CSX Corp (CSX) Q3 2020 Earnings Call Transcript

CSX Corp (NASDAQ: CSX) Q3 2020 earnings call dated Oct. 21, 2020

Corporate Participants:

Bill Slater — Chief Investor Relations Officer

James M. Foote — President and Chief Executive Officer

Kevin Boone — Executive Vice President and Chief Financial Officer

Jamie Boychuk — Executive Vice President of Operations

Mark K. Wallace — Executive Vice President of Sales and Marketing

Analysts:

Allison Landry — Credit Suisse — Analyst

Brandon Oglenski — Deutsche Bank — Analyst

Amit Mehrotra — Deutsche Bank — Analyst

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Tom Wadewitz — UBS — Analyst

Scott Group — Wolfe Research — Analyst

Brian Ossenbeck — JPMorgan — Analyst

Chris Wetherbee — Citi — Analyst

Bascome Majors — Susquehanna — Analyst

Justin Long — Stephens — Analyst

David Ross — Stifel — Analyst

Jordan Alliger — Goldman Sachs — Analyst

Jon Chappell — Evercore ISI — Analyst

David Vernon — Bernstein — Analyst

Ravi Shanker — Morgan Stanley — Analyst

Walter Spracklin — RBC Capital Markets — Analyst

Jason Seidl — Cowen — Analyst

Presentation:

Operator

Good afternoon, ladies and gentlemen, and welcome to the CSX Corporation Q3 2020 Earnings Call. As a reminder, today’s call is being recorded. [Operator Instructions] Following the presentation, we will be conducting a question-and-answer session. [Operator Instructions]

For opening remarks and introduction, I would like to turn the call over to Mr. Bill Slater, Head of Investor Relations for CSX Corporation.

Bill Slater — Chief Investor Relations Officer

Thank you, and good afternoon everyone. Joining me on today’s call are Jim Foote, President and Chief Executive Officer; Mark Wallace, Executive Vice President of Sales and Marketing; Kevin Boone, Chief Financial Officer; and Jamie Boychuk, Executive Vice President of Operations. On Slide 2 is our forward looking disclosure, followed by our non-GAAP disclosure on Slide 3.

With that, it is my pleasure to introduce, President and Chief Executive Officer, Jim Foote.

James M. Foote — President and Chief Executive Officer

Thanks, Bill, and thank you to everyone for joining today’s call. The last six months have truly been surreal. On last quarter’s call, we discussed the largest and most rapid sequential volume declines in CSX’s history. Now, just three months later, record sequential increases. Think about that, volume declines and increases twice as steep as the largest wins we experienced in the great recession in a span of just a few months.

Managing this historic volatility is incredibly difficult, and I am extremely proud of the dedicated men and women of CSX, as they continue to deliver against these challenges. Their hard work allowed us to efficiently absorb the record rebound in volumes, while maintaining high level of service. This level of execution requires a commitment, in coordination of the entire organization. Throughout this period, it has been inspiring to see CSX employees band together to reassess every aspect of the business and figure out where we can be even better. We are already seeing the benefits of these efforts in this quarter’s results and we’ll continue to do so in the years to come.

Now let’s go to Slide 5 for an overview of our financial results. Second quarter EPS declined a 11% to $0.96, and our operating ratio of 56.9% remained in line with last year’s record results. Maintaining these record efficiency levels, despite the combined headwinds from the pandemic, significantly weaker coal markets and approximately 250 basis points of unfavorable margin impact from lower real estate gains is truly impressive.

Moving to Slide 6. Third-quarter revenue declined a 11% and 3% lower volumes, due primarily to reduced industrial activity, as a result of the pandemic. Merchandise revenue declined 7% and 5% lower volumes with all end markets experiencing volume declines. Intermodal revenue was flat on 7% higher volumes, as growth in both domestic and international volumes from inventory restocking and a tightening truck market, were all — were mostly offset by declines in fuel surcharge revenues. Coal revenue decreased 36% and 27% lower volumes, as the coal business continues to be negatively impacted by reduced electrical demand, lower industrial production and lower global benchmark prices. Other revenue was down 12% due to lower affiliate revenue and declines in demurrage charges.

Turning to Slide 7. We cannot achieve any of our long-term goals without first operating safely. In the third quarter, we realized new quarterly record lows for both train accidents and personal injuries as well as a new quarterly record for low personal injury frequency rate. While CSX continues to lead the industry in safety metrics, we can never be satisfied if either one of our employees get injured while at work. The team is working to be even better by identifying and eliminating unsafe practices and conditions across the railroad. We continue to increase employee training and engagement with the goal of improving critical rules compliance.

Turning to Slide 8. Our safety focus is part of CSX’s broader commitment to ESG and driving positive social impact. Rail is the most sustainable mode of land transportation and we are working hard every day to further these inherent benefits and ensure CSX is the most sustainable railroad. We’ve made great strides in reducing our emissions in fuel consumption, including setting another fuel efficiency record this quarter by consuming only 0.93 gallons of fuel per 1,000 gross ton miles. And we’ve also set ambitious new long term emissions targets to continue this positive momentum.

Earlier this year, we were the first US Class 1 railroad, to have an emissions reduction target approved by the Science Based Targets initiative, setting the goal of reducing emissions intensity 37% by 2030. In addition to improving our emissions profile, we are focused on helping our customers meet their own emissions reduction targets. Not only does every shipment on CSX consume 20% less fuel than it did a few years ago, but our best-in-class service product uniquely position CSX to help customers further reduce emissions by converting freight off the highway and earn to CSX without sacrificing the reliability of their supply chain.

We are honored by the recognition received today, including recently being named one of the top 20 most sustainably managed companies in the world by the Wall Street Journal, but continuously push ourselves to be even better for our employees, our customers and the communities we serve.

On Slide 9, let’s review our operating performance. Despite the challenges presented by record volume increases, the railroad continues to run at a high-level. Planned changes enacted in the second quarter drove strong productivity gains across the system. We further balanced the network and set a new quarterly record of 93 distributed power trains per day, averaging over 100 distributed power trains per day for the last two months of the quarter. Yard productivity also improved by blocking cars further upstream, reducing touches in the yards and finding new ways to be more dynamic — to more dynamically share work between yard and local trains.

Slide 10. These product — productivity gains are further highlighted, which compares current volume and asset levels against the pre-COVID levels from March 1. In total, volumes ended the third quarter above the pre-COVID levels, while asset counts were lower across the board. Looking at train starts, we are currently handling 3% more volumes with a 11% fewer starts than we required on March.

On a year-over-year basis, train starts were down 15% in the third quarter compared to a 3% lower volume. Additionally, since May, the May trough, we were growing volume twice as scale as we have increased the train starts required to serve this growth. No matter how you frame these results, the strong operating leverage highlights the durable nature of the changes made last quarter and is a testament to the team’s success and taking advantage of the challenging volume environment, the pull forward lasting efficiencies. I’m sure you might have some questions for Jamie on this later in the call.

