CSX Corp (CSX) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CSX Corporation first-quarter 2015 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 introduction, I would like to turn the call over to Mr. David Baggs, Vice President, Treasurer, Investor Relations officer for CSX Corporation. Sir, you may begin.

Thank you, and good morning, everyone, and welcome again to CSX Corporation's first-quarter 2015 earnings presentation. The material that we'll be reviewing this morning, along with our expanded quarterly financial report and our safety and service measurements, are available on our website this morning at CSX.com under the Investor section. In addition, following the presentation, a Webcast and podcast replay will be available on that same website.

This morning our presentation will be led by Michael Ward, the Company's Chairman and Chief Executive Officer; and Fredrik Eliasson, our Chief Financial Officer. In addition, Oscar Munoz, our President and Chief Operating Officer; and Clarence Gooden, our Chief Sales and Marketing Officer will be available during the question-and-answer session.

Now before we turn the presentation over to Michael, 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, at the end of the presentation, we will conduct a question-and-answer session with the research analysts. 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 and Chief Executive Officer, Michael Ward. Michael?

Well, thank you, David, and good morning, everyone. Yesterday, CSX reported first-quarter earnings per share of $0.45, up 13% from $0.40 reported in the same period last year. The Company also generated double-digit growth in operating income, net earnings, and earnings per share.

Revenue in the quarter was $3 billion. With continuing broad-based demand for freight transportation, we see better pricing vibrancy than in previous years, and we are pursuing new growth opportunities in the merchandise and intermodal markets. These efforts are helping to offset the headwinds in coal, the impact of a stronger US dollar, and lower fuel recovery.

In addition, lower fuel price and cost-saving initiatives decreased expenses in the quarter. As a result, operating income increased 14% to $843 million, and the operating ratio improved 330 basis points to 72.2%.

While operations remain stable sequentially during the quarter, we expect sustained improvements going forward driven by the combination of resource investments coming online, asset utilization adjustments, and the extraordinary efforts of our employees. Specifically, we expect the positive trends we've seen over the past few weeks to gain momentum in the second quarter and accelerate in the second half of the year, as we progress toward the record levels of service we saw in 2012 and 2013.

These efforts will drive our ability to continue pricing ahead of rail inflation, growing merchandise and intermodal faster than the economy, and improving efficiency, which is expected to produce savings approaching $200 million this year. With that foundation, we took actions yesterday to reward our shareholders with a 13% dividend increase and a new $2 billion share buyback program that we expect to complete over the next 24 months.

Now, I'll turn the presentation over to Fredrik who will take us through the top- and bottom-line results as well as our shareholder actions in more detail. Fredrik?

Thank you, Michael, and good morning, everyone. Let me begin by providing some more detail on our first-quarter results.

Top-line growth slowed in the first quarter with revenue slightly up versus the prior year and volume up 1%. These results reflect weaker market conditions in domestic coal, a stronger US dollar, and the impact of winter weather, which, together, suppressed volume growth across the industry.

Revenue per unit was flat in the first quarter and includes the impact of lower fuel surcharge revenue, which declined $89 million versus the prior year. Core pricing for the quarter was up 1.6% overall and 3.4% excluding coal. Other revenue increased $23 million versus the prior year driven mainly by higher liquidated damages.

However, we incurred a similar year-over-year increase in train accident costs stemming from the Mount Carbon, West Virginia derailment, which essentially offset the gain in other revenue. Expenses decreased 4% versus last year driven primarily by the impact of lower fuel prices. Operating income was $843 million, up 14% or $104 million versus the prior year.

Looking below the line, interest expense and other income were similar to the prior-year period. And income taxes were $269 million in the quarter, reflecting an effective tax rate of approximately 38%. Overall, net earnings were at $442 million and EPS was $0.45 per share, up 11% and 13% respectively, versus the prior-year period.

Now, let me turn to the market outlook for the second quarter. Looking forward, we expect a generally flat demand environment in the second quarter as we cycle the strong surge in pent-up demand during last year's second quarter when volume increased 8%. Overall, we are projecting favorable conditions for 49% of our markets in the second quarter and stable-to-unfavorable conditions for the remaining 51%.

