CSX Corp (CSX) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CSX Corporation fourth-quarter 2012 earnings call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode.

For opening remarks and introductions, 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 2012 earnings presentation. The presentation material that we will review this morning along with our quarterly financial report and our safety and service measurements are available on our website at CSX.com, under the investor section. In addition following the presentation, a webcast and podcast replay will be available on 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; Oscar Munoz, Chief Operating Officer; and Fredrik Eliasson, Chief Financial Officer.

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

In addition because of the number of analysts covering our Company as they approach 30 at this point, we would encourage everyone during the question-and-answer session to limit their questions to one primary and one follow-up question.

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

Thank you, David. Good morning, everyone. Last evening, CSX reported financial results that further illustrate the underlying strength of our business, the ability of our team to manage and execute through very challenging conditions, and a steadfast commitment to preparing for the long-term growth we see.

Fourth-quarter earnings per share were $0.43 which included a $0.03 benefit from the sale of a nonoperating property. From a revenue perspective, significant declines in coal more than offset the increases we drove in Merchandise and Intermodal, gains that were solid in light of the overall uncertainty in the economy.

Operationally the CSX team delivered a powerful combination of safety, service, and productivity gains resulting in an operating income of $804 million and an operating ratio of 72.1% despite the lower revenues.

Turning to slide 5 for the full year, you can see that CSX continued to produce gains in its financial results. During 2012, our employees remained relentlessly focused in tough external conditions, making even more fundamental improvement in operations while responding quickly to changing market conditions. At the same time, they delivered steady gains in operating income at $3.46 billion, the operating ratio at 70.6%, and earnings per share at $1.79.

The team's many achievements in 2012 are a reflection of the initiatives we continue to drive but are even more so the outcome of a culture that remains steadfastly committed to its customers and to excellence. This focus allows us to perform well in tough conditions while positioning our business to create substantial shareholder value when the economy picks up more momentum and the Renaissance of the industry resumes.

With that, I would like to turn the presentation over to Clarence to discuss our topline results in more detail. Clarence?

Thank you, Michael, and good morning, everyone. Turning to slide 7, key economic indicators moderated in the fourth quarter. Looking at the left side of the chart, projected GDP and IDP rates both reflected a softer economic environment in the quarter. On the right, the Purchasing Managers Index registered a reading of 50.7 in December, reflecting a slight expansion of US manufacturing.

After indicating solid expansion in the earlier part of the year, the Index clearly fell back, providing further evidence of slowing activity. At the same time, the Customer's Inventories Index registered a rating of 47, indicating respondents believe their inventories are still slightly below normal levels.

As confidence in the US economy improves, the rebuilding of inventories will support future growth.

Overall, transportation demand in the markets we serve was mixed in the fourth quarter consistent with the broader economic environment.

Now let's take a look at the overall revenue. Total fourth-quarter revenue of nearly $2.9 billion was 2% lower compared to the prior year. Starting at the left of the chart, volume-related revenue had an unfavorable impact of $84 million in the quarter as volume growth in Automotive and Intermodal was more than offset by the decline in domestic and export coal.

Moving to the right, when combined, the impact of rate and mix net to zero in the quarter with the benefit of core pricing gains offset by the unfavorable mix associated with Intermodal growth and lower coal volume. Finally, fuel recovery increased $17 million in the quarter.

Now let's turn to pricing. Core pricing on a same-store sales basis remained solid across nearly all the markets. 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 represented approximately 80% of CSX's traffic base for the quarter.

Looking at the chart, overall pricing shown as the blue bars increased 1.6% in the fourth quarter. Lower overall pricing is attributed to the more dynamic export coal market where pricing is impacted by changing global conditions.

The gold bars, which exclude export coal, show pricing gains of 4% in the quarter exceeding rail inflation and consistent with the performance of the second and third quarters. Looking forward, delivering a strong product that creates relative value for our customers provides a solid foundation for pricing above rail inflation over the long term.

Given our confidence in the value of our product offering and the need for ongoing investment in the business, we will not sacrifice price for short-term volume gains.

Let's turn to the next slide and take a closer look at the volume. Total volume declined 3% in the quarter versus the same period last year and performance across the markets we serve was mixed. Export coal volume fell 10% after growing in previous quarters. Both Intermodal and the Industrial sector continued to grow in the quarter but at lower rates than we saw in the first half.

The Agricultural and Construction sectors remain challenged, with these sectors declining 4% each. Finally Domestic Coal declined 21% although the rate of decline moderated somewhat from what we saw earlier in the year.

Now let's take a closer look at some of the individual markets in more detail and let's start with coal. Coal revenue declined 18% to $747 million. Domestic volume declined 21% as natural gas prices remained low, leading to the continued displacement of coal and high stockpiles at many utilities. In addition, electoral generation declined in the Eastern United States.

Export coal volume declined 10% as demand for metallurgical coal softened particularly in the Asian markets. Total revenue per unit was flat as core pricing gains in domestic markets offset lower export rates. Looking ahead at this point, export coal volume is expected to decline in the first quarter and our best estimate of full-year volume is about 40 million tons.

Furthermore, we anticipate our rates to be pressured as we work with producers to keep US coal competitive globally in an environment where underlying commodity prices for thermal and metallurgical coal are lower.

At the same time, domestic coal headwinds will persist but we expect them to continue to moderate throughout 2013. As a result, we anticipate domestic volume will decline in the 5% to 10% range for the full year.

Next let's look at Merchandise. Overall, Merchandise revenue increased 4% to $1.66 billion. Automotive was the key driver in the Industrial sector, growing 10% as North American light vehicle production increased 8% in the quarter. In addition, the Chemicals market grew 6% on strength in energy-related petroleum products.

In the Agricultural sector, ethanol shipments declined as a result of lower production, increased competition from imports, and lower gasoline demand. In addition, feed grain shipments to the Southeast were lower as a result of the severe drought in the Midwest.

Regarding the Construction sector, building products rebounded on the strength of a slowly improving housing environment. However, this was more than offset by lower aggregate shipments associated with lower infrastructure spending and lower salt shipments due to the high inventories from a mild 2012 winter.

Looking to the first quarter of 2013, in the Industrial sector, we continued to see growth opportunities in Chemicals particularly in commodities related to the oil and gas industry. The automotive market will remain strong although we are now cycling tougher comparables. We expect the Agricultural sector to remain soft with lower grain shipments and continued weakness in ethanol more than offsetting increased fertilizer demand.

Finally, we anticipate a slow, steady recovery in the Construction sector that will drive growth in building products and aggregates.

Moving to the next page, let's review Intermodal. Intermodal revenue increased 6% to $398 million. Domestic volume was up 2%, driven by highway to rail conversions which continued despite a softening economic environment and the impact of Hurricane Sandy.

International volume grew 6% on growth related to the Maersk business. Total Intermodal revenue per unit increased 2% due to core pricing gains and higher fuel recovery. Looking forward, our strategic network investments such as the double stack clearing of our route into New England, the terminal expansions in Worcester and Columbus, Ohio will help increase our capacity and network fluidity while improving service for our customers.

