Oct 14, 2015
Executives
David Baggs – Vice President, Treasurer and Investor Relations Michael Ward – Chairman & Chief Executive Officer Frank Lonegro – Chief Financial Officer & Executive Vice President Fredrik Eliasson – Executive Vice President and Chief Sales and Marketing Officer Cynthia Sanborn – Executive Vice President and Chief Operating Officer of CSX Transportation
Analysts
Eric Morgan
Brian Ossenbeck – JPMorgan Christian Wetherbee – Citigroup Global Markets Inc. (Broker) Thomas Wadewitz – UBS Alison Landry – Credit Suisse Robert Salmon – Deutsche Bank Thomas Kim – Goldman Sachs Ken Hoexter – Merrill Lynch Rick Paterson – Topeka capital Markets Jason Seidl – Cowen & Company Matthew Troy – Nomura Ben Hartford – Baird Cherilyn Radbourne – TD securities David Vernon – Bernstein John Larkin – Stifel Bascome Majors – Susquehanna Jeff Kauffman – Buckingham Research Scott Group – Wolfe Research Cleo Zagrean – Macquarie Justin Long – Stephens John Barnes – RBC Capital Markets
Operator
Good morning, ladies and gentlemen and welcome to the CSX Corporation third quarter 2015 earnings call. As a reminder, today's call is being recorded.
During this call, all participants will be in a listen only mode. For opening remarks and introduction, I would like to turn the call over to Mr.
David Baggs, Vice President, Treasurer and Investor Relations Officer for CSX Corporation. You may begin, sir.
David Baggs
Thank you, Shirley and good morning, everyone and again welcome to CSX Corporation's third quarter 2015 earnings presentation. The presentation material that we'll be reviewing this morning along with our expanded 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. This morning our presentation will be led by Michael Ward, the company's Chairman and Chief Executive Officer, and Frank Lonegro, our Chief Financial Officer.
In addition, Cindy Sanborn, our Chief Operating Officer and Fredrik Eliasson, our Chief Sales and Marketing Office along with Clarence Gooden, our President will be available during the question-and-answer session. Now, before I turn the presentation over to Michael, 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 and accompanying presentation on slide 2. The disclosure identifies forward-looking statements, as well as the uncertainties and risks that could cause actual performance to differ materially from the results anticipated by these statements.
In addition, at the end of the presentation, we will conduct a question-and-answer session, with the research analysts. With nearly 30 analysts covering CSX today, and out of respect for everyone's time, including our investors, I would ask as a courtesy for you to please limit your inquiries to one question and if necessary, a clarifying question on that topic.
And with that, let me turn the presentation over to CSX Corporation's Chairman and Chief Executive Officer, Michael Ward. Michael?
Michael Ward
Thank you, David, good morning, everyone. Yesterday, CSX announced third quarter financial results that demonstrate our ability to effectively manage in a dynamic marketplace.
Our results included net earnings of $507 million, which translates to earnings per share of $0.52, a third quarter record. Looking at the top line, revenue in the quarter declined 9% as pricing gains were more than offset by lower fuel recovery, the continued transition in CSX's business mix, and a 3% volume decline as we cycled 2014's high demand environment.
At the same time, we continue to be an industry leader in safety and we are leveraging our improving network performance to deliver strong service and efficiency savings to help reduce operating expenses. As a result, CSX delivered operating income of $933 million and a third quarter record operating ratio of 68.3%.
As we look across our business, low natural gas prices are clearly challenging domestic coal volume. More broadly, low commodity prices and the strength of the US dollar continue to challenge many of our other markets.
In this environment, our goal remains providing safe, reliable service that consistently meets our customer's expectation. That service is the foundation of our ability to create long-term value for customers and shareholders as it supports pricing for the value of our service and produces increasingly efficient operations.
Now, I will turn the presentation over to Frank, who will take us through the financials and the outlook in more detail. Frank?
Frank Lonegro
Thank you, Michael and good morning, everyone. Let me begin by providing some more detail on our third quarter results.
As Michael mentioned, revenue was down 9% versus the prior year. This was driven mainly by $175 million decline in fuel surcharge recoveries and a $75 million impact from lower volume.
At the same time, core pricing gains were essentially offset by negative business mix. Volume decreased 3% from last year with low natural gas prices impacting domestic coal volume and low commodity prices coupled with the strong US dollar, challenging export coal and some of our merchandise markets, particularly metals.
Core pricing continues to improve sequentially and for the quarter was up 4.6% overall and 4.4% excluding coal. Other revenue decreased $32 million versus the prior year, driven primarily by lower liquidated damages, and an adjustment to reserves related to volume-based customer refunds.
Expenses decreased 11% versus the prior year, driven mainly by a $145 million favorable impact from lower fuel prices. Our ongoing focus on efficiency drove $42 million in productivity gains in the quarter, while lower volume resulted in over $70 million of cost reduction versus last year.
As a result, operating income was $933 million, down 4% versus the prior year. Looking below the line, interest expense was similar to last year.
Other income was favorable as we cycled environmental charges nor non-operating activities, as well as costs associated with the early retirement of debt from the prior year period. And finally, income taxes were $292 million in the quarter with an effective tax rate of about 37%.
Overall, net earnings were $507 million, essentially flat to last year, and EPS was $0.52 per share, up 2% versus the prior year. Now, let me turn to the market outlook for the fourth quarter.
Looking forward, we expect volumes to decline in the fourth quarter. Although we are projecting stable to favorable conditions for several key markets, this will be more than offset by unfavorable conditions for the remainder of the portfolio.
Intermodal continues to be a strong growth engine as our strategic network investments support highway to rail conversions and growth with existing customers, and automotive is expected to grow along with light vehicle production trends. Agriculture is neutral as strength during the fall harvest season and our improved efficiency will be offset by weakness in export grain and the continued risk of ethanol imports driven by a strong US dollar in a challenging global market.
Chemicals is expected to be down materially as energy markets reset to an environment marked by low crude oil prices and reduced drilling activity. We expect that crude oil volumes may be down at least 25% in the fourth quarter on a sequential basis.
Metals is unfavorable as the strong US dollar and high levels of imports continue to negatively impact domestic steel production levels. As such, we expect the year-over-year rate of decline to be similar to what we experienced in the third quarter.
Domestic coal will continue to be unfavorably impacted by sustained low natural gas prices and we now expect domestic coal volume to decline around 20% in the fourth quarter. As we look ahead to next year, significant coal headwinds are expected to continue in 2016.