We expect strong intermodal growth to continue as our strategic network investments support highway-to-rail conversions and growth with existing customers. Increased infrastructure development products are driving a favorable outlook for minerals. Agricultural is neutral as strength in domestic grain shipments is offset by a weakened export grain market resulting from the strong US dollar.

Automotive is expected to grow modestly, driven by projected North American light vehicle production. The outlook for chemicals markets is also neutral, due to a reduction in drilling activities stemming from the low commodity price environment. As a result, we expect crude volumes for the remainder of the year to hold relatively flat to the level we saw in the first quarter.

With sustained low natural gas prices under $3, domestic coal volumes were adversely impacted in the first quarter, and we expect volume to decline in the second quarter and to be down at least 5% for the full year. Export coal volume is expected to be lower in the second quarter reflecting global oversupply and the strong US dollar. While volumes have held up reasonably well in the first quarter, we still expect about 30 million tons for the full year.

The strong US dollar is particularly impacting the metals market where US steel production is down 12% year-to-date. Overall, the key drivers for our flat demand outlook in the second quarter are the change in commodity prices, the cycling of a period of strong pent-up demand during last year's second quarter, and a strengthening US dollar.

Turning to the next slide, let me talk about our expectations for expenses in the second quarter. Beginning with labor and fringe, we expect second-quarter average headcount to be essentially flat sequentially. On a year-over-year basis, this represents a 3% increase driven by T&E employees added over the course of the last 12 months to support service.

We expect second-quarter labor inflation to be around $35 million, similar to the levels seen in the first quarter and then moderate to around $25 million per quarter in the second half. As you saw in the prior quarters, there will be a $10 million to $15 million shift between the labor and MS&O expense lines in the second quarter as a result of the locomotive maintenance agreement we amended in June of 2014. This will be the last quarter that we are cycling this expense shift.

Looking at MS&O expense, we expect the second quarter to be driven primarily by inflation and higher resource levels versus the prior year, partially offset by efficiency savings. Fuel expense in the second quarter will be driven predominantly by lower cost per gallon, reflecting the current price environment and a continued focus on fuel efficiency.

We expect depreciation in the second quarter to increase around $10 million versus the prior year, reflecting the ongoing investment in the business. Finally, equipment and other rent in the second quarter is expected to stay relatively flat to last year, with higher freight car rates offset by improving cycle times.

Turning to the next slide, as Michael mentioned, CSX will be increasing its dividend. The Company will pay a dividend of $0.18 per share starting in the second quarter, which represents a 13% increase.

This builds on the 13 dividend increases we have made over the last 10 years at a 26% CAGR over that period and reflects the underlying strength in our core business. Our second quarter dividend increase will result in a payout ratio of 36% of trailing 12 months earnings.

Going forward, we are expanding our target payout range to 30% to 40%, which reflects our confidence in the future earnings power of the Company. In addition to the dividend increase, CSX is also initiating a new share buyback program. CSX remains committed to utilizing share buybacks to return cash to investors and as such, we have announced a new $2 billion buyback program which is double the size of our previous program.

We expect the program to be completed by the end of the first quarter 2017. This program will be conducted on a pro-rata basis during that period and is expected to be funded by debt, excess cash, and free cash flow from the business. Going forward, we expect to sustain our current BBB-plus, Baa1 credit profile which balances our financial flexibility and cost of capital through the business cycle while targeting a debt-to-EBITDA ratio in the low [2's].

Now, let me wrap up on the next slide. Overall, CSX delivered strong bottom-line results in the first quarter, and this is now our third consecutive quarter of double-digit EPS growth. While top-line growth was lower than our initial expectations due to volume headwinds, productivity gains and improved pricing contributed to strong earnings growth this quarter.

While we continue to see strength across many of our merchandise and intermodal markets, headwinds in coal are not greater than we anticipated at the start of the year. Domestic coal volumes are being impacted by the low natural gas price environment, and we now expect volumes to be down at least 5% this year.