Let’s turn to Slide 11, our hourly trip plan performance. Carload trip plan performance of 73% and intermodal of 74% slightly trailed previous quarters due primarily to the timing lag at the beginning of the quarter, when we began to step up to handle the surge in volumes. Trip plan performance improved throughout the quarter and we exited the third quarter near 80% trip plan performance level for carload and 90% level for intermodal.

I’ll now hand it over to Kevin to review the financial — review the financial results.

Kevin Boone — Executive Vice President and Chief Financial Officer

Thank you, Jim, and good afternoon everyone. What a year it’s been so far. Just three months ago, we were reviewing second quarter results, where we experienced record declines in customer business activity. We rapidly adapted and focused on driving efficiencies, and structural changes that would serve us well, as volumes returned. As you can see from our third quarter results, CSX was able to deliver, generating very strong operating leverage on a sequential volume increase of over 20%. As we sit here today, we are positioned for growth with a strong balance sheet and free cash flow profile.

We also made the strategic decision to continue to invest in our infrastructure at levels exceeding plan. As we leverage these efficiencies, we took advantage of slow business activity. This will position us well to absorb future volume and growth returns. As you can see in the income statement, revenue was down 11% in the quarter. And volume growth at intermodal was offset by economic headwinds and merchandise combined with weak coal demand. While merchandise and coal markets remain challenged, revenues improved sequentially each month through the quarter.

Partially offsetting the ongoing revenue headwinds, overall expense was down 11% on a 3% decline in volume. Walking down the expense line items, labor and fringe was 10% lower, reflecting significant efficiency improvements and lower volume-related costs. As Jim highlighted, we took the opportunity during this pandemic to make structural changes to the train plan, as a result crew starts were down 15% year-over-year, compared to a 3% decline in volume.

These improvements were made across the line of road, yard and local train plans. Fewer crew starts results in fewer active trains, the active locomotive count was down 14% year-over-year in the quarter. The smaller fleet combined with fewer cars online, fuel and freight and car repair efficiencies helped drive a 19% reduction in the mechanical workforce. Overtime was the key cost lever for us in the second quarter. As volumes recover, we can flex back up using overtime, where it makes sense, without adding headcount. Even with a small increase in overtime expense versus second quarter, we still reduced overtime year-over-year across all operating departments, by a total of 15%.

We were also able to maintain a significant reductions made in the second quarter through our engineering contract labor expense, in our intermodal terminal workforce, even as volumes increase sequentially. If you look, the average headcount was roughly flat versus the second quarter, as the increase in the team headcount was offset by the impact of our management restructuring, as well as the cycling of the emergency reserve boards from last quarter. MS&O expense decreased 7% in the third quarter, despite cycling some significant prior year impacts and that’s a $40 million in headwinds. These includes 65 new real estate gains, as well as non-railroad asset impairment.

Adjusting for these impacts MS&O would be down 15%. With fuel active locomotives and ongoing freight car repair efficiencies, locomotive support costs were down 24% and car material expense was 36% lower in the quarter. In addition, as volumes grow, we are absorbing it and driving efficiencies at our intermodal terminals, the cost will continue down over 25% year-over-year. We are focused on reducing cost across all areas, including optimization of utility contracts, to reflect current consumption levels, and increased use of efficient lighting, minimizing the use of external and contracted labor, where possible and leveraging technology to reduce redundancies.

These and other initiatives will continue to help control costs, as volume returns. Real estate gains were minimal in the third quarter and we continue to expect minimal sales activity in the fourth quarter. Looking beyond 2020, we continue to manage a pipeline of future properties, that we will monetize, when conditions are favorable. As, I mentioned before, I’m also excited about additional opportunities to leverage of our real estate and generate recurring revenue streams. Fuel expense was $104 million favorable, a 47% improvement year-over-year, driven by a 36% decrease in the per gallon price, lower volumes, recycling of prior-year net expense related to non-recurring state fuel tax matters and record fuel efficiency.

Ongoing fuel efficiency gains are enabled by a relentless focus on utilization of distributed power and energy management software, combined with train handling rules compliance. Looking at other expenses. Depreciation increased $10 million or 3% in the quarter. Equipment rents expense increased $3 million or 4% due to higher intermodal related equipment cost and inflation.

Turning below the line, interest expense was essentially flat. Its higher net debt balances were mostly offset by a lower weighted average coupon. Income tax expense decreased $37 million or 14%, primarily resulting from lower pre-tax income. Closing out the income statement, CSX delivered operating income of $1.1 billion, reflecting a 56.9% operating ratio.

Turning to the cash side of the equation on Slide 15. On a year-to-date basis, capital investment is roughly flat. We remain committed to investments that prioritize the safety and reliability of our core track, bridge and signal infrastructure. We use this opportunity to negotiate better materials and outside service costs, utilize track time to drive efficiencies and reinvestment savings into the network to take advantage of the lower train activity levels. We have spent a lot of time evaluating our non-infrastructure related capital and made progress prioritizing high return projects, while also eliminating projects that are no longer needed long-term.

Capital allocation remains a focus. As we identify and prioritize investments that will drive high returns in the future. Through the third quarter, free cash flow before dividends was $1.9 billion down 30% versus prior year, reflecting lower operating income, but also including impacts from lower proceeds from property dispositions. Free cash flow has continued to be a key focus for this team. Even in this challenging environment, free cash flow conversion on net income remains nearly a 100%.

Our cash and short-term investment balance remained strong, ending the quarter at $2.9 billion. As I have referenced previously, I expect this balance to normalize below $1 billion over time. As you saw with our announcement today of another $5 billion share repurchase program, we remain committed to ongoing return of capital with flexibility to remain opportunistic.

With that, let me turn it back to Jim for his closing remarks.

James M. Foote — President and Chief Executive Officer

Great, thanks a lot, Kevin. Concluding on Slide 16, we are continually assessing the pace of economic activity and we will respond to the prevailing environment by delivering customers the highest levels of service and reliability in the most efficient manner. We were encouraged by the speed at which volumes recovered from the trough, particularly the strength in the intermodal market. Fourth quarter volumes to-date are up year-over-year and we all hope for continued positive economic momentum.

As for capital expenditures, we still expect to be at the low end of our initial $1.6 billion to $1.7 billion range. This ability to confidently invest in our business throughout the cycle is a direct result of our industry leading free cash flow profile and is a testament to the work done to transform this company. We also remain committed to returning excess cash flow to shareholders. We recently affirmed this commitment by expanding our recent purchase program by $5 billion bringing our total buyback authority to more than $6 billion. We entered into this pandemic period in a position of strength, and confident that CSX would emerge a stronger company.

I am proud to say that by staying true to our core values of operating safely, operating efficiently and helping our customers succeed by providing high level of service, we are a better company today.