Sequentially, our quarterly run rate for domestic coal volume in 2016 should hold relatively flat to the level we expect to see in the fourth quarter. For the fourth quarter, export coal is expected to be lower, as global oversupply and the strong US dollar continue to pressure volumes.
Despite the year-over-year decline, we continue to expect about 30 million tons of export coal for the full year. Looking ahead we expect this market to be even more challenged in 2016.
Overall, we expect fourth quarter volume declines as we cycle a strong 2014 volume environment, continue to feel the effects of low natural gas and crude oil prices, and the impact of strong currency on our export and import sensitive markets. Turning to the next slide, let me talk about our expectations for expenses in the fourth quarter.
Overall, we expect fourth quarter expenses to benefit from the continued low fuel price environment as well as productivity and volume related cost savings as we remain focused on increasing train length and aligning resources to the lower demand environment. To illustrate our progress, in the third quarter we increased overall train length by about 10% versus the prior year, which drove a significant reduction in crew starts.
Looking at labor and fringe, we expect the fourth quarter average head count to be down approximately 2% on a sequential basis, which reflects about a 6% reduction from the prior year. We expect labor inflation to be around $25 million in the fourth quarter, slightly below what we saw in the third quarter.
Looking at MS&O expense, we expect inflation to be offset by efficiency gains and volume-related savings. Fuel expense in the fourth quarter will be driven by lower cost per gallon, reflecting the current price environment, volume-related savings, and continued focus on fuel efficiency.
We expect depreciation in the fourth quarter to increase about $15 million versus the prior year, reflecting the ongoing investment in the business. Finally, equipment and other rents in the fourth quarter is expected to stay relatively flat to last year with higher freight car rates offset by improving car cycle times.
Now, let me wrap up on the next slide. CSX delivered another solid financial performance in the third quarter with earnings per share up slightly from the prior year.
Top line growth was lower than we initially expected, but our continued focus on pricing for the relative value of rail service, driving efficiency gains, and aligning resources to a weaker demand environment helped to offset those volume headwinds. Looking ahead to the fourth quarter, we will again be cycling a strong demand environment last year, which coupled with the challenging market conditions we are facing this year, is expected to impact our volume growth.
In addition, we expect headwinds in our coal and crude oil markets to increase in the fourth quarter driven by sustained low commodity prices. As I mentioned earlier, domestic coal volume is expected to be down around 20% versus the prior year.
And crude oil volume is expected to decline at least 25% sequentially. As a result, we expect fourth quarter EPS to be down slightly versus the prior year.
Included in this outlook are two possible items that could be finalized in the fourth quarter. First, EPS could benefit $0.05 from a conveyance of non-operating property that could close near the end of the quarter.
This will be booked below the line in other income. Second, and above the line, EPS could also be impacted by a few cents relating to short-term costs in the fourth quarter associated with a new union labor agreement and some structural changes in our coal network.
Both of these costs will drive future benefits, as we gain greater workforce flexibility and adjust to lower demand in our coal market. Looking at full year 2015 earnings, we are still targeting mid-single digit EPS growth and meaningful improvement in our full year operating ratio.
In addition, as we further align resources to the soft demand environment, coupled with our expectation for 2016 coal volume, we are looking at opportunities to drive structural changes in our coal network, in order to accelerate efficiency gains next year. Our commitment to service excellence continues to drive efficiency gains, strong pricing, and long-term profitable growth, all of which supports investment in the business.
With that, let me turn the presentation back to Michael for his closing remarks.
Michael Ward
Well, thank you, Frank. As you heard today, CSX is taking action to manage the challenges of this dynamic marketplace.
With currency and commodity prices to continue to impacting coal and several other merchandise markets in 2016, we will continue to match resources to the business environment. At the same time, we remain committed to delivering strong service that supports operating efficiency and creates customer value necessary to support strong pricing, which enhances our ability to invest for the future.
Through these strategic investments and productivity initiatives, we are positioning the CSX network to leverage longer term opportunities for profitable growth in our merchandise and intermodal markets. As such, this management team absolutely believes that CSX can and will achieve a mid-60s operating ratio longer term.
We will now be glad to take your questions.
Operator
Thank you. We will now begin conducting a question-and-answer session.
(Operator instructions) Our first question comes from Brandon Oglenski with Barclays. You may ask your question.
Eric Morgan
This is Eric Morgan with Brandon's team. Thanks for taking my question.
I want to focus on intermodal, obviously, a really strong growth domestically, called out some share shift on the international side. Can you talk about just the outlook for each of those segments and if that sort of the growth domestically is really sustainable throughout next year?
Fredrik Eliasson
Well, thank you, Eric, this is Frederick. On the domestic side, we are seeing the benefit of the investment and improving service product that we are seeing.
We have been able to grow that business somewhere between 5% and 10% over last several years. We are seeing a little bit of an enhanced growth here this quarter, as we know one of our customers who has the contractual ability to further diversify the portfolio is doing just that here in the quarter.
So we are seeing a little bit of an uptick in the growth with that customer right now beyond what we would normally see, but we feel good about that business, feel good about the ability to continue to grow that at a multiple economic output for a period of time here going forward. On the international side, we are experiencing growth with several of our existing customers.
We have lost several contracts over the last 12 to 18 months, but overall we feel very good about our network reach and the service that we are providing, and so we feel good about that business going forward and we want to make sure that we continue to reinvest in that business, a critical goal of ours as we move forward.
Eric Morgan
I appreciate it.
Operator
Thank you. The next question comes from Brian Ossenbeck with JPMorgan.
You may ask your question.
Michael Ward
Good morning, Brian.
Brian Ossenbeck
Hey, good morning. Thanks for taking my call.
So I just wanted to ask a little bit more about the coal outlook. Maybe you can just run through some of the assumptions you are embedding in the domestic coal kind of holding where it is right now and may be retirements, natural gas, and any coal to gas switching, and then if you can touch briefly on export coal, a lot of the thermal pricing we're seeing now suggests that there's not a whole lot that's going to be economic going into Europe at least, especially when you adjust for FX.
So I'd like to hear a little bit more behind your assumptions there. Thank you.
Fredrik Eliasson
Sure. This is Fredrik again.
In terms of the domestic coal, Frank gave you a view there in terms of that sequentially, after we are going to be down, at 20% year-over-year is our estimate in the fourth quarter. Sequentially from there, that run rate of about 21 million tons or so for domestic as a whole is a good place to think about next year.
And really there are two drivers behind that, one is that our -- at this point, we are being dispatched last because of where natural gas prices are, so that is not going to shift as we move into next year unless natural gas prices come up. Obviously, it would be a very different and more appealing picture, but there are two drivers behind it.
