CSX Corp (CSX) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CSX Corporation fourth-quarter 2011 earnings call. As a reminder, today's call is being recorded. During this call all participants will be in a listen-only mode. (Operator Instructions)

For opening remarks and introduction I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation.

Thank you, Pat, and good morning, everyone. And again, welcome to CSX Corporation's fourth-quarter 2011 earnings presentation. The presentation material that we will be reviewing this morning, along with our Quarterly Financial Report and our safety and service measurements, are available on our website at CSX.com under the investors section. In addition, following the presentation, a webcast and podcast replay will be available on the same website.

Here representing CSX this morning are Michael Ward, the Company's Chairman, President, and Chief Executive Officer; Clarence Gooden, Chief Sales and Marketing Officer; Cindy Sanborn, Chief Transportation Officer; and Oscar Munoz, Chief Operating Officer.

Now, before we begin the formal part of our program, let me remind everyone that the presentation and the other statements made by the Company contain forward-looking statements. You are encouraged to review the Company's disclosure in the accompanying presentation on slide 2. This disclosure identifies forward-looking statements and risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements.

In addition, let me also remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With nearly 30 analysts now covering CSX, I would ask as a courtesy for everyone to please limit your inquiries to one primary and one follow-up question.

With that, let me turn the presentation over to CSX Chairman, President, and Chief Executive Officer, Michael Ward. Michael?

Well, thank you, David, and good morning, everyone. Last evening we were pleased to report record earnings per share for the fourth quarter and full year 2011. Fourth-quarter EPS was up 13% to a new fourth-quarter record of $0.43 per share. These results were driven by top-line growth reflecting strong core pricing and fuel recovery as well as an excellent service product.

Service measures are now at high levels thanks to the outstanding execution of our operating team and the resource investments we made in the second half of the year. We expect service levels to remain high going forward.

Turning to slide 5, for the full-year 2011, CSX generated record performance in operating income, operating ratio, and earnings per share. In addition, we strategically positioned the Company for long-term growth and set the stage for our 65% operating ratio target.

Yesterday, as you know, CSX announced changes to its senior management team. Oscar Munoz is now the Company's Chief Operating Officer, and Fredrik Eliasson is now our Chief Financial Officer. Both are proven leaders with a passion for driving compelling value for shareholders and customers.

We have excellent momentum in our operations; and combined with Oscar's broad leadership and business focus, we will ensure that outstanding team is even more successful for you, our shareholders. Fredrik is a proven and respected veteran in our Company and will be working with a finance team that has proven itself to be a strong business partner in helping drive excellent performance for investors.

For today, I have asked Oscar to take you through the financials for the last time. And Cindy Sanborn, our Chief Transportation Officer, is here to report our operating performance. With that, let me turn the presentation over to Clarence to review our top-line performance. Clarence?

Thank you, Michael, and good morning, everyone. As I get started on slide 7 let me remind everyone that the fourth quarter of 2010 included an extra week. After removing that extra week, you can see more comparable 2010 fourth-quarter results with revenue of $2.6 billion, volume of 1.6 million units, and revenue per unit of $1,655.

In the fourth quarter of 2011, total revenue increased 12%, volume grew 1%, and RPU improved 10% versus the comparable 2010 results. For the remainder of my presentation I will use comparable 13-week numbers to give you a better sense of the run rate of our business.

Now, let's turn to the next slide and take a closer look at the results. On a comparable basis, CSX revenue increased 12% to nearly $3 billion in the fourth quarter. As you can see on the chart, volume gains drove $51 million in year-over-year revenue growth.

In addition, the combined effect of rate and mix accounted for $138 million of the increase, reflecting yield gains across all three major markets as we continue to sell the compelling value of rail transportation. Finally, as you look further to the right, increased fuel recovery of $117 million in the quarter helped offset the impact of higher fuel cost.

The next slide shows the volume drivers in the quarter. Total volume increased 1% versus the comparable period from last year. Merchandise, which accounted for 41% of total volume, grew 5% reflecting gains in the majority of the markets CSX serves.

Intermodal, which accounted for 36% of total volume, was flat. The strong domestic growth was offset by weakness in the international business.

Finally, coal, which accounts for 23% of the total volume, declined 3% reflecting strength in exports. That was more than offset by continued softness in demand from electric utilities. I will provide more detail on each of these markets after we look at the revenue per unit on slide 10.

Revenue per unit increased 10% to more than $1,800, driven by a combination of price, mix, and fuel recovery. Same-store sales pricing increased 6.9%. Recall that the same-store sales are defined as shipments with the same customer, commodity, and car type and the same origin and destination. These shipments represent approximately 75% of the CSX traffic base. Mix also had a modest favorable impact on the revenue per unit change.

Finally, increased fuel recovery, a result of higher fuel costs in the quarter, contributed to higher revenue per unit.

Now, let's take a look at each of the major markets that we serve, starting with coal. Coal revenue improved 13% driven by an increase in revenue per unit reflecting improved yield and higher fuel recovery.

Domestic volume declined 10% on a comparable basis as overall electrical generation declined in the eastern United States and natural gas prices remained at low levels, leading to the continued displacement of coal at some utilities. Export coal volume grew 31% on a comparable basis as demand was strong for US coal shipments to Europe, Asia, and South America.

For the full year, we shipped a total of 40.2 million tons of export coal, up 33% versus 2010 and within our earlier guidance. Looking ahead, demand for export coal should remain strong on the strength of an expanding global economy, especially in Asia and South America. At the same time, domestic utility volumes are expected to remain soft due to the low natural gas prices, above-normal inventory levels in the southeast, and restrictive environmental regulations.

Now, let's turn to our Intermodal results. Intermodal fourth-quarter revenue increased 13% versus 2010 to $375 million driven by an increase in revenue per unit.

Domestic volumes were up 5% as the overall truck market remains tight and higher fuel prices encouraged over-the-road conversions. International volume declined 6% largely due to a more moderate peak shipping season this year.

Turning to revenue per unit, Intermodal had higher fuel recoveries and increased yields in both sectors, resulting in a 14% improvement versus the prior year. In 2012, we are seeing strong growth from the onboarding of Maersk. In addition, we anticipate growth from continued truck [conversions], new service offerings, and further economic expansion. Strategic investments such as our Northwest Ohio Intermodal facility and the National Gateway Initiative will continue to support long-term growth by increasing capacity while improving both transit times and service reliability.

Turning to the next slide, let's look our merchandise markets. Overall, merchandise revenue increased 11% driven by 5% volume growth and a 5% increase in revenue per unit. Revenue per unit increased across nearly all of our markets due to higher yields and higher fuel recovery.

In the agricultural sector volume increased in the quarter as growth in fertilizer and ethanol shipments offset declines in feed grain resulting from higher corn prices and lower production of poultry and pork. Metals and automotive shipments were key drivers of growth in the industrial sector. North American light vehicle production grew by 13% in the quarter.

In addition, domestic steel production remained high due to strong demand from the automotive and the oil and gas markets. Construction sector growth was led by increased aggregate shipments as milder weather in the quarter contributed to a longer construction season. Looking forward, we expect continued growth in our agricultural and industrial sectors, although construction shipments will be challenged by the lower levels of highway investment in 2012.