In addition, export coal continues to be challenged by soft global market conditions, and we are maintaining our full-year guidance of 30 million tons. Looking at the second quarter, as we previously mentioned, we will with be cycling a very strong demand environment from last year resulting in an overall flat volume outlook.

In addition, since we do not expect to see the full benefit from the resources we're adding until later this year, we now project second-quarter EPS to be flat to slightly up on a year-over-year basis. Looking at the full year 2015 earnings, with our first-quarter results being less robust than originally expected and with our new projections for the second quarter, double-digit EPS growth has clearly become more challenging. As a result, we're updating our guidance to mid to high single-digit EPS growth for the full year.

While our growth expectations this year are diminished, we still expect to deliver strong margin expansion by remaining focused on pricing above inflation, delivering efficiency savings approaching $200 million, and driving a stronger service product for our customers. Bottom line, CSX is committed to delivering full earnings potential of the business and maximizing value for shareholders. Our second-quarter dividend increase and the new $2 billion buyback program reflects our confidence in the Company's future.

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

Thank you, Fredrik. Before I begin my closing remarks, on behalf of all CSX employees, I want to extend our heart felt sympathies to the family, friends, and colleagues of one of our employees who was fatally injured in a switching yard earlier this month. His death is a tragic reminder of why safety is and will remain our first and highest priority.

Turning to our closing thoughts on the quarter, we continue our work to transform this railroad by consistently expanding the most diverse business mix in Company history. We're investing in growth markets, technology to improve safety, service, and efficiency, and innovative ways to collaborate with our customers.

As we've said, the foundation of that transformation and those innovations is service excellence, which creates value for our customers and enhances our ability to price above rail inflation, grow merchandise and intermodal faster than the economy, and improve efficiency and asset utilization. In short, these are the actions that will drive CSX to the mid-60s operating ratio.

We are relentlessly focused on that goal, and the shareholder actions we've announced clearly underscore our confidence. CSX is committed to maximizing new opportunities as we continue our critical role in serving both a growing American population and expanding global supply chain, all while creating sustainable value for you, our shareholders.

And now, we will take your questions.

Thank you. We will now be conducting a question-and-answer session. And our first question comes from Christian Wetherbee from Citi Research. Your line is now open, sir.

Good morning, Chris.

Hey, good morning, guys. I was wondering if you could maybe talk a little bit bigger picture about the balancing of resources relative to the volume outlook? It seems, from a volume perspective, a little bit more of a sluggish outlook for this year across the industry. And as we are kind of recovering, from a service perspective, over the last year or so, obviously, you have more resources coming on board.

Taking a step back, do you feel like the network is balanced enough? Or when do you reach that point where you can think a little bit more strategically about the resource you bring on to the network relative to the outlook of the volumes?

Hey, Christian, it's Oscar. It's probably appropriate for me to take that one since we do think a lot about that. And again, I think a couple things that I've had you think about with regards to the moderating volume forecast -- we still have quite a strong baseline from the growth we had last year. So, there's, from an operational perspective, quite a bit of work to do.

So, after what happened to last year with that kind of growth, we are actually glad to be in a position where we may indeed have a slightly higher level of resources than we need. But again, with the increased volatility we're facing, and all the other issues, I think we're pretty comfortable with that.

I might take the entire listening group back to 2009 where we did some extensive work around the variability of the industry, and certainly CSX. And I think those facts and data there proved to be, again, rough order of magnitude, a third, a third, a third; where a third is relatively fixed, and you really can't get at it other than a very long period of time.

But two-thirds of it, we bifurcated into a short-term variable aspect, which is immediate unit trains we can shut down. But we kind of went through this long-term variable cost aspect of that where we can take steps. And I think, as we think about this very question, and you hear about something like variable train scheduling, which is an initiative we kicked off a month ago, that's part of long-term variable cost adjustment that we're working through.

So, the obvious results -- the obvious initiatives that we can take when volume moderates is we can put our locomotives into storage very quickly. We talked about that a couple years ago; and certainly, the furlough aspect is available to us. So, we think about it. We think about it hard. We have some strategy around it. We do not see that coming into play over, certainly, the next couple of quarters with the kind of baseline growth we have from prior year.

