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Operator
Speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Bill Slater, Head of Investor Relations, you may begin your conference.
Bill Slater
Thank you and good afternoon, everyone. Joining me on today's call are Jim Foote, President and Chief Executive Officer, Kevin Boone, Executive Vice President of Sales and Marketing, Jamie Boychuk, Executive Vice President of Operations, and Sean Paukey, Acting Chief Financial Officer. On slide two is our forward-looking disclosure, followed by our non-GAAP disclosure on slide three. With that, it is my pleasure to introduce President and Chief Executive Officer Jim Foote.
Jim Foote
Great. Thanks, Bill, and thank you to all who are joining us today for the call. I want to begin by thanking all of CSX's employees for their extraordinary efforts to help our customers navigate the strained global supply chain. Across virtually every industry, there are challenges presented by extended lead times, poor congestion, shortages of labor and key materials, and lack of storage capacity. While the current operating environment is challenging, we are not sitting idle. We are designing new solutions to help reduce congestion, adding container yards and dredge to keep intermodal terminals fluid. And we are investing in both people and network capacity to ensure CSX is able to reliably meet customer needs today and for years to come. In a few minutes, Kevin will go through the revenue numbers and discuss some of the steps we are taking to provide new service offerings to our customers to help them overcome these challenges. And Jamie will provide an update of our hiring initiatives as well as actions we are taking to keep our network fluid. So let's first turn to the presentation and begin on slide four with an overview of our third quarter results. Operating income increased 26% to $1.44 billion. Earnings per share increased 34% to 43 cents. And the operating ratio improved by 50 basis points to 56.4. These figures include the results of quality carriers. which did not have a significant impact on operating income, but increased third quarter operating ratio by approximately 250 basis points, excluding transaction and integration expenses. I'll now kick it over to Kevin.
Bill
Thank you, Jim. Turning to slide five. Third quarter revenue increased 24% year over year, with growth across all major lines of business. The inclusion of quality carriers revenue represented roughly eight percentage points of the total increase. Supply chain challenges, including a lack of labor and equipment, continue to impact almost every market we serve, driving volatility and freight flows and uneven volumes. Merchandise revenue increased 6% on 2% lower volumes, as higher revenue across all other markets was offset by declines in auto, driven by the ongoing semiconductor shortages. The industrial and construction-related markets, such as metals and equipment, forest products, and minerals, all showed strong declines year-over-year volume growth. In addition, our core chemicals business grew, but was partially offset by declines in crude oil and other energy-related markets. Intermodal revenue increased 14% on 4% higher volumes due to increased international shipments as a result of strong demand. inventory replenishments and growth in rail volumes from east coast ports the domestic side was more challenged as multiple supply side constraints including container and chassis shortages have resulted in the inability to meet the strong demand coal revenue increased 39 percent on 16 percent higher volumes with growth across all in markets Domestic coal benefited from higher utility and industrial demand, and export coal revenue increased from the combination of higher demand and higher export benchmark prices. Weather revenue increased primarily due to higher intermodal storage and equipment usage due to the broader supply chain disruptions from truck driver shortages. chassis availability, and a lack of warehouse capacity. Turning to slide six. This is an extraordinary time as customers and global supply chain face challenges we have never experienced before. From trucks to chassis, supports to containers, lack of truck drivers, to labor challenges at the warehouse and production facilities, we are seeing shortages everywhere. The entire CSX team has been highly focused on delivering new, innovative solutions and partnering with customers to address the supply chain challenges by driving more volume to the railroad. Across the network, we have accelerated investments to create new capacity. to address the truck driver shortages we have added 13 new overflow container yards implemented new steel wheel options for west coast cargo and added transflow sites that offer customers additional options to move their freight at a lower cost to address the port congestion and container shortages we have added new solutions to accelerate repositioning of containers and utilized port support lanes to alleviate marine terminal congestion we are working closely with partners including gpa to utilize additional inland rail yards to help reduce congestion at the port we have also been aggressively expanding our customer solutions team to further supplement the significant investments we are making in customer-facing technology. Our team is working diligently to create new solutions and options for shippers with supply chain disruptions unlikely to improve in the near term. Finally, we are starting to see early signs of customers making long-term investment decisions. to reinvest in onshore production and supply chain solutions to address these customer needs we continue to develop and invest in new csx select sites that offer a shovel ready csx served solution to meet customer requirements with that i will hand it over to jamie to discuss operations thank you kevin
Jim
As noted, our teams are working closely together to find new ways to overcome the supply chain disruptions and provide new solutions for our customers. In addition to the ongoing supply challenges, this past quarter was further impacted by a rise in COVID mark-offs due to the Delta variant. At peak, we had several hundred employees marked off, including regional concentrations that required us to adjust our network plan in real time to get customers their freight. Despite these challenges, we're able to maintain network performance compared to the prior quarter, and we expect the initiatives we have underway to drive improved fluidity going forward. Kevin touched on many of the things we're doing to help reduce congestion at the ports and keep containers moving, and I want to thank my intermodal team for the exceptional work they're doing to accomplish these goals. These efforts are highlighted by the nearly 90% intermodal tripline compliance they continue to deliver in a challenging environment. We entered the year focused on hiring, the people required to respond to the rising demand. And I'm proud of how our team has been able to think creatively and act decisively to overcome