CSX Corp (CSX) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CSX Corporation first-quarter 2014 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. You may begin, sir.

Thank you and good morning, everyone, and welcome again to CSX Corporation's first-quarter 2014 earnings presentation. The presentation material that we'll 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 that 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 in the accompanying presentation on slide 2. This disclosure identifies forward-looking statements as well as the uncertainties and risks that could cause actual performance to differ materially from the results anticipated by these statements.

In addition, let me also remind everyone that at the end of the presentation we will conduct a question-and-answer session with the research analysts. That said, with nearly 30 analysts covering CSX today, I would ask as a courtesy for everyone to please limit your inquiries to one primary and one follow-up question. And with that, let me turn the presentation over to CSX Corporation's Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Thank you, David, and good morning, everyone. Last evening CSX reported first-quarter earnings per share of $0.40, down from $0.45 in the same period last year. These results reflect the challenging winter conditions faced by CSX and the broader transportation industry this quarter.

In that regard, I would like to offer my sincere thanks to the talented and dedicated men and women of CSX who worked tirelessly through one of the worst winters on record to keep the network running as fluidly as possible. I would also like to thank our customers for their patience and support as we work through the service impacts to meet their needs.

Looking at the quarterly results, revenue increased 2% to $3 billion on a 3% volume increase. The underlying economy remains strong and supports continued gain in CSX's intermodal and merchandise markets, which more than offset the decline in coal business.

At the same time, as Oscar will discuss in more detail later, we took many steps during the quarter to keep service levels as high as possible in a challenging environment. Dealing with those challenges also had the effect of increasing costs.

As a result, operating income decreased 16% to $739 million and the operating ratio increased 520 basis points to 75.5%. As we look forward, we have the resources in place to support a gradual service recovery while also capitalizing on market opportunities created by broad economic strength.

We see the first quarter headwinds transitioning to longer-term positive momentum in the back half of the year, as the economy drives additional growth in our merchandise and intermodal business, coupled with an improving environment for domestic coal this year, based on increased electrical demand, higher natural gas prices and reduced stockpiles across much of CSX's service territory. Given these opportunities, we will more than offset the challenges of this quarter.

For that reason our earnings picture remains intact with modest growth expected for full-year 2014. Now I'll turn the presentation over to Clarence, who will take us through the top-line results in more detail. Clarence?

Thank you, Michael, and good morning. This was a challenging quarter with the impact of the severe winter masking the underlying strength of the economy and the strong demand for our service.

As you can see on the left side of the chart, total volume grew 3% and surpassed 1.6 million loads in the quarter, with growth in merchandise and intermodal more than offsetting the decline in coal. As a result, merchandise and intermodal now combine for 82% of CSX's total volume.

Moving to the right, total revenue increased $49 million to over $3 billion in the quarter, reflecting overall volume growth and increased pricing across most markets. Here, merchandise and intermodal now account for over three-quarters of CSX's overall revenue.

Next, the average revenue per unit was down slightly. The impact of core pricing gains and liquidated damages was offset by the unfavorable mix impact related to growth in intermodal versus the decline in coal.

Finally, core pricing on a same-store sales basis remains solid across nearly all markets. Recall that same-store sales are defined as shipments with the same customer, commodity and car type and the same margin and destination. These shipments represented 75% of CSX's traffic base for the quarter.

On this basis, all-in prices was 0.5% in the quarter, primarily reflecting continued rate pressure in the export coal market. Since we continue to have greater variability in both our export and domestic coal business, reflecting global market conditions and our fixed variable contract structure; and since our merchandise and intermodal markets are becoming a larger portion of our business, we have again provided you with the same same-store sales pricing for these two markets on a combined basis.

At the bottom of this panel you can see pricing for merchandise and intermodal averaged 2.6% for the quarter. This increase is less on a year-over-year basis, but still represents a solid spread over rail inflation.

That said, we remain confident that the value created by our service product for our customers provides a solid foundation for growth and pricing above rail inflation over the long term. Now let's look at the individual markets in more detail starting with merchandise.

Overall, merchandise revenue increased 4% to nearly $1.8 billion in the quarter. Volume in the agricultural sector was up 4%. Feed grain shipments, both domestic and export, increased sharply due to a strong 2013 harvest. In addition, ethanol shipments grew as lower corn prices resulted in higher ethanol production levels.

The construction sector declined 2% overall, as weather-related challenges more than offset the continued recovery of the residential housing market. Finally, the industrial sector was up 3%. Strength in energy-related commodities including crude oil and liquefied petroleum gas more than offset lower shipments in the metals and automotive markets impacted by the severe winter weather.

Moving to the next slide let's review the intermodal business. Intermodal revenue increased 4% to $421 million.

Total intermodal volume grew 5% setting a new first-quarter record. Domestic volume was up 7%, also setting a new first-quarter record driven by continued highway to rail conversions. International volume was up 3% year-over-year, reflecting continued economic growth.

Total intermodal revenue per unit declined 1% as continued core pricing gains and higher fuel recoveries were offset by unfavorable mix. Volume associated with our domestic door-to-door product, which has a high revenue per unit, was more severely impacted by the weather.

Finally, we continued to focus on the intermodal product by adding new service offerings and making strategic investments. These investments include the new terminal in Winter Haven, Florida, which opened early this month; the Montreal terminal, which will open later in the year; and the ongoing expansion of the Northwest Ohio facility.

Moving to the next slide, let's review the coal business. Coal revenue declined 9% in the quarter to $662 million. Export coal tonnage declined 15% as global market conditions for both thermal and metallurgical coals continued to soften.

The API 2 benchmark for thermal coal recently fell to $75 per ton, a level where US coals are more challenged to compete. The Queensland metallurgical coal benchmark has also fallen to low levels of $120 per ton.

Domestic coal tonnage increased 8%, driven by increased northern utility shipments, including competitive gain. Finally, total revenue per unit was down 8% with lower export pricing and unfavorable domestic mix negatively impacting RPU.

Moving onto the next slide, let's take a look at the macroeconomic environment. The underlying macro economy remains constructive for growth.

The Purchasing Managers Index increased to 53.7 in March. A reading above 50 indicates the manufacturing economy is expanding. This is the tenth consecutive month the PMI index has signaled expansion.

Meanwhile, the Customer Inventories Index declined to 42 in March. A reading below 50 indicates customers' inventories are low. This is the lowest reading since May of 2011, when the customers inventories index registered 39.5.

On the right side of the page, both the GDP and IDP projections remain strong and show continued growth throughout 2014. This is consistent with what we see in the marketplace and what we hear from our diverse customer base.

Now let me wrap up with the outlook for the second quarter. Looking forward, we expect the overall volume outlook for the second quarter to be positive, with favorable conditions for 83% of our markets and stable conditions for the remaining 17%.