One is the fact that we have probably about 3 million tons that we are moving this year that we will not see next year because of planned closures; and then the second driver is, as we look at the inventory levels at utilities that we serve, they are still at elevated levels. So we are going to have some headwinds next year and that's kind of the foundation.
And that 21 million tons that I alluded to, which is the sequential quarterly run rate, is probably about 15 million tons on the utilities side and about 6 million tons on account of that net coke and iron ore. On the export side, I think what we've said is that we did about 18 million tons in the first half of this year.
We are in a run rate with implied guidance that we've given of 30 million tons -- of 12 million tons in the second half. And as I think about the second half run rate, I think that's a good run rate if you analyze that, so 24 million tons for next year.
We will have a much better sense as we get to the fourth quarter because we are obviously in a market right now to try to see what we can do, especially on the steam side, and it is a much more difficult environment even today than it was just six months ago, so we are working through that but we will have a better sense of export market as we get to the fourth quarter earnings release.
Brian Ossenbeck
Okay. Thank you.
A quick follow-up on just some of the initiatives on the coal network. It sounded like you're taking some steps to do some realignment on the actual infrastructure, if you could just run through what you're doing and what type of benefits you are seeing and when you would expect to see those.
Thanks a lot.
Cindy Sanborn
Okay, Brian, this is Cindy. Frank mentioned that we are analyzing and looking at what we need to harvest from our existing coal network, where we have seen the most significant declines in Appalachia.
We haven't announced anything yet, but we have plans to do so and stay tuned on that one.
Operator
Thank you. The next question comes from Chris Wetherbee with Citi.
You may ask your question.
Michael Ward
Good morning, Chris.
Christian Wetherbee
Hey, good morning, guys. Thanks for taking the question.
Cindy, if you could just bear with me, I wouldn't mind just following up a little bit on that. If there is any way you can give us a sense of what might be on the table, if it's sort of shuttering lines completely or at least sort of dialing the volume dynamic down quite a bit.
I mean, is everything on the table? I'm just kind of curious if there is any incremental detail you can add to that.
Thank you.
Cindy Sanborn
Chris, I think everything is on the table. And as far as whether it would be facilities or lines, I think you will understand and appreciate that we want to be able to talk about those things internally before we do externally, but there's really not anything that's not on the table.
Christian Wetherbee
Okay. That's helpful.
And then when you think about sort of the head count of the business as you look out into 2016 and start your planning there, assuming we maintain sort of a fairly slow growth economic environment, how should we think about the appropriate staffing levels at CSX? And maybe what the opportunity is, potentially, in terms of leveraging that dynamic of growth and volume -- maybe not so much growth on the head count side.
Any help you can give us there would be really great.
David Baggs
Well, I think what we've demonstrated here in the third quarter, we have to run a tight, efficient, and reliable network. And we are, as you mentioned, in a very dynamic environment.
From the standpoint of operations head count, we do have 1200 T&E employees furloughed. We have ramped down our training significantly.
And we will be continuing to do that going forward to match demand. Clearly, we have furloughs that we can pull back into active service if needed.
Although, there are a handful of locations where we have very few furloughed and we will need to -- we may need to hire in those locations. We will be offering opportunities for existing employees and what we would consider deep furlough, those opportunities to go back there -- back to those locations.
But generally speaking, we are managing that on both the hiring side and recognizing that we have furloughs to pull from as needed.
Christian Wetherbee
Okay. All right, that's helpful.
Thank you so much for the time. Appreciate it.
Operator
Thank you. The next question comes from Tom Wadewitz with UBS.
You may ask your question.
Michael Ward
Good morning, Tom.
Thomas Wadewitz
Hi. Yeah, good morning, Michael.
Good morning, everyone. So, I wanted to ask you a question to start with on the pricing side.
You guys have done a great job at ramping up the pricing and really capturing the opportunity with the further ramp up in same store price. I think when we saw the tightness in 2014, we thought, "Well, maybe there's at least two years of good price."
But, obviously, 2015 volumes have been pretty tough. How do you think that translates into pricing in 2016?
Would you say, "Well, given the weakness in volumes, we are likely to see a deceleration versus the same store price?" Is that realistic or do you think there's some way that you can just really leverage your position in the market and sustain what's been very good pricing this year?
Michael Ward
Well, I think the key thing is continued service excellence for value proposition with our customers. And that's what Cindy's team is doing a great job here as the resources have arrived to really provide the in-service excellence for our customers.
So, we are pleased with the results here in the third quarter in terms of the same store sales. And, as you well know, you will be able to see that each and every quarter, as we move forward, in terms of what we are able to accomplish.
But, strong pricing is a critical component of what we're trying to do from an overall value equation. It's one of the key levers we are pulling.
And, as we tip to improve our service product, we feel good about what we are going to do going forward as well.
Thomas Wadewitz
Okay. So, it sounds like you don't really want to comment at this point on 2016 pricing, whether it gets better or worse.
What about the sensitivity to the truckload market? I think there's been good truckload contract pricing this year, but the spot market has been weak.
Is that something you would expect to impact your pricing fairly broadly? Or is that -- would you say, "Well, that's kind of narrow in terms of impact maybe on 2016 pricing?"
Fredrik Eliasson
Well, I do think and just going back to your first point, you know, we do look at pricing as being critical in terms of what we are doing and we said this for a long time, strong pricing is paramount to our long-term success financially. That's a key driver for us going forward as well.
Thomas Wadewitz
Okay. So it sounds like you don't really want to comment at this point on 2016 pricing whether it gets better or worse.
What about the sensitivity to the truckload market? I think there's been, you know, good truckload contract pricing this year but the spot market has been weak.
Is that something you would expect to impact your pricing fairly broadly or is that -- would you say, well, that's kind of narrow in terms of impact maybe on 2016 pricing?
Fredrik Eliasson
Well, I do think that, and just going back to your first point, we do look at pricing as being a critical component to what we are doing. And we've said this for a long time, that strong pricing is absolutely paramount to our long-term success financially.
So, that is a key driver for us going forward, as well. In terms of the truck market, it's clearly sequential over the last, probably, four to six months, it has gone softer.
But you also have to remember that, if you look at where truck prices are today, versus the beginning of last year, they are still up significantly. And we have only been able to touch portions of our contract base.
So, I think you know that in our merchandise business, only about half of our business is up on the annual basis. And most of our other businesses, they are mostly 3 to 5 year contracts.