Okay. That's helpful.

And then, just when you think about the longer-term growth potential of the Business -- so we're now going to be I think about three years sort of in this mid- to maybe high-single-digit growth rate, down from the double-digit expectations earlier this year -- how do you think about the longer-term outlook for the Business? Is it possible to ramp back up to double-digit EPS growth? Or do you think about things like coal and just the overall volume environment as potentially being somewhat limiting to that ability?

This is Fredrik. I think that all depends on your assumption about coal, but I think you've seen that we just had three quarters in a row where we had double-digit earnings growth. So we think it's, certainly, possible for us to do that. It just depends on how much the headwind is on coal.

We've had three years of very significant headwinds in coal that clearly has impacted our earnings growth, but at some point we believe that moderates. And when it does, we do feel that what we have lined out in terms of our inflation, plus pricing, continue to drive productivity in excess of [$130 million], [$150 million] a year, and continue to grow with the economy as the markets allow, I think we have an opportunity to continue to get back to very strong earnings growth going forward.

Okay. Great. Thanks for the time. Appreciate it.

Thank you. And our next question here comes from Tom Wadewitz, UBS. Your line is now open, sir.

Good morning, Tom.

Yes, good morning, Michael. Wanted to ask you -- I guess to start with a question on utility coal. And, Fredrik, I think you said 5% or more decline in utility. I think that's been your comment for the last, I don't know, six weeks or so.

Can you give us a little more color in terms of where you think stockpiles are at in the south and in the northern parts of your network? And how much visibility you have to that being down 5% -- 5% sounds like, potentially, an optimistic number given where natural gas prices are. So, just wondered if you could give a little bit more color on the utility coal picture, and then, maybe, risk to that 5% decline?

Tom, this is Clarence. The stockpiles in the north and the south are both well above the target levels, and that's particularly true when you take the reduced burns rates that are into account. In March, the stockpiles were about 85 days at the current burn rates in the north, and about 180 days in the south.

So, your stockpiles are that high, I would guess your normal target is something like, what, 60 or 65 days? Or maybe -- ?

It varies in the north versus in the south. You're right, about 65 days in the north. It's a little bit higher than that in the south, but not much.

So, if the stockpiles are that high, and natural gas prices are as low as they are, do you think there's risk that your utility coal is down quite a bit harder than 5%?

There's some risk that it's slightly down more than 5%; depends on what the weather conditions will be this summer. We're hoping they're going to be hot.

And, Tom, just to clarify; this is Fredrik. What we've said is at least 5%, to put kind of a lower level or a higher level on it, depending how you look at it.

Okay. And then, on liquidated damages, can you just give us a rough sense of how to forecast that the next couple quarters? That was, obviously, a little higher than we thought in the first quarter.

Sure, Tom. I think that, for the rest of the year at least, based on the visibility we have today, we don't expect any material liquidated damages.

So, flat year over year for other revenue, or down, or up?

I think if you just look at each quarter, I don't think it's going to be more than $5 million to $10 million, if that, in terms of absolute amount.

$5 million to $10 million.

Yes.

Okay, great. Thanks for the time. Appreciate it.

Thank you. Our next question comes from Allison Landry from Credit Suisse. Your line is now open.

Good morning, Allison.

Good morning. Thanks for taking my question.

I wanted to actually ask about how we should be thinking about the progression of coal yields for the balance of the year. And is there a possibility that RPU could be up in spite of fuel? And the things that I'm thinking about are lapping of the export coal rate concessions, which I believe happens in 2Q? Correct me if I'm wrong.

And then, thinking about the new fixed/variable contract structure and a meaningful portion of the domestic book with volume declines, I would expect the yields to rise on that. Am I thinking about that correctly? What are some of the other factors that would move that up or down?

This is Fredrik. I'll start, and let Clarence add any thoughts there. I think that, from a fuel perspective, I think you're going to continue to see pressure in the remaining three quarters of the year. We benefit a little bit here in the first quarter from the lag.