Thank you. And I’ll now turn it back to Bill.

Bill Slater — Chief Investor Relations Officer

Thank you, Jim. In the interest of time, I would ask everyone to please limit themselves to one question. With that, we will now take questions.

Questions and Answers:

Operator

Thank you. We’ll now be conducting a question-and-answer session. Our first question is from Allison Landry with Credit Suisse. Your line is open.

Allison Landry — Credit Suisse — Analyst

Thank you. Jim, so you talked about the trip plan compliance improving throughout the quarter and it sounds like it ended at least fairly close to where you were in the past few quarters, but what is the take from here to get those numbers up further. And then maybe, specifically if you could address on the carload side, where do you think you need to be ultimately to start to chip away at the opportunities to convert the merchandize volume from the highway? And then do you think this is something that could start to accrue in 2021 or is it more of a 2022 and beyond story? Thank you.

James M. Foote — President and Chief Executive Officer

Well, Allison, it’s a perfect question. Let me just say, and then I’ll turn it over to Jamie and Mark to follow-up, in terms of trip plan compliance. The surge of volumes was a challenge, but we’re getting — we’re going to get back, number one, we’re going to get back to where we were. And we’re going to get back to where we were as quickly as we can. And then we are going to get better and we’re going to get better and we’re going to get better and we’re going to get better. So and Jamie can talk about some of the details associated with that.

Jamie Boychuk — Executive Vice President of Operations

Absolutely. Look, as we continue to analyze the plan and we made our changes throughout the last few months, we wanted to make sure that everything we gained with respect to our train footage and train tonnage, road starts that we didn’t lose any momentum on that side. And as Jim had said, the traffic was really at times, it was all over the place and it was coming at different bubbles. We weren’t sure exactly where it was going to end up, working really close with Mark and his team, we were able to pull off some pretty amazing results making some large reductions.

If you take a look at just our train year-over-year, our train length is up 13%, our train tonnage is up 12%, we’re able to do that with 350 less locomotives. So, there’s a lot of assets that we were able to pull out as we were making these changes and — it really, it’s about exercising our people and getting them up to speed on running a network, that’s a little bit different than what we were used to, making that 18% reduction in road starts and longer trains, heavier trains in some areas, some of the execution wasn’t perfect maybe what we were used to at the time.

If I take a look at some of the areas, where we missed, on our trip plans, it was only within a few hours. It wasn’t like it was days and really for us, service is all about reliability. So, it’s really important for us to get that reliability to the customer and we’re working on it each and every day, and we’ll continue to push that forward, and I’ll let Mark comment on the other.

Mark K. Wallace — Executive Vice President of Sales and Marketing

Yeah, it’s a great, it’s a great question, Allison and everything Jamie and his team are doing to continue to deliver great service for our customers is really helping us win share in the marketplace with our customers as we sit down and we open up their books and look for opportunities to — to gain share in lanes where maybe they haven’t traditionally used our rails, they have been more truck focused where in order for — some lanes in order for us to gain more of their wallet share. We’re seeing a number of these wins even during Q2 and Q3. So, as the service continues to get better and it will, we’re going to find more of those opportunities.

We’re excited by them, we’re growing a lot, and we’ve seen a lot of good wins in forest products and metals and even in bulk markets like Ag, we’re seeing some great truck conversion wins. So, the team is focused on it. We’re identifying them and thanks to the service product that Jamie and his team are delivering to us. That’s making those opportunities easier with those conversations with our customers.

Allison Landry — Credit Suisse — Analyst

Thank you guys for the great color.

Operator

Our next question is from Brandon Oglenski with Deutsche Bank. Your line is open.

Brandon Oglenski — Deutsche Bank — Analyst

Hey, it’s actually Brandon with Barclays. There has been a big M&A transaction on the bank side. But, Jim, I just wanted to ask you, you know, there is a narrative out there with a lot of investor focus at other railroads and what the sector is doing really well, but you guys have already gone through your PSR and if you look at your former employer obviously some pretty big valuations north of the border. So, I guess what do you want investors to measure against the next few years to hopefully regain some of that relative valuation premium to reflect your cash flow today?

James M. Foote — President and Chief Executive Officer

Well, we don’t measure ourselves necessarily against the other railroads. I guess if they thought we’ve already gone through it that’s only because we’re so far ahead of them right now, all they see is our tail lights. And so yeah, we’re benchmarking against what we think are excellent operating companies out there, and also looking at how we can continue to expand our services and help Mark out in any way he can possibly do to continue to grow our profile and grow our revenue base. And that’s what this company has been about since the first day I got here. You can’t really sell — you can’t sell anything until you got a good product and we’ve created a fantastic and excellent product and now we’re going to continue to sell it.

Brandon Oglenski — Deutsche Bank — Analyst

Thank you, Jim.

Operator

Our next question is from Amit Mehrotra with Deutsche Bank. Your line is open.

Amit Mehrotra — Deutsche Bank — Analyst

Thanks. First of all, I’m glad Brandon is still at Barclays, I got worried there for a second. Congrats, guys, Jim, Kevin, Jamie and everybody on the strong operating results. I was hoping you could give us maybe some high level thoughts as we enter ’21 — into ’21, specifically about the point at which you guys just have to add back more — add back costs more meaningfully given the recover — the recovery in revenue. It’s obviously pretty amazing to see close to a 20% sequential increase in revenue and headcount be flat to down, MSO to be down pretty materially sequentially. If you can just talk about the runway on that type of performance in terms of the revenue versus cost performance and just how incremental margins can trend relative to the 80% that you guys achieved in the third quarter. Thank you.

Kevin Boone — Executive Vice President and Chief Financial Officer

Hey, Amit, it’s Kevin here. We’re not going to get in to the 2021 guidance at this point. But, when we think about —

Amit Mehrotra — Deutsche Bank — Analyst

No, I’m not asking, I’m not asking for 2021 guidance.

Kevin Boone — Executive Vice President and Chief Financial Officer

Yeah, yeah. I got it.

Amit Mehrotra — Deutsche Bank — Analyst

Okay, yeah. Go ahead.

Kevin Boone — Executive Vice President and Chief Financial Officer

Yeah, yeah. When we think about, to your point, incremental margins, clearly what we were able to do here in the third quarter versus second quarter shows the power, the leverage we have in the model. Certainly, if we see volume increase at a good pace next year, we will have to add some headcount that will be a good new story. It won’t be one for one. Maybe I’ll let Jamie talk to that a little bit, but we’re preparing for that. We’re preparing for growth around here. But we’ve done a lot of things structurally, when you look at our management workforce. You look at our G&A cost, that will certainly leverage in the next year.