Now let me wrap up on the next slide. Looking ahead, CSX's outlook for 2012 is favorable, with growth expected across all markets; and we expect CSX's overall rate of growth will again exceed that of the general economy. Intermodal will lead the way as we onboard the Maersk business, grow with our other international customers, and continue to attract domestic loads from the highway in partnership with our truckload customers. We expect strong demand from phosphate and fertilizer with the USDA's projection for planted acreage at high levels. Projected strength in harvest levels and new ethanol terminals on CSX will drive growth in agricultural products.

In chemicals, we anticipate growth in the overall chemical production. Oil and gas related markets will drive additional growth as our frac sand business continues to expand and we develop new products to deliver crude to eastern refineries by rail. Continued demand from the oil and gas and automotive industries will drive further expansion of steel production and scrap demand and drive growth in our metals business.

We expect export coal demand to remain at high levels, although challenges remain in the domestic utility market due to the low natural gas prices and restrictive environmental regulations. Overall, we expect coal volumes to be down modestly.

Our emerging markets business, which includes aggregates used in concrete production, will also be challenged as a result of lower levels of highway investment. Bottom line, we expect solid growth across a significant majority of CSX's markets, with 71% of our overall volume reflecting favorable market conditions.

Thank you. Now let me turn the presentation over to Cindy to review our operating results.

Thank you, Clarence, and good morning, everyone. Our fourth-quarter results are a clear reflection of our success and commitment to delivering excellent performance.

Looking at safety, CSX once again delivered strong performance, reflecting the fact that safety continues to be a top priority. At the same time, CSX is poised to handle 2012 volume growth given the employee and locomotive resource investments made in the latter half of 2011.

With these resources we expect to be able to handle much of CSX's volume growth this year within the existing train network. As a result, we are confident that operating leverage will return in 2012.

These resources also increase reliability and fluidity across all three networks -- coal, intermodal, and merchandise. As a result, overall service was sustained at a high level this quarter.

Now, let's review the results in more detail, starting with safety on slide 17. This slide shows both fourth-quarter and full-year FRA personal injury and train accident rates over the last four years. On the left-hand side of the slide, you can see that personal injury results improved for both the fourth quarter and the full year.

For the fourth quarter, the personal injury rate improved 10% to 0.93. For the full year, the frequency improved 10% to a rate of 0.91.

Looking at train accidents on the right, the quarterly frequency increased slightly to 2.40, while the full-year measure improved 14% to 2.32. Looking ahead, we remain committed to our goal of zero injuries and accidents.

Now, let's turn to the next slide and review the operating performance. Here you can see CSX's key service measures improved significantly in the quarter and are now at high levels. On the left-hand side of the slide, on-time originations improved to 82% and on-time arrivals improved to 72%.

Looking to the right, overall train velocity increased to 21.7 miles per hour, and dwell improved modestly, both contributing to the increase in on-time performance. We are pleased to see this level of performance and expect service levels to remain high going forward.

As we move to the next few slides let me give you a more detailed view of performance for each of these networks, starting with coal. On the left hand of the slide you can see CSX's extensive network of coal receiving facilities along with full-year 2011 traffic flows.

The coal network operated well in the fourth quarter as reflected in the key measures highlighted on the top right-hand side of the slide. During the fourth quarter, coal velocity improved to 17.4 miles per hour. This is a record in fourth-quarter coal train velocity.

Also, train length increased to 105 cars per train. This increase in efficiency translates to adding nearly 200,000 tons of incremental coal with the existing level of resources.

As Clarence indicated, domestic coal shipments were down in the quarter. As a result, some of the resources devoted to this business were redeployed throughout the system to support service and growth in other markets, including our export coal market, where we handled over 10.4 million tons of coal in the quarter.

Moving to slide 20, let's take a look at the intermodal network. On the map to the left you can see CSX's Intermodal Terminal network, including the state-of-the-art Northwest Ohio Intermodal Terminal and the 2011 intermodal traffic flows.

The intermodal network also operated well in the fourth quarter, with velocity of the overall network improving slightly over 2010 while availability of the intermodal expedited service on CSX remained at extremely high levels. This operational improvement was partially driven by efficiencies gained with the Northwest Ohio terminal, as streamlined routing of intermodal traffic led to shorter transit times.

As Clarence mentioned, the onboarding of the new Maersk business began over the last three weeks and is going well with no service issues. On the map you can see the key lanes the Maersk traffic will utilize represented by the red arrows.

At the same time, the efficiencies of Northwest Ohio have translated into strong service offerings for all of our customers, including Maersk. During the first week of 2012, we operated our first run-through international train from Los Angeles to the Ohio Valley in conjunction with one of our Western interline partners. This train avoided delays in Chicago, running directly to the Northwest Ohio terminal and effectively connecting CSX's network of terminals in the Ohio Valley.

This strong service product allowed the train to reach its destination before it typically would have even cleared the Chicago Interchange, an improvement of one to two days in transit time. Service reliability like this is allowing us to grow by meeting the needs and expectations of our customers. As we look ahead into 2012, we have a strong terminal network and adequate capacity on our train network to absorb much of our intermodal volume growth.

Looking to slide 21, let's now look at the merchandise network. Here you can see CSX's merchandise network, which utilizes much of the system. CSX's largest terminals are indicated on the map along with the 2011 traffic flows.

This network benefited by operational improvements in velocity and terminal dwell. This quarter's velocity is the best we have seen since the fourth quarter of 2009 despite carrying 10% more in merchandise carloads.

These improvements allowed the merchandise network to handle higher volumes while at the same time maintaining a high level of reliability. Going forward, we expect service levels to remain high and to absorb much of 2012's volume growth within the current train network without adding resources.

Now, let's turn to the next slide and review resource levels. While active train and engine employees and locomotives have increased during the quarter, both remain below 2008 levels. As the chart on the left shows, CSX continued to hire additional train and engine employees in 2011 to both improve service and handle volume growth.

It also highlights the fact that despite these increases, active T&E headcount is still down 12% from 2008 levels, with volume down only 5%. This reflects our commitment of providing a high level of service while continuing to deliver sustained productivity.

Looking to the right side of the page, this chart highlights the sequential increase in locomotives by quarter. It also shows that despite these increases, active locomotives also remain below 2008 levels.

Going forward, it is important to remember that CSX continues to have the flexibility to both adjust the hiring pipeline and manage locomotives to meet changes as service, volume, or attrition dictates.

Now, let's look at productivity on the next slide. Slide 23 shows annual year-over-year operations productivity savings. Since 2004, CSX has generated nearly $1.2 billion in productivity savings, which has helped to offset a significant portion of CSX's non-fuels inflation and drive operating ratio improvement.

In 2011, productivity results fell short of historical levels as resources were ramped up to aid service reliability. Moving forward, CSX is now in a position to handle improving volumes without significant resource additions, creating sustained operating leverage.

As such, our productivity pipeline for 2012 is full, and CSX is well positioned to deliver $130 million in savings. Our goal is always to attain our productivity target while at the same time maintaining high levels of service, and we intend to do that in 2012.

Now, let's wrap up on the next slide. Looking forward, CSX will build on its strong safety performance with a focus on continuous improvement in both personal injury and train accident rates.

Network performance was high in the quarter. Key measures have improved and are now at high levels. This performance demonstrates that we are committed to providing a service product that meets the standard customers have come to expect from CSX.

Additionally, resources are in place and flexibility remains to handle changes in attrition, peak volume, and growth. Bottom line, CSX employees are committed to providing the high levels of service customers expect, and in doing so will deliver a strong foundation for their success and that of our shareholders. Now, let me turn the presentation over to Oscar to review the financials.