the challenges presented by the tight labor market. Over the course of the year, we have redesigned our recruiting process to eliminate unnecessary steps and significantly shorten the time from application to offer. We have also implemented new recruiting tools and referral programs that are improving our application through different conversation rates and better identifying highly qualified candidates. These efforts have successfully increased the size and frequency of our conductor classes and provided strong ongoing hire visibility by expanding our new hire pipeline almost 300% since July. We are also increasing intermodal headcount and supplemental labor to keep the terminals fluid and allow us to continue moving containers for our customers. While these hiring initiatives are underway, we're taking steps to increase the availability of our existing T&E workforce. We have implemented new attendance-based initiative programs, which allow us to better utilize our existing headcount to move more freight for our customers. We are also making upgrades to our network to increase throughput and create additional capacity. We're installing more automated equipment at our hump yards. We are converting intermodal terminals to grounded facilities in order to increase capacity. And we are expanding our investment in autonomous cranes to increase intermodal terminal throughput. While we still have sufficient line of road capacity, we are strategically investing in growth by extending sightings in select locations across the network. These sighting investments will allow us to continue to refine our train plan and provide growth capacity for years to come. Every action we take is focused on network reliability. That begins and ends with running a balanced train plan to minimize delay and maximize network performance. Running a scheduled network ensures assets are in the right place at the right time. We will continue to maintain network balance and the principles of scheduled railroading as we add resources to meet current demand. These principles have allowed us to keep the intermodal network open and running well this year, and we are focused on continuing the strong performance as we enter into peak season. Turning to slide eight. Maintaining a safe operation is the foundation to the success of any other operating goal we want to pursue, and we remain committed to being the safest railroad. In the third quarter, personal injury rate improved sequentially, and ongoing safety initiatives also drove a decrease in injury severity. While train accident rates increased slightly from last quarter's record result, accidents rates have improved year over year. Focus for the remainder of the year will be critical rule compliance and reducing human factor accidents. We are leveraging the approximate 9,000 tablets distributed to field employees to more productively deliver these messages. Not only do the tablets allow real-time communication of key safety information, but we are also able to more effectively combine electronic and in-person communications to increase the impact of our training programs and drive lasting changes in the behavior that will better protect our employees. I'll now turn the call over to Sean for the financials.
Bill
Thank you, Jamie, and good afternoon. Looking at the income statement on slide 9, operating income grew nearly $300 million, or 26%. Revenue was up 24%, reflecting gains across all major markets, higher fuel prices, and the impact of quality carriers. The operating ratio of 56.4% is a third-quarter record for CSX, as we focus on operating efficiently and growing the business. As a reminder, this includes an impact of approximately 250 basis points from the ongoing operations of quality. Looking below the line, interest in other expense was $16 million favorable to last year due to a lower weighted average coupon and lower average debt balances, as well as favorable pension impacts. And income tax expense was up on higher pre-tax earnings. The effective tax rate for the quarter was 24.3%. Looking at expenses in more detail on the next slide, total costs increased $349 million for 23% in the quarter. Including transaction-related expenses, approximately $200 million of the increase was driven by quality carriers. Higher locomotive fuel prices were also a significant factor, up about $90 million versus last year. Partially offsetting these items, real estate gains were $56 million higher, Non-fuel inflation remained steady versus last quarter at around 3%. As I mentioned last time, we have some lagging contracts that may drive higher inflation going into next year. As Jamie discussed, we continue to focus on hiring and retaining train and engine employees. While headcount was roughly flat sequentially, excluding the addition of quality carriers, the conductor count was up and was offset by reductions in other areas of the business. As a result, we experienced $16 million more in hiring and retention costs versus last year. You'll note that we have renamed the prior MS&O line to Purchase Services and Other. The base expenses are identical to the prior MS&O category, but the new description better reflects the costs in this line post-acquisition. Increased costs on this line reflect the addition of quality, as well as higher intermodal terminal and locomotive expense. Depreciation was up on a higher asset base that also includes the acquisition impact. Finally, we are proud to report another all-time record for fuel efficiency in the quarter. This reflects continued focus and investment by CSX, demonstrating our commitment to sustainability and the ongoing environmental advantage of rail. Looking into the fourth quarter, we typically see a seasonal increase in property expense due to weather, lower capitalized labor, as well as holidays and vacations. That trend should continue this year, in addition to expected headwinds from higher incentive compensation and lower sequential gains on property sales in the fourth quarter. Peak season expenses are also likely to be higher than normal as a result of ongoing supply chain disruptions. Now, turning to cash flow on slide 11. With operating income up 34% on a year-to-date basis, free cash flow before dividends this year is $2.9 billion, up nearly 50%. Free cash flow conversion on net income is exceeding 100% year-to-date, and we expect it to remain near this level on a full-year basis. The company's cash balance of $2.2 billion is beginning to normalize. The lower balance reflects the acquisition in the quarter and a step up in distributions to shareholders. We expect cash to continue to normalize over time. After fully funding capital investments in our core infrastructure, year-to-date shareholder returns have exceeded $2.9 billion, including approximately $2.3 billion in buybacks and over $600 million in dividends. We will continue to be balanced and opportunistic in our buyback approach, and we remain committed to returning excess cash to our shareholders. With that, let me turn it back to Jim for his closing remarks.