Looking at some of the key markets, agriculture is favorable with higher year-over-year crop yields supporting continued growth in grain shipments. We expect growth in chemicals as we continue to capture opportunities created by the expanding domestic oil and gas industry.

The continued expansion of the US housing and construction markets will drive growth in the forest products and mineral markets. Strong intermodal growth will continue as our strategic network investments and service reliability support highway to rail conversions.

We expect domestic coal volume will grow in the second quarter, as inventory levels have normalized and gas prices have increased to levels where most coals are a more competitive fuel source. Export coal volume is expected to be neutral in the second quarter. And our best estimate of 2014 volume remains in the mid-30 million ton range, reflecting soft global market conditions particularly in the thermal market.

At the same time rail pricing will likely continue to reflect the weak global market conditions. The automotive market is stable with North American light vehicle production expected to grow 1% in the second quarter.

The US economic expansion is expected to continue in 2014 with projected GDP and IDP growth at 2.9% and 3.2% respectively, producing and macroeconomic environment that supports growth. The value of the service we provide supports not only growth but also pricing above rail inflation over the long term. Thank you, and now I'll turn the presentation over to Oscar to review our operating results.

Thank you, Clarence, and good morning, everyone. As most of you know or heard by now, this past winter season was one of near-historic proportions in terms of the duration, the cold, the snow and ice. The corresponding impact on not only rail but truck and airline transportation systems, their supply chains and frankly the overall economy, was pretty significant.

We at CSX certainly felt the impact of the severe weather, and despite the best efforts of our operating employees, who often worked around the clock to ensure we were able to deliver freight even in the worst of conditions, CSX's operating performance this quarter was not at the high levels we've all come to expect. We assure you that the team is fully engaged to support both a gradual recovery and the strong demand that Clarence just discussed.

Now looking at the operating results in the first quarter and beginning with safety, while CSX still remains a leader amongst the Class 1 railroads, we did experience an increase in both personal injuries and in train accidents. The personal injury rate was up to 0.96 and the train accident rate rose to the 2.35, both up from near record low levels in the first quarter of last year. Adverse operating conditions were a factor in these results, but we remain focused on prevention with a specific emphasis on avoiding catastrophic injuries.

Let me now turn to the Company's service performance on the next slide. Our operating measures echo the challenges that the North American transportation industry faced in the first quarter. Originations, arrivals, velocity and dwell are all well off the record levels of the last few years. But, as you'll see later on in the presentation, service measures are stabilizing and beginning to improve.

If you turn to slide 15, I will highlight some of the specific challenges we face from the severe weather in the quarter. While the impact on CSX's network was most keenly felt in the Midwest and Northeast, this is a network business. And as you can see on the map on the left of the chart, on-time originations were negatively impacted as far south as the state of Georgia. Of course our northern region clearly faced the worst of the storms, resulting in on-time performance for the quarter of just above 50%.

On the right side of the chart you can see Heating Degree Days, an indicator of the severity of cold temperatures, were up over 17% on a year-over-year basis. And snowfall was more than double prior-year levels in most of our northern service territory.

In a normal winter when a storm approaches, we make adjustments to the operating plan, move the relevant resources to the area to accommodate the disruption. And then usually have a little time to return to normal operating plans after the weather has passed.

This year 25 storms came back to back over several months, which meant that the operating plan had to be constantly adjusted to serve customer needs. These adjustments require more resources and can also stress our line of road and yard capacity.

The worst of the weather seems to be behind us, and we're beginning to see fluidity recover. However, given the duration of the storm season and the backlog of freight it created, along with the increased demand we are seeing, our complete service recovery will be gradual.

Let me turn to the next slide and I'll discuss the effects on the operating cost of the business. While Fredrik will provide more specifics on where these impacts were in the quarter and what to expect going forward, let me give you some details on the key operational impacts.

If you look at the chart and on the left, the number of relief starts doubled year over year. Overtime across the entire operating department was up nearly 50%.

We positioned maintenance of way and signal employees around the clock along our critical routes to ensure traffic can move safely and efficiently through these affected areas. Mechanical employees worked extra shifts to ensure locomotives and freight cars were available to help catch up and meet customer demand. The Transportation Department labored to ensure terminals remained fluid and trains ran as close to schedule as possible.

Moving down the chart average freight car cycle days were up 9%, reflecting the additional time it took to move cars to and from customer facilities. We also placed additional locomotives into service. The result was a 7% increase in the average locomotive count.

With this many additional locomotives and the harsh conditions, fuel efficiency was impacted. I'm encouraged however, that we only saw a 2% setback in this measure, as the underlying technology and processes we have in place to drive fuel savings are still yielding results.

Finally, our active T&E crew count was flat on a year-over-year basis. Crews worked extra hard to run the network through this harsh winter, and I am pleased to say that crew availability remained high and the team was able to support solid volume growth, even through the operating challenges. So recapping, maintaining network fluidity in these extreme conditions drove a significant short-term cost impact, but was necessary to serve our customers.

Now let me turn to slide 17 and discuss our recent service trends. CSX has stabilized and is beginning to recover. The last of the significant storm systems came through about a month ago, and as you see depicted on the chart on the left of the slide, on-time originations is trending up and dwell is declining since that time, both positive signs.

As Clarence reviewed, traffic levels are also increasing. In support this growth, we expect our current high-level locomotives to remain in service for the foreseeable future, and we have new crew members in training to meet this rising demand.

The recovery in Chicago, specifically, will likely take longer due to the amount of interchange traffic with other railroads and the complexity of the rail network there. Nevertheless, the rails are in close coordination and we're beginning to see some headways.

As we look forward, we remain confident in our progress. Though it is clear that recovery and the related additional costs will extend through the second quarter, with more meaningful improvement in the second half of the year.

Now let me wrap up on the last slide. As I discussed, the effects from the winter storms were wide and significant, driving an increase in costs and impacting service levels.

Nevertheless, CSX is confident in the ability of this operating team to steadily return service to the levels our customers have come to expect. We are adequately resourced for recovery and our operating measures are headed in the right direction.

From a productivity perspective, while it's too early to give you an update estimate for the full year, it's pretty clear we're not going to be able to deliver our normal $130 million savings. But we'll update you on that later on in the year.

So at this point, let me echo Michael's comments and thank each of our employees for their skill and dedication and safely and efficiently serving our customers through this challenging winter. With that, let me now turn the presentation over to Fred to review the financials.

Thank you, Oscar, and good morning, everyone. As Clarence mentioned earlier, revenue increased 2% in the first quarter, as declines in coal revenue were more than offset by gains in merchandise, intermodal and the other revenue.

In the quarter other revenue included $55 million of liquidated damages, an increase of $22 million versus the prior year. Looking at the remainder of 2014, we expect liquidated damages to be about $10 million for each of the remaining quarters.