Thank you, Cindy. If I could, let me again remind everyone that our fourth-quarter results in 2010 included an extra week associated with the Company's fiscal reporting calendar. And while Clarence reviewed the quarterly volume and revenue results on that comparable basis, 13 weeks, I will present our consolidated financial results on more of a GAAP basis, which includes the impact of the extra week in 2010; and we won't have to worry about this for another six to seven years.

Okay, in the fourth quarter, CSX continued to achieve strong top-line growth and has followed a disciplined approach of investing in resources to support improved customer service. If you look at the top of this slide, revenue improved 5% to nearly $3 billion on strong core pricing and the impact of higher fuel recovery. Operating income was $841 million in the quarter, a modest decline from the record fourth quarter of 2010, which as I mentioned earlier includes the impact of an additional week.

If we look below the line, interest expense was down $9 million due to the impact of last year's extra week, and other income was up $7 million, the details of which are available in that Quarterly Financial Report.

Additionally, income taxes were $255 million in the quarter for a tax rate of 35.8%. This primarily reflects a favorable state income tax impact in the quarter. Going forward, we can continue to expect a normalized tax rate of 38%.

Finally, EPS was $0.43, an improvement of 13%.

Turning to the next slide, let's begin to discuss expenses in more detail. Labor and fringe expense was essentially flat versus last year, up just $3 million.

The impact of wage and healthcare inflation in this quarter was $28 million or about 4%. In 2012, we expect that labor inflation will moderate and average approximately $15 million per quarter.

Turning to the chart on the left, headcount this quarter was up 6% as we have been adding resources over the course of the year. Now, about half of this year-over-year change supports the improving levels of service; another quarter or so represents employees in training to help offset attrition and meet the peak demand levels that we will see in 2012; and the remaining quarter are field engineering forces for PTC and ongoing capital projects. This last group of employees, as you know, does not have a direct operating expense impact.

Now, looking at the first quarter, headcount should increase less than 1% sequentially. This will reflect the additions -- reflecting the additions we have made to the workforce. Training-related costs were up $9 million in the quarter. Partially offsetting these items was $22 million of lower incentive compensation and $12 million primarily associated with lower volume due to the extra week in 2010.

Turning to slide 28, MS&O expense increased 17% or $84 million versus last year. Looking at the table to the right, inflation was $11 million. Next, casualty reserves were $41 million higher primarily driven by last year's $40 million favorable reserve adjustment.

Volume-related expenses increased $13 million in the quarter reflecting costs related to our growing export coal and domestic intermodal business. As you round out the table, Other costs increased by $19 million this quarter.

On the next slide, let's discuss the impact of fuel. Total fuel cost increased 22% or $77 million versus last year. Looking at the chart on the left, CSX's average cost per gallon for locomotive fuel climbed to $3.05, an increase of 26%. This increase in fuel price accounted for $81 million of higher expense, as seen in the table on the right.

Next, slightly lower fuel efficiency drove $6 million of increased cost. Volume-related savings were $16 million versus last year; and rounding out the table, non-locomotive fuel increased by an additional $6 million.

Now on the next slide, we'll round out the fourth-quarter expense review. Beginning with depreciation, these costs were down 8% or $21 million. While we saw the ongoing impact of a net increase in our asset base, this was offset by an extra week of depreciation expense last year and a favorable adjustment related to asset retirement. Going forward, you can expect depreciation to range between $260 million and $270 million a quarter in 2012, increasing throughout the year.

Moving to rent, expenses decreased 3% or $3 million reflecting efficiency in the auto and merchandise networks. That concludes the detailed expense review for the fourth quarter.

Let's turn to full-year results on slide 31. On a full-year basis, revenue was up 10% to a record $11.7 billion, of course reflecting the impact of profitable volume growth, pricing above inflation, and higher fuel recoveries.

Total expense for the year was also up 10%, with the biggest single driver being the increase in fuel price. Excluding fuel, total costs were up 5% versus last year.

Full-year operating income was up 11% off a base that includes an extra week for a full-year operating ratio of 70.9%. As a reminder, while CSX has an effective fuel recovery program, higher fuel costs are recovered with an operating ratio of approximately 100%. When you adjust for this higher fuel price, CSX's full-year operating ratio in 2011 would have been 69.8%.

Finally, earnings per share increased 24% due to strong core results and the impact of the share repurchase program.

Now, as we move to the next slide, let's take a moment and just step back and reflect on the progress that we have made over the course of the year. As you look on that chart on the left, those solid blue bars represent total reported non-fuel expense by quarter in 2011. As you can see, costs have increased throughout the year; but those increases have been relatively modest on a sequential basis.

The red line represents gross ton miles, which is a good proxy for our total workload, which is now -- which we have indexed to the first quarter. As usual, our workload peaked in the second quarter.

At the same time our service measures began to decline, as you recall; and we made a conscious decision to begin to add the resources. Now as we began to add those resources and expenses increased to reflect that, we also saw a softening in the economy in the third quarter across the industry. This drove up our expense per gross ton mile, represented by the gold line on the chart.

Now as you look at this last fourth quarter we see this as an incredibly good sign of things to come for 2012. GTMs increased sequentially; non-fuel costs were only up $14 million from the third quarter; and as a result, expense per gross ton mile improved sequentially.

In addition, as Cindy spoke about earlier, service measures were at very high levels for the quarter. All of this sets the stage for 2012.

As we go forward into this year and as I mentioned earlier, we expect to be able to handle growth with few additional resources. To be clear and reflecting the fact that we have made most of the resource investments beginning in the second half of 2011, over the course of 2012 we fully expect incremental margins to return to the levels we saw in 2010 and the first half of 2011.

Now, let's turn our attention to capital investment on the next slide. The Company's confidence in near- and long-term profitable growth help support CSX's continued balanced approach to cash deployment, beginning with capital investment. In 2012, CSX plans to invest $2.25 billion in our business.

On the chart on the left you can see that the bulk of the capital spending in 2012 will be used to maintain the infrastructure and invest in equipment to help ensure a fluid network for our customers. We will also continue to focus on strategic investments, supporting long-term profitable growth. These investments, coupled with a continued focus on operating efficiencies and inflation-plus pricing will help us grow to a 65% operating ratio no later than 2015.

Finally, the investment needed to meet regulatory requirements will continue to be driven primarily by Positive Train Control.

Now, let's turn to the next slide and discuss our dividend and share buyback approach. On the left-hand side of the page, dividends per share increased by 36% in 2011. Going forward, CSX is committed to a dividend payout range of 30% to 35% of trailing 12 months' earnings; and this will be reviewed annually every May.

Moving to the chart on the right, CSX has now collectively repurchased $7.2 billion of shares since 2006, representing an approximately one-third of total shares outstanding. Last year, we repurchased $1.6 billion worth of shares; this included $1.3 billion of our current $2 billion share repurchase program. This remaining $700 million of repurchases under the current program will be completed by the end of 2012 and will be funded primarily through free cash flow.

A reminder. Once the current program is complete, we anticipate continued share repurchases of approximately $1 billion a year from 2013 through 2015, again funded primarily through free cash.

Now, let's turn to the next slide as I wrap up. Recapping the fourth quarter, we delivered strong financial results. And while costs were up marginally on a sequential basis, service has returned to high levels. On a full-year basis, EPS was up 24% on a combination of strong pricing, volume growth, and resource investments, translating to strong customer service by the year-end.