Jim Foote
Great. Thank you, Sean. Concluding with slide 12, we are maintaining a full-year outlet for double-digit revenue growth before the impact from quality carriers. We expect capital expenditures to be at the top end of our initial $1.7 to $1.8 billion range due to materials cost inflation, the capacity investments we just reviewed, and the inclusion of quality carriers capital spending. I'll conclude my remarks the same way I began. We are committed to helping our customers overcome the current supply chain challenges. And as you heard today, our entire team is aligned around this goal, and we will continue to act. We have a strong hiring pipeline, and we will hire until we have staffed a network to match demand. We expect to hire above attrition throughout the rest of this year and into next year. Economic demand remains strong, and CSX will help customers capture that demand. Everything we do begins with a commitment to providing customers a high-quality service. We will build on the positive momentum from actions taken to date. We will continue putting resources in place to drive growth and we will provide customers with creative new offerings that make CSX a more meaningful part of the customer supply chain. Thank you, Bill.
Bill Slater
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.
Operator
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Ken Hexter. Your line is open.
Bill
Great. Good afternoon. Congrats on some really solid results in a tough environment. Great to see. Maybe just a follow-up, either Jim or Sean, just talking about your thoughts on pricing. I know you were kind of running through some of the categories there. Maybe how much you can still address and some of the opportunities to catch this rising market and obviously coal up. you know 20 you know it seems like you're touching some of that maybe even faster than than thought or there's different kind of moves maybe just delve into the pricing network thanks hey ken i'll take a shot at this kevin um i think it's clear that you know cost inflation over the last year expectations have risen and are arising in the next year and uh this is not surprising to our customers they're facing the same uh cost inflation pressures that we see and uh what we strive to do is be transparent around that in our conversations with customers uh fourth quarter and first quarter are heavy renewal periods for us so we'll be having those discussions the exciting part though um as we get into a higher inflation environment is really the value proposition we offer uh when you're when a customer is looking to offset some of that cost inflation rail is such a great alternative uh to shift more of their volumes over to the rail and then you add on top of that the persistent driver shortages that we're likely to see uh well in the next year and probably the years ahead uh the value proposition is there and then then on top of that the environmental discussions that we're having increasingly with customers is really resonating uh with those so you know uh it's no it's no surprise uh cost inflation is uh is higher than what we uh we saw last year it'll be a higher cost inflation environment than what we've probably seen in the last number of years and we've got to have conversations with our customers around that I guess just any just to follow up any detailed thoughts on kind of the trend of pure pricing pace of acceleration or any level of that detail Well, we get to touch, as I mentioned, contracts into the fourth and first quarter. That's a heavy renewal period. And we'll continue to have those discussions. I think I'll probably leave it at that. All right. Thank you very much, Ken.
Operator
Your next question comes from the line of Amit Mehotra. Your line is unmuted.
Randy
Thank you, operator. Hi, everybody. Kevin, can you just update us on the quality carriers acquisition, the status of the revenue opportunity you're seeing, converting some of those into chemical carloads, and just when we may see kind of a more meaningful uplift. Obviously, that's a great offset to intramodal carloads, which are growing. It just seems like it's a great idiosyncratic opportunity. If you could just give us a little bit of update there, and then just any initial thoughts on you know, margins or performance next year. Obviously, you've got a big pricing cycle ahead of you. Any willingness to opine about what the opportunity is from an OR perspective next year would be highly appreciated. Thanks.