Expenses increased 9% versus last year, driven primarily by the adverse impact of winter weather that Oscar mentioned, and the cycling of real estate gains, both of which I will discuss in more detail in the coming slides. Operating income was $739 million, down 16% or $141 million versus the prior year. Looking below the line, interest expense was down $7 million versus last year, driven by favorable interest rates on debt that was refinanced in 2013 and modestly lower debt levels.

Other income was $7 million and income taxes were $208 million in the quarter, for an effective tax rate of approximately 34%. This included the state legislative tax change which benefited earnings by $0.02 per share. Without this change, the effective tax rate would have been 37.6%.

Overall, net earnings were $398 million and EPS was $0.40 per share, down from $462 million and $0.45 respectively, from the prior-year period. Now, before we move on let me take a moment to summarize the total impact that weather had on our first-quarter financial results.

We estimate that weather impact on the first quarter expense was around $90 million or $0.06 per share. The revenue impact is more challenging to quantify but we estimate there was about $0.02 to $0.03 per share in revenue contribution that we were not able to recover in the first quarter due to weather disruptions.

With that, let's turn to the next slide and briefly discuss how fuel lag impacted the quarter. On a year-over-year basis the effect of the lag in our fuel surcharge program was $4 million unfavorable. This reflects $9 million of negative in-quarter lag during the first quarter of 2014 versus $5 million of negative in-quarter lag for the same period in the prior year. Based on the current forward curve, we expect the year-over-year fuel lag impact to be negative in the second quarter, similar to what we saw in the first quarter.

Turning to the next slide, let's review our expenses. Overall expenses increased 9% in the quarter. I'll talk about the top three expense items in more detail on the next slide, but let me first briefly speak to the bottom two on this chart.

Depreciation was up 5% to $283 million, due to the increase in the net asset base. Going forward, we expect depreciation to increase sequentially a few million dollars per quarter, reflecting the ongoing investment in our business. Equipment rent was up 6% to $101 million due to the weather's impact on the network and higher locomotive lease expense as active fleet was increased to minimize service disruptions.

Turning to the next slide, let's discuss our other expenses. First, let me highlight the impacts that we had attributed to weather disruption across each of these expense categories.

As I previously mentioned, we estimate the first-quarter weather impact on expense was $90 million. Of that, $35 million is attributable to labor and fringe driven primarily by overtime and relief crew starts.

$35 million in MS&O due to an increase in active locomotives and higher utility expense. $15 million is in fuel, driven by loss of efficiency and an increase in non-locomotive heating fuel. And finally there was $5 million of weather impact in equipment and rent expense, which I covered on the previous slide.

Looking ahead at the second quarter, we expect to incur additional costs associated with recovering from the weather disruptions, although not to the same degree as seen in the first quarter. That summarizes the weather impact on our first-quarter expenses.

Now let me discuss the other drivers for each of the expense categories, beginning on the left with labor and fringe. Total labor and fringe increased 6% or $47 million versus last year, and included $14 million of inflation.

Going forward, we expect labor inflation to be around $15 million on a year-over-year basis for the remaining quarters in 2014. At the same time, we expect headcount to remain roughly flat to our first-quarter level, although as we have consistently demonstrated, we will continue to adjust resources to reflect current volume levels and drive efficiency.

Moving to the right on the slide, MS&O expense increased 24% or $122 million versus last year. This included a cycling of $49 million of real estate gains, a $12 million increase in expenses related to train accidents and $9 million of inflation. In addition, there was $17 million increase in other MS&O spanning multiple items, none of them of which were significantly by themselves.

Looking ahead, MS&O expense will continue to be impacted by the cycling of real estate gains, which as a reminder, totaled $36 million in the second quarter of 2013. However, there are no further gains to be cycled in the second half. In addition we continue to expect higher year-over-year expenses in the remaining quarters related to inflation and volume growth.

Finally, fuel expense was essentially flat to last year as favorable price, driven by a 5% decline in fuel costs per gallon, was offset by volume and weather headwinds. That concludes the expense review for the first quarter.

Turning to the next slide, I'm pleased to announce that we'll be increasing our dividend. CSX will pay a dividend of $0.16 per share starting in the second quarter, which reflects a 7% increase versus the prior year. While this results in a dividend payout ratio slightly above our target range of 30% to 35%, it is important to note that weather-related headwinds we experienced in the first quarter are not indicative of the core earnings power of the business.

We expect our full-year EPS to better reflect the true earnings power and to support a 30% to 35% dividend payout range in 2014. Our second-quarter dividend increase builds on the 11 increases we have made over the last 8 years, representing a 20% CAGR in a dividend over that period.

Now let me wrap it up on the next slide. First, the core earnings power of our business remains strong. Despite the very challenging operating conditions that we faced, we delivered top-line revenue growth of 2% and grew volume by 3% in this first quarter.

Across the portfolio we generally have a positive outlook on the growth trajectory for our merchandise and intermodal markets. In addition, we expect 2013 was the low point for domestic coal and that volume will grow this year, whereas the export coal market continues to be volatile.

Our near-term focus is to restore superior service levels across the network as quickly as possible. We experienced significant incremental operating expense in the first quarter from weather disruptions and expect some of these costs to continue into the second quarter. While we plan to recover a portion of this lost productivity during the remainder of the year, our first priority is to restore higher service levels.

For the full year 2014 we expect to see modest earnings growth despite first-half headwinds from weather and the cycling of real estate gains. We have visibility into several million new tons of utility coal as a result of the cold winter and higher natural gas prices, which will more than offset the incremental costs incurred in the first quarter.

Looking at 2015, it is still not clear whether our projected 2015 growth rate will be strong enough to deliver 2-year EPS CAGR of 10% to 15% across 2014 and 2015, given the modest growth expectations we have for this year. That said, we feel confident that CSX can sustain double-digit EPS growth as we get through this year.

That earnings growth, which will be more balanced between volume, price and efficiency, will also contribute to an improving operating ratio, which we expect to be in the mid-60%s longer term. With that, let me turn the presentation back to Michael for his closing remarks.

Thank you, Fredrik. As you've heard this morning, this first quarter was certainly more challenging than most. And again, I thank our employees and customers for their perseverance and patience over these past few months.

As I look ahead, we have the right people and resources in place and we're working hard to return our network to the high levels of service and reliability that we have consistently produced for our customers, while remaining a leader in one of the nation's safest industries. With that as a foundation, I am confident in the Company's ability to deliver modest growth for the full year 2014, and become more effective serving broad markets that will put the Company in a position to sustain positive earnings momentum over the long haul.