Now, with this as background, the stage is set for CSX to deliver strong margin improvement in 2012. With resources in place today for growth, over the course of the year we expect to deliver improving incremental margins. Our progress in 2011 gives us confidence that we will again deliver record results in 2012, which keeps us on track to grow to 65% operating ratio no later than 2015.

So, with that, let me turn that back to Michael for his remarks.

Well, thank you, Oscar. When we stand back and look at 2012, it helps to think about the opportunity for our Company against the three criteria. First, what does the business environment look like?

As Clarence noted, there are favorable conditions in nearly every major market we serve. CSX provides service to a diverse portfolio of businesses, and through them we see an economy that continues to be favorable for growth.

Second, are we able to grow in this environment? Yes. As stated earlier, we believe we will be able to grow faster than the economy overall.

In the merchandise business, which makes up more than 40% of our volume, we expect to achieve solid growth in line with the macro economy. We are also expecting strong growth in intermodal, which makes up more than 35% of our volumes. We have a significant head start coming into the year with the onboarding of Maersk, and there is every indication that highway conversions to rail will continue to drive further growth in intermodal.

Third, can CSX grow profitably in this environment? Here again, the answer is yes.

It is important to note that CSX was able to generate record earnings in 2011 at a time when we were making strategic resource investments that will position the Company for future and drive long-term growth. Now we have a network that is more capable than it was a year ago and a workforce that still has a relentless focus on safety, service, and productivity.

In 2012, it is our job to leverage that capability of our network and our organization to deliver outstanding results for our customers and for you, our shareholders. As we do this I am confident CSX will once again deliver record financial performance in 2012 and continue to progress toward a 65% operating ratio by no later than 2015.

Thank you for joining us this morning, and we look forward to taking your questions at this time.

(Operator Instructions) Scott Group, Wolfe Trahan.

Thanks, good morning, guys. So, wanted to start a little bit with utility coal and try to understand, with gas prices now well below $3, how much incremental switching do you expect at this point?

And when we think about cheap gas, regulations, a warm start to winter, what gives you the confidence that domestic coal volumes won't be down another, give or take, high single digits in '12 like they were last year?

Thank you, Scott. That's an excellent question. This is Clarence.

First, we saw a significant impact on our coal business already in 2011 because of natural gas prices. So most of the plants that are in our region that can convert either to the combined-cycle gas or in the latter part when gas prices got below $3, which would be the single-peakers coming online, we have seen that conversion.

Number two, most of the utilities that were impacted by the environmental regulation of CSAPR, which are our older plants and less efficient plants, the principal and preponderance of those plants had been off-line; and we don't expect that to have any significant impact going forward for us.

Third is that gas prices, in our view, are nearing the end of where the bottom of the gas market is. As I am sure you are aware because your group follows it pretty closely, you are seeing the rig counts start to do several things. One, they are changing; they're actually going down particularly in the Marcellus Shale.

Two, a lot of the drill rigging counts are moving from Eastern Pennsylvania over to Western Pennsylvania to go for the Utica oil reserves. So we see a stabilizing in the natural gas prices.

Now having said that, sequentially on a year-over-year basis we will be a little softer than the first quarter, but nowhere near in our utility business like it was in 2011.

Okay. That's good color. Then one for Oscar. Wanted to dig a little deeper on your guidance on the incremental margins getting back to 2010 and first-half 2011 levels.

Actually, a pretty big disparity I think between '10 and first-half of '11. When you think about the guidance to get to a 65% OR, it feels like we need to get incrementals back into the 50% range. Is that something that is achievable in 2012?

I think as I said, Scott, we will see those improve throughout the year as we cycle the resource investments in 2011. And on a full-year basis, it will return to the levels we saw back in there.

To get to the 65%, obviously the math says you have to get your incremental margins at least above 35% over the course of time. And the power of our pricing, the power of our service and productivity, are the things that drive that. So yes, we have good confidence over the course of the next couple years, along with an economic recovery, that we can get to those numbers.

Thank you, Scott.

Okay. Thanks for the time.

Ken Hoexter, Merrill Lynch.

Hey, good morning. I guess maybe if we could just start off with a little bit of insight on the management changes. Oscar, as you move over to the operations role can you dig in on some of the projects that you target for that $130 million of annual savings? I guess almost doubling from what you did this year.

Before that, let me just address it a little bit in general, this change. We have, I think, really good disciplined operation in our culture now, and that is in place. What we really need to do is to go to our -- to our grow to 65%, we have got to continue to get our productivity of $130 million to $140 million a year. We need to continue to get above rail inflation pricing, which I am confident we will do. We also need to grow the business.

The primary drive for this is we can take that disciplined culture; put more rigor, better customer service, better margin expansion through those efficiencies to really take it to the next level. And in my view, Oscar was the guy. He has been a proven leader here at CSX, a key business partner of me, nine-year veteran of the Company. I think Oscar is the guy to take us to that next level.

So that is primarily the reason for those changes; and as you know, Fredrik is going to come in behind him, Fredrik Eliasson. Again I think many of you know Fredrik from his years when he did Investor Relations for us. Again, another proven leader that brings great expertise and knowledge.

So I just wanted to talk about that in general some, before Oscar, you talk some about the productivity.

Sure. And Ken, I will eventually fade back here to your specific question on $130 million; but I can't tell you how exciting this opportunity is for me for a host of different reasons, and there's a lot of initiatives.

But before I start with that, I can't overemphasize -- and frankly, we have all read the overnight critiques on all, on the management changes and appreciate everyone's viewpoints. But you can't underemphasize the importance of how many people we have, 30,000, that over the course of the last few years have built a great disciplined culture around operating our business. Cindy Sanborn who is in the room with us is one of those.

This is not a business about one person running trains. This is about an entire network and a whole group of people. That structure is in place and working through that.

So my role, as I will talk about it a little bit, is a broader one initially, as I transition to the role.

On the $130 million, the great news about it is that there is no new initiative that I have to bring. That plan is in place. As Cindy mentioned, that pipeline is built-in.

We are in the process of building a pipeline for the next couple of years. That is how the process has always worked. That is how it will continue to work.

So I will clearly have more individual input into the outer years. But as far as this year, we have a great group of accountable individuals that are going to get at it and we will pivot from that. So, that is the long answer on the $130 million, Ken.

No, I appreciate the insight there, and congratulations and good luck on the new role. If I can just get a follow-up then on -- can you talk about what projects are on deck for this year in terms of the National Gateway?

Obviously the Northwest Ohio opened last year. Are there further projects that you see enhancing that ability I guess to grow intermodal and others?

Yes, Ken, this is Michael. As you are right, the Northwest Ohio terminal is up, running well. We're just working on expansion of our Columbus Intermodal Terminal. We just opened up a new one in Louisville at the end of last year.

On the clearance side of it, what we are calling Phase I of clearance, which is between Northwest Ohio over to our facility in Chambersburg, Pennsylvania, it is proceeding on plan. It is underway, and we expect by early 2013 that route will be cleared.

In addition, we are working very closely with the Maryland Department of Transportation to site a new Intermodal Terminal in Baltimore, and we have a very huge project in the District of Columbia where we are working to double-stack, clear, and double-track the Virginia Avenue Tunnel.

We are in the environmental evaluation, environmental assessment period at this time. We have been doing community outreach for about a year now. And we are hopeful that that EA will be done somewhere mid-year this year, mid to late third quarter and that we would be able to commence construction at that point to clear that from Norfolk over through to Chambersburg.