Bill
Maybe I'll let Sean take the OR question, but I don't think we're giving guidance today on next year, but On the quality carriers, as you'll remember, that really is focused on our chemical franchise, and the customer reception has been overwhelmingly positive in a market where supply is constrained. Our customers are looking for more options to move their freight. And so Randy and his team combined with our transfer team have found a number of options and we're moving freight today. Now that we're, we're doing it in a way where it's awful and calculated and that the customer is seeing a good service on that product and we'll continue to build momentum in the market. But I think everything that we thought before we made the acquisition is coming true. The only thing I will say is you know, from a, From an equipment standpoint, obviously with things tight right now, the equipment backlog is going to take a little bit longer in the next year to really ramp that up when we think about some of the iso tank solutions that we're contemplating out there. So other than that, everything is full speed ahead. I would say there's customers that we believe would take a lot longer to adopt that have been first to adopt, which is exciting for us market leaders in the industry. And their adoption, I think, is going to really set the tone for this to really take off into the market. So the other thing that I think is positive is it shows other partners that we have that we're capable of doing this, of using the TransFlow solution in unique ways. And we don't always have to do it ourselves. We would love partners to continue to bring freight and through all of our different capabilities that we have. So I think that momentum is starting to be seen in the market as well.
Randy
Sean, do you want to talk about BOR? Maybe you can offer guidance, but maybe another way to ask it is there's obviously a lag on this coal revenue opportunity. Just wondering, are we going to see more uplift in coal yields in the fourth quarter as some of that lag gets caught up? Just talk to us maybe about the cadence if you don't want to answer our question next year.
Bill
Yeah, clearly on the export coal side, you've seen some favorability in the prices there. And as we mentioned before, our price is tied to the benchmarks, and you will see some favorability sequentially in the fourth quarter versus third quarter. uh you know it's a strong market uh we continue to see uh you know favorability in the next year how long it holds up at these levels um it probably won't hold here but these are extremely elevated levels that will probably carry in the next year and hopefully create some favorability there but um uh you know it's it's a everybody's trying to produce more coal and we're trying to move more of it today. And at the mine, there's been some struggles here in the third quarter, as you could see with some of the production hiccups that some of the producers have had. So we're working through that as diligently as we can and really ramping up, you know, our ability to serve those customers.
Randy
Okay. Thank you very much. Appreciate the time.
Operator
Your next question comes from the line of Tom Wadowitz. Your line is unmuted.
Bill
Yeah, good afternoon. I think this is probably for you, Kevin, but, you know, maybe for others also. How do you think about the impact of capacity constraints on volumes? You know, you think Intermodal would have been meaningfully stronger. Do you – you know, how much – optimism do you have as you look forward that maybe in the 22 that capacity constraints get alleviated quickly? And how does that, you know, kind of inform your perspective on growth looking to next year? You know, is it reasonable to expect easing of constraints in a pretty good acceleration? I guess it's primarily around intermodal, but, you know, you may have capacity constraints other areas as well. Thank you.
Jim Foote
Hey, Tom, it's Jim. Let me take a shot. I would say, yeah, we're clearly constrained. There was more business out there this quarter. There has been more business out there throughout this year that we could not handle. And the primary reason for that. is our inability, like everyone else in the world right now, to ramp up our workforce coming out of the steep declines of the early phases of the pandemic. And as Jamie talked about, we are now starting to see the fruits of all of our hard work for the last nine months or more and are beginning to bring on more people and actually deploy those people into the field so we're able to operate a little bit better. And we fully expect that that trend will continue as we go forward, unless some other crazy curveball gets thrown at us. And be in a much, much better position as we exit this year and move into next year. And hopefully be able to take advantage of what seems to be a continuation of strong demand for transportation services into 2022. And now some people are even saying 2023.
Bill
Do you think a lot of that's in your control, or is it hard to have visibility given the warehouse labor, drainage labor, other pieces?
Jim Foote
My first and number one priority is getting enough CSX employees in the train, principally conductors on the train, so we can operate more fluidly and get back to some of the performance metrics that we were putting up pre-pandemic in the end of 2019 and the beginning of 2020. The fluidity, the dwell, the on-time performance, the customer service metrics that we put out there, the trip plan compliance numbers, those numbers are all down. And it's principally a result of our having an extremely difficult time getting people to come to work for us. And it's taken a complete, I would say, reengineering of the hiring process, a complete review of everything that we do when we onboard employees for us to get to this point. This has been extremely difficult. You know, we're no different than, you know, every business At least in the United States, every business, I think, every business, every hospital, every school, everybody is struggling with the same phenomena of trying to get people to come to work. I am confident that we have done everything we can do right now and are seeing that numbers are increasing in terms of the number of employees that we can put into our training programs and begin to qualify them to go to work. And, you know, like I said, unless something else comes along that disrupts that process, I hope we're going to be in a lot better shape at the end of this year and the beginning of next year than we have been over the last nine months.