So, a lot of work that we’ve accelerated next year that I would fully anticipate that we take advantage of going forward. The fortunate part is through this pandemic, we invested in our network. We have a lot of capacity, I think that actually differentiates us in the market today from what we’ve heard out there. So, we have the ability to grow and grow at the volumes there. And so, that’s what we’re all talking about right now as we look out to 2021, what that might look like. How do we resource for it, but still keeping an eye and capturing all the things that we’ve done over the last six to seven months and not losing those great efforts that we were able to achieve.

Amit Mehrotra — Deutsche Bank — Analyst

So, it sounds like — yeah, I’m sorry.

James M. Foote — President and Chief Executive Officer

As Kevin noted, I mean we’ve got a network that we can still bring on 20% to 30%, we’re quite comfortable with continuing to bring on business, as we move forward. But I mean, look at the plan. The plan itself is running well. We continue to analyze it. We continue to execute and we will analyze and execute and continue to work very close with Mark’s team with all new business opportunities that are out there. We’ve got a number of locomotives in storage that we can pull out. We are going to be doing some hiring.

We have got some hiring classes out there with some T&E employees and I think it’s important that we stay ahead of what we see coming forward, as well as working very close with our union groups and making sure that we’re hand in hand with the — with supplying the service that we said we would. And look, I’ve said it time and time again and I think we’ve proved it. We don’t bring on assets unless, we — they are in their keep and we sweat them. So, that’s what we’re going to continue to do is to stick on the same model that we’ve been working towards.

Amit Mehrotra — Deutsche Bank — Analyst

Is the comment on 20% to 30% volume growth, a capital, a capex comment in terms of nodding to add capex or is that also a comment about nodding to add a significant amount of opex to — yeah go ahead?

Kevin Boone — Executive Vice President and Chief Financial Officer

That’s obviously, on the capex side, we’ve got a great plant out there, we’ve got long sidings, we’ve got a double-track. We’ve got a good mainline, we’ve got good yards. So, yeah, absolutely. We can continue to absorb business on our mainline as Mark and his team brings it off.

Amit Mehrotra — Deutsche Bank — Analyst

Okay, thank you very much.

Operator

Next question is from Ken Hoexter with Bank of America Merrill Lynch. Your line is open.

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Great, good afternoon. And congrats on the really strong results, great to see. Maybe I don’t know, Jim or Mark, if you could just talk a little bit about pricing, what you’re seeing in the marketplace obviously, competitor is focused on and region focused on yielding up. Yet you still seemed to be taking share maybe you could talk us through a little bit because obviously with the 7%, 8% on our revenue for cards tough to see on the mix impacts overall, you can talk a bit about what’s going on in pricing and business wins?

Mark K. Wallace — Executive Vice President of Sales and Marketing

Hi Ken, hope you are doing well. So let’s look at — let’s go back on the different markets. Merchandise RPU down to fuel surcharge was a 3% headwind this quarter, to that intermodal RPU down 6%, fuel surcharge 2 — sorry 4% and coal RPU down 12%, fuel surcharge was 3% headwind. The rest obviously, the delta there mix and price on for core most of that was due to price just given some of the export benchmarks that we saw and the softness in the domestic utility markets.

Now obviously mix continue to play an overall driver of RPU. This quarter like it always does, there was a negative mix overall. We saw that in metals and equipment and chemicals, there was positive mix in some like coal, export coal. We had favorability due to the thermal exports declining faster than the net exports and minerals also saw some larger declines in shorter haul in Northern aggregate business. That was basically giving some of the budget cuts and some of the project cuts, because of COVID-19.

So mix is always a bit of an issue for us, as you know, we’re probably Ken, going to see continued 7% to 8% — sorry, 7% to 8% gap between volume and revenue going forward into the Q4. I would expect that to sequentially improve into Q1 and beyond. Pricing, our pricing philosophy has not changed and price continues to be a main focus for the team as we deliver on sustainable and profitable growth. We’re partnering with our customers to create solutions to help them grow and price to the value of the service product that Jim and his team are delivering. And I say — I said it before and I’ll say it again, we’re not sacrificing price for volume.

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Wonderful. I appreciate the thoughts. Thanks, Mark.

Operator

Our next question is from Tom Wadewitz with UBS. Your line is open.

Tom Wadewitz — UBS — Analyst

Yeah, great thanks. Good afternoon. Mark, I’ve got, I guess questions for you or a question, if you will. How are you thinking about — I guess, you had kind of two different dynamics where the consumer and retail side has been super strong and trucking intermodal tight and industrial has been kind of slower rebounding. What’s your thought on industrial view, are you optimistic that you’re seeing signs of that picking up?

And what is the customer seeing in the industrial side, are they seeing a lot of tightness in truck? They are really encouraged conversion to rail or they not being such a tight market, given that the industrial side maybe hasn’t improved like the retail and consumer side. Thank you.

Mark K. Wallace — Executive Vice President of Sales and Marketing

Yeah. So it’s a great question. And so we are seeing a tight, obviously the tight truck market out there, things are on the intermodal side. Clearly there is a — capacity has been constrained, replenishments have been going on, there has been some driver shortages in several markets like Southern California, Chicago etc. We have seen some good pick up and some truck conversions with our intermodal businesses as Jim highlighted, our intermodal trip plan performance has been quite good, our service has been quite good. So we’re happy with that and I think that will continue obviously.

The consumer is still very, very strong. We expect a robust peak season around Thanksgiving times usually when we see that e-commerce peak to Christmas time. We expect that to be very strong actually, it has been strong through the pandemic. Just as people have been staying at home and ordering stuff online, but we expected to pick up even more robustly going forward, as we approach Thanksgiving. So looking for that to continue through Christmas and then overall intermodal, we are quite happy with the business and speaking with our customers, we expect that to continue deep into Q1. So good side there.

I think on the merchandise side, on the industrial side, the tighter truck market obviously is, has allowed us to sit down with our customers have different conversations. They’re looking in these tight times now and their business levels are down to save some cost, obviously transportation costs for them is a significant headwind. And so, as we all know that the 12% to 15% discount that rail offers given with our good service product has allowed us to go and sit down with our customers and they can’t get trucks, the truck market is tight, the spot rates are up. And so we are seeing conversions there and we hope that continues and hopefully that traffic that comes to us, we mean sticky even post things to improve and the truck market eases up a little bit, if we’re able to show the power of rail and keep performing like we know we can, hopefully a lot of that traffic will stick on CSX going forward.

Tom Wadewitz — UBS — Analyst

Great, thank you.

Operator

The next question is from Scott Group with Wolfe Research. Your line is open.

Scott Group — Wolfe Research — Analyst

Hey, thanks. Good afternoon, guys. So Kevin, on the MS&O costs, I know they’re lumpy, but anything unusual or one-time-ish in this quarter, any thoughts on how to think about MS&O in the fourth quarter, up or down. And then I was just wondering with the buyback, any thoughts on timing? Are you guys considering an ASR and does this change your leverage targets in anyway? Thank you.