At the same time as we maintain our focus on profitable growth, we are excited about our highway to rail or H2R initiative. We are working collaboratively with our channel partners to market the compelling value of intermodal rail transportation to targeted customers in this new initiative, which will be a key driver for CSX and tapping an estimated 9 million truckload opportunity.

Let's turn to the outlook for the first quarter. Looking forward, we recognize the economic environment has moderated and uncertainty remains. While we expect stable to favorable conditions for 71% of our markets, we expect an unfavorable environment for the remaining markets and an overall neutral outlook for the first quarter. Intermodal growth will lead the way as our strategic network investments and strong service delivery will continue to support highway to rail conversions.

In addition, the chemicals market will grow as we capture opportunities created by the expanding domestic oil and gas industry. Automobile and light truck production will remain strong but year-over-year comparisons become more difficult in 2013.

In emerging markets, we expect to continue recovery in demand for construction and building materials while waste shipments will remain challenged. The overall look for agricultural products remains unfavorable with low corn supply and high prices caused by last year's drought impacting shipments to feed mills and ethanol shipments impacted by lower demand and higher corn prices.

Finally, export coal volume will be lower on softer demand for thermal coal and domestic coal volume is expected to remain below prior-year levels although the headwinds will moderate throughout the year.

Now in wrapping up, looking at the state of the economy, the indicators we follow generally point to continued expansion but at a more modest pace. Overall, the first-quarter volume outlook is neutral but the outlook for 71% of our markets is neutral to favorable. We anticipate total volume will be flat to slightly down year-over-year with declines in unfavorable markets offsetting the gains in the favorable markets.

Utility coal volume will continue to be challenged by low gas prices and high utility stockpiles. Although we expect these headwinds to moderate somewhat through the balance of the year, we anticipate they will continue well into 2013.

At the same time, much like we saw in 2012, we expect our Merchandise and Intermodal markets to continue to grow at a rate that is above the general economy. Finally, we continue to deliver high levels of service which creates compelling value for our customers and will drive long-term profitable volume and revenue growth for the shareholders.

Thank you and now I will turn the presentation over to Oscar to review our operating results.

Thank you, Mr. Gooden, and good morning to everybody. I am pleased to report that CSX's operating performance for the fourth quarter is again strong across the board. Safety results continue to be at or near all-time best levels, reflecting our strong safety culture that has driven sustained improvement over the last nine years.

Customer satisfaction is also at record levels, reflecting the team's ongoing focus on service excellence. At the same time, resource adjustments and asset utilization produced nearly 200 million of productivity for last year. And as we look long-term, our operational strategy is based on providing safe, efficient, and reliable freight transportation solutions for our customer. This also positions us well to deliver strong value for shareowners.

So let's review the results for the quarter and we'll start with safety. As you know, safety remains a consistent focus at our Company and in the industry. Strong results in safety demonstrate not only adherence to operating rules but are a reflection of employees' engagement. Looking at the FRA personal injury rate on the chart on the top left, our employees operated safer than ever and CSX produced a record low rate of 0.54 representing an astonishing 42% improvement year-over-year.

The chart on the bottom left shows a consistent pattern of improvement over the last four years in personal injury results, another illustration of the Company's strong safety culture. The chart on the top right shows the FRA train accident rate which improved 38% to 1.70. The full-year results on the bottom right show a similar improvement with a 2012 train accident rate of 1.98.

Before moving on, let me pause and thank our employees for their outstanding effort in this area. As the FRA recently noted, railroad safety is at record levels and I am especially proud that CSX led the entire industry in 2012. These results are a testament to our employees' commitment to each other and to the communities we serve.

Now on the next slide, let's review on-time performance. Here you can see on-time originations on the left, on-time arrivals on the right. You may recall that during the fourth quarter, CSX was impacted by Hurricane Sandy. Although the storm caused a temporary shutdown, washed out segments of the network and impacted port operations, our employees once was again responded valiantly and service was restored quickly.

During the quarter, CSX matched the record high of 90% in on-time originations and achieved a record in on-time arrivals at 84%.

Now from a system performance, let's turn to the next slide. Terminal dwell is a strong indicator of how well we are utilizing our assets. Looking at the chart on the left, you see dwell improved 4% to 24.3 hours. Looking at the chart on the right, velocity again showed improvement up 7% to 23.3 miles per hour. This is a clear example of where great customer service builds great shareholder value.

Assets moving through the network quickly and reliably translate to customers receiving outstanding service and over the long term allows for more efficient capital deployment.

Now let's go to velocity on the next slide. As a further reflection of the operating improvement, velocity was once again up against all -- up across all three networks. In coal, we are driving improvements in service and efficiency, with volume down 19%, CSX adjusted operating plans and maximized loadings to increase both train length and tons per car.

Turning to Intermodal, velocity continued to reach high levels with a record fourth-quarter volume. Higher velocity in the Intermodal network gives us the ability to reach end markets more quickly and meet or exceed customer expectations. Across the network, container and trailer availability to the customer in the terminal was at 86% and in the high 90s for our expedited product.

Finally, the Merchandise network also continues to perform well, with velocity up 5% to 21.9 miles per hour. Car cycle times improved 8%. This means we are making more final deliveries to customers on time requiring fewer locomotives, cars, and crew sites.

Over the course of the year, service has improved significantly in all the markets that we serve including those where we have absorbed strong growth.

Turning to the next slide, we will look at productivity. Over the past five years, CSX has delivered nearly $850 million of productivity savings including nearly $200 million in 2012. Efficiencies last year were driven by overall car cycle times that were 15% shorter, lower estimate, lower overtime up across all operating departments, and increased fuel efficiency. In 2013, we expect to build off this success by delivering another $130 million in productivity gains.

We will continue to focus on improved asset utilization using a combination of plan, process, and technology enhancements to continue to gain traction. We will also adjust resources up or down based on customer demand and remain flexible to ensure we are operating as efficiently as possible. We are moving locomotives in and out of storage more efficiently now and we are leveraging furlough retention boards when it makes sense.

So let's talk more specifically about the reserve adjustments we made in 2012 on the next slide.

The chart on the left represents the total active T&E workforce with the blue portion of the bars representing full-time employees and the gold portion representing those employees on furlough retention boards. On a year-over-year basis, the active T&E count was down 1% with volume down 3%. At year-end, CSX had over 600 employees on full furlough and approximately 300 on furlough retention board.

As you know, furlough retention boards are useful in areas of the network where we would otherwise need to hire new employees to meet attrition or customer demand within a relatively short period of time. It's easier and quicker to bring an employee off one of these retention boards in the longer process of bringing an employee back from a traditional furlough.

For those currently on full furlough, we have offered a voluntary transfer. The intent of this program is to meet employee demand in other geographic locations without incurring the hiring and training costs associated with most new employees.

In addition to lower T&E headcount, overtime hours were down 17%, with 26% fewer relief crews in the quarter.

Now let's look at locomotives. Looking at the chart on the left, you can see that the active locomotive count peaked during the first quarter of 2012. Since then we have been storing excess power and had 8% fewer locomotives in the fourth quarter of 2012 than a year ago with nearly 400 units currently stored.

We measure our locomotive efficiency based on gross ton miles per horsepower hour. Using this measure, locomotive efficiency improved by 7% on a year-over-year basis.