Bill
Great. Thanks for the insights, Jim.
Operator
Your next question comes from the line of Justin Long.
Justin Long
Thanks, and good afternoon. Sean, I think you called out a few sequential headwinds to OpEx in the fourth quarter. I believe it was incentive comps, lower gains on sale, and then some peak season expense. Any way you can put a finer point around those three items to just help us understand the order of magnitude here in the next quarter?
Bill
Yeah, thanks, Justin. So you got the items right. Higher incentive comp, lower gains on property sales, and then just some additional costs related to the supply chain. If you put all those together, you're probably looking about a couple of pennies over and above what we would normally see from the third quarter to the fourth quarter.
Justin Long
Okay, very helpful. And then any thoughts on other revenue as well? I know it was pretty elevated and took a A decent step up here, sequentially X quality, but thoughts on that into the fourth quarter and maybe into next year?
Bill
So if you look just at the pure other revenue line, not considering the trucking revenue line, which trucking revenue should be pretty consistent quarter to quarter, really the big driver, as Kevin said there, is the intermodal storage and premise use charges as well as demurrage. um and that's you know a direct result of what's going on in the supply chain that we've been talking about here so as things start to um you know improve that line the other revenue line will come down but you know here we sit in october we're probably in about the same place as we are we were in q3 and we'll see where it goes from here okay i appreciate the time thanks
Operator
Your next question comes from the line of Scott Group. Your line is open.
Scott
Hey, thanks. Afternoon, guys. So just back on headcount, if you can get all the people that you'd like to get, I guess two thoughts. One, how much, it sounds like you want to be above attrition directionally. Like what kind of percentage increases in headcount are you thinking about and Is there a way to think about if you add back 5% to headcount, what do you think that means to volume growth and things like that? Do you still think you can grow volume in excess of headcount? I'm just trying to understand the spread there and things. Thank you.
Bill
Yeah, Scott. You know, what we're looking on a sequential basis is modest increases in headcount, right? We're bringing on trying to fill classes of 40 every week and then getting those folks trained up and out into the field, right? So you're not going to see dramatic increases in headcount. I think it's also fair to assume that we've got capacity still on our existing trains and capacity on the network. So we are hiring for growth, but it doesn't need to be one for one.
Scott
Do you think next year is a year where you could grow volume in excess of headcount?
Bill
I don't see any reason why that wouldn't be the target. All right.
Scott
Thank you, guys. Appreciate it. Thank you.
Operator
Your next question comes from the line of Brian Oglinski. Your line is open.
Brian Oglinski
Hey guys, this is Brandon. So I just want to ask a quick one about the fourth quarter cost commentary. I guess, I don't know if it was directly asked, but does that mean that it's going to be hard to show alarm for the near term? And then I guess longer term, if I can sneak a two-part question in. Kevin, what's the question there?
Bill
Yeah, so just on the OR question, you know, we're not going to give OR guidance, but, you know, I think it's fair to assume sequentially, given some of the cost pressures, as well as just the normal seasonality, we'll probably see an OR that's a little bit higher in the fourth quarter than the third quarter. Brandon, I guess the question was, what can we do with more headcount? Yeah, you can't do it by yourself. strategically, we're going to move a lot more freight. You know, when we talk to customers right now, they're looking for capacity. And they're trying to offset a lot of cost inflation, too. The environment couldn't be any better for us to go out and sell the product we have. So we're going to move more freight, and we're going to get more wallet share with the customer. It's, you know, it's a perfect environment for us.
Brian Oglinski
All right. Thanks, Kevin. Thanks, Sean.
Operator
Your next question comes from the line of Brian Alsenbeck. Your line is open.
Brian Alsenbeck
Hey, thanks for taking the question. So, Jim, I just wanted to ask a bigger picture question about just capacity and interplay with the regulators in D.C. You know, we'll see what your peers put out there later this week and next week, but it looks like you have some I'll see a lot of capacity solutions here that you're ramping up on your own. Do you think you need additional help on that for some of your supply chain partners? Maybe just some perspective on what you can do on your own versus what you sort of need help with. And then just contrasting that with obviously the big other revenue you just mentioned, clearly the demurrage is a cost for everybody at this point. But there have been some fairly pointed comments out of the STB about growing and focusing maybe less on OR than on growth. So maybe you can address all that in terms of adding capacity if you need help and what the regulators you think will take away from all this. Thank you.