Kevin Boone — Executive Vice President and Chief Financial Officer

Yeah. Let’s start with the MS&O. No, I wouldn’t call anything extraordinary unusual in the third quarter, usually what’s unusual or what the analysts like yourselves like to call out of the real estate, which was almost de minimis in the quarter. So nothing there and obviously we had a year-over-year headwind, when you look at real estate gains, we had some significant gains last year and didn’t have that this year.

When we look to fourth quarter, we always have seasonality. This is around a number of areas in our business. When I look at engineering, the extra costs related to the winter, vacations start to — the capital teams once they go on vacation, on the vacations start to hit OE expense. We have G&A seasonality in the fourth quarter. So I would expect some year-over-year improvement in MS&O, into the fourth quarter when you exclude the real estate from last year there. So we’ll see an uptick in MS&O sequentially, but still year-over-year improvement excluding the real estate gains from last year. What was the follow-up question?

Scott Group — Wolfe Research — Analyst

Just about the buyback and timing and leverage targets all that.

Kevin Boone — Executive Vice President and Chief Financial Officer

Yes, I think we’re going to evaluate the buyback program. Jim and I talk closely I think as we get more visibility, stability in the markets here, as we get more clarity around the pandemic and the implications there. Clearly $202.9 billion of cash is not what we need to operate our business. So I’d expect that to trend down in the next year. So I would — you could expect us to be back in the market.

Scott Group — Wolfe Research — Analyst

Thank you.

Operator

Our next question is from Brian Ossenbeck with JPMorgan. Your line is open.

Brian Ossenbeck — JPMorgan — Analyst

Hi, good afternoon, and thanks for taking the question. Kevin, one more for you, how are you viewing the opportunities in the land portfolio with gains pretty much minimal here for the rest of the year and maybe if you can elaborate on some of those recurring revenue streams that you’re evaluating. If you look at this book of business, are there more ways to grow in the future and convert traffic off the halfway would maybe leveraging some of that land for the industrial development projects?

Kevin Boone — Executive Vice President and Chief Financial Officer

Absolutely. We’re in great conversations, actually just had the opportunity hire a new Head of our Real Estate Group. I’m very, very excited about what she is going to drive here at the company. She has set the ground running here over the last few weeks. But she is working really closely with Tom or with Mark’s team on the industrial development side and identifying areas where we might be able to locate whether it’s warehousing, other opportunities, whether it’s us investing in those assets or partnering with others that know how to do it.

So it’s a great opportunity for us. In terms of the real estate sales, we have — I mentioned it on my prepared remarks, we have a great pipeline. These things we’re not going to — we’re going to sell when the time is right, when we can maximize value. But there is still a robust pipeline. It will probably be lumpy from here. But, I’m pretty excited about what we have in store over the next few years there. All these things tend to take time to get to a close, but we’re working pretty hard on that area. And then just on the recurring revenue side, it’s something that I’ve asked the team to really focus on over the next six months. Whether, it’s electronic billboards, whether it’s more fiber and I think we can do to leverage our real estate portfolio.

These are great, great opportunities. And once you sign these contracts they continue, you get revenue every year after year, so, it’s really, we were — one of the largest landowners in the Eastern United States, we should leverage out as much as we can and so, I’ve challenged the team to go out and do that. And I think they’re doing a good job so far.

Brian Ossenbeck — JPMorgan — Analyst

Alright. Thanks, Kevin. Appreciate the update on that.

Operator

Next question is from Chris Wetherbee with Citi. Your line is open.

Chris Wetherbee — Citi — Analyst

Hey, thanks, good afternoon guys. On Slide 10, you have an interesting chart on operating leverage. And it really shows how much the resources have flattened out even as volume has continued to improve kind of coming out of August and into September and October. Conceptually, is there a point with volume growth that you feel like there will be a step function higher in some of these resources or can you continue to maintain, do you feel like you have capacity with the resources that are operating right now even as volumes are going to pick it up Jim, as you mentioned here in the fourth quarter?

James M. Foote — President and Chief Executive Officer

Well, clearly as you — it’s a two-part question, which I think Jamie answered a second ago, we’ve got a ton of capacity and available to — availability to bring on more business from a physical infrastructure perspective without spending any capital to do that. But, you’re not going to, you’re not going to grow the business forever without having to add additional employees, mainly because we have tons of locomotives in storage and all of that. So, the question is, with your operating performance.

When you get to the point where you’re train length gets to the point where long enough or heavy enough where you need to split that train, and when you split at train, you need to have the additional employees to utilize in order to be able to operate it and so we are, we’re moving in to, we’re moving in to a new level now but what you’ve seen over the last few years and what was highlighted in great detail, in the last few months is the day we can do things from a staffing perspective, the railroads in the peers couldn’t do. If you would add this and I’ve been doing this a long-term if you’d had this kind of traffic surge across the rail network in North America four, five years ago, we would be now talking about gridlock across all the major cities in the country and we wouldn’t be doing anything.

And now with the common mindset of how you run a railroad, we were able to respond, we’re able to pivot, we are nimble, we can add capacity, we could shrink capacity, we can right size our business and we can do that much more effectively and much more logically and thoughtfully and God, I hope we get to the day sooner the better but we got to start hiring more and more people because the business is growing and growing and growing and Mark is just not going to mile of the park every single day. But in the meantime, we’re not going to add back assets as Jamie said, when we don’t need them. But the minute we do, we talk about that on five times a day, the minute we do, we’ll put them on, so we can move to freight.

Chris Wetherbee — Citi — Analyst

Okay, got it. Thank you.

Operator

The next question is from Bascome Majors with Susquehanna. Your line is open.

Bascome Majors — Susquehanna — Analyst

Yes, thanks for taking my question. Kevin, I want to go back to an earlier question, can you refresh us on your comfort level with leverage, given some of the uncertainty on either tax policy, economy etc. With that buyback, what are the guardrails of the upper ends that you’re watching for to perhaps tap the brakes since you start — when you start buying stock again?

Kevin Boone — Executive Vice President and Chief Financial Officer

Look, as I talked about, we have $3 billion of cash on our balance sheet. So, I’ve got to get through that, before we are even, would think about leverage and — plus we’re generating significant amount of cash at this point. So, when you look at the algorithm that we can create with that and it’s quite compelling where we are in the leverage standpoint, we’re in a great position. We didn’t go under stress during this significant decline in the second quarter, we had access to capital, which is what we always want to have with our strong investment grade rating.

So, that’s important and you want to be at a point where you can always have the ability to be opportunistic, and so I think where we are today allows for that flexibility. If the opportunity arises, we can react and leverage the opportunity when it’s there. So, I think we’re quite comfortable today with where we are.

Bascome Majors — Susquehanna — Analyst

Thank you.

Operator

Our next question is from Justin Long with Stephens. Your line is open.