The decision to store locomotives is aimed at saving costs but not at the price of service or flexibility. As such, we are constantly monitoring locomotive levels and are currently bringing some units out of storage to prepare for seasonal volume needs. As we make changes to the locomotive count, it is critical that we monitor the impact on the service, recognizing that locomotives are generally a fluid asset and we can put in or take out of storage on a relatively short notice to meet demand or service need.

Let me turn my attention to customer satisfaction on the next slide. Every quarter, CSX uses an independent firm to survey our customers on a wide range of factors that influence customer satisfaction. These factors include things like speed and consistency of service, problem resolution, and ease of order placement. In 2012, we received our highest score ever from customers, highlighting the operating success we have sustained.

When we look at the makeup of the overall customer satisfaction score, the most significant driver of the increase is our total score -- the most significant driver of the increase in our total score is the progress we have made in local service delivery.

By focusing on service excellence across all operating departments, we've been able to proactively address customer issues and respond quickly to their concerns. Over the long term, consistent service translates into sustained high levels of satisfaction and in turn is a key enabler for CSX to capture future growth.

So let me wrap up. CSX's record personal injury and near record train accident results demonstrate the Company's commitment to keep our employees and the communities we work in safe. Our operating team had an outstanding year in 2012, operating as safely as we ever have and serving customers efficiently while generating nearly $200 million of productivity.

As we look forward, we expect to sustain momentum on service and asset utilization and are targeting an additional $130 million of savings in productivity. In addition, customers are experiencing service reliability at sustainably high levels which help CSX achieve record levels of customer satisfaction. This service product drives long-term value for customers, which in turn drives growth and long-term value for all owners.

We recognize there is uncertainty in the market place and CSX remains committed to providing flexible solutions for customers to enable growth and drive significant long-term value for shareowners.

So with that, let me turn the presentation over to Fredrik for a review of the financial.

Thank you, Oscar, and good morning, everyone. Looking at the top of this slide, revenue was down 2% for the fourth quarter. At the same time, expenses improved 1%, driven primarily by lower volume, productivity, and efficiency gains related to resource adjustments made in response to changing market conditions.

Operating income was $804 million, down 4% versus the prior year. Looking below the line, interest expense was up slightly year-over-year reflecting debt that was issued in the fourth quarter to pre-fund most of the 2013 maturities.

Other income rose $59 million, primarily driven by a $57 million pretax gain on the sale of a non-operating property. Income taxes were $275 million in the quarter for an effective tax rate of 38.3%.

Overall, net earnings was $443 million, down 3% versus last year and EPS was $0.43 per share, unchanged from last year, reflecting the impact of our share repurchase program.

As we turn to the next slide, let's briefly discuss how fuel lag benefited the quarter. On a year-over-year basis, the effect of the lag in our fuel surcharge program was $14 million favorable. This reflects the $5 million positive in quarter lag during the fourth quarter of 2012 and the $9 million unfavorable in quarter lag for the same period last year.

Turning to the next slide, let's discuss expenses in more detail. Overall expenses were down 1% in the quarter. I will talk about the top three expense items in more detail on the next few slides but let me briefly speak to the last two on the chart.

Depreciation was up 15% to $271 million due to the increase in the net asset base and the cycling of a prior-year favorable adjustment related to asset retirements. On a sequential basis, the increase in depreciation was $3 million in line with the guidance we gave last quarter. Going forward, we continue to expect depreciation to increase a few million dollars each quarter, reflecting the ongoing investment in our business.

Equipment rent was up 5% to $97 million as improved cycle time of our car fleet was more than offset by higher costs associated with automotive volume growth.

Now let's discuss labor and fringe in more detail. Labor and fringe expense was down 3% versus last year or $27 million. Looking at the chart on the left, headcount, which includes employees on retention boards, was down 2% both versus last year and sequentially.

Last quarter we gave guidance that our headcount would remain relatively constant, but also noted that we would adjust accordingly as market conditions warranted. Accordingly, as we saw business conditions slow throughout the quarter, we reduced our headcount.

Moving to the table on the right, efficiency and volume-related cost savings drove $35 million of cost favorability compared to last year primarily driven by a 6% reduction in crew starts and lower employee headcount.

Moving down the table, labor inflation was up $9 million in line with our expectations, which were for labor inflation to rise modestly from the third quarter. While wage inflation was about 3%, lower costs on health and welfare programs as well as the impact of a lower railroad unemployment tax rate continued to provide favorability. Rounding out the table, other costs were $1 million lower.

Looking at the first quarter, headcount should remain relatively constant on a sequential basis though as we demonstrated this quarter, we will adjust accordingly as business conditions warrant. In addition, as we move into 2013, we expect that labor inflation will rise to around $20 million a quarter.

Next, we will review MS&O expenses on slide 32. MS&O expenses decreased 7% or $41 million versus last year. Looking at the table on the right, the change in real estate gains reduced MS&O expense by $21 million versus 2011, the details of which are provided in the quarterly financial report.

Next, efficiency and volume-related cost savings reduced our MS&O expenses by $19 million compared to last year. The impact of running 8% fewer locomotives coupled with material cost savings initiatives had a favorable impact on our materials usage.

Moving down the table, inflation increased by $12 million while net casualty and other decreased $13 million as continuing favorable adjustments to our cash with the reserves as well as other favorable costs were partially offset by the railroad costs.

Moving to the next slide, let's discuss the impact of fuel. Total fuel costs decreased $2 million versus last year. Looking at the table to the right, fuel efficiency was favorable by $15 million reflecting a 4% year-over-year improvement in gallons consumed per gross ton mile. Lower volume also reduced fuel expense by $15 million with gross ton miles down 4%.

Next, as shown in the chart on the left, CSX's average cost per gallon for locomotive fuel increased to $3.28, up 8% versus last year, and driving an increase of $28 million as seen in the chart on the right.

That concludes the detailed expense review for the fourth quarter. Now let's turn to the full-year results on slide 34.

On a full-year basis, revenue was up slightly to $11.8 billion as volume growth in Merchandise and Intermodal, pricing gains and higher fuel recovery was offset by coal volume declines. Total expense for the year was slightly down as productivity savings were offset by higher depreciation and inflation.

As a result, full-year operating income was up 1% and operating ratio improved to 70.6% despite the substantial coal headwinds and a moderating economy. Finally, earnings per share increased 7% due to earnings growth and the impact of our share repurchase program.

Moving to the next slide, I would like to take moment to review CSX's full-year performance in more detail.

2012 was a year in which CSX lost over $500 million of coal revenue year-over-year as utilities on our network accelerated the switch from coal to natural gas. It was also a year clouded by a global economic uncertainty, as Europe grappled with recession while both the US and Chinese economies decelerated over the course of the year. Despite these obstacles, CSX delivered on its guidance to grow earnings and improve operating margins.

By focusing on delivering a superior service product, CSX was able to grow non-coal volume by 4% in a moderate economic environment. This volume growth combined with continued inflation plus pricing resulted in more than $500 million of additional Merchandise and Intermodal revenue in 2012.

In addition, our focus on providing a superior service product for our customers was also a key driver in improving asset utilization. As a result, CSX was able to generate nearly $200 million in productivity savings.