We do feel that we will have good opportunities to reflect what the value we have in the marketplace, and with improving service on top of that, we do feel good about our pricing opportunities going forward as well.
Thomas Wadewitz
Okay. Great.
Thank you for the time.
Operator
Thank you. The next question comes from Alison Landry with Credit Suisse.
You may ask your question.
Michael Ward
Good morning, Alison.
Alison Landry
Good morning. Thanks for taking my question.
Within context of your comments on coal for 2016, and specifically on the domestic side, could you help us think about coal yields within the -- given the variable coal price structure, obviously we saw some impact this quarter, but thinking about 2016, any color there would be helpful. Thanks.
Fredrik Eliasson
Yeah, so in terms of the coal yields overall, not just on domestic, but on the export, if you look at the book of business as a whole, there are three, really, drivers there. One hand we are clearly getting core pricing in that business and we expect to continue.
Clearly, the export side is very difficult right now, but on the domestic side, we are getting some good core pricing. On the fixed variable, was clearly also a big driver here in the third quarter, as the volume came down significantly, about 20% of the utility contracts have that sort of structure, in terms of their contractual nature.
And then also lapping, fully lapping the significant pricing declines that we took in our export market in the second half of last year, having fully lapped that was also very helpful as well. So we have three drivers.
As we move forward, I think you are going to continue to see the export market being very challenged. And there's little opportunity, if any, to really improve pricing there.
But, on the rest of the market, we are going to continue to see what the -- what the value proposition is. And we are going to look, plant by plant, to see what we can do.
Alison Landry
Okay. And then, just on the 20% of utility contracts that have the fixed variable structure, do you have a sense of what that percentage would be in 2016?
Fredrik Eliasson
I don't, right now, see that that's changing materially. But as we go through the normal sort of negotiations, that might change.
But, right now, I don't see that changing materially.
Alison Landry
Great. Thank you so much for the time.
Operator
Thank you. The next question comes with Rob Salmon with Deutsche Bank.
You may ask your question.
Michael Ward
Good morning, Rob.
Robert Salmon
Hey, good morning. And thanks for taking my question.
As a quick follow-up to Allison's question with regard to the fixed variable component. With the domestic coal expected to be down even more strongly next quarter, should we expect coal yields to improve sequentially, even with the lower fuel price?
Or is kind of Q3 a pretty good run rate for us?
Fredrik Eliasson
I think, to Tom's dismay, a few questions earlier; we tried to stay away from specifically forecasting our pricing. Mix will always play an impact in it.
But, ultimately, the same store sales, I think, is the best way to look at our pricing. So, we are going to continue to do what we can to make sure we capture the value that we provide in the marketplace and then let the chips fall where they fall in terms of what the ultimate number will be.
Robert Salmon
Fair enough. And, Frank, in your prepared remarks, you mentioned, kind of, that you guys were doing some work on a labor agreement and there being, potential savings.
Can you remind me whether it was a cost or a benefit we should be expecting in the fourth quarter? And any sort of preliminary thoughts that we can use as we think out to next year for what that means for the bottom line for CSX?
Frank Lonegro
Right. So, publicly, we've announced that we have a tentative agreement with some of our mechanical unions which would imply, if ratified, a slight cost in this quarter, and then benefits as we go forward into next year and beyond, based on labor efficiencies there.
But we are not going to quantify that right now, until everything gets ratified by the unions.
Robert Salmon
Understood. And the cost in the fourth quarter?
What did you call out in the prepared remarks?
Frank Lonegro
Yeah, we said a few pennies and we bundled a couple of things together, there that are above the line. The union agreement that I just mentioned.
And then some of the coal structural things that Cindy had talked about previously.
Robert Salmon
Got it. Appreciate the time.
Operator
Thank you. Our next question comes from Tom Kim with Goldman Sachs.
You may ask your question.
Michael Ward
Good morning, Tom.
Thomas Kim
Good morning, guys. I wanted to ask, on the service side, obviously, we are still seeing some good incremental improvement.
But, we did notice that, sequentially, whether in speed or in dwell, the rate of change, or the rate of improvement slowed a little bit. And, I'm just wondering, can you give us a sense on how -- so you are thinking about the trajectory of when your service levels get back close to that 2013 level.
And, if you could, frame what sort of cost savings opportunity that presents for us. I think that would be very helpful, thanks.
David Baggs
I think, Tom, we are where we thought we would be on our service measures, as we look at this, about this time last year. We feel like our customers are seeing and feeling that benefit.
And we are also seeing, from a performance perspective, reduction in overtime crews and those type of costs. And it's worth noting that we have accomplished these significant improvements in -- during the same timeframe we have been working very hard on our operating plan to institute our variable train schedules, which has also given us some consistent and valuable productivity, particularly on the T&E side, yet is still giving our customers a very clear and obvious trip plan that they can depend on.
So, I think, as we go forward, we will continue to see some improvement. I don't think it will get quickly back to 2013 levels at all, as we are -- as we are challenged at some locations on the southern part of our network with side incapacity with our longer trains.
But we will see incremental improvement and we think we are doing a pretty good job of balancing the service measurements along with the productivity and efficiency side by taking this approach.
Thomas Kim
Thanks very much.
Operator
Thank you. The next question comes from Alex [indiscernible].
You may ask your question.
Michael Ward
Good morning, Alex.
Unidentified Analyst
Good morning. Thanks for taking the question.
I wanted to just touch on the efficiencies in the quarter.
Michael Ward
It looks like you got about a $41 or $42 million, if I added it up correctly, in the quarter, roughly in line with kind of the first half. Is that kind of 40 millionish per quarter productivity savings something that you would expect to kind of continue, or should we expect it to maybe accelerate into 2016 as service continues to improve?
I know there's a lot of moving pieces, but how do we sort of think about that productivity savings and maybe within the context of your the long-term historical productivity achievements?
Frank Lonegro
Thanks, Alex, it's Frank. You are right.
We saw a little bit over $40 million in productivity in the quarter and also delivered over $70 million in volume-related cost reductions. Sometimes that gets left out of the conversation, but for the fourth quarter, I think you should you expect a similar productivity level from us that you saw in the third quarter and, again, volume costs ought to come down in line with the volume declines as well.
For the full year, as you probably remember, we started the year with approaching $200 million as our productivity target, and throughout the year we helped you understand that that would be more and more challenging as volumes came down and our mix began to change, and we're now targeting the full year 2015 productivity to be approximately $160 million. And, again, that's in addition to the volume right-sizing that we're doing as we take resources as volumes decline.