Justin Long — Stephens — Analyst

Thanks, and good afternoon. So, headed into this year, you had talked about some irregular year-over-year headwinds. Kevin, I know you had called out D&A lower gains on sale and real estate sales, other revenue, I know you’re not giving guidance on 2021, but just from a high level, are there any unique items like that, that we should be modeling or do you think next year, it’s more of a clean year where we should see the underlying operating leverage of the business play out?

Kevin Boone — Executive Vice President and Chief Financial Officer

Yeah, I mean, we’ll obviously get more into that on the next call here, but depreciation would be a similar headwind to what we have right now. But, I would also point out our depreciation relative to our capex is probably the smallest gap of in the industry right there. So, probably not the step-up that we saw this year on the depreciation side. We don’t have any significant life study that created a headwind this year. Real estate taxes will continue to be a headwind in the next year, probably around the same level it was maybe a little bit less of a headwind going into next year.

Inflation, we think inflation remains relatively modest, no significant pick up there, which is good. Outside of that, as we get into it on the next call, we’ll highlight any other things that come up.

Justin Long — Stephens — Analyst

Okay and based on your comment about D&A being pretty close to capex, it sounds like your expectation for 100% free cash flow conversion isn’t going to change in the near term.

Kevin Boone — Executive Vice President and Chief Financial Officer

We are — we are very focused on our free cash flow conversion.

Justin Long — Stephens — Analyst

Okay, I’ll leave it at that. Thanks for the time.

Operator

Our next question is from David Ross with Stifel. Your line is open.

David Ross — Stifel — Analyst

Good morning, gentlemen. Lots of good stuff to talk about. But I want to talk about one of the lingering pains in terms of coal. What’s the latest on inventory levels and outlook? I think Kevin your recent comments at an industry conference about maybe getting flat to up comps in 2021. So, any more color on coal would be helpful.

Kevin Boone — Executive Vice President and Chief Financial Officer

Yeah, sure, David. We’ll just stick to domestic coal or are you interested in export, as well?

David Ross — Stifel — Analyst

Give it all for me.

Kevin Boone — Executive Vice President and Chief Financial Officer

Perfect. We’ll start with domestic that’s largest part of our coal business. So, the stockpiles right now to your question is — are at or below sort of averages, both in the North and in the South. We have seen a good summer for burn, it was kind of hot both in North and South, so the stockpiles did diminish a bit. Gas prices, net gas prices, we saw them creep up to $2.50 or so, they came back down. Now they’re back up to the mid to high 2s. We’d like to see them above $2.80, really the economics work for the utilities to start to burn — burn more coal.

I’m really encouraged by sort of the November contract and the forward curve into 2021, as we see it above $3, which is quite encouraging. So, hopefully that continues and we can expect to move more coal going into the new year and in Q4, in the back half of Q4. On the export side, starting with met. Met right now is it’s actually about 75% of our export portfolio, it used to be about 60%, it was about 60%, 40%, 65%, 35%, but now it’s about 75% met, 25% thermal. Most of that met is going to Europe, about 55%, 30% Asia.

The benchmarks, as you know, have been challenged. We saw some restocking in the quarter in India and Brazil, unfortunately the Chinese quarters on Australian coal have been a headwind as that’s keeping the benchmark prices low and it’s offsetting some of the outputs for our US coal. So we’ve had some issues there coupled with monsoon season and obviously the COVID situation has really impacted industrial production worldwide.

So, but mostly the met side of the business has really been a price story, more than a volume story. Different on the thermal side, it’s really been a volume story, 30% are thermal coal, about 75% of that thermal coal goes to Asia. Mostly India, some to Morocco as well. No longer any coal going to Europe, which used to be a big outlet for us, but we have no thermal coal going to Europe these days. API-2 has been a headwind it was under $60 for the quarter. India, the COVID situation in India really impacted a lot of the volumes there. However, things are picking up and we should see some increased volumes in the fourth quarter, and we’ll see what happens as the COVID situation plays itself out going into next year.

At the beginning of the year, we provided some guidance on our export coal. We said we were going to be somewhere around 30 — low 30s million tonnes for 2020. My best guess right now is, we’ll be right up 30 million tonnes for the year.

David Ross — Stifel — Analyst

That’s helpful around the world color. Thank you very much.

Kevin Boone — Executive Vice President and Chief Financial Officer

Yeah, no problem.

Operator

Our next question is from Jordan Alliger with Goldman Sachs. Your line is open.

Jordan Alliger — Goldman Sachs — Analyst

Yeah, I know you’ve talked about sort of the lasting efficiencies and the structural changes. Maybe I missed it a little. But I was wondering, if you could perhaps give some further example of what some of these changes are that has allowed metrics such as process per hour do so well, or even frankly, just keeping headcount flat while volumes surged here sequentially. So I know you talked about the structural changes. I’m assuming with the operating plan and things along those lines, but to the extend if you provide some additional color around that would be great.

Kevin Boone — Executive Vice President and Chief Financial Officer

Thanks for the question, Jordan. I guess some of the easiest ways I can put it as, we are constantly analyzing the plan. So this is you think about the cars switched per man hour. I go out with a number of my team members and we take a look at different terminals and we question what we do and how we do it and change the way we do things. Just because that’s the way it’s always been done, doesn’t mean that’s how you do it. And those are kind of the guidelines, when you think of scheduling railroading. So some yards you may have switched cars one way, we’ve been able to find different ways of switching cars that made it more efficient.

And I mean that’s an ongoing process that we’re always going through and you think about a network is complicated as CSX can be, we have had hundreds of terminals and yards and different areas where we switch boxcars. We probably have some of the greatest opportunity to make those changes and continue to make those changes as we move forward. And then, when you think about the service plan with respect to growing our train size. Well, we said it earlier that we were blessed when we got here 3.5 years ago that we have a plant that was built beyond what it needed to be. And it wasn’t necessarily being run in a PSR method.

So we have been able to increase our train sizes, move traffic better. And when you think about our train miles, we’ve reduced our train miles significantly, just by moving traffic in a better pattern. So as we continue to find those opportunities and they’re still out there we still find them each and every day. The team is evolving every day with respect to how our plan works and how scheduled railroading continues to develop those different efficiencies, you’re going to — there is more-and-more opportunities we continue forward just to find those opportunities to move things better, quicker and more reliable for our customer.

Jordan Alliger — Goldman Sachs — Analyst

Thank you for the color.

Operator

Our next question is from Jon Chappell with Evercore ISI. Your line is open.

Jon Chappell — Evercore ISI — Analyst

Thank you. Good afternoon, everyone. Hey I know you spent a lot of time on the sustainable operations and you have in the slide, you had the ESG recognition. Mark, as you’re talking to customers and when we think about this, is this just a nice to have for us right now maybe some investors open up a new investor base? Or is this really starting to move the needle in your conversations with the customers, as it relates to their total freight wallet or are those conversations still just service price?