At the same time, CSX also benefited in 2012 from two items which we will cycle in 2013. First, we had $55 million of lower incentive compensation in 2012 versus the prior year. Second, gains on the Sun Rail transaction comprised the majority of the $90 million of favorability in 2012 real estate interactions.

Looking at 2013, we expect Sun Rail to be a much smaller contributor to our operating income. Of the remaining deferred gains we expect to realize about $40 million in the first half of 2013 with the balance to be recognized in future years.

Now let's turn to the next slide to discuss 2012 capital investment, dividends, and share buybacks. On the left-hand side of the page, full-year capital investment was $2.2 billion, excluding public-private reimbursable projects, unchanged from last year. Our 2012 investment reflects our continued commitment to improving our infrastructure and equipment to sustain high safety and service levels, enhanced productivity and leveraged strategic growth opportunities that can produce superior returns.

Moving to the right, CSX paid dividends of $0.54 per share in 2012, up 20% versus last year. Going forward, CSX remains committed to a dividend payout range of 30% to 35% of trailing 12-month earnings and this will be reviewed annually after the first quarter.

Finally in 2012, CSX fulfilled its commitment to complete its 2 billion share repurchase program by repurchasing $734 million during the course of the year. Collectively, CSX has repurchased $7.9 billion of shares since 2006, representing approximately one-third of total shares outstanding today.

Looking forward, CSX remains committed to share buybacks as an important tool to return free cash flows to investors. We will update you on our plans for future share buybacks in the coming months.

Moving to the next slide, let's discuss capital investment plans for 2013. In 2013, CSX plans to invest $2.3 billion in our business with an increase versus 2012 almost entirely driven by positive train control. On the chart on the left, you can see that the bulk of the capital spending in 2013 will again be used to maintain the infrastructure in the invest in equipment to help ensure a fluid network for our customers and to enhance productivity.

We'll also continue to focus on strategic investments that support long-term profitable growth. Intermodal highway to rail movement in the East continues to be one of the best long-term growth opportunities. We will invest accordingly to ensure that we are positioned to capture this profitable growth and generate attractive incremental returns.

Finally, positive train control which in total is expected to cost $1.7 billion represents $325 million of spending in 2013 leaving approximately $800 million to be spent in the coming years to complete the project.

Now let me wrap up on the next slide. Recapping the year, CSX achieved earnings growth and margin expansion in 2012 despite substantial declines in our domestic coal market and a moderating economic environment. We accomplished that by executing well on the things we control the most -- providing a superior service product, maintaining inflation plus pricing, driving productivity to more than offset the cost inflation, and most importantly, remaining focused on providing the safest work environment for our employees and the communities we serve.

Looking forward, we expect broad-based merchandise growth in 2013 to be led by our markets that support the oil and gas industry. We also see continued strong growth in Intermodal on further highway to rail conversion. However, we still expect coal to remain challenged well into 2013.

On the domestic side, volume will continue to be affected by high inventories and low natural gas prices. On the export side, we expect volume to moderate from the record levels achieved in 2012. In addition, we anticipate transportation pricing for export coal to be pressured as we work with the producers to keep US coal competitive globally in an environment with underlying commodity price where thermal and metallurgical coal is lower.

As mentioned earlier, CSX will also be citing the expense favorability we experienced in 2012 from real estate transaction and incentive compensation.

While CSX has realized margin expansion for nine consecutive years and earnings growth in eight out of the last nine years, it is too early to project margin expansion and earnings growth for 2013 at this time due to the evolving coal market, the cycling of the 2012 benefits, and a still uncertain economy.

While 2013 will be a transitional year, our business remains fundamentally strong. Looking longer-term even with the evolution in energy that has occurred, our business prospects continue to point to a future of sustainable growth enabled by superior service product that supports inflation plus pricing, productivity gains, and a broad-based volume growth that tracks above the broader economy.

With that, let me turn the presentation back to Michael for his closing remarks.

Thank you, Fredrik. At this time last year, we had just completed eight straight years of operating ratio improvement with earnings growth in seven of those years. Both occurred in a period that included one of the most severe economic periods in our nation's history.

In 2012, we again grew earnings while facing a major drop in a key market, one of the slowest economic recoveries on record and a political environment that has added even more uncertainty to the mix. Through all of this we have remained a vibrant, healthy company with a compelling long-term value proposition for investors. That remains true today.

We still see the inevitable movement of freight to rails as the population and consumption increase. Global trade creates a need to move more product between ports and people. The highways continue to become more congested. The re-industrialization of our nation gains momentum and the nation becomes more aware of the environmental benefits we offer.

CSX stands ready to bring real solutions to these problems on its premier transportation network, a network that serves a broad portfolio of products in some of the biggest and most robust consumer markets in the world. In the nearer term as we outlined earlier, 2013 will be another challenging year as the evolution in the energy market continues but begins to stabilize.

Regardless of the conditions, we are going to focus relentlessly on the things that are most in our control of which are employees do extraordinarily well while capitalizing on market opportunities available in energy and other markets. By doing so, we will optimize our performance in the near-term and prepare for the bright future we see for our business and for you, our shareholders.

In the meantime, CSX like the customers we serve across many industries is advocating for Washington to remain diligent about deficit reduction, restore certainty and stability to the economy, and unleash the expansion that can and ultimately will take place.

Thank you for your time this morning and we now look forward to answering your questions.

(Operator Instructions). Scott Group, Wolfe Trahan & Co.

Good morning, guys. So Clarence, I wanted to start on the export coal side. I think the guidance for 40 million tons implies about an 8 million ton reduction and I'm wondering how you think about breaking that down between the met and the thermal side?

And then on the pricing side I know you talked about pressure on export pricing. We saw pressure on pricing in 2012. Do you think the pressure on pricing in 2013 is bigger or less worse than what we saw in 2012?

Scott, as we told you, we expect the export coal to be about 40 million tons. It's a little early in the year to get much more precise than that. As you know, by the end of the first quarter, a lot of the metallurgical contracts for the quarter will start firming up and we will see what it looks like on that.

In regards to the pricing, I would tell you that the metallurgical coal appears to us to be firming up in terms of pricing. The metallurgical coal that's selling at Queensland now which is the benchmark in Australia, is about at $170 a ton and it appears to have stabilized there over the last few months.

Where we could have some potential headwinds on the export coal pricing will be in the thermal coals with the API Index now running about $92. But having said that, we have about half of that 40 million or so tons of coal already under contract on the thermal side of the business, so we are pretty positive about where that pricing will be. Does that answer your question?

Certainly it does on the pricing side. I guess on the volume side, you are saying within that 40 million tons it is tough to know how much of it is going to be met and thermal. It's just too early to say. Is that what you are --?

Yes, I know that 20 million of it is going to be thermal but I don't know how much more of that will be thermal. So it's going to be about the same mix we have had this year. For 2012, our mix was 50-50 met and thermal and for the fourth quarter, it was 56-44 in favor of met.

Okay, that's great. Then just second question I guess for Fredrik or Michael, do you guys still have the 65 OR target longer-term? I know you've been talking about how it's a lot tougher to get to but you still see a chance for it. I am wondering given your view on 2013 if you still even see any chance of that or is that now really getting very tough to do?