Unidentified Analyst
Okay, great. That's helpful.
And then I just wanted to clarify a comment on the 4Q guidance. Does the 4Q guidance for EPS to be down slightly year-over-year, is that inclusive of the two items you highlighted as possibly occurring and finalized in the quarter?
Frank Lonegro
Correct.
Unidentified Analyst
Okay, thanks.
Operator
Thank you. Our next question comes from Ken Hoexter with Merrill Lynch.
You may ask your question.
Michael Ward
Good morning, Ken.
Ken Hoexter
Hey, good morning, Michael and team. I just wanted to follow up on the coal outlook for next year.
You mentioned kind of run rate in the second half. Does that mean we should not see accelerated plant closings or continued conversions in nat gas when you look at that, particularly on the domestic side?
I just want to understand Fred's second half outlook. And then just a follow-up on that last question on the charge in the fourth quarter that you've included, does that look at the gain offsetting the cost or can you quantify as one larger than the other?
Thanks
Fredrik Eliasson
This is Fredrik. Let me just clarify the coal guidance.
There are two pieces to it. One is the domestic guidance where we said that we expect the fourth quarter to be down about 20%, and from that absolute level, which implies in 20% decline, about 21 million tons total for domestic, that that's a good run rate going forward by quarter for 2016.
The second half guidance is really related to the export coal market where we said we did about 18 million tons in the first half of this year and implied in the guidance of 30 is that you are doing 12 in the second half. And I think that 12 million-ton, if you analyze that, it gets you to you 24 million tons in 2016.
That's a good starting point at this point. They are still in the third quarter or early in the fourth quarter.
We have a lot of work to do here to see what ultimately gets placed, but our best estimate, just to give you as much transparency as we can on the export side, is that's probably a good starting point for 2016. On the EPS, Ken, yes, the property sale below the line a nickel and then we have said a few pennies in the combination of the union agreement in the coal structure and I'll let you draw your conclusions from there.
Ken Hoexter
Great. I appreciate the follow-up.
Thank you.
Operator
Thank you. The next question comes from Rick Paterson with Topeka capital Markets.
You may ask your question.
Michael Ward
Good morning, Rick.
Rick Paterson
Good morning, guys. A question for Cindy.
Welcome. Could you update us on locomotive capacity and if there's anything more you need to do there?
For example, are there any plans to increase rebuilds beyond 150 or increase next year's new order beyond the 100 currently on the books? Thanks.
Cindy Sanborn
I think where we are with locomotives, our active locomotives have decreased in terms of number sequentially from quarter one to quarter two to quarter three and to accomplish that, we are returning leases and we are also paying back horsepower hours. So those are the outputs, what we're moving out of the active count.
We are, as you mentioned, getting new locomotives. We have 65 yet to receive in the fourth quarter and another 65 rebuilds, of which a portion of those are 4X, locomotives for our local fleet.
Overall, we intend to manage demand by storing locomotives as the next option to take out any excess that we would have. And you mentioned the purchases in 2016 also that, yes, we are receiving 100 in 2016.
But we will manage our locomotive fleet based on demand and obviously balancing that with service.
Rick Paterson
Thank you.
Operator
Thank you. Our next question comes from Jason Seidl with Cowen & Company.
You may ask your question.
Michael Ward
Good morning, Jason.
Jason Seidl
Thank you, operator. Good morning, gentlemen.
Let me start with intermodal first. Can you talk a little bit about the demand side?
Because we are starting to hear about pricing expectations in truckload slipping, and given that, diesel prices are near six-year lows. Are you starting to see any weakening on the demand front in terms of conversions out east or is it still staying strong?
Fredrik Eliasson
Well, in terms of the fuel reference that you made there, I think overall it's important to remember that our fuel surcharge on our intermodal business is different than the rest of the business. It really mirrors the trucker.
So it really does not come into play that much in terms of what fuel does in regards to how much we can and can't convert. We are still seeing good vibrancy.
There is no doubt, though, that at least on a spot basis right now that the truck rates have come down. But on the contractual side continues to have, as far as we can see, a pretty good rate increase on the contractual side, because I think people are cognizant of what will happen longer term, both in terms of driver retention and some of the negative productivity initiatives that the trucking industry is facing.
So obviously, we'd like to see it get sequentially stronger from where it is today, but knowing where the contract rates are, and the fact that if you go back a year and a half, rates have come up quite significantly since then on the trucking side. We still feel that it's a good opportunity, both to convert traffic and to continue to have good pricing vibrancy.
Jason Seidl
Okay. Thank you.
That was great information, Fred. And if I look out to 2016, you gave us some really good starting points on how to look at coal, I doubt anybody had coal up in their internal models, but we'll have to see how that pans out.
How do you look at the rest of the business, given that coal is going to be a drag again? Are you guys going to be able to grow your overall volumes in 2016, based on what you see now in your book of business?
Fredrik Eliasson
I think that's a little bit too early to tell, but clearly with this sort of a significant decline in our coal business, it is going to be difficult to do that. What we are going through right now is our normal planning process and look at the rest of the business to see what we're facing.
There are some opportunities for continued growth in several markets. In several markets, though, we are facing both significant volume from last year that gets the year-over-year comps difficult for the rest of this year and perhaps even a little bit into the first quarter.
And we are continuing to see the negativism impact on the dollar and the lower commodity prices as well. So as we think about the book as a whole, there is a lot of dynamics that goes into planning for next year, but we continue to feel good about some of the secular things that we are seeing out there like domestic intermodal, for example.
So we will have a much better view of that as we get into the fourth quarter and especially as we get to the fourth quarter earnings release.
Jason Seidl
I appreciate the comments and the time, sir.
Fredrik Eliasson
Thank you.
Operator
Thank you. Our next question comes from Matt Troy with Nomura.
You may ask your question.
Michael Ward
Good morning, Matt.
Matthew Troy
Good morning, everybody and thank you for the time. I just wanted to ask a question on the broader economy.
Obviously we're getting mixed signals, but directionally there seems to be a sense that some of the industrial weakness, some of energy commodity weakness has crept in the consumer end markets, beginning in the spring and maybe spread a bit further into fall, early winter. I want to just get your sense, if we strip out energy, how does that consumer economy look?
You've got good comments about intermodal, but you guys have been at this for a long time. How does the economy feel to you and where do you think we are in the cycle?
Fredrik Eliasson
Yeah, I think that if you look at some of the core tenants of our economy, such as the housing and the automotive side, you continue to see good vibrancy, obviously growth from a low base in housing and auto being at the peak demand, but continued expectations for growth there. The core chemical business is also doing okay.