Thanks. Appreciate the insight.

Tom Wadewitz, JPMorgan.

Yes, good morning. Let's see. I know you gave us some comments on the management change. I just wonder if there is anything else you can add in terms of the catalyst for why you made the decision, the timing of it.

Oscar, it sounds like the operation is running well. But do you have any initial thoughts on what you may do to drive that next leg of improvement that Michael was talking about?

Well, Tom, I think you can appreciate our not making further comments as to some of the reasons why David has chosen -- or David has left the Company. The Company decided that he should leave; and we're just going to leave it at that. We're not going to comment further on that at this point.

I do think, though, that this is a very positive thing with Oscar and Fredrik moving into the new positions. I think it will really propel us into the next level.

Yes, Tom, and I will be a little esoteric on this, because again I've been thinking about this for quite some time, just as a general part of the overall executive team. As we look forward, and as you know very well and as all of the people on the call, the markets in our business are becoming slightly more volatile. That appears to be a trend that is going to continue for some time.

We will have questions on domestic and export coal and other markets over the course of time. And all our network structure, how we design and build, has to become more nimble and agile. Those are key things that I think I can help with, with regards to leveraging the tools we already have, the technology organization that is coming along with me, which is why we married the two.

And of course, I can't emphasize the personal leadership of all the experienced people we have in our operating team. So it is about nimble and agility aspects going forward as we fine-tune and take this network to the next level.

Okay, great. I appreciate those comments; and also congratulations to you, Oscar, on the new role; and also to Fredrik on his new role.

The second question for me is on export coal. There is some noise in the market that you may be discounting or perhaps at the end of the year were discounting some shipments of export thermal coal, perhaps to get the coal flowing into the market. I think thermal coal prices globally have been down.

So, I don't know if you can comment on that or perhaps comment more broadly about how we should think about modeling your pricing in your export business in 2012, whether there is some risk that your pricing in export coal is down; or whether you think that that is more likely to be flattish. Thank you.

Tom, this is Clarence. Most of our thermal coal that we are selling into the market right now was actually physically sold in some cases as late as -- or as early as 2010, but in most cases throughout the year in 2011. So they were all sold on forward curves at the time of the API2 Index.

Our metallurgical coals are sold both in our tariff, which has not changed, and is sold usually in most cases on an annualized basis beginning in April of each year. So one, nothing has materially changed on that metallurgical side; and two, we will know more as we start to approach that April time frame.

There was some things in the coal rags that talked about in December the pricing for thermal coal into the export market, and there were some cases there where we were in fact pricing on what the API2 Index and its forward curve was, based on the December numbers. But it was no price cutting at all that was going in there on any kind of existing business that we had.

Okay. So you think flattish pricing and take another look in April, I guess, to see what it is (multiple speakers). Okay. Thank you for the time.

Bill Greene, Morgan Stanley.

Hi, good morning. Clarence, just a point of clarification on the export coal. You sort of suggested the strength will continue. I assume that means flattish, maybe slightly up volumes on export coal. But just some clarity there.

And if that is the correct interpretation, what are the data points you look for that give you confidence export coal is not going to fall?

Well, at this point, Bill, as we said earlier, (technical difficulty) is really too early for us to accurately forecast the full year ahead. But we do expect the export coal to be at strong levels and similar to what they were in 2011.

We predicate that on at least two of the markets that we are serving, both Asia -- which China is still growing at a 6% to 7% clip -- India's need, as well as South American need in our particular coal franchise.

Then as I pointed out for the foreseeable future the thermal contracts that we have are in place or under contract; the shippers are required to take them. We have seen no indications that anyone plans not to take those shipments.

So for at least the foreseeable future we feel very positive.

All right. That's helpful. Thanks.

Then, Oscar or Michael, just as we look at the buybacks you didn't do any in the fourth quarter. I realize you probably had some debt that you were going to pay down.

But as you look to '12, given the comments on incremental margins and the growth that you are expecting, it would seem that we should resume here and arguably on an aggressive rate. Is that fair?

Bill, I think what we have said is that we have a remaining authority of $700 million, which we will complete this year.

Okay. Thanks for the time.

Chris Ceraso, Credit Suisse.

Thank you. Good morning. A couple of areas. On the Maersk business, can you tell us how much of that is going on existing trains versus how much is going on new trains?

Yes, Chris. This is Clarence Gooden. The principal and preponderance of that Maersk business is going on existing trains.

There are exceptions to that. So for example, we have a lot of volume that is coming out of Commonwealth's new -- Maersk's new facility called Commonwealth over in Virginia; and that required some new train starts. Then in the Chicago to New York lane, where we had some of our train capacity was filling up, we had to add incremental train starts there. But a lot of it was absorbed within the existing network, particularly in the Southeast.

Okay. Then as a follow-up, you were pretty thorough on your comments about domestic coal, but one follow-up on that. Some of the folks that we have spoken to in the industry have mentioned the $2 level on gas as a price at which we might see it trigger some additional switching.

Can you comment on that? Do you agree with that?

Well, I don't know is the truth. I know that below $2.50 it starts to impact the Powder River Basin coal. Having said that, when coal starts to -- when natural gas starts approaching those $2 levels, as you are aware there was a lot of speculation yesterday on that.

One, the drill counts start coming down because it is very -- it is not as profitable to drill for the natural gas at that low a rate. Number two, you saw some of the energy companies announce they will focus more on the shale that can produce the liquids, the oil.

Number three, then, you have to start taking into consideration what are the mineral leases? When do they expire?

So, Chris, it is a very complex formula. But let me just say it, conclude it like this. I don't like natural gas this cheap.

Fair enough. Okay. Thanks.

Justin Yagerman, Deutsche Bank.

Hey, good morning, guys. Clarence, your comments on the response to Bill Greene on export coal, it sounded like the thermal side of that export is take-or-pay. I was just curious that, when we look at this year's export coal mix, how much ended up as thermal coal? How long do those contracts last for?

So I guess what I'm trying to get at is what is -- putting met coal aside, which sounds a bit more volatile, what is the baseline expectation for coal in 2012 on the export side?

Our thermal mix was about 38% last year. It is projected to be in that area to slightly higher this year. That is point number one.

Point number two, those thermal contracts were on a yearly basis in general. And the prognostication for those thermal contracts we really won't know until later in the year, because as you are aware, there has been -- we have moderating temperatures in the United States' Eastern part. We have moderating temperatures in Northern Europe. We got drought conditions in South America.

So a lot of this stuff is going to be influenced by the weather. I guess your second part of it -- Justin, help me -- was on metallurgical?

No, no, that really -- it was more the duration of when does this -- these take-or-pay contracts last through?

A lot of them will last through most of 2012.

Okay, all right. Great. Then I guess the next question is on the intermodal side; was curious how long the trains that you are currently running are, and what you see as capacity on those trains. Then you gave us some quantification on that on the coal side but not on the intermodal side.

Then when I am looking at the Maersk business coming on and you re-signed a contract with Schneider on the domestic side, should we expect any change in terms of the profitability of the overall business with these two new contracts being an influence this year?

Justin, this is Cindy. Let me address the question about capacity on the intermodal network. We see about 15% to 20% capacity capability on the existing trains that we are operating. So we see a great opportunity to take on the growth that we are anticipating and do so with the existing network.

And I will let Clarence answer the Schneider question.

Justin, we feel very positive on the profitability of all of the intermodal business that we are handling right now. In fact, it is helping us to justify the capital investments that we are putting into it. So in my view it is a very positive story.