I think we are in the process right now of going through a really detailed bottoms-up review of our strategic plan just like we do every year and that plan is going to be reflective of the new coal environment that we find ourselves. There's some pluses and minuses I'm sure that's going to come out of that plan. There's certain markets that probably are stronger than we thought when we originally laid out that guidance, but obviously the big driver here is going to be what has occurred to our utility coal business.

So we're going to work through that and review it with our Board here this spring and once we have gone through that, we are going to be communicating that appropriately some time after that session.

Okay, great. Thanks, I appreciate it.

Tom Wadewitz, JPMorgan.

Good morning, Michael. Good morning, everyone. Clarence, I wanted to ask a little bit of following up on the export pricing. I thought that given some of the pressures in fourth quarter in export pricing your revenue per car in coal might be down sequentially. It was actually flat.

I think you talked about -- I don't know if you are referring to a utility contract and maybe spot price up in the quarter or what it was that would have provided an offset. Can you give a little more thought on that sequential price in coal?

Yes, Tom, I can. There are several factors of why that RPU in that coal remained relatively flat. One was the escalators that we have built into our utility contracts had kicked in. Second was we had a positive mix both in our Southern utilities which have a longer length of haul as well as a positive impact from Northern Utilities picking up. So it was a mixture of both the mix and the length of haul that we were handling as well as the escalators.

Okay, so how would you --? Obviously you took some significant pressure on export pricing and your commentaries appropriately cautious I think on export looking at 2013. How would you think the revenue per car in coal would look if you compare it off of kind of a fourth-quarter base? Do you think that escalators repricing whatever in utility offsets weakness in export and you kind have flattish coal yields or how would you think about coal yields in total kind of up or down in 2013?

Well, I think in 2013, Tom, you can sort of look at it being relatively flat on a year-over-year type basis with the yields there. As I mentioned earlier, we've got the thermal coal under contract so we are pretty comfortable with those numbers. I think export has about bottomed out in terms of the price there. And we will still have escalators in our current utility contracts.

Okay, that's helpful. Thanks for your time.

Bill Greene, Morgan Stanley.

Good morning. Can I just ask one follow-up there just on coal? Was the take or pay at all a big deal this quarter or will it be next year that we have to think about that when we model the coal revenue?

No, Bill, it was not an issue at all.

Okay, then Oscar, I know obviously some very impressive productivity metrics, but given what's going on with the coal side of the business, is there a case for taking a more aggressive sort of approach and sort of saying like -- I know you are talking about 130 and that's aggressive but just to say we've got to do even more and maybe this number could get ratcheted up over the course of the year. How sort of flexible is the cost structure?

Let me answer it a couple of ways, Bill. I think there is almost infinite possibilities over the long run. I think it's important to give our team credit for the great delivery in 2012. And as you know, our 130 is a long-term guidance that we've given for quite some time and it is a difficult thing.

Having said that, as we have exhibited over the many years I think we do it cutely through the plus method on those numbers. Give us this first quarter to see how the weather turns out and see how we see business demand and I think we will give you a better update. But our numbers are not -- our published guidance numbers are not reflective of our long-term commitment to continued success there. So you will see more from us over the long run.

Okay, fair enough. Thank you for the time.

Kevin Crissey, UBS.

Good morning, just wondering what -- you're changing coal pricing to keep that commodity competitive in the world market, understood. Why is that not appropriate for all client and commoditized products? Why -- you talked about getting rail price, rail inflation plus pricing overall. Why wouldn't you have that same effect in other commodities where you see world prices decline or weakness in overall volumes such that your customers are struggling? Thanks.

Kevin, I think it varies in those commodity basis from literally from commodity to commodity. So let's take corn and soybeans, for example. Although those are world traded commodities because of the sheer volumes that the United States produces in both those markets, what is going to govern that in my view is going to be what the domestic market is for the US, whereas in this export coal market it is truly a global type of commodity.

And the same thing applies in our phosphate and fertilizer business. Most of our phosphates and fertilizers are either domestically produced or North America produced, meaning Canada in this example, although some phosphates do come in from Morocco and Saudi Arabia, but they really don't tend to be market makers, if you will. Does that answer your question?

Yes, so I understand the global aspect of it, but in general if the customer is struggling to make money or have -- end the market demand, will that have -- what effect would that have on your overall ability to --? I mean you are adding a certain amount of value but if their customers' product isn't adding as much value, it's difficult to see why they would want to pay a higher rate or be able to pay a higher rate.

Kevin, this is Fredrik. We always look at our rate structure to make sure that we maximize whatever value we can create for CSX. So if there are opportunities to lower the rate to create more bottom-line value for CSX, we would do that. Export coal is a very extreme example of where we can create potentially incremental demand by lowering our rates to make sure that the producers are competitive worldwide.

If there are other opportunities like that, we would do that but you also know that at the same time we're very focused on inflation plus pricing and so that's a trade-off that we do in combination between what the sales and marketing team does and what we in finance work through in each and every contract to make sure we set the price at the right place to maximize the bottom line for CSX.

Ken Hoexter, Bank of America Merrill Lynch.

Great, good morning. Just as you -- can you talk through on the coal side as you look at repricing some of those contracts, what percent come up? Is it about -- I guess just give me a range of what you are looking at renewing in 2013 and how do those terms change now that the utilities have gone through this downturn? Are they guaranteeing lower minimums? Are they looking for rate relief? Can you kind of just walk us through how some of those negotiations are proceeding?

I assume that in the contracts you are talking about domestic utilities.

Yes, I am.

We don't have any major domestic utility contracts immediately coming up in 2013. We have some toward the very end of the fourth quarter so that's number one.

Number two, I really don't want to get into how we price individual utility contracts because that tends to be between us and the utility and there is some market applications there.

Okay, but can you at least follow-up in general? Are they -- are you seeing just given the high inventory levels, are you seeing lower demand levels on those take or pay portions of that guarantee?

We are not having a lot -- if you're asking about liquidated damages, we are not seeing a lot of liquidated damages. There's nothing material that's showing up right now.

Okay, just a follow -- a follow-up question on the operating ratio target your long-term, obviously, Fredrik, you reiterated that only a couple months ago and I guess I just want to understand -- have things deteriorated more rapidly since your last couple of conference go-rounds? Just trying to ascertain what the incremental news is since you last reiterated.

I guess looking at the Florida gains, those have been scheduled to disappear for a while and I presume there is only maybe two to three quarters left on that. Just when you think about that, what scale does that target begin to change? Are you talking basis points or are things significantly different since you've last talked about it?

Really since the last earnings release and some of those public events we have had since then, nothing has really changed. It's become more and more challenging and we have said repeatedly we are going through the same process that we go through every year, which is to develop a strategic plan and then that gets approved by our Board during the spring.

So nothing has really changed beyond the fact that we do have now a firmer understanding of 2013 and the challenge that we are facing that we have outlined today. So as I said, while clearly the coal environment is different and has continued to be a negative drag, we're also seeing some other opportunities that are potentially stronger or better than we thought previously, but net-net we've got to work through and see what the impact is on that for our long-term guidance.

Great, I appreciate the insight.

Thomas Kim, Goldman Sachs.