And then with the lower fuel prices, I think the consumers are feeling a little bit stronger. But then you do have the energy side that you talked about and the fact that if you look at kind of the broad industrial production index, you see industrial production sequentially coming down.
And I think the latest number I saw for the fourth quarter was actually that industrial production will actually decline year-over-year. So I think you have a lot of different variables that goes through right now.
Clearly, we are very much dependent on the industrial economies. That's a big driver of ours.
But at the same time, we do our -- we are getting more and more exposure to the consumer side of things as we continue to grow our intermodal business. That's helping to offset that.
So, without saying anything more than the fact that it's a dynamic environment and we are recognizing the industrial side of things are struggling sequentially, we still feel good about our long-term prospects in terms of being able to grow our business.
Matthew Troy
Thanks, Fredrik. And, I guess, one follow up would be -- As you mentioned specifically in your comments in the press release, that you had lost several contracts in international intermodal over the last 12, 18 months.
Were there any additional ones in the last quarter? Or are you merely highlighting the ones you've previously highlighted, and the lag impact they had through the quarter.
I'm just trying to get a sense if the competitive environment has changed at all. Or is this just a residual impact of contracts we already knew about?
Thanks.
Fredrik Eliasson
Yeah, this was the residual contracts we already know about. I think we pointed out, in our second quarter earnings release as well.
And, so nothing has really changed from that perspective. We continue to be focused on our network and continue to be focused on the service product that we are producing.
And making sure that whatever we carry on our network allows us to continue to reinvest in the business.
Matthew Troy
Okay. Thanks, everybody.
Operator
Thank you. The next question comes from Ben Hartford with Baird.
You may ask your question.
Michael Ward
Good morning, Ben.
Ben Hartford
Good morning. Good morning, guys and Cindy.
Cindy, specifically, can I get your perspective on service and your expectations? Obviously, we are dealing with a weaker volume environment, we have been this year.
Next year's outlook is being tapered lower. But, in terms of the pace of service improvement, could you provide any context to what expectations should be next year?
And whether there's line of sight to getting back to some of the prior peak levels of 2012, 2013's experience at any point in time during 2016?
Cindy Sanborn
So, as I mentioned before, I think we will continue to see steady improvement in service performance. As far as 2013, I mean, that's certainly aspirational for us.
I really can't give you that, at this point. It's a balance of -- of both service, which obviously our customers expect of us.
We want that to be very reliable, but we also have to manage the efficiency component of that as well. So, that's kind of the place that we are in and figuring out what -- when we will get back to 2013.
Ben Hartford
As a follow-up, has anything changed -- has the experience, I should say, over the past 18 months, has it changed your confidence in your ability to get back to those high watermarks, as it relates to service?
Cindy Sanborn
I don't think it's changed. I think it's just simply balancing -- making the balancing act in an environment where we are seeing the reduction in volumes that you heard us talk about.
Ben Hartford
Okay. Thank you.
Operator
Thank you. The next question comes from Cherilyn Radbourne with TD securities.
You may ask your question.
Michael Ward
Good morning, Cherilyn.
Cherilyn Radbourne
Thanks very much. And good morning.
Just on the economy, again, there has been some talk that what we are seeing, at least in part, is an inventory correction that's related to the West Coast port disruption. Because, in effect, shippers over ordered when they weren't sure how quickly inventory could move through the supply chain.
I'm just curious if that's a dynamic that you are seeing in the marketplace?
Fredrik Eliasson
Yeah, I do think that that's a good point. We are seeing that the inventory levels are coming up.
I think we referred to it in our paper market, for example. And as you look at some of the official statistics out there, you have seen an increase in customer inventory.
So, that certainly is playing a factor here in terms of the more muted volume outlook.
Cherilyn Radbourne
And then just a very quick one on labor expense. It looks like labor inflation in the quarter was a little higher than you had been expecting.
Was there anything of a one-time nature in there?
Frank Lonegro
Hey, it's Frank. Yeah, there sure was.
In the quarter, we had inflation of $33 million, which is slightly higher than you are normally seeing. The base wage inflation was normal.
We did have a fringe adjustment related to employee furloughs. So, you should expect a more normalized $25 million run rate in the fourth quarter.
Cherilyn Radbourne
Perfect. Thank you.
That's all for me.
Operator
Thank you. The next question comes from David Vernon with Bernstein.
You may ask your question.
Michael Ward
Good morning, David.
David Scott Vernon
Good morning. Thanks, guys.
Maybe just bigger picture, Michael. As you think about looking for low double digit decline in coal next year, after a mid-teens decline this year.
As you think about the earnings power of the business, how should we be thinking about that? Obviously, longer term people have been thinking rails as low double digit growers.
This year has been a transitional year of more mid-single. Is next year also going to be setting up as more of a transitional year?
Do you think there's a chance that you can get back up to that double digit EPS growth rate?
Michael Ward
Well, clearly, we have the challenges of coal we've discussed pretty extensively here. I think some of it depends on where the economy heads.
Because, as you know, over the last two to three years, we have been growing those other businesses faster than the rate of the economic growth. If the economy improves, we think we can do that again next year.
If it stays at a moribund rate, obviously, it's much more challenging.
David Scott Vernon
So, in your theory, is there more you guys can do on the productivity side to kind of help offset some of that? Obviously, the core pricing is good; the share gains in intermodal are great.
I'm just wondering, obviously, you did a little bit of back office work in Jacksonville earlier this year. Should we be expecting you guys to dig a little bit deeper on that front, as well?
Or how should we be thinking about the productivity side for 2016?
Michael Ward
I think you're going to see us extremely focused on the productivity side. You saw evidence of that here in the third quarter, that same intensity we will bring to 2016.
And we'll take actions to make ourselves more and more productive going forward.
David Scott Vernon
All right. Thanks, guys.
Operator
Thank you. The next question comes from John Larkin with Stifel.
You may ask your question.
Michael Ward
Good morning, John.
John Larkin
Hey, good morning, gentlemen. Thanks for taking the question.
I'm fascinated by the strategy to run longer trains by running essentially six trains within a seven day window, where you normally would have run seven trains. How far along is the implementation of that strategy?
And then, as a follow on to that question, how long will it take to add enough passing sidings or extend existing passing sidings so that those longer trains don't impinge upon network fluidity and service quality?
Cindy Sanborn
Good morning, John. I think what you will see is we are pretty far along in the adjustments that we are making for longer trains in our merchandise network.