In that regard we are particularly optimistic about the opportunities and plans to support increases in the intermodal and merchandise markets. Put another way, the underlying strength of our network and team, coupled with a more stable domestic coal environment and a growing economy, gives us confidence that in 2015 and beyond CSX should again sustain margin expansion and double-digits earning growth. With that, we're pleased to take your questions.

(Operator Instructions)

Bill Greene, Morgan Stanley.

Fredrik, can I ask you for a little bit of clarification on your guidance commentary, particularly as it relates to 2015? Because I think most of us recognize there's some extraordinary events so far this year, so we don't have the same kind of expeditions for this year.

But in 2015, when you think about that double-digit growth rate, what gives you confidence in it? Can you walk us through a little bit of the assumptions behind it?

Obviously there's still concerns about how long export coal could be weak and this sort of thing. So I think it would be helpful to know what goes into that comment.

Sure. So take a different year. First of all we said modest earnings growth in 2014. And while we feel strong and have good confidence in what we see for 2015 as a year by itself, we're pretty bullish about the macro factors that we're seeing.

We're pretty bullish about the fact that as we get the network running better again, 2015 by itself will be a very strong year. The question is, will it be strong enough to make up for the fact that we're only making modest gains this year? And that's left to be seen.

Clearly the domestic market on the coal side has gotten stronger over the last few months, but at the same time, we continue to see the export coal market deteriorate. So it's a little hard at this point to be too bullish about that part of the market.

Instead of getting into individual components, what I've said throughout the quarter has been from where we're seeing things right now for 2015, we're going to need some help as we think about this thing from a bottoms-up perspective. That help can come in different forms. It can come in terms of export market firming up, a little bit more domestic coal, a little bit better pricing, more productivity. We just don't know.

But overall, 2015 by itself will be a very strong year. It is just not sure it's going to be strong enough to make up for the modest earnings growth we're seeing here in 2014.

Yes. One point of clarification there, another comment you've made in the past I think on 2015, has been the sub 70% OR, so high 60%s OR in 2015. Are you walking away from that?

I think the same thing holds true there. In order to get to that sub 70% operating ratio, we're going to also need some help from where we're seeing things today.

It doesn't mean we can't get there. We're certainly going target it. We're trying to get there, but we're going to need some help from where we're seeing things today.

Does the change to fixed variable costs do anything to pricing there? If domestic coal comes back, does this make pricing weaker and does that affect the view?

No, it doesn't really impact the overall trajectory.

All right. Thank you for the time.

Ken Hoexter, Merrill Lynch.

Michael, you mentioned a couple times that you're prepared for a gradual recovery. Oscar mentioned a little bit about maybe not hitting the $130 million recovery this year, because some costs are coming in.

We've seen volumes already up 11% quarter to date. What if we get a little bit of a sharper recovery in terms of volumes? What does that do in order to flex the network and stress test what your infrastructure is?

Ken, so that was a couple of questions. Specifically, restate your question a little bit, if you could.

I'm just wondering, because you mentioned, Michael mentioned a couple times and, I think, as did you, in terms of a gradual recovery, you're prepared for that. What if we see, we've already seen volumes up 11% starting off the second quarter pretty robust.

How are you prepared, if the recovery is a little bit stronger than that? Does that mean you're fearful that if we get too much volume, it's going to stress the network too much and you wouldn't be prepared? Because you mentioned the word gradual recovery so many times.

Thank you, Ken I appreciate t hat. So the gradual recovery is based on exactly the volume that we are seeing, so both backlog as well as the increased demand.

And again, our balance between productivity and ensuring superior service levels. And so we're making sure that everyone understands that our balance is geared toward our customer.

The volume that we're seeing today is, if you think of our annual peak periods, weeks 9 through week 23, is at the peak of it. Right now we're probably in the highest point of workload we're going to have in the course of the year. And we're slightly improving, so we feel pretty confident around that.

Given that fact, we're bringing on some more locomotives. We continue to bring crews out of training, and of course doing the hiring that's required. But no, the volume is a very welcome event for us after a couple of years of being in relatively dry.

Ken, this is Michael, the only thing I'd add to that is obviously with that demand, which I think we're doing a reasonable job of handling, it does slow your ability to recover. And I think the other thing I would point out is Chicago, as you know, is a key interchange.

I think all the major carriers have issues around Chicago. Those will take time to work through, and it does have a cascading impact on the rest of the network.

We will continue to improve. I think the reason we used gradual several times, is we don't think this is going to snap back immediately. And we're trying to make people understand that.

But if we see a little bit stronger, is that something that you need to then reengage the One Plan from years ago? Is it evolutionary?

I'm just trying to understand. Is that something that could make this was look even worse if you get a little bit faster growth?

Well, we used the term reengage at one point. We still use the One Plan to run our railroad. But I'm not overly concerned.

I think the demand levels we're seeing out there we can handle, we will work through. I don't see that as a major risk. As Oscar said, it's an opportunity for us to help regain some of that lost earnings in the first quarter.

Wonderful. And then just to follow-up on Bill's question there on the coal RPU. If you exclude the liquidated damages, how should we think about coal yields for the rest of the year, Fred?

Is that something we're going to see accelerate on the declines, given the change in contract structures? Or you could walk us through your thoughts a little bit on that?

This is Clarence. I think you'll see the coal RPUs will be very similar to what you saw in the first quarter. Our utility north business was up about 22% in the first quarter. That tends to carry a lower RPU.

Our southern utility was down about 6% in the first quarter. Our rates on our export coal, as we mentioned, was slightly down. That particular mix will tend to carry through here in the second quarter. You'll see something very similar on the RPU going forward.

Great. Appreciate the insight and time. Thank you.

Brandon Oglenski, Barclays.

It's still snowing in New Jersey, by the way. So it's a pretty tough spring, as well.

Never-ending.

I want to ask a longer-term question, Michael. Coal revenue used to be 30%-plus of your mix. It's down to close to 23%, 22% this quarter. We've seen your non-coal volume expand 3% to 4% for the last few years.

What are some of the impediments that keep that non-coal growth from driving better operational margins? I'm not even talking about the quarter, but thinking longer-term, how do you get that base of revenue to drive better margins and better earnings growth looking forward?

As Fredrik alluded to, one, obviously the coal is a high-margin business and our portfolio has changed, but we're very optimistic. If we look at our intermodal and merchandise growth, it is good margin business. We think, as we go forward, if you look at our value creation we drove in the decade prior to this, it was about two-thirds price and one-third productivity.

As we look at the Company going forward, we still see strong value creation opportunities, but it will be more balanced. Not exactly one-third, one-third, one-third, but it's going to be continued productivity, continued pricing above rail inflation and adding the element of growth.

The intermodal margins are very nice now that we have basically double-stack economics and the density of lanes. And the other business we're growing, the crude by rail, the growth in our other merchandise businesses are all good margin businesses that will help drive us to that mid-60%s operating ratio long term.