Good morning. Thanks for taking my question. I was interested in the Intermodal side of business. Would you be able to articulate what the growth would have been without Maersk? So just so we can get an idea of what the year-on-year comparisons might look like going forward once the comps sort of cycle through? Thank you.

Maersk was the preponderant driver of our international growth, so when you look on that flash report and you see those numbers there for the International segment, that was all driven primarily by Maersk.

The Domestic is growing at 5%, 6%.

-- 5% to 6% and we would have had -- our growth would've been about 2% higher in the quarter than it actually was but we were impacted by Hurricane Sandy. That really disrupted the entire New York -- Port Authority of New York and New Jersey there for nearly a couple of weeks.

Does that answer your question, Thomas?

Brandon Oglenski, Barclays.

Good morning, everyone. Maybe I will follow up on that question, then. Is Domestic Intermodal growth of 5% to 6% then a fair target for 2013 especially after you have onboarded the Maersk business now?

I think that 5% to 6% for our Domestic business in 2013 would be in the range.

Okay, how much of that is going to be utilizing existing capacity to think about the incremental benefits from growing that business?

The majority of it would be in the current capacity that we have in the network both in the training network as well as the terminal network.

Okay. Thank you.

Chris Weatherbee, Citi Investment Research.

Good morning, guys. Thank you for taking the question. Just a quick question just to clarify on the export pricing. Clarence, you mentioned on the thermal side you said about 20 million tons of the outlook for 2013 is thermal. Is it fair to say that that is under contract -- that does not come up for renewal in 2013 or is already locked in from a price perspective?

It's already locked in from a price perspective.

Okay, that's very helpful, thank you. Then maybe switching gears back to Intermodal, I just want to get an understanding of how lapping Maersk may impact kind of Intermodal yield. It seems like you got a bit of a reacceleration in total yields in Intermodal in the fourth quarter and I don't know if that has any impact by the Port of New York being shut down for a couple of weeks and maybe seeing a little bit more domestic growth and international growth. But just maybe want to get a sense of what the puts and takes to yields are as you lap that Maersk contract this year?

I think the big driver has been the value that we are creating and what we mentioned earlier about we are not pricing for volume. We are pricing to make a profit here. And with the service that Oscar mentioned that he is providing here where we are in the 90-plus% and on time as defined as available to our customers in both our premium Intermodal products and approaching that in our regular Intermodal products has made a difference in the marketplace.

I think the third thing that has happened for us is where in our highway to rail conversions we have a proprietary model that we can use with our customers to model what their transportation flows are and can demonstrate how we can save money and create value for the customers. That has been a very positive experience for us.

Okay, so you are getting that benefit from a lot of different factors. Okay, that's very helpful. Thanks for the time, guys. I appreciate it.

Chris Ceraso, Credit Suisse.

Not to harp on this, but just to clarify one last thing on the coal pricing, you said that the book of export thermal now is priced if I'm remembering this right -- that repriced on January 1. So maybe we haven't seen the effect of that in the numbers yet. Is there going to be any kind of a step down in the RPU from the Q4 yield that we saw in coal to Q1?

The thermal coal did not reprice on January 1. Thermal coal had been -- that I am speaking of has been under contract for some period of time. What you may end up seeing though in the overall coal is export side of the business is slightly down in the first quarter.

Okay, yes, I apologize, I was referring to the export book, so there will be some step down in export thermal for Q1?

Could be, yes.

Then just as a follow-up, you mentioned a few times in your breakdown or the outlook in the positive side of the ledger, the crude and energy-related, can you just help us size that maybe give us an idea of what the total revenue was in crude and drilling-related equipment and materials in 2012 and what you think that goes to roughly in 2013?

I don't want to give you a specific number on that because you can pick up the volume from the AAR data and then divide it into it and know what our revenue is between us and our customers and that wouldn't be right for them.

I will tell you that we are averaging between seven and nine trains of crude a week. We expect that that will increase in 2013. Those numbers I gave you there were what was happening in the fourth quarter. Toward the end of the fourth quarter I would tell you that in energy and petroleum-related products, our frac sand business is up. We have an announcement of one ethylene cracker being located on CSX, and possibly a second one. We have two fractionators that will be coming online in the first quarter in West Virginia.

So petroleum-related products for us in 2013 I think is going to be a very positive number.

The seven and nine trains per week, is that something that doubles in 2013 or not that big of an increase?

I don't want to go there.

Okay, thank very much.

John Larkin, Stifel Nicolaus.

Good morning, gentlemen. Thanks for taking my questions. It seems like CSX is doing a better job than perhaps some of the other class ones in matching resources with changes in traffic and changes in traffic mix. I'm just wondering how organizationally you approach that. Do you have a SWAT team in the operating department that focuses on that and is constantly monitoring events and tweaking resource allocations to different divisions and so forth? How does that work internally so well?

John, it's Oscar. This is a really novel item and you might be surprised and shocked to hear that. But I think the way we do it is a combined group of our senior leaders in both the sales and marketing organization and an operations meeting on a regular basis discussing the trends and making the appropriate adjustments very quickly. It is as simple as that, frankly, and they're doing a great job of it.

And we're willing to take some risks. If we look and see the thing might be moving in a negative direction in a given market, we tend to move quickly on it rather than wait to see it evolve.

We can always get better forecasts from sales and marketing. I've just got to say that.

Great job on that front nonetheless. As far as the balance sheet is concerned, you've got a debt to total cap ratio somewhere just a tad over 52% or so. That's a little bit higher than some of the other railroads. Do you feel comfortable with that and is that a range that you can live with this year, next year, and beyond? Do you think with that kind of leverage the Board is in a position to reauthorize another share repurchase?

Starting with the share repurchase question, we are in conjunction with the strategic plan also going to review the Board our share repurchase plans going forward and we will update you once we have a decision around that.

In regards to the debt level, I think what we have said is that we are targeting kind of the upper spectrum of a BBB in a BBB area and I think also right now from where we have been, an improving credit profile. So we might be perhaps a little bit more leveraged than the other railroads but we think that being in that upper end of BBB is the right place to be. We think we generally trade -- our debt generally trades a little bit higher than what our rating is. So we think we are in a pretty good place.

And as we think about the share repurchase programs and sizing of that, I think predominantly we want to use free cash flow but if there is balance sheet capacity that we can use within the context of an improving credit profile, we are certainly going to do that as well.

Thanks for the answers.

Cherilyn Radbourne, TD Securities.

Good morning. Nobody has asked about stockpiles, so I wondered if you could just kind of give us an update on where those stand in your service territory?

Yes, you know in the past we've been giving you days per burn and that's all over the place because of how it's figured. In the South, utility stockpiles continue to be high. In fact, they are growing to some extent. It's being driven by electrical demand and the Southeastern United States is down about 1.2%.

The second factor that's driving it is these low natural gas prices which are staying low and therefore gas is being dispatched ahead of coal.

In the North, our utilities have slightly higher than normal stockpiles and in the mid-Atlantic, they are about where they need to be in terms of the size of stockpiles. Does that help you?

Yes and I was just curious in terms of the 5% to 10% decline in the thermal coal guidance that you provided, what are you assuming in terms of underlying generation demand?

Underlying generation demand will be -- the assumption in our plan is flat.

Okay, thank you, that's helpful. That's all for me.

