms of meeting the requirements. Any thoughts on the timetable of the spending levels required to meet the requirements and whether the technology will be there to meet the requirements by 2015?

Oscar Munoz

Hey, John, it''s Oscar. You are correct. There is a bit of delay across a couple of different areas with the development of the actual software and applications that are required for this. At this point in time, we''ll make up the time. The mandate is out there, the deadline is out there. And we''re focused on spending the money in that appropriate fashion. But yeah, in the near-term, there''s a little bit of delay.

John Larkin – Stifel Nicolaus

Thanks very much.

Michael J. Ward

Thank you.

Operator

Cherilyn Radbourne of TD Newcrest, you may ask your question.

Michael J. Ward

Good morning.

Cherilyn Radbourne – TD Newcrest

Hi. Good morning. Wanted to ask a question on train starts, your road crew starts in the quarter were up 8% year over year versus the 10% volume gain, which makes sense as we start to lap more difficult comps, but on the local and yard crew starts those are still very well contained. So I wondered if you could just talk about some of the initiatives you have under way at the local level and in your yards to contain those costs?

David A. Brown

Certainly, Cherilyn. We are looking closely at our starts and how we add additional service as customers grow their business and have needs for additional service. So we''re looking at a very granular level and very responsive level to particular customer needs and that allows us to contain, especially in the local and the yard network where we serve customers on a car load basis. It allows us to contain those starts within the capacity -- the additional capacity we have within our existing local and yard networks. So you see the results of that in the measurements.

Cherilyn Radbourne – TD Newcrest

Okay. Thank you. And my second question, there was a bit of a year-over-year increase in the other revenue category. And I wonder if you could just indicate whether there was anything special going on in that line?

Oscar Munoz

No, Cherilyn -- it''s Oscar. It''s liquidated damages in essence that is driving that up a little bit.

Cherilyn Radbourne – TD Newcrest

Okay. Thank you. That''s all for me.

Michael J. Ward

Thanks.

Operator

Jason Seidl of Dahlman Rose, you may ask your question.

Michael J. Ward

Morning, Jason.

Jason Seidl – Dahlman Rose

Good morning, everyone. How''s everyone doing today?

Michael J. Ward

We’re doing well today. Great. Thanks for asking.

Jason Seidl – Dahlman Rose

Well, nice results will do that to you. Quick question. Oscar, very impressive on the FRA personal injury and the FRA train accidents, they keep going down. Could you talk to us about expectations for maybe actuarial studies, sort of, lowering some costs going forward and when your next study''s going to come up?

Oscar Munoz

Yeah. Thanks, Jason and thank you for noticing. We are very pleased with the safety trends that we do continue to improve. As you know, we do that adjustment process that you referred to twice a year.

Jason Seidl – Dahlman Rose

Yeah.

Oscar Munoz

The next one being in this fourth quarter, and that is currently being reviewed by our third-party actuary so we''ll provide an update on that as we finish do that and in the fourth quarter call.

Jason Seidl – Dahlman Rose

Well, based on the trends, though, we would assume that it''s not going to be adjusted upwards based on these rates?

Oscar Munoz

Again, that would be a layman''s assumptions but actuaries are what they are. But yes, I think that what we focus on is safety trends improving. That''s the most important thing, the accounting will take care of itself.

Jason Seidl – Dahlman Rose

Okay. That''s good. And my follow-up, Clarence, in relations to the North Ohio intermodal terminal and to the new markets that can open up, can you give us a little more color? I know you guys are taking out a lot of time in intermodal and into New England but how big of a market could that be for you guys?

Clarence W. Gooden

Well, I think it could be an extremely big and important market for us because what Northwest Ohio will allow us to do eastbound is overhead Chicago with much bigger and longer trains going into Northwest Ohio and then we can serve both the entire Ohio Valley, the Upper Midwest, over to the Mid Atlantic and into the New England areas out of that. And then conversely on the reverse side of that as we come out of those same areas going back west it allows us to consolidate freight back at the Northwest Ohio terminal and then overhead the Chicago lanes, which will improve both in terms of capacity utilization, track utilization as well as longer and better trains.

Jason Seidl – Dahlman Rose

And the opening date on the terminals at mid 2011?

Clarence W. Gooden

It''s end of first quarter of 2011.