Okay. At what point, though, do you need still coal revenue stabilization in order to overall expand margins for the business? Is that what we're hearing today?

Well, we do need the coal to stabilize and we think we're getting fairly close to that point now. This cold winter, the only blessing of this cold winter is it did draw down those stockpiles.

Actually, as Clarence alluded to, the demand in the north is very strong and actually the stockpiles are below where they ideally would like to have them. And the overhang we've been living with in the south for the last couple years, about three-quarters of that was eliminated here. So we really do see that domestic as very strong.

Just to add, Brandon, also in terms of underlying core earnings power of our Company over the last two years, it's been pretty strong. We still think in that double-digit earnings range. The issue has been $800 million of coal revenue that has gone away.

And in this year, we're still seeing some headwinds in coal, which is why we only feel that we're going to have modest earnings growth. But we're pretty confident, as I said, once we get through this transition that we're going to return to that more normalized earnings growth going forward.

Okay. Appreciate it, guys. Thank you.

Chris Wetherbee, Citi.

Clarence, can I ask for a little bit of clarification on your comments around the export coal market? I think you included it in the neutral category in the outlook. I want to get a rough sense of how you think about that relative to the full-year target I think you still said in the mid-30 million ton range.

Should we expect a bit of an absolute tonnage step up in the second quarter? Which I guess would be a little bit more neutral. Or is that still going to be a little bit under pressure on a year-over-year basis?

Well, it's a little too soon, Chris, to see what this export coal business is going to do. Frankly it's a lot stronger in this first quarter than I anticipated that it would be. So we're sticking with mid-30s throughout the year.

We've got, in the second quarter right now, about 80% of what we project for the quarter is tied up under contracts. And that's obviously subject to market conditions. We think we've hit pretty much the bottom in where the global price of coal is going to be.

The thermal is very low right now in Europe. The metallurgical prices are very low over in Queensland right now.

So as we move towards the middle of the year, we expect to see a more firming in the rate structure. And we can tell you a little bit more toward the middle of the year what it looks like. But right now we're sticking pretty much to the mid-30 ton, mid-30s in the export market.

Okay, that's helpful. I appreciate that. And then Fred, I think three months ago you mentioned that the first half of the year, when we thought about 2014, was going to be the one where you were lapping some of the real estate gains and other stuff that you had in 2013.

When you look at the second quarter, with volumes bouncing back but still some costs lingering, is that still the right way to think about -- the first half is going to be a bit flat to downish on a year-over-year basis? And then you get a little bit of upside? Is that how your plan is building if you think about 2014 showing modest growth?

I would say probably flattish is a good way to think about the second quarter. I think we feel very good about the top line.

I think that you have still those things to cycle that you talked about, real estate gains. Based on what I said earlier, liquidated damage will probably be down a little bit in the second quarter as well.

And then we will have some lingering costs here for a period of time, because of the fact that a network is not running as well. But offsetting that is a more vibrant top line, especially on the coal side than we expected.

So I think flat is probably a good place in the second quarter. And then from there be able to produce earnings growth for the rest of the year to get into the modest earnings growth for the year.

Do you think you're mostly caught up on volume by the end of the second quarter, is that how the plan would trend?

I would think that based on what you've seen here the last few weeks where volumes are up double digits, that that would be a good assumption.

Okay. Thanks very much for the time. I appreciate it.

Allison Landry, Credit Suisse.

I wanted to ask a question about core operating margins. If I'm adjusting both this quarter and the prior year for all the unusual items including weather, liquidated damages, real estate gains, fuel lag, et cetera, doesn't appear that there was very much operating leverage on the 3% volume growth during the quarter. So I wanted to ask how we should think about contribution margin for the balance of the year, considering both the rate cuts on the export coal side and the fact that you plan to bring on additional locomotives and people.

Yes. So obviously it was a noisy quarter in terms of the ins and outs. But I think you're right, if you do adjust for the real estate gains in both years, you adjust for the fact that you did have weather impact here. You will see that you have modest earnings growth, year-over-year. That doesn't even factor in also the fact that we had taken our export rates down quite significantly.

So once you adjust for all these things, as I said in my previous answers, the core earnings growth of our Company and margin expansion is still very healthy. We are just dealing with a lot of factors right now that we have to cycle through.

As we get through this, real estate gains will be behind us here as we get through the second quarter. We're at the tail end, I think, of what we reasonably can do on the export side.

And the rest of the business is doing good. Coal on the domestic side is coming back. We feel we're going to return back to normal incremental margins going forward, but it's just a lot of noise right now that prevents that from coming down to the bottom line.

Okay. And a follow-up question on the tax rate benefit during the quarter. I did notice that there was a comment in the earnings review that the future corporate tax rate would be reduced. Should we expect a similar tax rate as we saw in 1Q? Or was there any prior-period catch up?

This is a state legislative tax change that impacted our earnings by $0.02 here in this quarter that made the effective tax rate 34%. If you adjust out for that, we were right at 37.6%.

Our guidance has always been somewhere around 38% as a conservative place to be. We think that should be the place going forward as well.

Okay. In terms of the comments that said that this will reduce the future corporate income tax rate, is that -- ?

I don't know about that comment. Maybe David can start later on. But nothing has changed in terms of our overall tax rate. We would like to, of course, have a lower tax rate, but nothing is imminent around that.

Perfect. Thank you so much.

Rob Salmon, Deutsche Bank.

Fred, you had called out about 7 million incremental utility coal tons you guys are going to be taking on that you've got now line of sight into the back half of the year. How should we think about this as we look out to 2015 as well?

Does this give you guys conviction that we're going to see utility coal volume at least stabilize to growth as we look out? Even in spite of some of the 4 million tons that you're expecting to go away in 2014 and 2015 from some plant closures?

A couple of things there in your question, just to clarify. First of all, we do see several million tons of incremental demand here this year because of the cold winter.

Then I think your question was around 2015 and beyond, the impact of MATS. What we have said is that as we look at the movements of coal for 2013 into plants that we expect to be closed because of MATS, we had identified 7 million tons that we think is going to come out between 2014 through 2018 essentially.

4 million of those tons we think is going to come out in 2014 and 2015 and the remaining three in the years beyond that, between 2016, 2017 and 2018. Does that answer your question?

That answers the question. With regard to this several million tons that are coming out in the back half of the year, will we have continued -- are you expecting that -- do you have line of sight in terms of that traffic looking out to 2015 as well? Where you've got a lot of conviction that utility coal volumes have at least stabilized and are growing as we look out over the next several years?

Rob, this is Clarence. We expect that our growth in coal continues through 2015. In fact, the growth for the rest of this year in utility coal will be in the mid to the high single-digits.