Mark K. Wallace — Executive Vice President of Sales and Marketing

Excellent question. No, I think ESG has really gone from a talking point to having a real world impact now especially with our customers and so several of our customers in several negotiations sitting down and really appealing back and showing them everything that we have done at CSX over the last number of years. We’ve been a leader in this ESG space for a very long time. And as Jim said in his opening remarks, we’re very proud of our leadership position there and being recognized by the Wall Street Journal, and other — Dow Jones Sustainability Index and others and we’re opening up having those discussions with customers and showing them that clearly our safety performance is a big discussion there as well.

And I can tell you, one of the major, major contracts that came up for bid this year. One of the big factors was they really want us the business was on — it was around ESG and safety and Jamie and I spent a lot of time with this customer, talking about these things and it’s having a real impact. I would tell you also, as customers look in especially some of the big shippers out there, retail shippers as they look to their efficiency targets and their targets to emission targets, taking trucks off the highway, given all the efficiencies that Jim talked about are real. And if they can move more traffic on CSX and take trucks off the highway that clearly leads to them achieving a lot of their efficiency metrics. And so, real world impact, real world negotiations and it’s paying off specifically in many deals that we’ve looked at this year.

Jon Chappell — Evercore ISI — Analyst

That’s great to hear. Thanks for the insights, Mark.

Mark K. Wallace — Executive Vice President of Sales and Marketing

Absolutely.

Operator

Next question is from David Vernon with Bernstein. Your line is open.

David Vernon — Bernstein — Analyst

Hi guys, thanks for taking the time. Mark, I wanted to talk a little bit about intermodal and what you’ve seen in the pipeline over the next three years is going to put you guys, I mean less of a position to maybe take what the truck market gives you and more of a position to maybe improve the product either at an infrastructure level or channel level because you think about what you guys are investing in the [indecipherable] side, what is it that’s in the pipeline that you’re excited about that’s going to get you make a little bit better than market growth in that market.

Mark K. Wallace — Executive Vice President of Sales and Marketing

Yeah, so let me talk about the market, then I’ll ask Jamie to talk about some of the efficiencies that they are working on in the terminals, because his group has the intermodal terminals. And so, we are — we really like, we love the intermodal business. We think there is a lot of growth and as I’ve said, before I think this is an — this intermodal space is one where we can continue to grow faster than the economy repeatedly every year. And so, we’re doing a lot of different things, working on a lot of new different products with customers, looking to take more share off the highway, really talking about the benefits of intermodal.

We have lot of customers out there and we’re working with them and the different shippers on the benefits of converting that freight. E-commerce is obviously having a very big impact on our business. And we like that business and we think it’s going to continue to grow here in the future. And so, we’re thinking differently about things that we need to do going forward and position ourselves to capture a lot of that e-commerce growth in the future.

With that, Jim, do you want to talk about the efficiencies in the terminals?

Jamie Boychuk — Executive Vice President of Operations

Yeah, our terminals — again, we’ve got terminals that were I think probably over built for the time when they are built and we’re actually getting to utilize them to a maximum, I’ve got an unbelievable intermodal team led by Marcelo Estrada and Scott Marsh and their team. They have been able to over a number of years here put automated cranes and technology with X-Kate, allowing truck drivers to flow freely in and out of our terminals, giving us opportunities to use GPS cranes to operate autonomously in some areas.

So, we’ve been able to bring our dwell times down over the past couple of years by — from up over 24, 26 hours down to 15 to 14 hours in some circumstances of origin dwell. That’s significant. When you turn your traffic over in these terminals you gain space. You’re able to handle more and the traffic volume just come our way. We haven’t hit a bottleneck, we’re definitely inviting more and more come through the gate and looking forward to it.

Operator

Our next question comes from Ravi Shanker with Morgan Stanley. Your line is open.

Ravi Shanker — Morgan Stanley — Analyst

Thanks. Good evening, everyone. Kevin, maybe, just to start off with you. You obviously have the high quality problem of apparently having more cash than you know what to do with. So maybe you can share some of your thoughts on the M&A environment. You’ve seen some of your peers going to make investments in infrastructure assets, both the rail-related and adjacent. So, do you have any opportunities out there on this and kind of do you — do you expect to move on that anytime soon?

And Jim, maybe a follow-up on the ESG question, obviously very exciting and very encouraging to see that come up so much. But, do you get the sense that shippers are looking to move from truck to rail on a structural basis or are they seeing rail as somewhat of a stop gap until we get to electrified cross? I’m trying to figure out how do you make these ESG gains sticky.

Jamie Boychuk — Executive Vice President of Operations

Let me answer the second question first. Absolutely, it’s significant. It’s a significant change when major, major customers, users of the logistics supply chain globally begin to make public commitments to reducing their carbon footprint. To be able to walk in the door and say, I can help you do that. In fact, I might even be able to make get to your targets about it like a decade early because 75% cleaner and all these trucks, you got running around out there and I’m just is reliable. The good news was that we couldn’t do that. If there was ESG 10 years ago or whatever, we weren’t reliable enough, you wouldn’t be able to have this kind of conversation.

So, the timing of our service offering coming together with a real, not just PR, but a real commitment globally that people don’t want to be able to do this is creating a lot of opportunity for us in all lines of our business and we want to be as environmentally responsible as we can be. And so to the extent we move coal, people don’t like that, but to the extent that we can be a huge player in other lines of business and be a facilitator for improvements from a client perspective, that’s a great news for us.

I’ll let Kevin follow up a little bit, but on the M&A issue. We’ve got a tremendous amount, as I said earlier, I can’t remember what’s the reason for the question was, but from an M&A perspective, as it relates to rail, to the extent that we now have a common focus and a common purpose across to rail network as individual entities, it is opening up great opportunities for us to work together to further become more effective and efficient as we interchange traffic with one another, as we do business with one another, as we understand our systems and we had to exchange for information with one another better than we did before, all with the sole purpose of being able to grow the business on a network basis, creates the capabilities for the individual companies to achieve a lot of the benefits in the synergies, that before everybody thought, well, the only way you can do that is go out and spend a couple of hundred billion dollars to buy some of the railroad.

You know, we will look like we’re much much smarter than what we used to be. And so, we’re eagerly pursuing all of those kinds of opportunities today with the sole purpose because it makes us better competitors individually as individual railroad companies and as an industry.

Kevin Boone — Executive Vice President and Chief Financial Officer

Yeah. And just add to that, Ravi, I think you’re right in terms of our cash position today. We’re in a position of strength, it gives us a lot of opportunity. First to invest in our business. It’s been exciting as we’ve gone through our capital program, we’re still going through that for next year and the years ahead. We are finding some really good opportunities on some really high return investments and so but that’s going to be the first priority for our cash going forward, but as we sit here today, I’d point out, we just which to spend it’s a quarter where, if you look at it, intermodal for the first time, contributed the most to our revenue profile and coal was at least in our history.