Okay, great. If I could ask one more, just on the MS&O side, Oscar, as we look out at 2012, obviously this past quarter you had a bit of a bogey if you didn't pick up on the $40 million from last year. As we look out sequentially for the first few quarters of this year, are there any of those types of items that we should be aware of as we are modeling out?

Chris, we don't typically talk about a particular line item -- Justin. Particularly talk about that.

But let me rephrase your question just a little bit. The MS&O line was the line item in this quarter that, if I look at (technical difficulty) sequentially operations ran well, volume ticked up, the operating expenses were well controlled. We had a host of small items in that MS&O line that, frankly I own -- or not controlling as well as I should. And that was the blip this year.

As we go forward, we have got that under control. And again that MS&O line as you know always moves around a little bit, but the sort of unique items that have hit us at year-end are not going to be repeated.

Great. All right. Thank you guys for your time.

Gary Chase, Barclays Capital.

Good morning, guys. Wondered if Michael or maybe Oscar could take a stab at this one. I wondered if you could give us a qualitative sense -- or how would you describe qualitatively what the difference in the network is today versus, say, where you were operating through the majority of 2010? I know the service levels have gotten back to where you like; but I also think the cost outcomes aren't quite what you would like.

So I am wondering what is it qualitatively that describes it? And how do we get out of this? What gives you the confidence that you can get back to the right kinds of answers there?

Well, if you go back a little bit, as you know in 2009 we very aggressively took out cost. Actually had our second-best operating year ever -- operating income year, even with volumes down about 15%.

As we moved into '10, Gary, we were very conscious to not bring those resources back more quickly than we needed to. So we through a good portion of '10 did not bring back many resources. And quite frankly, we may have been actually a little too stingy at that, because then when we got into the beginning of '11, especially the first quarter, volumes were up 7%, and we started off the year pretty well. But then we got hit with a sequence of storms, and I think that really showed that we probably didn't bring the resources back as quickly as we needed to.

So then as we went into the second quarter and especially the third quarter, what we were doing basically is restoring those resource levels to where they need to do to provide the service our customers needed. So that is why I think you saw our margins in both the third and fourth quarter somewhat less attractive. Because not only were we bringing the resources back, but the volumes really didn't behave as we expected them to in the fourth quarter.

October and November were actually fairly weak. It rebounded in December, which was encouraging to us going into this year. So I think it is a matter of we were a little too tight in bringing back these resources quickly, and we had to correct that during the course of this year.

That being said, I think it puts us in a very good position going into '12 because we have those resources in place. We have capacities on both our merchandise and intermodal trains to where we can get back to those incremental margins that you like to see -- and we like to see, quite frankly -- and that are necessary to get to our goal of 65%.

I would just add one very simple thing. In all that process over that course of time with those (technical difficulty) beyond the qualitative side, I think our teams have quantitatively and analytically understood what the driver is behind those issues.

So when Michael talks about we were a little too stingy on resources, we know the pivot points as to where we reach that threshold. So we now have a lot of science both on the downside, '09, and on the recovery. And I think that is exciting as we go through that.

Getting back to the qualitative side, our increasingly younger management team that is out there has got to experience both ups and downs, and that is critical in running an operation, because they have got to see both those sides. And that is going to bode well for us in the future.

To get to these incrementals, is volume required? Or is it a situation where you could decide to take down the absolute level of resources to get to that cost outcome if the volumes disappoint a little bit?

Well, Gary, if the volumes aren't there, obviously we will adapt to that as we did in '10. I mean '10 -- '09? '09; sorry, they all meld together after a while.

So some of it depends what business it is. So stuff that is unit train in nature -- grain, coal, aggregates -- it is very easy to pull those resources out very quickly and we would if the markets weren't there.

It is a little trickier in the scheduled networks of intermodal and merchandise. Small volume decreases you really can't do much; bigger ones you can.

All that being said, though, as Clarence stated and as we believe, we actually see the economy continuing to grow. We see ourselves growing faster than that economy. So we really think we are well positioned to handle that growth.

But again should it not be there, we will take the actions to adjust the resource levels.

I think that is important. Our levers are price, volume, and productivity. So as we have shown before that we can do, we will pull on all of those. But volume, of course, is an important portion of that.

Okay. Thanks, everybody.

Chris Wetherbee, Citi.

Great. Good morning, guys. Maybe sticking on the expense side, Oscar, you highlighted that the first quarter headcount likely to be up less than 1% sequentially in the first quarter. Assuming the volume plan plays out as you would expect it for the full year, is that the absolute level of headcount that probably feels good for the volumes that you expect to move? Or how should we think about that as we go forward through the year?

Again, as you can appreciate, with the economy still fluid and a lot of the questions (technical difficulty) we may need to adjust up or down. But right now our projection is that we would be up really only marginally above our year-end 2011 levels, and certainly less than on a one-to-one basis with regards to volume.

Okay. I think I missed your cost inflation on that. If you could just remind me what the cost inflation was on the headcount basis. I think you highlighted it in your prepared remarks.

I think we said $15 million per quarter.

Okay. That's helpful. Then just a follow-up on the export coal side, it sounds like about 60% of the export coal has the opportunity for repricing normally on the April 1 coal year. Clarence, just trying to get a sense of, in a flattish type of environment -- or maybe some growth, maybe some declines -- how do you feel about the pricing opportunity for export coal as you move forward into the second quarter?

Well, obviously, if the demand slackens some, the pricing opportunities that we have slacken some. But I think it is important to note that there is not a 100% direct correlation between the delivered price of the coal and what our transportation price is in the coal.

So, if the year pans out the way that we think it is going to pan out, we expect to have a year similar to what we had this past year.

Okay. So pricing up in that piece of the business. That's helpful. Thanks very much. I appreciate the time.

Jason Seidl, Dahlman Rose.

Good morning, guys. Two quick questions sticking on a common theme here on both coal and intermodal. How much backlog do you guys have for steam export that was priced off of API2 in late 2010 and 2011? What percent should we be thinking about?

Help me on the question. When you say backlog, you mean coal that has been sold but not shipped?

Correct.

I don't know off the top of my -- I don't know.

Okay, so --

(multiple speakers) Clarence usually knows everything.

Looks like I stumped him. Well, if you get the number, maybe you get back to me off-line.

On the next question, just help me through incremental margins on the intermodal product. As I have always understood it, intermodal business that goes on existing trains tends to actually have pretty high incremental margins, which is contrary to people's historical belief on the intermodal product.

Is that still the case as we think about some of this new Maersk business that is going on existing CSX trains?

It's Oscar, let me take that one if I could. You're absolutely right, and as Cindy mentioned, with the 15% to 20% capacity level, where we can we are filling up and lengthening trains.

Of course, because it is a new customer, want to insurance service, we do have multiple train starts being supported. But yes, that incremental margins on the intermodal business is probably equal to some of the margins on some of our core business like coal.

Now, Oscar, what percent did you say goes on existing trains? Did you say it was over 50%? I'm not sure if you gave a number or not.

Sorry, we have 15% to 20% capacity on our existing network. Where we can, that Maersk business is going into that capacity.

In addition, we are having train starts in certain origin/destination pairs, as you can imagine, where we didn't before. The percentage of between the two, I don't have an exact knowledge; but we work that into our network.

Guys, thanks for the time as always.

Do you have a read on that? How much is incremental on trains and how much is new starts?