A lot of those plants that Fredrik is talking about that will be closing those years in terms of tons. The other plants that will remain open will simply run harder to absorb those tonnage.

Thanks. Appreciate the color.

Bascome Majors, Susquehanna.

One for Clarence here. We've talked pretty extensively about export coal pricing pressure over the last couple of years. You've said again today that you're at the end of what you can do to help incentivize your customers' competitiveness in that market.

If my math is right, it looks like the yields have come down a bit on domestic side of the business over the last few quarters as well. I know you called out mix earlier, but can you directionally walk us through what's driving that drop in domestic yields between mix and any pricing or fuel that's in there as well?

Well, as I said earlier on the mix side, the price played preponderantly in the mix. The utility coal, which carries a much lower rate than does the northern utility coal, which carries a much lower rate than the southern utility coal, is up about 22% this year.

The southern utility coal, which carries a considerably higher rate due to the much longer length of haul, was down about 6%. Then when you put in the export coal, which we said has been slightly down in terms of rate, those three combinations have led to the lower RPU.

Very little of that has been driven at all by the fixed variable charges in our coal rate. So that's the principal and preponderant driver.

Okay. And a bit more broadly on a similar theme, you talked about competitive gains helping your domestic coal volumes this quarter. What's the competitive dynamic like in that business today?

Has the volatility we've seen over the last couple years given you more opportunities to go after your competitors' business? And vice versa them after yours?

Not really. It was a single account in the north that the customers put up for competitive bid. And it did involve the one-time issue. We really haven't had many opportunities in that area at all.

Is there any way to quantify how much of that is driving your domestic gain that you talked about in the previous question?

Very little is driving our domestic gain in that area. Most of it has been as a result of a burn in the northern utilities and their stockpile depletion.

All right. Thanks for the time this morning.

Jeff Kauffman, Buckingham.

I think the point on the weather has been well made but I have a question concerning some of the noise we've been hearing on the regulatory side. I don't know if your prepared to comment, but there recently were hearings on competitive switching. They've put out some requests for recommendations on the revenue adequacy questions.

How do you view the regulatory environment right now? And what are your thoughts out there on some of the discussions?

Jeff, this is Michael. So on the ex-parte 711, which is the NIT League proposal, as you're well aware, we did testify at the March 26 hearing opposing that proposal. Because it basically provides no public benefit at all.

The only possible beneficiaries, and you may recall there was a study commissioned by the STB a number of years ago by the Christensen Group, is that very few shippers would benefit to the detriment of everyone else. And we think that's still true.

It would degrade service. It would drew introduce uncertainty in the marketplace, disrupt our plans for growth and capital investments, strand prior investments. If you think about it, our witness, Cressie Brown, at the hearing did say that you could introduce a perpetual winter like we've just seen because you'll be putting unnatural moves in there. So we're hopeful that the STB, in its wisdom, will not do anything to disrupt what is working quite well today for our customers.

On the side of the revenue adequacy piece, we actually welcome that examination. As you know, that's an issue that's I think right for ripe for examination in that no time in the past have the revenues even been anywhere close to revenue adequacy.

Some of us are approaching that, but there's issues around what is sustained revenue adequacy? How many years do you have to be doing it through a business cycle? What is the appropriate criteria?

And we've really welcomed that examination to try to bring better clarity to what will happen as the railroads continue to grow in their financial health. And we like to bring the question of replacement costs into that equation, because we do have to replace old assets with new dollars. We think that's a really ripe one and we're glad that they've called for it.

Okay. Thank you very much and congratulations.

Scott Group, Wolfe Research.

Want to clarify one thing, Clarence. Did you have to take the export rates down further in 2Q as the new benchmark kicked in?

Scott, we did in a couple of lanes with a couple of customers to make them competitive, yes.

Okay. On the intermodal side, so nice volume growth but still some pressure on the yields. And wondering if that's a pricing thing. Is that mix?

I wouldn't think it's mix, with domestic growing faster than International, but maybe it's mix. Then with the truck load pricing that's really starting to get better, should we start to think about your intermodal pricing getting better going forward?

Two answers. It was definitely as specifically weather-related, it was definitely in mix, it was in our door-to-door product. It had almost a 2.5% impact.

It was in the spot market where we couldn't price because of the weather-related issues this quarter. The other pricing and the other areas was positive.

Yes, we are seeing a firming in the spot market with truck capacity tightening up in the US in just about every regional area that we serve. So you are seeing a more firming in truck pricing.

Okay, great. And last thing maybe for Oscar or Michael. You guys have done such a great job taking resources out of the network following 2008, 2009. After a winter like this and maybe with volumes getting better, are there longer-term implications of do you need to spend more capital or bring back on a more sustainable basis, more people or equipment?

Scott, it's Oscar. Being the operations and no longer the financial guy, I can always use a little more capital here and there. But generally, we had adequate level of resources.

It's just the winter conditions were harsher than in a long, long period of time, which created a little bit of a logjam. I think there's a high level of learnings we've had operationally, that we'll obviously include.

But we went into the year, into the start of the year, with more locomotives. We've done a lot of the work on the line of road over the course of time.

From a long-term perspective, there are places that we will strategically review over the coming thing. Nothing immediately evident that would have been that helpful.

Chicagoland Terminal, which as you know, is the interchange between all of the different railroads, that's where the CREATE Project is really making a lot of that investment. I think continuing that is probably the biggest investment the industry can make to make that fluidity in that location better.

Any implications on capital? Sounds like not really.

Not from a CSX perspective.

All right. Thanks for the time, guys.

Jason Seidl, Cowen & Company.

Two quick questions here. One for Oscar, I'm sorry, one for Clarence. Clarence, you mentioned you guys had to bring down some of the export rates due to the benchmark weakening a bit. If the benchmark starts recovering, how quickly can you bring those rates back up?

Within a quarter.

Within a quarter? Okay. And the next question is for Michael. Michael, I've done this a while and Chicago has always been the major interchange issue for the rail industry.

It should have improved over the last 10 years with the CN taking EJ&E and taking some pressure off of that downtown area. What's needed going forward in terms of capital investments by the railroads, maybe as jointly or with some help from the government? Because it's pretty much still a sore point after all these years.

Well, two things. One, you're certainly correct, we need to put some better infrastructure in. That is the CREATE Project which we're in the process of working. There's money from the railroads, from the State of Illinois and federal money to improve the fluidity in Chicago.

But I will remind you though, it's funny, we looked at the statistics in Chicago going back to, I think 1871, they kept records from then. Normally you can have a cold winter or you can have a snowy winter. You rarely have both. This was the third snowiest winter in Chicago, the third coldest winter in Chicago.

I think they had 32 snow days, they closed schools in Chicago, which is really rare. So this is an extraordinarily tough winter that exacerbated some of the natural challenges in Chicago.