Jason Seidl – Dahlman Rose

In the first quarter. Okay. Thank you very much, everyone, take care.

Operator

Art Hatfield of Morgan Keegan, you may ask your question.

Michael J. Ward

Good morning, Art.

Derek Rabe – Morgan Keegan

Good morning, guys. This is Derek Rabe in for Art.

Michael J. Ward

Hi, Derek.

Derek Rabe – Morgan Keegan

I just wanted to look real quick at your rolling stock. Could you talk about where you stand on your storage levels? Also do you see any need for particular car types in the near term and if so, are those mainly still on the coal side?

Clarence W. Gooden

Derek, this is Clarence. On the cars that we have stored, we have about 2,000 box cars that are still in storage but they''re mostly Class C box cars, which would be good for brick loading and bulk type loading. All of our Class A''s are out and being utilized and the same is true in our multilevel fleet. There is a couple thousand cars in the automotive fleet stored but they tend to be bi-level cars as opposed to tri-level cars that are all in use. Then we have some gones and coal metal cars still under storage but not as many as there were. That''s driven mainly by the fact that steel capacity utilizations in the low-to-mid 70s. And the biggest number of cars that we have still in storage is center beam lumber cars as a result of the construction business being down. I guess the second part of your question was what are our car needs going forward?

Derek Rabe – Morgan Keegan

Yeah. Both on a short-term and long-term basis.

Clarence W. Gooden

We''re looking at replenishing some of our coal fleet in the near term. We''re making some plans right now to go back and do some rework on our automotive cars. We''re acquiring some box cars through TTX''s national fleet to help us improve in our Class A box car side of the house and that''s principally and profoundly where those numbers are. And our jumbo covered hoppers, that''s right. Jumbo covered hoppers we''re adding in the new 286 short wheel-base capacity covered hoppers.

Derek Rabe – Morgan Keegan

All right. Perfect, that''s all I''ve got.

Michael J. Ward

Thank you.

Operator

Walter Spracklin of RBC Capital, you may ask your question.

Michael J. Ward

Good morning, Walter.

Walter Spracklin – RBC Capital Markets

Good morning, guys. So I just want to ask you -- first question here is for Clarence. You had -- you''re pretty optimistic on your 10 segments, you''ve got as favorable and essentially where -- the shippers we''ve been talking to, not that they''re much less optimistic, it''s just their crystal ball''s a lot more cloudy. And I''m just curious are you getting insights from your investors perhaps more recently as to how the volume, the demand level''s going to be developing into 2011 that gives you your case for optimism?

Clarence W. Gooden

Yes, Walter. We -- before we do a forecast of the type that you''re seeing here on an internal basis, we canvas all of our customers to see what they see in the short-term, as well as the longer term and the customer base we''re dealing with has been very positive to us in the growth and just in all of those segments that we''ve mentioned there. As you know, the automotive market is still strong for us.

Our intermodal business is strong for us right now. In fact, last week in our intermodal business, we almost had a record week. We were very close in terms of volume and doing that. And we''re still very optimistic in both our export coal and our utility coal.

Walter Spracklin – RBC Capital Markets

Okay. Switching gears here now over to Oscar, obviously debt rate -- or rates on cost of debt is certainly low and dropping quite low here. Just curious, how this might have affected your view on what CSX''s optimal capital structure is and is it possible that we''d see that return to sort of a debt financed share buyback or raising debt to increase your share buyback in 2011?

Oscar Munoz

Yeah. As you know our capital deployment over the last few years has sourced by two things; our strong operating cash flow and of course, our even stronger balance sheet. So I think as we go forward we''ll continue to get that same approach and always staying investment grade. So we''ll always look at all those options.

Walter Spracklin – RBC Capital Markets

Okay. Thank you very much, everyone.

Michael J. Ward

Thank you.

Operator

Jeff Kauffman of Sterne, Agee & Leach, you may ask your question.

Salvatore Vitale – Sterne, Agee & Leach

Hi, it''s actually Sal Vitale in for Jeff, I had a quick question on the labor side. Were there any sort of accruals that helped labor expense because I guess we were surprised to see your incremental margins go from 45% range in Q1 and Q2 up to 60%?

Oscar Munoz

No. This is Os