Most of it, all except the New York/Chicago and the Portsmouth/Chicago went on incremental trains.

But more than half's going on incremental trains.

Oh, more than half? That is fantastic color. Thanks, guys. I appreciate it.

David Vernon, Bernstein.

Good morning. Can you talk a little bit about the average duration of utility coal contracts? How many maybe actually be coming up for renewal in 2012 and whether or not take-or-play -- or how the take-or-pay provisions of the utility contracts may have affected volumes last year?

David, there's a couple of answers to that. Yes, we do have take-or-pay provisions that impacted our utility contracts last year. And there were in fact liquidated damages paid. We have no major legacy contracts in our coal coming up for renewal in 2012.

But what about like an average duration? I would assume that some of the non-legacy staff would also be coming up in this coming year.

Well, I would prefer not to give you the average duration of our contracts with our customers, because of the market conditions on that.

Okay.

It varies a lot.

And it varies, too; right.

Okay. Then maybe just as a quick follow-up, to the extent the expectations of the volume for the Maersk business may have been priced on a backward-looking basis, are you still comfortable with the market is expecting on the volume growth side for the intermodal traffic you're going to get from Maersk, given the weakness in the international markets?

Yes, we are.

All right. Thanks.

John Larkin, Stifel Nicolaus.

Good morning, gentlemen. Could you help me understand why when you use the 13 to 13-week comparison volume is up only 1%, whereas if you use the AAR stats volume is up 4% year-over-year? That was a little confusing.

Hey, John, this is David. When you think about the AAR reported basis versus the CSX reported basis, the AAR data was actually based on a consistent 13-week period for both 2011 and 2010, which included the Christmas week.

When you look at our reported 1% on a comparable basis, what happens there is we in essence removed the 53rd week, which was the Christmas-New Year's week last year, which is a very weak year. That is the discrepancy between us being up 1% on our comparable basis versus the AAR being up close to 4% where the Christmas week is included in both periods.

You can give him the detail of that conversation or calculation off-line, if he wishes.

Yes, I can certainly do that. Thank you, Michael.

All right. Thanks, Mike and David. Then one other maybe for Oscar. You had provided some insight as to what the operating ratio for the full year would have been without increased fuel cost and the surcharge effect. Do you have a similar estimate for the fourth quarter?

Yes, it would have been about 30 basis points. So maybe we would have been 71.2%.

Got it. Thanks very much.

Peter Nesvold, Jefferies.

Good morning. Most of my questions have been answered. Maybe just a little bit of color on yields in phosphates and fertilizers which were -- took a step down; and then metals, which took a big step up. Just want to make sure I am modeling this right going forward.

Peter, the yield in the phosphate and fertilizer is directly related to our mix, so you get involved in the short-haul phosphate that is going to the export piers at Rockport for export.

In the case of our metals franchise, as you saw our volumes went up in our metals business pretty strongly. So we simply took those covered coal cars and all that are in short supply and priced at market, took the rates up.

So it sounds like the metals one might be arguably sustainable since auto production has been improving. The phosphate and ferts one might be a little bit more temporary?

That's right.

Okay, great. Thank you.

Matt Troy, Susquehanna Financial.

Good morning. Two questions. I guess one, obviously, Clarence I always appreciate your very astute read on the economy.

Just curious; we have seen some weakness in chemicals recently across the industry. Yours held up relatively well. Just wanted to get a sense of, on the chemical front were you hearing about either destocking or inventory levels being okay, or an intent to restock?

And then more broadly, what is your sense of optimism and intention with your customers in terms of restocking across other industries in 2012?

You know, Matt, I was looking at some numbers yesterday, and for the last 12 months the inventory numbers that have come out from the Institute of Supply Management have been at one constant number. That inventory number has been 1.27; and it has been pretty much like that for 12 months.

So somebody has reached a new norm and has decided I'm not going to keep a lot of inventory around in my warehouses, and I am going to order it and keep the logistics -- keep it in the logistics pipeline when I need it.

Chemicals side of our business, what we are seeing happening for chemical companies is, because of the low natural gas prices and the fact that the US plastics markets is predicated on chemicals, natural gas -- as opposed to the rest of the world, which as you know is on petroleum products -- the US chemical industry has been very competitive on a worldwide basis.

That doesn't necessarily help CSX per se; but it does help our chemical customers. They use -- a lot of that is exported out of Texas ports and out of the Gulf ports directly into the world, so we don't see as much as probably we should see about it.

The good news is long-term what is good for our customers is good for us.

Right. So is it fair to characterize the broader destocking or inventory policy as kind of a wait and see?

I think so.

Okay. Thank you. My second question would simply be just a straightforward one. In terms of the percentage of contracts that are booked for 2012, what percentage of your revenues is now on paper with the ink dry?

70%.

All right. Thank you, sir.

Walter Spracklin, RBC Capital Markets.

Good morning. Thanks very much for taking my call. Just a couple questions.

Maybe, Clarence, you could give us a little bit of color. You noted that 71% of your revenue or your volumes are in the favorable camp. Can you pick out one or two here that really give you the most guess -- you get excited about the most? If we were to characterize some as a little bit more heady growth than others, which ones would you pick out there?

I think our automotive industry is in a very positive growth situation. The industry itself is projected to be at 13.8 million vehicles and light vehicle production. There are some analysts -- more than not -- that think that number could be a little low and could go up.

For us in particular, a huge growth opportunity for us this year we are going to be very proud of is our intermodal franchise. We have business now under contract with seven of the 10 largest steamship lines in the world, with four of the largest motor carrier operations in North America.

Our IMC community, intermodal marketing companies that we do business with, is very strong. The connections that we have with the Western carriers are all positive in our intermodal business. So there's two that we feel very strongly about.

And then it is a little too soon right now, Walter, to tell, but as we start looking to see what the crops are going to look like this spring and this summer that, too, could be a very positive thing for us.

Okay. That's great color. And sticking with you, Clarence, the service levels were a challenge last year. You have done a great job already; we see it in the numbers. So congrats to your operations team on the success there.

I am just wondering, Clarence, how does that feed into your customer perception of that service? In other words, did they let you hear it last year when it came to those service levels? And are you seeing them -- seeing that reception change with regards to the conversation you are having with your customers on that service standpoint?

I will give you two answers to that. The first question was -- did our customers let us know when our service got bad? Every day.

Number two is, have they seen a difference in it? And they started seeing that difference in it actually last fall. There is a time lag in our business with -- when things start getting better before people see it. But we were really moving out.

We just had a customer advisory council meeting a couple of weeks ago here in Jacksonville where we bring in some of our customers, both large, small, and medium, and talk about issues. And they had nothing but glowing remarks to make about Cindy and her team.

We have several internal initiatives that we kicked off to improve our service. All of them getting positive response from within our Company from the ground level up to the ballast level, the men and women that actually make this place work.

So to Oscar's point earlier today, our operations team is extremely strong.

That's great, and congratulations on a turnaround. I think that is pretty encouraging. That is both my questions. Thanks very much.

Ben Hartford with Baird.

Good morning. I think this question is for Cindy. To what extent -- if volumes were to come back specifically on the domestic coal side quicker than expected, or if we were to experience positive growth in that commodity, some of the resources that you have redeployed into other networks, to what extent can you return those resources back to service the domestic coal business?

And maybe alternatively, how much do you have in the way of furloughed equipment and access to other equipment if volumes were to rebound more quickly than expected?