So yes, as an industry we are putting more capital in there. But I think we do need to put the context of how severe this winter was when we think of what happened this year.

And does what happened this year maybe accelerate some of the industry's plans to fix Chicago?

Quite frankly, the railroad piece, the money for the railroad elements of it, because CREATE not only helps the rail freight infrastructure, it also helps the commuters. It also helps the interface at grade crossings and those sorts of things. The money related to the rail freight infrastructure is being provided by the rails today.

The federal and state money for the other aspects, the commuter and the interface crossings, et cetera, is coming a little bit slower, because of some of the budget challenges, both state and federally. So that's moving at a slower pace, but the freight piece is moving forward faster.

Okay. Gentlemen, thank you for the time.

Ben Hartford, Robert W. Baird.

Just want to circle back. Fredrik, I know we addressed this earlier in the Q&A, but in terms of abandoning that sub 70% OR target for 2015, I want to understand the reasons. I believe it's on the export coal side, specifically on the pricing side.

Clarence, I think you as well had made a comment about volumes, frankly, in the first quarter being slightly stronger than you guys had anticipated. And we know that the settlement prices are lower here on the margin in the second quarter.

Fredrik, maybe you could provide some context into really what is driving the lack of confidence there for 2015, in terms of that line of sight to the sub 70% OR. And when you say that you will need some help, is it simply on the export coal pricing front? Or are there other opportunities even at current pricing levels in the export market that would allow you, that would provide for that help to get back into that sub 70% OR range for 2015?

Sure. I wouldn't say we abandoned it. What we said is that we need some help from where we see things today as we do a bottoms-up view of things, we're going to need some help. And that help can come from different places. It doesn't have to be from export coal.

Particular to that, while Clarence is absolutely right, our export coal market has done better than we thought from a volume perspective. As you also heard, we will continue to make adjustments on the rate side to make sure we optimize our bottom line and of course try to do what we can to keep the US producers in the business.

At these low levels, in terms of underlying commodity prices, it is unknown to us, or it's difficult for us to predict how long this will be able to sustain, how long will the producers be able to be competitive in the marketplace? So until we see some sort of an uptick there, it's hard to be too bullish on 2015 in terms of what overall volumes will do. But it's not defined through that.

If we can, as I said earlier, get help from other places as well in terms of more price, more productivity. The economy is doing well, and so we continue to target it. We continue to think that that's where we want to be.

At the same time, one of the things that we try to do as a Company is be very transparent about how we see things. That's really, I think, pretty consistent with the two public appearances I had in the quarter in terms of saying what we need in order to be able to get there.

We certainly haven't given up on it. We certainly haven't abandoned it.

Of course. Okay. If I can ask a follow-on, in terms of the mid-60%s OR target longer term. Do you have comfort that at current global settlement prices on the export coal market that this mid-30 million tons run rate is an appropriate run rate going forward?

And that with the components of productivity gains and volume growth and core pricing growth, you have visibility over time to be able to get to that mid-60%s OR? Is that how we should look at that longer-term target?

Yes. As we think about pulling the three levers that we have, price, volume, productivity, as we do our long-term modeling, we still feel comfortable that we will be able to get to that mid 60%s level. Obviously it's taking longer than we had expected because of the fact that we've lost $800 million of coal revenue in two years alone here. And we still have some headwinds we're facing this year.

But even at the current levels, as we model things out, we'll get there over time. It's just a little bit longer than we had anticipated originally.

Perfect. Thank you.

Cherilyn Radbourne, TD Securities.

In her testimony before the STB last week, I think I heard Cressie Brown indicate that you'd recently acquired a new route through Chicago. And given all of the focus on Chicago currently, I wondered if you could give a bit of color on that, and how it might be strategic to you going forward.

Cherilyn, this is Michael. We acquired the Elsdon sub of the Canadian National in a swap last year. When they acquired the J, the EJ&E, they didn't need that route anymore, so we acquired that from them. We're currently, once this weather has broken, we're making improvements to that route to allow additional fluidity in the Chicago area.

And how long would you expect those investments to take before you start seeing some benefits?

Cherilyn, this is Oscar. By mid-year, let's say July, we should be fully operational.

Okay. And one last quick question. In terms of the double-digit volume growth that we've seen over the last couple of weeks in your carloads, do you have any feel for how much of that is pent-up demand versus real organic traffic growth?

I think a lot of that is pent-up demand. But at the same time though, we still feel that the economy, as we said in the prepared remarks, continues to be very vibrant. We're also seeing our coal business finally picking up.

So the underlying volume trend is also very positive. But there's no doubt that there's a fair amount of that double-digit volume growth that is related to just catching up with things we didn't move in the first quarter.

But I would add to that, the economy is forecasted to grow, let's call it roughly 3%. We think our merchandise and intermodal business, we can grow faster than that rate, which we did last year. We will do this year as well.

So we will be some amount above what that economy is doing with the great service product we've been providing. We do need to temper that a little bit because it is pent-up demand, but it's also strong demand in the base business.

Great. Thank you. That's all for me.

David Vernon, Bernstein.

A higher level question. As you think about the slower rate of operating margin development, and keeping CapEx as high as it is, is there a point where you need to start thinking about the capital budget a little bit differently? Just to ensure overall returns are getting to an upward trajectory?

David, this is Michael. One, I think when I think of these slower operating margin growth, I don't know that I'd necessarily agree with that base premise. If we look at our business and strip out the effect of the loss of that coal business over the last couple years, we are in the high single to low double-digits growth on the other businesses. Once we get through this transition we will produce that kind of growth.

Now, to do that we have to make the investments necessary to support it. So that 16% to 17% of revenues that we've held with the last few years, we still think that is the appropriate level.

We do need to make strategic investments in our intermodal, as we're doing, to capture that growth opportunity. We think there are 9 million truckloads out there that we can go after and we have to make the investments necessary to do so.

So we still think the 16% to 17% is the appropriate level. And it will produce value for our shareholders as we grow the business and the margins.

You don't get concerned at all about the asset turns and created by that mix headwind towards lower revenue intermodal?

No, because while it's lower revenue, it doesn't mean it's lower margin. So if we look at the margins on the intermodal business, it's as good as our other margins for our merchandise businesses.

So it's good margin business, it's lower RPU. But what we get paid for doing is producing margin, not necessarily revenue per unit. So we think it's good business and we'll lower the overall RPU, but we'll increase our profitability, which is what we really need to do.

All right. I appreciate the time.

Walter Spracklin, RBC.

I just have two follow-up questions, really. One is for Clarence on the export coal side and the guidance that you provided with regards to the neutral on the second quarter.

I know Chris asked this, but to clarify. If we reflect in, you did 11.5 million tons last year. You did 10.5 million last quarter. Even if we just say 10.5 million this quarter, it would imply a step-down of over 20% in the back half of the year to get to about 36 million tons.