We are also, as an aside, increasing the length of trains in our bulk network too. So we are taking -- we are pushing both levers.
What is great about the variable train schedule is, as demand requires, we can flex up and flex down. So, I think it will be a continuing effort on our part to match demand in what is traditionally been a fairly fixed -- what we considered fixed network on our carload side.
So, I don't know that the answer -- I think the answer is we are probably not ever done, but a principle and preponderance of the work has been done, based on the demand that we are seeing right now. And I couldn't remember your second question.
Michael Ward
Passing siding.
Cindy Sanborn
Passing siding. So, I think we are evaluating really where we are in the corridors that we need to adjust the length of passing sidings.
We are really in the middle of that now. So, there's some corridors that are more impactful to us than others.
Obviously the northern tier is mostly double track. What we are going to be working on is in the southern part of our network that is preponderance of single track.
John Larkin
Maybe just a follow on, on the general topic of capacity. Since intermodal is growing quite nicely, particularly on the domestic side, where do you stand with respect to excess capacity in the intermodal network?
Can you absorb another 5%, 10% 15%? Where do we start to run into congestion problems and limited capacity issues, as intermodal continues to grow, even in a tepid economic environment?
Cindy Sanborn
I think from a train perspective, I think we have taken advantage of our northwest Ohio expansion and actually have reduced some train-- or increased some train length on our intermodal network as a result of that. But we do have capacity on the trains for the foreseeable volume that we think we will see.
And I will remind you, we have done a lot of work on double stack clearances and so forth as well. So, we feel pretty good about where we are there.
John Larkin
Thank you very much.
Operator
Thank you. The next question comes from Bascome Majors with Susquehanna.
You may ask your question.
Michael Ward
Good morning, Bascome.
Bascome Majors
Good morning. I wanted to dig in a little more onto the longer term changes you are considering making to your coal network here.
And I know you don't want to talk tactically about what's going to happen next year and the impact. And I understand that.
But, you did say that everything is on the table. And I'm just curious, the end game three or four years down the road, could you frame, maybe, some metrics that would apply to your coal network today, whether it be related to capital, investment, CapEx to revenue and some of the dedicated parts, or any way that we can think about it and what your goals are for two or three years down the road to change that network and improve, be it profitability or capital efficiency on that part of your network where the revenues are down considerably?
Cindy Sanborn
Well, I think when we look at our -- the coal network, it's a kind of spaghetti branch-line kind of operation with some main lines in between. As we are seeing some of the loaders -- load outs either closing and consolidating, it is our -- we have an effort afoot here to try to figure out where the best efficiencies are.
Some of it will be mainline operation; some of it will be facilities. Clearly, the capital investments have been over time not, maybe, transparent externally, but have been, over time, coming down.
That will continue to take place. And as we really lose open a particular branch or a particular line volume there; we can also look at repositioning some of the assets into other parts of our network where we are growing.
And back to the siding capacity question that I got a few minutes ago. There's kind of a multifaceted way that we are looking at it, but as you can imagine, it's a very complex challenge because we want to certainly serve the customers that are loading.
It is very profitable business for us, and as you probably would recognize, not everybody is on one branch is closing. We have multiple examples of places where we have got some closing, some not, that we have to look at how we are going to serve.
So that project is underway, and I probably can't give you more color than that.
Michael Ward
I guess we would add we do expect the Illinois basin coal to continue to grow. As you know, we made an investment last year in what we call our Casky yard, to allow us to move unit trains from the Illinois basin down into the southeast in a much more efficient manner.
So it's not just looking at some assets tar less intense but also making sure we are positioned for the future growth.
Bascome Majors
Understood. I appreciate the color.
Tying it all together, is there an environment where CapEx could be hitting sort of its cycle high watermark in this year and last at the kind of 2.5 range? Or is it too early to see if that could fall off materially as we look into next year and 2017?
Michael Ward
This is Michael again. I think it's probably a little early to look at that.
Obviously, we are still going to be making investments in the base safety and efficiency of our network, but in addition, as we see our opportunities in the intermodal market growing, there will probably continue to be strategic investments there. So I think it's a little early to give you an overall number on that.
Bascome Majors
Understood. Thanks for the time this morning.
Operator
Thank you. Our next question comes from Jeff Kauffman with Buckingham Research.
You may ask your question.
Michael Ward
Good morning, Jeff.
Jeff Kauffman
Thank you. Hey, good morning, Mike.
How are you?
Michael Ward
I'm doing good.
Jeff Kauffman
Congratulations. Tough environment out there.
These are terrific results.
Michael Ward
Thank you. [indiscernible] say that on this call.
Thank you for doing so, Jeff.
Jeff Kauffman
Oh, a pleasure. Thank you.
A question for Cindy, because a lot of my other questions have been asked. We take a step back and look at how these changes in the environment are changing the network.
So, for instance, you are still down about a mile and a half, almost two miles an hour on train speed, but maybe the traffic mix doesn't allow you to get back there. We are still at 204,000 cars online versus 182,000 two years ago before we got the big volume surge.
Can you talk about where you are in terms of getting productivity to where you want it to be? And, as you mentioned with the longer trains, maybe that's a drag on train speed and looking back to two years ago, maybe that's not the right metric to think about where you will eventually be.
But when we look at train speed and when we look at accidents and when we look at assets online, where do you think we eventually go, say, over the next one to two years as you are looking to get the network where you want it to be?
Cindy Sanborn
So, as far as productivity, we obviously want to be a reliable network and serve our customers, but we are we are probably never satisfied on the productivity side. When you look at velocity and, to your point, take it a step back, we are seeing a concentration of volume on one portion of our network and we are seeing a tremendous reduction in volume on other parts of our network.
So you've got a compression there on top of building longer trains that we talked about, which in a single track railroad can be a little bit challenging, at least at the onset, until we make maybe a few investments there. I wouldn't say we have a target with cars online.
With volume running well, you don't want that number to ever get to zero. You want to be able to serve your customers and you want to be able to do it efficiently and effectively.
I think our viewpoints on going forward, it's probably on the productivity side, the cycle time of equipment, and to a lesser extent maybe the velocity side, although that is an important component in terms of turning assets, but the asset component is really where we'll be spending the most of our time.
Jeff Kauffman
Okay. And, Cindy, this quarter we saw a big jump in on time originations, but on time arrivals still continued to lag.
Can you talk about what's causing that friction and when you expect that gap to narrow?
Cindy Sanborn
Yes, and we've talked about that on previous calls that we are seeing the span on our arrivals decrease. And that has continued into the third quarter.