So, you're going to continue to see that impact in RPU for the full year, at least based on where we're seeing fuel today, and probably more so than what you saw in the first quarter. You are right that, as we get through the second quarter, we are lapping the decreases that we took last year for export coal. And that should be beneficial as we get to the second half.

And I always point our investors to looking at the same-store sales. That's why we provide them. Because I think that's a much more meaningful number to look at, because that gives you the true indication of what's going on from a pricing perspective.

And with a fuel surcharge mechanism that is designed to make us neutral to fuel price volatility, with the exception of lag, I think when you look at it from that perspective, I think that gives you a more better view of it. But fuel surcharge revenue will be low year over year, and it is going to impact the yields negatively throughout the year.

Okay. But you don't think that the lapping of the concessions, and then with the fixed/variable structure, if volumes are down, then yields theoretically should be up? That's not enough to offset the fuel decline, in other words?

I think it would be helpful, but I'm not sure it's going to be enough to offset the impact we're seeing from fuel.

Got it, okay, perfect. Thank you.

And then just the follow-up question: Based on some of the numbers you gave in the release, it looks like productivity gains in the quarter were around $18 million. Should we expect a step-up in the second quarter? Or would you say that the bulk of the roughly $200 million is expected to be realized in the second half, as service is restored?

If you look at the different line items in our quarterly flash, you will see that if you add it up between labor, MS&O, and fuel, that it was about $38 million in the quarter.

Okay.

-- in total. And that is, obviously, the first quarter of our target to get to something that approaches $200 million for the year.

Okay. I was clearly missing $20 million. All right, thank you for the time.

Thank you. Our next question comes from Rob Salmon, Deutsche Bank. Your line is now open, sir.

Good morning, Rob.

Hey, good morning. Thanks for taking the question.

Very strong performance with regard to the core pricing increases -- could you give us a sense, in terms of the expectation and cadence as we look out through the remainder of the year? Have we experienced the full benefit of those stronger pricing increases in the first quarter? Or can we potentially see a step-up as we look out through the duration of the year, particularly in intermodal?

No, Rob. This is Clarence. I think you can expect to continue to see our pricing increase. I think we mentioned in the fourth quarter that we had begun fairly aggressive pricing earlier in the year.

Our third-quarter same-store sales pricing in our merchandise area was [2.5%]. In the fourth, it was [2.7%]. In this quarter, as you saw, it was [3.4%]. So, I think you can continue to see a continual increase in our same-store sales pricing in our Business as we move throughout 2015.

Thanks. That's really helpful.

I guess, Clarence, I think you had mentioned about the -- speaking a little bit more positively about the potential for international intermodal conversions over to the east. Could you give us your updated thoughts in terms of what that opportunity is looking like for 2015, and then as well as a longer-term perspective?

I think the water's still a little muddy and unclear, given the situation -- an ongoing situation that's in the west. I continue to believe that there will be divergence to the Gulf and the east coast as more and more customers get comfortable with what is going to finally emerge with the canal and with the post-west coast strike. It's just too early to see how that's going to settle out.

And as you know, there's a lot of congestion up and down the east coast. So that's going to have to settle down before people make decisions. But I think you'll see more than what even we had anticipated seeing as time moves on over the course of the next couple of years.

Fair enough. Appreciate the time.

Thank you. Our next question comes from Thomas Kim, Goldman Sachs. Your line is now open.

Good morning. Thanks for your time here.

I had a couple questions, just with regard to the near-term guidance. With your 2Q EPS, is that including buybacks?

Yes, that is an all-in view, yes.

Okay, all right. That's very helpful.

And then with regard to the outlook for the year, does your guidance assume that fuel prices increase, as the forward curve would imply?

I think we've just included whatever the forward curve currently is that we're seeing out there. I don't think it's a significant difference from what we're seeing right now; but, yes, whatever the forward curve dictates.

Okay. All right. That's very helpful. Thanks a lot.

Our next question comes from Ken Hoexter, Merrill Lynch.

Good morning, Ken. Ken?

Can you clarify the other revenues? Is that $5 million to $10 million comment from other revenues from liquidated damages -- is that a change or year-over-year increase of $5 million to $10 million? Or you're only looking for $5 million to $10 million from now on, on the entire other-revenue line.