Is that what you're guiding? Or are we giving a little bit more room for upside in the case that the back half turns out to be better than we're expecting?

Walter, I guess if somebody was to hang me up in a corner and say what are you really guiding, I'm guiding that this market is very volatile. That at $120 a ton in Queensland, your guess is as good as mine. It is extremely volatile.

With thermal coal selling in Europe between $75 and $79 a ton, some of the things that we've seen in the first quarter really defy what have been historical norms. It's highly speculative. We've worked with our producers to try to stay in the marketplace right now and it's just too soon for us to bet on.

So we've got a fairly clear line of sight of what the next two, three months look like. But to tell you what the third and fourth quarter looks like is just going way out on a limb.

Okay, all right. That makes a lot of sense. Okay, I appreciate that color. Staying with you, Clarence, here on intermodal pricing. Again, a clarification question.

A lot of moving parts in the last few quarters with regards to fuel recapture or quite the opposite, a lower fuel surcharge, firming truckload market, or trucking market. If we strip all that out now, on a base level going forward, would you see average RPU in intermodal flat or up going forward?

Up.

Okay, that's all my questions. Thanks very much.

Justin Long, Stephens.

First one I had was on core pricing. You talked about overall core pricing being up about 50 basis points year over year. Could you talk about the headwind this number saw from a lower level of rail inflation?

I'm just trying to understand the overall core pricing environment absent any changes in inflationary mechanisms. Would you describe it as stable? Or are you seeing some type of moderation?

Well, if you saw core inflation was around 1.4% from Global Insight. When you took coal out of the mix we were at about 2.6%. That was down from what it was a year ago, which was around 3.3% in the merchandise and the intermodal markets.

So we are pricing above rail inflation in our basic markets. The coal markets are being mainly impacted and influenced by what's happening in the global coal markets. So I would tell you that we're seeing stability in our general freight and our general merchandise markets.

As we're seeing capacity demands, as just witnessed by the previous questions, we think that will firm up through the year as we go forward from where we are today. Depending on what happens in these coal markets, we think we've seen of the near bottom start to approach in global markets in coal. So the trend should be upward in the future in there.

Okay, thank you. That's helpful. As a follow-up, I was wondering if you could talk about the industrial development opportunity and your current pipeline of projects. It seems to be pretty robust. Is there any possible way to quantify how much this could contribute to volume growth in 2014?

I don't have that number right off the top of my head. I'm sorry.

Okay. That's fine. Maybe you could provide some color on some of the opportunities as far as industrial development and what you're seeing, and how that pipeline looks in general.

Well, one of the things that we are seeing as a result of the expansion in the oil and the gas industry, is a lot of development is happening in the Marcellus area with fractionators either located on CSX or on the short lines that feed into CSX. We have five new fractionating facilities located on us. Each one of those are producing between 15 and 20 cars a day of by-products of the gas industry that are coming onto CSX. That's a positive for us.

We have two new ethylene crackers that have been announced on CSX as a result of that. So those tend to be, for lack of a better phrase, annuities going forward for us on CSX. So you're seeing a lot of developments in those areas.

In the last, I guess, 18 months and all, we've seen a lot of activity in general in industrial development as the economy's beginning to expand with new industries on CSX. I think last year we announced almost $1.5 billion, $2 billion worth of new industries that are locating on CSX. So you're seeing a lot of the economic activity now, as the economy's beginning to expand.

Okay, great. That's helpful. I'll leave it at that. I appreciate the time.

Keith Schoonmaker, Morningstar.

I'm in Chicago and actually calling you from an igloo this morning. (laughter) Appreciate those comments on uncertainty of export coal demand and wanted to turn to domestic with a couple quick questions.

Fredrik mentioned expectations that 2013 was probably the nadir in domestic coal volumes. I know there's no crystal ball, but I want clarify it if you're thinking that, based on current information, you expect domestic coal to be flat or up from here on indefinitely, next three to five years?

No, no. We expect growth in the mid to high single digits for the rest of this year in 2014 in domestic coal.

And then beyond the current year?

Well, I expect 2015 to also be up. I don't see much beyond 2015 right now at this point.

Okay. If I recall correctly Illinois and Powder River basins constitute about half of your recent utility carloads. I'd like to ask about your expectations for mix, same time period, two to three years from now?

Two to three years right now, you're right. It's running just slightly above 50% in both those markets. We expect to see growth continue in both of them, particularly the Illinois basin coals.

We're actually making capital investments on that line near the Illinois basin to allow us to muster those unit trains more efficiently. When's that expected to be done, Oscar?

Again, probably third quarter of this year.

So we're putting infrastructure in because we do think that Illinois basin is going to be a continual growing market for us.

That infrastructure is track?

Yes, putting in a yard. It's a yard to be able to assemble unit trains and move them more efficiently.

Thank you.

Cleo Zagrean, Macquarie Capital.

My first question relates to, again, the outlook for the export coal market, could you help us understand your leverage to recovery in met coal across your book of business contracted in spot? And also what your assumptions are with regards to this market in your guidance for double-digit EPS growth for the next year?

Our leverage in met coal? Is that your question?

The rebounds, what kind of leverage?

Yes. How been at how fast can you benefit from a recovery in pricing and demand and volumes, given that you have a mix of contracted and spot business. And if you could also clarify how much of your contracted business is up for renewal this year, that would also help.

Okay. Our export coal business is priced on a quarterly basis. So our ability to leverage and to respond to the marketplace, we'd be able to do so only on a quarterly basis.

So if it upticks, we can move.

We can respond within the quarter.

All right. And with regards to your guidance for 2015, what kind of outlook do you have embedded for export coal?

I think what we've said is that that is one market that we are concerned about, in terms of how long we can see the positive volume despite having the underlying commodity markets as weak as they are. But we haven't given a specific number in terms of what we're assuming for 2015.

Thank you. And my follow-up is with regards to the past year of mid 60%s operating ratio long term. Can you help shed some light onto what you mean by long term? And the main drivers, especially from the [hard output] by this hard winter?

In terms of the mid 60%s, we talked about it earlier on the call today. Because the fact that we've lost so much momentum and the $800 million of coal revenue that went away, it has been pushed out longer than we originally anticipated.

We're going to have to get there a little differently than our original plans. But we're still confident that as we look at our long-term modeling, as we look at our pricing productivity and volume opportunities, that we will get there.

We're not going to put a timeframe on it today. Clearly that's where we need to be long-term in order to be able to reinvest in the business the way we want to be able to do.

So it could be three years or five, I guess?

We have not put a timeframe on that.

Thank you very much.

Everyone, thank you for your attendance and interest in the Company. We'll talk to you again next quarter.

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