Jim Foote
I think Kevin did a very good job of outlining all of the activities that we've been undertaking here over the last six months or so to do on our own without any without any plotting to improve and increase capacity. We were way ahead of the curve in Chicago, the biggest terminal for us in terms of intermodal capacity, expanding our 59th Street facility that we bought that property two years ago. We had it. We had another yard right down the street. which was ready to go, cranes available. So we've always tried to be somewhat visionary in trying to determine where the growth would be and make sure that we were properly positioned. Some of these new initiatives, like Kevin talked about moving traffic inland from Savannah into a facility in Atlanta. We had a yard available there. It wasn't an intermodal yard. We created an intermodal yard. And so we're taking the steps that we think are appropriate and necessary in order to make sure that our railroad continues to operate more fluid and provide better service all the time. And that's always been the case. That'll always be the case. And whether that's mainline track that moves uh merchandise business or whatever it is we're always being thoughtful in our planning process to make sure that we have the capacity available to um to handle a traffic growth as it comes on the lucky the lucky fact is that we over the last four years uh by changing the methodologies we use to run the railroad have freed up an enormous amount of capacity uh across the rail network just simply by running the trains in a more reliable and efficient manner. And so we don't need to make big, big, big investments in the railroad in order to handle future growth. We've got locomotives in storage. So we're ready to go. I had thought, I believe it was on the year-end conference call in January where I called out the fact that we were going to be hiring and i fully believed in as much as at that point in time we had about 300 of our training engine service employees off on coded uh that we would just simply do what we'd always done we'd hire 500 employees the 300 employees would come back from off sick and we'd be rocking and rolling and we'd be moving freight no one uh no one ever gave me a heads up that says oh by the way when you want to hire somebody nobody's going to want to work for you Plus, all the people that you had furloughed as the railroad had, the traffic had declined so dramatically. There was so many more than was usual. When we called them back and said, do you want to come back to work? They said, no, I've decided to go do something else. I've changed my lifestyle. I'm going to go, you know, enjoy life. Enjoy the scenery on the Jersey Coast or whatever it might be. You know, this is not a phenomena that is unique to CSX. This is a phenomena that nobody saw coming. And it is a phenomena that everybody in the supply chain, whether you're a trucker, whether you're a steamship company, whether you're a port, whether you're a warehouse operator, whatever, phenomena that is impacting everyone and everyone who's trying to deal with this, what is now the new norm. So we've had to change everything the way we think about it. And that's, but have done that as we always do. We adapted, we recognize the situation and we adapted and we made changes. And that's why we're reasonably confident that we'll be in better shape As we move forward this year and in pretty good shape as we move into next year. I don't need any help from the government in order to figure out what I'm supposed to do. I just don't want to make sure the government does something that screws it up worse.
Brian Alsenbeck
Understood. Thanks, Jim. And if I could sneak one quick one in, all the stuff on page six, do you think that would be permanent, you know, going into the future, these things you had pulled forward from prior plans, or do you think this is more of a case of reacting to kind of what we see here? Thank you.
Jim Foote
Well, I think we're, you know, what we're doing is, you know, we're responding to the situation. It's simple as that. uh you know we we can we can think we can plan we can do all kinds of things uh unfortunately uh i think we've had more black swan events in the last two years than most people would experience in a lifetime so as i said you know what's the what's the next thing so i am i started out my remarks saying how proud I was of our employees. All of this going on, all of these challenges all of these changes all of these demands all of these people saying you know first of all jesus you know the entire supply chain issue was as a result of the railroads oh my god you know you know the railroad said it screwed this thing up well then as time went on everybody figured out it's not related to the railroads we don't own the warehouses where this stuff goes we don't have the trucks to bring it there if i need to buy a truck and bring it there i'll bring it there and i'll put the box in the warehouse parking lot there'll be somebody else's problem but most of the issues associated with everything that is talked about The railroads are doing an extremely good job. Their employees have been critical workers throughout the entire pandemic, have been out there working, have not been home in the basement, have been complying with all the requirements and making sure that the economy keeps going. And so the railroad guys, not just CSS, but the entire railroad industry has done a phenomenal job under unbelievably difficult circumstances. Thank you, Jim.
Brian Alsenbeck
Appreciate it.
Operator
Our next question comes from the line of Chris Weatherby. Your line is open.
Chris Weatherby
Hey, thanks. Good afternoon, guys. Jim, I think you mentioned on the call that the quality impact is more than 200 basis points on the operating ratio.
Bill
And so I guess it sort of struck me that you guys are running sort of the core rail business at an operating ratio really high.
Jim
They haven't seen before.
Bill
And I guess in the context, and I understand the pricing environment, particularly on the accessorial side, is certainly elevated and that probably has some impact on how we should be thinking about operating ratio.
Jeff
But maybe big picture as we think forward, you are growing volume arguably better than your peers.