So, on a percentage of our revenue, coal was the least it has ever been, and intermodal has been the best and we did 56.9, here we are in a position of strength, it gives us a lot of opportunity to invest in our railroad, and we will look at anything that will strengthen our franchise over the next few years. So I’m excited about looking at those opportunities and driving value for us.

Ravi Shanker — Morgan Stanley — Analyst

Great, thank you.

Operator

The next question is from Walter Spracklin with RBC Capital. Your line is open.

Walter Spracklin — RBC Capital Markets — Analyst

Hi, thanks very much. Good afternoon, everyone. So, I want to turn, Mark, if I could to ask you about volume visibility. I know when the pandemic really hit in March that visibility tightened up quite a bit and was difficult to see directionally which way volumes were going, other than down at the early — in the early period. And then Jim you mentioned, obviously the big rebound. Mark when you look at and speak to your customers now, how would you characterize that visibility? I know you touched a little bit on coal, you touched on intermodal with some of the opportunities there. Can you go through a few of the others and just directionally indicate whether that visibility is improving, as you go into 2021 or is it really a coin toss here as to which direction it goes kind of on a broad segment-by-segment basis.

Mark K. Wallace — Executive Vice President of Sales and Marketing

No, thanks, Walter. Great question. I think clearly the visibility we had when the bottom fell out sort of in Q2 when the economy shut down, they didn’t send notes to us or emails to us and saying, we’re closing. It was kind of overnight, things just tanked. As things are coming back, our job has been even while the pandemic was going on the sales and marketing team were working from home, we needed a priority to stay close to our customers, check in on Zoom and Teams and all the fancy video conferencing technology.

Everyone had laptops and computers at home and phones and we made it a priority for them to stay close and really figure out to the best of what they could tell us and then we can relay that information to Jamie and team, but it was a challenge for them to even know. Things were so dynamic, things were changing so rapidly. It was very tough to pinpoint them and when the volumes came back, it was a snap back literally within days and weeks and so it was very hard.

When we were — our auto business was effectively, you know, you’d open up the morning revenue report and it was zeros and then week later boom, the plants are reopening. And they said, we’re going to one shift for probably for a month and then we’ll tell you when we’re going to go to two. And then a couple of days later, they say we’re going two or three right away and it was like worldwide. So, we had to react pretty quickly to that and it was a challenge.

Two weeks ago, we had our fifth customer engagement forum. We did it usually customers come here to Jacksonville for a day or so where we talk to them about what’s going on in their markets and their business and share ideas. We did this by Zoom meeting and we spent a lot of time, Jim is there, myself and Jamie and really listening to a lot of their questions and their views on what we think is probably is going to happen, likely to happen. And I would say, most are cautiously optimistic as we head into the back half of Q4 and into 2021. There is visibility on some markets and clearly intermodal, we know what’s happening there and we’ve got some pretty good visibility.

We talk to our channel partners in the ports and our international steamship lines and clearly there is, we are seeing a lot of strength in those markets and the best visibility they have now is, we see continued strength and replenishment beyond Chinese New Year and deep into Q1 as I said earlier. So from that perspective, good. Coal I touched about — I talked about a little bit earlier and more we have started to clearly the markets are dynamic there and we’ll see what happens with natural gas domestically. But the world markets clearly have an impact on our export business. And for merchandise, I mean, lot of people are watching, what’s going on?

There still remains many risks, right. The pandemic, what’s going to happen with the pandemic, there is other geopolitical factors that we’re monitoring extremely closely, the election is coming up in a couple of weeks. Government stimulus, as I said, the effects of the pandemic and on their workers and everyone is watching that. I mean we’re heading into the fall and into the winter and people are concerned if the cases spike again, will they be able to continue producing. And then the health of the overall economy and what’s that going to look like as we head into the end of the year and into next year.

So visibility is murky, there is — it’s been a challenging year probably something that none of us have ever seen in our careers before. But our job is to continue to stay close and provide as much clarity as we can to Jamie and the team. So that we’re prepared to handle the freight, when it comes back.

Walter Spracklin — RBC Capital Markets — Analyst

Okay. That’s great color. I appreciate it, Mark.

Operator

Our last question is from Jason Seidl with Cowen. Your line is open.

Jason Seidl — Cowen — Analyst

Thank you, operator and guys I appreciate the opportunity to back clean-up here. Jim, you mentioned something that intrigued me, you mentioned about railroads now working more together than they have in the past. I was wondering, if you can give us some examples of what you guys are doing now. And also, do you see more of that in the future, as some of your other partners go more through the life cycle of PSR?

James M. Foote — President and Chief Executive Officer

Jamie, might be able to jump in with a little bit?

Jamie Boychuk — Executive Vice President of Operations

Exactly, again, we basically have — basically have or have had a group of individuals that work together for years and years and years and built this model, get more efficiently and effectively and reliably runs a railroad company. And they are now in one way shape or another having a significant influence on how those companies operate. And we think of ourselves, obviously as standalone entities. But we want to work together from an industry perspective. So that we can grow the business. It’s not about forcing unnatural gateways to move traffic farther and out of routes, or maybe you can make an extra $12.50 per car by owning something 500 miles longer.

And at the end of the day, when you have business practices like that, you drive all business off to railroad and it moves by truck. So at the end of the day with a narrow focus like that, you’re shrinking, shrinking, shrinking, shrinking, shrinking, shrinking, shrinking, cut and cut and cut and cut and shrink and shrink. So, we’re all about growing the business and to grow the business by working together as a network of 50% of the business originates on somebody else or terminates on somebody else. So, I’m not an island. And so, I think that’s the MO going forward. And it’s not a foreign concept.

When you talk to the other railroad executives, whether it’s me or it’s Jamie or it’s Mark or whether it’s anybody else in the organization, there is a much greater sense of urgency and a much greater focus on customer service than I think there has been in the past and hopefully that not only continues, but hopefully will begin to get better and better and better at that, so we can become more relevant in the transportation market place and grow what today, the overall share of our transportation spend is very, very small. So, we want to get, we want to get bigger.

James M. Foote — President and Chief Executive Officer

Just, I think Jim nailed it down. When you have a partner that thinks like you and acts like you, it sure makes it a whole lot easier to do business with them. Always we had issues over the years with interchange points, traffic will get locked up there, customers didn’t have visibility between railroad and railroad. So as we continue to have partners around us, who are getting better and better at what they do, it makes a big difference for our customers and it helps to grow the industry. So it’s exciting to work with some of the western roads, who are really starting to come around and work with us. And of course, the Canadians know the game, so it makes a big difference, where we can all flow together.

Jason Seidl — Cowen — Analyst

I appreciate the color and time as always, gentlemen. Thank you.

Operator

[Operator Closing Remarks]

James M. Foote — President and Chief Executive Officer

Thank you, everyone for participating.