I think I heard the beginning of your question, so I'll -- just to make clear: On liquidated damages, what we are expecting for the rest of the year, if I look at each quarter, it looks like it's going to be somewhere between $5 million and $10 million of absolute amount of liquidated damages, not year over year.

Okay. Thanks for clarifying that.

And then just on looking at operations, Oscar, the on-time originations has fallen to 50%; arrivals down to 41%. We're kind of all the way back to the start of the ONE Plan here, going back to 2005. Can you just talk through what's going on; what needs to happen? Why we're not seeing maybe even a more negative impact on that from operations or cost side? And what needs to swing back into the positive on that?

Hey, Ken. I think it's what we've been saying for the last, almost year: The amount of growth that came on to our very structured and disciplined ONE Plan was -- the only missing part was the amount of resources in order to run it. And I think we've been fairly consistent with saying -- as those resources arrive, well trained and well manufactured, we can put them to good use and start to spin again. And that's exactly what's been happening over the last month, along with our own initiatives and the efforts of our employees.

And so the really last saving kind of grace is this locomotive arrivals that are beginning to trickle in here; some in the first quarter and second quarter. That's the big factor in the whole business. And I think, again, we've been consistent with this second quarter being the vital point, and then the increasing level of service that we'll get in the back half of the year. And then, again, trying to approach the record levels we had just a couple of years ago.

So the crew base is where you think it should be now; is that correct?

Literally, we got 400 people here in the first quarter that came out. We'll have another 400 to 500 that come out here in the next three months, and then it tapers off. And so, yes, resources, from a crew perspective, I'd say, other than a couple spot areas, we are in very, very good shape. And that's caught up. And that's been a six- to nine-month initiative to get those folks well trained and ready to work.

Thanks for that insight. So, just to clarify then on maybe the cost per employee -- do we see that ramp up? Or is that at the levels you want it now?

I think it's essentially at the level. We'll have a few more people coming in here in the second quarter; some of this for attrition, but some of it was for specific areas of shortage.

And in terms of the cost per employee, I think to some degree, over time, we expect, frankly, cost per employee to come down. Because right now we're working a very elevated level of overtime. And so the cost per employee should, over time, moderate from where we are right now, and have been for the last few quarters.

Great. Thanks for that. Appreciate the time.

Thank you. The next question comes from Bill Greene, Morgan Stanley.

Hi, there. Good morning.

Oscar and Michael, I know you are aware of this. If we look at the Eastern rails, the margins have moved toward the lower end of the group. And I'm curious your thoughts on -- I realize there's a priority of things we have to do.

So coal's been a challenge recently, and we want to get the service right. But when do you come back and say -- well, let's take pen to paper here, and let's really figure out how we're going to get the costs out. Because coal may never come back. And while the pricing can accelerate, maybe there's a lot more we can do on cost.

How do you think about 2016 or 2017, or even longer term, about addressing that, and getting you guys back toward these long-term targets -- mid-60%s -- try to accelerate that as best you can? How do you think about doing that from a cost standpoint?

Bill, this is Michael, and I think you're quite right. So, I guess as we look forward, the coal has been a challenge in both the Eastern roads. And I think as we look forward, it's about how do we grow the other businesses -- intermodal and merchandise -- above the rate of inflation -- of the general economy, which we have been doing, price above inflation, which that is actually accelerating, and start getting the costs down?

And as you know, we targeted $200 million this year. And we think the combination of those three -- some modest growth, pricing above inflation, and good cost discipline and efficiency -- will drive us toward those [mid-60%s].

And, Bill, I would add, at the trailing part of your question, you specifically mentioned how that relates to costs. And I think Michael's concept is a great one. It's not just about one thing. It's about pulling all the levers we've pulled historically.

But specifically to address the cost aspect of it -- it's the normal productivity we've been able to achieve, plus some. And so the plus some is initiatives and objectives that probably border on more innovative, and, potentially, in the world of railroading, a little bit more risky, people think. So this variable scheduling thing that we've done -- as you read the press about that, half the people are supportive and the other half are -- oh my God, they're going to tank the whole place by doing all this crazy stuff.