Ben Hartford, Robert W. Baird.

This is Ken on for Ben. I had a couple questions on the domestic intermodal side. What are your guy's expectations in terms of container count adds for 2013?

We are not planning on adding to our domestic container fleet in 2013.

Okay, then in terms of pricing is sort of the pricing in line with truck expectations more in like the 2% to 3% range or do you think that you can sort of recapture some of the historical discount?

Well, the historical discount over the past few years has become smaller and smaller as a percent of the total transportation costs. But I think you can expect to see our pricing for intermodal stay in that 2% to 3% range.

Okay. Thank you, guys.

Jason Seidl, Dahlman Rose.

Good morning, everyone. First off, Oscar, great job on the safety front. That was impressive for the quarter.

My question, it's really for Fred. Fred, just as I go through the sort of puts and takes 2012 versus 2013, if I am reading it right from what you guys said it looks like you got $50 million of incentive comp headwind. You got about a $50 million differential from Sun Rail. And you mentioned about you are going to see $20 million of labor per quarter plus we layer on top of that you are looking at about $130 million in productivity savings. Am I missing anything in the puts or takes for the cost side?

I think those are the key things that we have outlined. Obviously with also the headwind that we are facing on the top line in terms of both the utility coal side and what we are facing both on the volume side on export and the fact that we have been able -- we have had to reduce our rates on the export side as well.

So I think you got the cost side, the key drivers on the cost side right. Then you also have the top line.

Okay, so there is a modest negative cost headwind as I calculate it and then whatever the topline does, it does.

Right, correct.

Okay, perfect. That was my only question. Guys, I appreciate the time as always.

David Vernon, Sanford Bernstein.

Good morning, just a follow-up on some of the steel and frac sand volumes specifically. Are you seeing those volumes trend a little bit weaker here in the first half of the year as rig and well counts have slowed down a little bit in the Marcellus and the Utica, or is that stuff remaining strong for you?

Well, we saw a some decline in the second half on the frac sand going in. But what has happened for CSX is as that drilling count granted being down has moved from the east side of Pennsylvania to the west side, it's been more conducive to our network and so are frac sand as a whole is holding up reasonably well.

Okay, and just as a quick follow-up, with the length of haul increase on the domestic, is that a change in type of coal? Is it the Illinois Basin coming in perhaps going into a plant that used to be taking PRB or is it just the ebbs and flows across the network?

Some of it is Illinois Basin coal but it's not going into plants that took PRB. It was going into plants that took Central app and the rest of it has just been the ordering patterns of the utilities fulfilling their coal contracts.

Just fulfilling the coal contracts. Okay, great. That's my two. Thanks very much.

Jeff Kaufman, Sterne, Agee.

Good morning, Sal Vitale on for Jeff. Just had a quick question, just a clarification on -- you mentioned that some of the reasons why RPU for coal was flat in 4Q was number one, you mentioned the escalator. And then you mentioned the positive mix impact of longer haul. Can you isolate excluding those two factors what would RPU have been?

I can't right now, no.

Okay, I was just thinking just by order of magnitude is it really significant or is it just a couple of hundred basis points perhaps?

I don't know.

Okay, and then just looking forward to 2013, you also mentioned that export coal pricing is still weak and yet you mentioned that coal RPU for 2013 could be relatively flat. The main offsets there are, what, the escalators and the fact that you have thermal coal under contract?

Well, what I hope I said was that export coal pricing we think for the full year is going to be flat. The first quarter you may find it down slightly mainly because we had a very strong first quarter last year in our coal pricing and you won't see that totally reflected in the first quarter this year.

Okay, so just to clarify, you didn't intend to say that coal RPU, overall coal RPU for the 2013 would be relatively flat?

Yes.

He did intend to.

I did, for the whole year.

You did? Okay, thank you. Thank you for the clarification.

Peter Nesvold, Jefferies & Co.

Good morning. First just a clarification, so you -- your outlook for export volumes are 40 tons -- 40 million tons. That would be down about 16% from 47.8 million for the year. You also said you're going to hold the line on pricing. So do you think the market is down 16% or is there some sort of temporary market share losses in there based on price?

I think the US market is down. You know, it's difficult to assess what the Chinese will do here particularly after the Communist Congress party is meeting in March. But that's -- the export coal number is just reflecting what the US is.

Understood, okay. Then just to my follow-up question, so longer-term and we look at domestic coal volumes down maybe 50% from the peak, some of that clearly is permanent changes in Central app, Northern app.

Any sense for longer-term, so we sort of get back to a normalized environment on industrial production, electricity consumption, natural gas prices, how much of those losses do you think eventually come back as we get into a normalized environment?

I think it's going to be difficult to assess for multiple reasons. First, there's going to be some impacts that there's a lot of different guesses now exactly what they're going to be as 2015 kicks in.

Secondly is as long as we have gas prices in this $3, $3 plus range, it is going to be difficult for coal to recover back to the levels that you and I are talking about them going to.

Okay, but if the longer-term curve were implying $4 -- what I am trying to do is separate gas prices from EPA regulations and other sort of structural changes in the market. One could obviously argue that nat gas is structural, but if we were to separate nat gas from it, any kind of perspective on that?

Peter, I guess -- this is Michael. We think a lot of the plants that would have been shut down in 2015 due to EPA regulations have largely been shut down by the low gas prices. So really accelerated what we expected would happen three years from now.

On the longer-term basis, I think there is an issue of how do we make sure we turn the lights on so we think some of those remaining coal-fired plants are going to be part of the energy mix in the eastern half of the United States.

Okay, all right, thank you.

Matt Troy, Susquehanna International.

Good morning. A question on Intermodal, kind of a bright spot to move away from coal. We all know the incrementals are good if you add a couple boxes and a double stack or if you make a train longer.

I was just wondering structurally over the next two, three, four years as you begin to harvest the investments you have made in building out the network, is it reasonable to assume when I think about segment margins that Intermodal could begin to approach and one day surpass corporate average? I know this is a business historically where margins have been thinner, but obviously given the critical mass the industry and you folks have achieved, just wondering if it's reasonable to assume that that kind of inflection kind of turning the bars if you will is something that we could expect let's call it in the next couple of years?

Matt, let me take this. This is Fredrik. I think overall as we look at the contribution of our different business segments, we try to stay away from talking too much about it but I do think that as we think about incrementally the margins on Intermodal, they are attractive and they are from an average -- plus or minus versus average, I think they are pretty close to it. I think the issue generally in Intermodal is that you need a lot of boxes to make up for a carload because the RPU is a third or so of a carload.

But the margins on the traffic that we are getting because we are so focused on the pricing and making sure that every load that we carry carries its own weight is attractive. It is just you need a lot of boxes to make up for the carload decline.

Right, right, I guess my follow-up would be just more tactically near-term for Clarence, ex Maersk International Intermodal running closer to flat by my calculations. We have been destocking for some time now in the US economy; the numbers that you disclosed earlier certainly bear that out. Inventories remain on the lower side of what we would consider historically normal.

Given that we have run down for so long and the international business is somewhat -- I'm just curious what are you hearing from your customers about first quarter their intentions around shipping for Chinese New Year? Things slow down in a couple weeks here and there's not much time left thereafter in the first quarter. What are your conversations indicating about import intensions and what folks might be planning from an inventory perspective? Thank you.