Thanks, Ben. We have the ability to redeploy people, locomotives, and of course crews to handle the unit train network. As you know domestic coal is a unit train business, and if we needed to be able to do that we have the capacity to do that fairly well.

At the present time, since domestic coal is moving throughout our network as opposed to specific lanes like maybe export coal, we have not needed to make any adjustments to headcount at this point or manpower at this point. But if we need to we will, and we think we are able to handle what is coming our way and any more fairly readily well.

And, Cindy, don't we have about 70 locomotives in active storage you could pull out very quickly? We would love to have that problem, Ben, and we would be able to handle it.

We would --

Sure.

(multiple speakers) We have 70 locomotives in storage still.

And what is the count on furloughed conductors, if any?

None at this time.

None? Okay. Great. Thank you.

Jeff Kauffman, Sterne, Agee.

Hey, guys, thanks. I know it has been a long call. Thanks for taking my call. Oscar, Fred, congratulations.

Two quick questions. The first may be more for Cindy. I see your on-time originations up to 82%, which is fantastic, but your on-time arrivals still in that 72% range. What is accounting for that difference, and what does it take to get back to the 78%, 79% arrival range?

Well, as I mentioned in our presentation, all of our service measurements look extremely strong, both the ones we are displaying here and our internal ones as well. So we feel really good about the momentum that we have, that we have been able to drive from the third and into the fourth quarter.

As far as the arrivals specifically, that is a measurement we will continue to work on. I think it is still in front of us, as the rest of our measurements are, to continue our great progress in maintaining our service at very high levels.

That is about a 10-point gap between originations and arrivals. I'd tell you historically, Jeff, the best we have probably done is something in a 6% to 7% gap. I think as we move through this year, we will probably move more toward that kind of spread.

Okay. Then one quick follow-up on the coal pricing. I know a lot of guys hit it. If the API price is flat versus where it was, say, 12 months ago right now, and the coal mine prices are down, are you basically implying that there is not as much pressure on the rail rate portion of that? Since the mines are bearing more the brunt of the API difference.

That's what we are implying, is that there is less volatility in the transportation rates. There is some now; I don't want to mislead you. There is some. But not to the extent that it is on the commodity price itself.

We didn't get the run-up they did during the (technical difficulty)

That's right.

Right, right. You didn't get the heavy run-up either. So I just wanted to imply that you are saying the rail rates are holding reasonably steady.

Yes.

Okay, all right. Thanks, guys. Congratulations.

Anthony Gallo, Wells Fargo.

Good morning. Thank you. I want to refer to Oscar's slide 32. If I look at the cost run rate in the fourth quarter versus the first three quarters, I come up with about $91 million of difference. Is that the right way to think about the cost associated with being under-resourced?

I think I would use more -- it is tough to figure out all the points. I would think a better barometer is probably on the operating productivity side chart that Cindy had, which is more like in the $50 million to $60 million.

Again there is a lot of math that goes between the two, but I would go more with the $60 million than what is on this chart. This includes a whole host of other items; some are unique, some are not. I think the productivity measure is the more of the one that emphasizes how we are running as an operating Company.

Okay, so when we think about your comment about first-half 2011 incremental margins, we can use that as sort of a placeholder to maybe think about a more normalized number?

Yes, I think you could.

Okay, then the last question. The $130 million targeted of productivity improvements, how much of that is volume leverage and how much of that is actually cost coming out of the system?

I will take that one. This is Cindy. The $130 million productivity amount is expected with the volume increases that we expect to see in 2012. So we feel very good about the areas that we have targeted. We have good, solid plans in place to execute.

But it all comes from basically volume growth?

No.

No, no, the opposite. The opposite. The opposite. We should --

Obviously we get some efficiencies from running more volume through there; and then we have actions that reduce the cost regardless of the volume.

Correct.

Do you have a feel of the percentage between those two buckets?

No, not off the top of my head, Mike.

Anthony, I'm sorry. We don't have a good answer on that.

That's okay. Fair enough. Thank you, gentlemen. Thank you.

Neal Deaton, BB&T Capital Markets.

Hey, good morning. All my questions have been answered. Thanks.

Okay. Thank you for your interest.

But I will reflect on the last question on productivity. To be clear, I know that was a little maybe unclear. Our productivity measure are cost driven. It is the concept, the math behind it is doing more things with similar resources, or a similar volume with less resources. That is how the math and algorithms are built in.

So it is a cost-driven function. There are efficiencies and all that, but the $130 million is a cost take (multiple speakers).

(multiple speakers) dollars coming (multiple speakers)

(technical difficulty) dollars coming out across a host of departments.

Keith Schoonmaker, Morningstar.

Thanks. Regulation compliance is pulling about 12% of budgeted CapEx for this year, somewhere north of, I guess, $250 million. How will this increase in the next couple years as we get closer to the PTC implementation deadline?

And second if no PTC was required would you reduce CapEx or deploy this capital elsewhere? And I guess if the latter, what is being displaced?

Well, Keith, let me address that. So, one, we're going to spend well over $1 billion deploying this over the next few years. I think our estimates this year -- about $250 million we're going to be spending this year on that. Probably similar amounts over the next several years.

There is some possibility -- I think there is no possibility this will not be there. It's the law. I don't think there is momentum to repeal that law.

So we will be spending those monies. There is some possibility that the time to implement will be extended beyond 2015.

The FRA has to give a report to the Congress in I think it is March of this year -- March 1, actually. To say, where is the industry on the implementation of this? As a matter of fact, we are meeting with the FRA Administrator Szabo tomorrow as an industry.

Our view at CSX is that given the complications with developing the new technology and the delay in receipt of some of those new technologies, that it is unlikely that 2015 will be achievable and that there will be a need to extend that deadline just because it cannot be implemented in that time frame. We would hope the FRA would have a similar view and recommend to Congress that that timeline be extended, which obviously would make it easier to do a more orderly implementation of it.

On the question of what is being, in effect, pushed out by the PTC, obviously I think we would be doing additional purchase of certain car types; probably buy a few more locomotives; maybe a little bit more into our track structure. So we have had to trim each of those back some to accommodate this and stay within the 18% of our revenues which we are going to spend over the next few years through 2015.

Great. Thank you.

Donald Broughton, Avondale Partners.

Good morning, Michael. This may be the most lay-up question I have ever given you.

Good. Please.

If what I just heard you say holds -- the opposite holds true and instead they say no, you must get your PTC in place by 2015, we would see -- I am guessing -- a significant ramp over the current PTC spend you're making right now.

No, actually, we are doing some of the preparatory work that we have to do to our locomotives and to our signal systems. We are doing what we can absent the technology being ready yet.

So for instance, we know how big the component is going to be on the locomotive, so we are making the space to plug it in when it comes. So we are spending the money to be ready.

If they said it must be by 2015, we are working to have it done by 2015. However, there may be certain components that are being developed that will not be available in time to be deployed. And if that is the case, they can insist all they want we make 2015; it is not going to be practically possible because the devices won't be available.

Okay. So at this juncture the holdback would not be money or the workers to put it in place; it would be the actual technology.

We hired roughly 500 people to help with signal installation last year. That work is going on this year.

We are certainly going to spend the money. It is the law. We are going to obey the law.

The issue is the technology being developed is not coming as quickly as one would hope.

Thanks. That's helpful insight.

Thank you. That concludes the question-and-answer session. I will turn the call back over to the speakers.

Well, thank you all for your interest and attention, and we certainly appreciate all the good questions this morning. We'll see you next quarter.

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