Bill
Pricing is going to be a cycle here for a period of time. And, you know, you're talking about bringing some folks back, but service is good. Can we talk a little bit about maybe we need to think about a new way to think about OR over the long run? I guess I just want to make sure I understand what this business is capable of in terms of, you know, incremental margins and the ability to take on some of this new freight and these new opportunities, you know, which seems to be very... Yep, you did the math.
Jim Foote
Yeah. and and yeah that was excluding some of the transaction costs and some other things too so it's pretty simple math yeah the railroad is running uh efficiently uh when we stretch when we stretch it says all of a sudden it's a million million times this is not about or this is not about you know how low can we go how many heads can we take out like we're doing right now and the reason we're stretching is because we're trying every single hour right and when you do that and you focus on getting it there as quickly as you can and as efficiently as you can You know, it results in, unfortunately, not a perfect service product, but a very good service product in difficult times. You do it efficiently. And as a result of that, the score adds up that says, you know, you've got a low operating ratio. But that's not the goal. That's just the result. And so, yeah, we've run up a pretty good number. I would have preferred to do a lot more business, as we said we could have.
Jamie Boychuk 's
uh and we try to do every single day we can provide solutions to our customers or freight that's what we do we move freight and the more freight we move the more revenue you pour in the top the more efficiently you operate it's simple as that it's just math so uh you know it's
Jim Foote
Think about what the – think about – you want to worry about what the operating ratio was? Think about what the operating ratio could be for the railroad industry if they were able to grow more than it's historically grown. Then you can start talking about what the operating ratio might be. Stop thinking about how much cost you can take out. Okay. That's a helpful call.
Bill
Thanks very much. Appreciate it.
Operator
Your next question comes from the line of FASCA majors. Your line is open.
spk01
Yeah, thanks for taking my question. Jim, as you alluded to earlier, you've been talking about hiring to support growth since January, certainly doubled down on that in July, and it's been a big topic today. But, you know, at this point, it doesn't feel like your U.S. competitors are are talking as much about labor and some of the challenges there that they're having as you are today. You got a letter from the STB on Monday about CSX service specifically. So can you help us understand, is there something different with your situation with labor versus your other public peers in the U.S.? Is it a messaging difference?
Jim
Just anything to help us unscramble this would be helpful. Thank you.
Jim Foote
Yeah, well, I'm trying to unscramble it for myself. And, you know, yeah, I've said from the very beginning of this year that we had a challenge in terms of hiring. We needed to hire. I thought we would be able to hire like we always had. We aren't able to hire. I reported to the SDB in terms of all of the railroads, whether it be velocity, whether it be dwell. My service metrics are continuing to lead in most areas. So the railroad here is still running better than most. um during that period of time where we were finding out that a lot of people wanted to make career choices and leave the company that we hadn't expected we were having the difficulties that everybody else was having um during that period of time um we were the epicenter of the world in terms of the pandemic here in jacksonville uh so uh I think we got probably hit during that period of time a little more severely. The states of Florida, Georgia, Alabama, Louisiana, Tennessee, Mississippi, why that might be, that's just the facts. And so while we have been saying publicly, we are hiring as fast, aggressively, anyone right now that will want to come and work here. During the midst of the worst of the pandemic in the world, I'm going in our service territory. And yeah, guess what? I got a letter. Well, the STB takes in complaints from customers and they relay them to me.
Jim
So we'll respond. They're just doing their job. We'll respond.
Jim Foote
uh i found it a little unfortunate that under the circumstances of everything we're doing based upon what our overall service metrics show our performance to be based upon how the sdb measures us in terms of how we operate that we got the letter but you know i'm a big boy i've been around you know we'll deal with it we'll respond we'll work with the regulator and our customers to try and try and address any customer issues
Jim
You should give me a call. And Jamie Boychuk's the same way.
Jamie Boychuk 's
So I wish they'd just call me if there's a challenge.
Operator
Your next call comes from the line of John Chappelle. Your line is open.
Jim
Good afternoon. Good evening. The theme of the earnings season has been pricing power.
Chris Weatherby
And obviously, there's things like accessorials that are helping intermodal. But your whole core business has been kind of reset a bit higher on the revenue increases that have gone in. And where is the total portfolio set on a contractual basis as we think about maybe the ability to push pricing higher this quarter or two?
Bill
Yeah, you know, look, I've gotten a couple of pricing questions already, and I'm going to stick to the script for the most part. It's a discussion we're having with our customers. We're being transparent around the cost pressures that we face and that we expect to cover those costs. But we also want to talk about volume growth with our customers, wallet share, and all those other things. um you know we do have parts of our business that you're well aware of coal which moves with the benchmark prices so we have seen some favorability there we participate uh when our customers are participating in a good market and obviously when those markets come down we participate uh uh on the other side as well uh you know intermodal businesses uh some other parts of our business are tied directly to inflation um uh metrics and those have moved up and so we'll see uh some favorability in those parts of our business that are tied to those indices and those will continue to probably flow through uh into the fourth quarter and the next year so we'll have some momentum there and then obviously this is probably uh our expectations for for inflation in the next year are higher than the previous year, last year.