So while the absolute number is exactly what with you see, we are seeing the amount of lateness, if you will, go down. And this is occurring as we are doing some tremendous -- I talked about tremendous and significant changes to our operating plan.
So we expect that to get to more normalized levels going forward.
Jeff Kauffman
Okay. Everybody thank you and congratulations.
Michael Ward
Thanks.
Operator
Thank you. The next question comes from Scott Group with Wolfe Research.
You may ask your question.
Michael Ward
Good morning, Scott.
Scott Group
Hey, thanks, good morning, guys. Frank, can you just clarify one quick thing?
The comment on fourth quarter earnings is the base from last year that you are using $0.49 or is it the $0.52 excluding some of the one-time labor stuff?
Michael Ward
It's on the reported basis, Scott.
Scott Group
Okay. So I see kind of the fourth quarter is going to have really good productivity with labor down 6% or so.
Very good pricing, but a big coal headwind and earnings down. It kind of feels like that's the environment for 2016 of good pricing, good productivity, but coal down a lot.
What is your confidence that you can grow earnings in a full year 2016 environment?
Michael Ward
Well, I think your summation of the fourth quarter is correct. It's probably too early for us to talk about the specifics on 2016.
We have certainly gives you a lot of visibility into domestic and export coal and as we always do, we'll be focused on the things that are most within our control, right sizing the resources, driving efficiency, running a better railroad and value pricing and growing what we can grow with the markets.
Scott Group
Okay. And Michael, maybe just one for you.
So we had some unexpected management changes. Maybe give us your perspective on the changes, the new team and kind of what it means for you and your plan and long term at CSX.
Michael Ward
Well, I think evidenced today by the answers you have been getting from this new team we have in place, we have a super team here to drive us forward. I think we've got the talent we need.
Our direction as a company is not changing. It's all about controlling the things we can control, growing where we can, and I'm very excited about it.
I will be around. I have committed to at least another three years to the board to make sure that we have a good transition here as we work our way through this transition, but I feel very good about it, and I feel great about the team we have.
Scott Group
Okay. Thank you guys.
Operator
Thank you. The next question comes from Cleo Zagrean with Macquarie.
You may ask your question.
Michael Ward
Good morning, Cleo.
Cleo Zagrean
Good morning and thank you. My questions relate to your targets for a long-term operating ratio improvement.
Can you please refresh us on your latest view on how the building blocks for that may have changed, based on your experience this year and your latest strategic update? Where should operating improvement come from most -- price, volume productivity or any other way you would like to describe it to us?
And as a follow-up, related to that, how should we think of the mix impact on margins, given that intermodal versus coal continues to evolve? Thank you very much.
Michael Ward
Thank you. In terms of the long term guidance, again, you saw in our prepared remarks and in the press release, we are still confident in our ability to deliver a mid-60s operating ratio long term.
I think the drivers are going to be the same drivers that you've heard us talk about over the long term, and those are the efficiency, the service and the value pricing and adjusting our resources to volumes as they tick up and tick down, but we're confident in that ability. In terms the mix, certainly mix will be an impact for us in the fourth quarter and moving forward but that doesn't change our confidence in our future that we will reach a mid-60s operating ratio longer term.
Cleo Zagrean
Thank you.
Operator
Thank you. The next question comes from Justin Long with Stephens.
You may ask your question.
Michael Ward
Good morning, Justin.
Justin Long
Thanks. Good morning.
So as we think about the pace of pricing over the next several quarters, do you think intermodal price increases will be roughly in line with car load price increases or is there a reason to believe that price increases in one of these businesses will outpace the other?
Fredrik Eliasson
This is Frederik again. I do think we're going to stay away from specific guidance.
We are pretty transparent already in terms of the same store sales that we provide you in terms of a look back in the previous quarter. Intermodal is always the most difficult one to get sustained inflation plus pricing, but nevertheless, based on the fact that we haven't been able to touch as many contracts as we would like since the beginning of last year, we do feel good about where we are heading on pricing going forward.
Justin Long
Okay. Great.
And maybe a quick last one. I wanted to ask about share buybacks.
With the pullback in the stock, I'm just curious if you've considered a more aggressive approach to buybacks going forward.
Fredrik Eliasson
You know, we have considered that. At the same time, we are railroaders and not stock pickers so we've also done some post-audit work on prior programs and really looked at whether or not a rateable approach or a timing approach was better and we are sticking with a rateable approach.
So you can anticipate a similar run rate to what you saw in the third quarter.
Justin Long
Okay. That's helpful I appreciate the time.
Operator
Thank you. Our final question comes from John Barnes with RBC Capital Markets.
You may ask your question.
Michael Ward
Hello, John.
John Barnes
Hey, thank you. Hi, Mike.
How are you? Hey, Mike, I know you said you are a little reluctant, maybe, to delve too deeply into the CapEx budget.
But, your long-term guidance has been in that high-teens percent of revenue. It looks like you are tracking a bit over that this year.
Is that the right metric to look at going forward? Or do we need to focus on the absolute dollar amount of capital required in the business?
And just how do you think about that guidance going forward?
Michael Ward
Well, John, it's interesting that you mentioned. It may be a better way to look at it, just as the absolute dollars.
Obviously, the fuel surcharge revenue is going down. And, as you know, it's not a profit element for us, but it clearly impacts those top line revenues and maybe that percentage.
So, I think thinking of it in terms of absolute dollars may be the way we evolve over time.
John Barnes
All right. All right.
Very well. And then, Frederick, you talked about the contracts and the intermodal-- I guess, the international side that you lost earlier in the year.
Is there anything else from a competitive standpoint, contract-wise that's coming up for bid, that's out there that we should be keeping an eye on, nervous about? Has there been some change in the competitive environment that puts any other business maybe more at risk than it has been in the past?
Fredrik Eliasson
No, I think we continue to be focused on the intermodal side specifically, on making sure that we continue to reinvest in the business. We have a great service product.
We have a strong network. We have some very innovative things in terms of what we have done with our hub and spoke system that gives us a network that I think is unparalleled in the east.
And as we move forward, we always will have a contract that comes up and we will have some wins and losses over time. The key thing for us, as I said, we've got to make sure that we continue to reinvest in our business.
And that's how we judge in terms of how we look at and how we approach contracts.
John Barnes
Very good. Hey, nice quarter.
Thanks for taking my questions.
Michael Ward
Thank you everyone for joining us and we'll see you again next quarter.
Operator
This does conclude today's teleconference. We thank you for your participation in today's call.
You may disconnect your lines.