When I talk to our steamship customers, they are singing the blues. It's a tough business for them to be in right now. They have to keep these vessels full. The fuel costs -- buffer fuel is still a problem for them. The largest trade lane in the world is down now, which is Asia to Europe, so the steamship business is tough right now.

As far as the Lunar New Year goes, it's early this year and we should have that behind us here by sometime in March I think is it that it will be behind us. I think you will see the business -- the International actual business start picking up for the spring.

Okay, I look forward to that. Thank you.

Walter Spracklin, RBC Capital Markets.

Good morning. Just a follow-up here for Clarence. When I look at your Q1 outlook, you mentioned 57% that's positive. Then I listened to Fredrik on when he's talking a little bit on the full year talking a bit more broad-based growth. I guess am I to infer that you do see the second half or even Q2 onwards sequentially improving versus your Q1 outlook?

And if that's the case, Clarence, which areas do you think where you might be a little bit negative on right now would you see being more positive as we get through the year?

My own view of the economy is not dissimilar than what Michael has said publicly, and that is we should have slow, steady continuous growth. There are some models, economic models, that point to a much stronger second half. Now I am an optimist and I would like to believe those models but I'm going to stick with slow, steady growth here.

I think some of the markets where you could see possible improvements for us would be in the metals market. I think you could see some improvement for us in our chemicals particularly the petroleum side of our business going forward. I think there could be opportunities in the construction sector to see more growth. Housing starts could approach 850, maybe a little higher than that 850,000, maybe a little higher than that here in the year.

Until we get housing back and automotive back at the same time, I think it's going to be difficult to see the economy growing much faster than the 2% plus.

Regardless of what the economy does, if you take all of our non-coal businesses as a group, we expect we will outperform car load growth against whenever the economy turns out to be. Is that correct?

That is correct.

Okay, just a second follow-up question here for you, Oscar. Obviously when we exclude some of the let's call it the nonrecurring items that occurred in 2012 and looked at the OR given on a year-over-year basis, we did see a decline in the OR as a result of the significant decline you saw in coal.

Arguably some of that coal was unexpected in nature and didn't give you, Oscar, the opportunity that you might have had had you had a crystal ball to really reengineer your network to accommodate that. Clarence is now giving you heads-up that thermal is going to be down 5% to 10% and export is going to be down 18%.

Given that outlook on coal again for this year, can you protect the OR versus this -- now that you might have a little bit more certainty around it or would we see another drag on the OR excluding those nonrecurring items in 2013?

I'm trying to understand whether you are asking an OR guidance question, which I want to pass over to Fred very quickly, or if you are asking about our intent to continue our very productive and efficient way. So the answer to the latter is clearly within the coal fields by the way, we have done and have taken a lot of action already and over the past couple of years, we have anticipated some of the decline and have planned accordingly.

And again -- but you got the export coal growth which is offsetting some of that and then you've got the Illinois Basin coal movement, which is helping us, so a lot of our expense is kind of moving in those areas.

So I think we've taken quite a bit of action. We will continue to do that but again, with regards to long-term overall, I think that is something for Fred.

Okay, so for Fred, then, is what Oscar is telling you -- when you pull that in, do you think that's enough to protect the OR this year?

Well, I think that is what we -- the guidance that we gave in the prepared remarks, is that's it is a little too early to tell where we're going to come out for the year on the OR. We certainly are used to as we also said -- we have done it for nine years in a row to improve our OR. But it's just too early at this point to tell. We'd certainly like to see it and we certainly overcame a lot of challenges in 2012 to be able to produce an improved OR but we'll see as we go along here to see how things materialize.

Understood. Okay, thank you very much, guys.

Keith Schoonmaker, Morningstar.

Good morning. I'd like to ask about growth initiatives. Of 2013 CapEx, about 16% looks budgeted for strategic growth initiatives but then emphasis called that on Intermodal growth. Is this yards or double stacked clearance still but not containers? Could you add some detail to this investment please?

The growth is essentially yards for Intermodal, terminals, and some double stacked clearance. There's a small amount I think for boxes as well but it's a relatively small amount. So it's really to support the long-term opportunities that we see in Intermodal and the preponderance of capital for Intermodal goes into expanding the terminal capacity but we are in the midst of a national Gateway initiative where we do have to spend some capital to finalize the double stacked clearance that we need on our network. But after the next two or three years, that would be completed.

At this time, how much is left not yet cleared for double stack that needs to be?

I think if you look on a volume basis, I think we are close to a little bit over 80%. I think that as you complete a couple more areas over the next few years, you will be closer to 90%. And that's really where I think we are going to stay because I think the remaining obstacles are big enough where there's not -- we're not going to do that.

We just cleared this year -- the fourth quarter of this year, Massachusetts and we are double stacked cleared from Chambersburg, Pennsylvania over to Chicago we will be double stack clear in the first quarter. The only real link we have to get yet is the ports in Virginia and Baltimore and Wilmington over to Chambersburg cleared yet.

Second, is any material investment needed to serve the new energy markets or is that pretty low cost to serve?

It's pretty low cost to get into it. It had no significant investments.

Thank you.

Justin Yagerman, Deutsche Bank.

Looks like I am the caboose today. I wanted to dig in for a second, Clarence. You gave some good color around the export coal side and I was curious what the duration of those contracts were going to be on the thermal side, the 20 million tons, and what -- when they were signed? Was that a Q4 or an early Q1 event?

Justin, some of those contracts were actually signed in 2011. Some were signed throughout the year in 2012. They are constantly rolling over, if you will. We were fortunate enough to get some back in the first part of 2012 when the pricing was much better than what it is now. But it's a constant rolling over of those thermal contracts.

Okay, I guess I was under the impression that most of them were coming up at the end of 2012. But maybe it was a bit more spread out.

And is met still on a quarterly basis as we look out or are you doing most of that now on a spot basis? How are you looking at the met side of the export business?

It's mostly on a quarterly basis with some on a spot basis, but mostly quarterly.

Okay, then Intermodal, you talked a little bit on the yield side on the international, but just curious, you gave some volume expectations around domestic. You are lapping the win of the Maersk business. What do you expect that growth rate to look like as we move through 2013 on the International Intermodal side volumes?

I think that the last FTR data that I saw showed imports around the 3 -- was it 3% to 4%? Yes, about 3% to 4%.

Okay, so kind of in line with market growth on imports?

Yes.

Okay, just last one. I was curious, Michael, we haven't heard much on the regulatory side but I think our newly reelected President has been kind of vocal on the coal side of things in terms of how he views energy in the world.

How has that factored into your view and then how does that inform the regulatory atmosphere in Washington as you think about your relationship to those businesses?

Well, I know the President has said that climate change is an issue he does want to address. As you well know, the EPA has been fairly aggressive with its regulatory actions that are limiting the usage of coal. My belief is we would not see any legislation that would further inhibit coal being passed with this Congress because I don't think the appetite in the Congress will be to put any kind of a carbon tax or other type of legislation like that.

Okay, I appreciate the time, guys. Thanks so much for taking my calls.

Thank you, everybody, for joining us and we look forward to seeing you next quarter.

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