Jim
And so we'll have those discussions and, you know, price accordingly.
Bill
I'll probably leave it at that. Thanks, Kevin.
Operator
Your next question comes from the line of Jason Seidel. Your line is open.
Randy
Thank you, operator. Afternoon, gentlemen, and congratulations on that about some on-shoring production due to sort of supply chain issues.
Jim
Is that sort of a one-off customer? Is this a trend you're seeing?
Randy
And then also, are you having customers coming to you telling you that they might change sort of how they run their inventories in the future?
Bill
Absolutely. I can think of multiple industries right now, and you've seen some announcements from some large producers out there that are making incremental investments in U.S. production. I think they're looking at from overseas labor. is less of a component in some of these production facilities than it's ever been. So that labor differential moving in here to U.S. just doesn't matter as much.
Jim
It's more about having availability to the inventory. And we all ensure...
Bill
You know, phenomenon, I hope, has legs here. We're seeing the early signs of that. You've seen some big announcements. I hope we'll see some further announcements coming forward. And, you know, we talked about this with the energy renaissance here a number of years ago when we had cheap, you know, energy with gas and oil and the fracking. That never materialized. I think this time, in my opinion, could be different. I think all the things are starting to align for our customers and others to reconsider where they want to have production and more balanced so they don't run into the same issues that they're having currently.
Randy
And in terms of total inventories carried, are you seeing a change there as well?
Bill
I certainly think there's more customers are reevaluating, you know, forward positioning inventory levels. We're having those discussions around our transflow products, you know, so they don't need next day shipping or things like that, but they're forward positioning those things so they can make sure that their production facilities remain up and running. That's very, very important. So all these things, are, I think, playing into investments that we'll see customers make over the next couple of years.
Randy
Kevin, I appreciate the caller. And gentlemen, thanks for the time as always.
Operator
Your next question comes from the line of Ben Nolan. Your line is open.
Randy
Hey, thanks, guys. I appreciate you sending me in here. I guess I wanted to – we talked a lot about lower impacting there, but just thinking about maybe the opportunity to actually get a little bit more volume through, and specifically, you know, we talked about coal, but curious what your customers are talking about with respect to sort of further ramp up there and also on the intermodal side. We've seen – I mean, the steamships diverting cargos away from Savannah, for instance, to get into Jacksonville or other places on the East Coast, trying to fit more volume through the system. But I guess the question is, how capable are you of accommodating some of those things?
Bill
Well, you know, you've seen the East Coast ports outgrow the West Coast ports for the last number of years. That's going to continue to... uh ongoing um Savannah's making significant investments all the ports that we operate into are making investments uh to be able to handle that so we're well positioned uh you know whether it's you know Savannah Charleston Jacksonville Tampa all those locations are areas where we're uh have the ability to serve so we're ready to take on that volume we've made some investments Our intermodal network continues to be the best network in the East operationally. There's no question around that. Just look at the service metrics, look at the growth. We've been able to handle that better than anybody else, and we'll continue to leverage that product into the market.
Randy
Sure. So there's no near-term inhibitor to being able to put more volume to some of the network, I guess, is the question, right?
Bill
We talked about all the capacity.
Jim Foote
Yeah, clearly we have the rail. Clearly we have the rail capacity. We're well positioned with all of the ports. You know, and again, it's not just international steamship companies that are coming in. It's plastics, imports, exports. There's a lot of merchandise business, bulk business, that we move through these ports as well. And so, yeah, we're working with them through the transload facilities, either our own facilities or partnering with people who are building big, big, big transload facilities along the coast to be able to handle them. handle the capacity and we clearly as i said earlier you know 30 percent uh room on the railroad uh to handle the traffic without making any more uh big investments all right thanks a lot guys our next question comes from the line of jeff kaufman your line is open
Jeff
Hey, thanks for squeezing me in, and congratulations. Just some questions for Kevin. I'm trying to get used to my model with quality carriers in it here. Your non-locomotive fuel expense was up about $38 million year-on-year. How much of that was attributable to the inclusion of quality?
Bill
Just a little over $20 million.
Jeff
Okay. And just one other net, the depreciation, that was up about $19 million sequentially. About how much of that would have been attributable to quality?
Bill
Jeff, it's Sean again. Yeah, about half of that is related to quality. We'll see that impact carry forward.
Jeff
Okay. That's all I have. Congratulations. Terrific quarter. Thank you.
Operator
There are no further questions at this time, and this concludes today's conference call. Thank you for attending. You may now disconnect.
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