You've got to understand -- the things that we do, we think through very thoroughly. We plan through, and then we communicate to our folks. And that particular program right now is just reeling; it's freed up 50 locomotives in a month. Our metrics are starting to go up, for a lot of different reasons, but including that.

But again, my point on the cost side -- it's an efficiency play. It's not just necessarily a wholesale reduction in people. Efficiency creates productivity, and productivity creates the economic value that [you're coming].

Pull all the levers; the cost one's a big one. The rate that we're increasing this year is probably a rate that we'll keep thinking about in the next future years to get to that mid-60%s.

Yes. And when we think about the challenge that occurred in 2014, partially that was weather, but partially significant growth in volume. And then as we look at what you've just walked me through here, the volume aspect of it -- it would almost seem to me that the more profitable way to do it would be to focus on both price and productivity. Volumes can do what they'll do, but growing faster than the economy actually would seem to make it more difficult to solve the service issue. Am I missing a piece of that?

Yes, in a way, because when we talk about growing faster than the economy, you may remember last year in the second quarter we surged 8%. We don't do surges well. We do 2% to 3% growth very well. So our hope is that we can modestly grow at a little bit above the inflation.

We can adjust to that kind of growth. It's just surges we don't do well, Bill. But I agree with you -- just, clearly, the pricing and productivity are more under our control. And obviously, we're going to focus intensely on those, but we do think that third equation of some growth above inflation really creates shareholder value.

And just one point of clarification on that last point then: Does the growth above inflation require higher levels of CapEx, or are you at where you need to be?

I think the 16% to 17% we've been at historically will take care of it going forward.

Okay. All right. I appreciate the time. Thank you.

Thank you. Our next question comes from Brandon Oglenski, Barclays. Your line is now open.

Good morning, Brandon.

Yes, good morning. And thanks for taking my question.

So, Michael or Oscar, this has got to be the third or fourth year now when we've taken guidance down, and yet you lead off the release last night with a $2-billion buyback. So, can you put in context what the Board is thinking in upping the buyback right now, in the midst of what seems to be another challenging year for all the reasons we've discussed on this call?

Well, Brandon, I think we've all along thought that the best way to create shareholder value is our balanced approach to our capital deployment and cash deployment. So we're going to spend $2.5 billion this year, 17% of our revenues, investing for growth in the future.

Secondly, this increase on our dividend takes us a little bit above a 2% yield, which some of our shareholders value that dividend. And we think we want to be a little bit above the average for the S&P 500. And the share buybacks at $2 billion, we think, helps those shareholders that like buybacks.

So we think that balanced deployment of doing all three really is the best way to create shareholder value, as we've done over the past decade. So I don't view this as very different than what we have been doing, and a way to create strong shareholder value going forward.

And, Brandon, this is Oscar. You kind of ask -- how does the Board think about it? Being a Board member in a different place than here at our Company, the way Board members think about it -- any time you project forward things like this, they're based on a baseline of financial strength and economic viewpoint that there is growth and strength in this business and in this particular Company that can actually pay for that. So it's a very thorough review process. It's not something that gets done very lightly.

So we have a lot of potential for growth. We weathered a significant storm here over the last few months. And I know it's hard to go back to it, but you lose that kind of volume stream and revenue stream and operating profit stream, and make it up and stay even, that's the strength of our Business. Now we've got to build upon that. And clearly, our Board sees that benefit, and has approved the initiatives that we've opened up here with.

And I guess to follow up on Bill Greene's question on margins, there's other US carriers that do have 20% of their revenue exposure in coal. They haven't had great outcomes either on the volume side. And growth hasn't been great for the industry for the last 10 years, and yet we've seen a lot of margin traction on price and productivity. I know that's part of your plan.

But what is changing in the forward outlook for CSX that suggests we are going to get significant margin expansion beyond just the fuel contribution in 2016 or 2017 that you, I assume, took to the Board and said -- hey, this makes the shares relatively attractive at this point in time. And are you willing to put out a long-term margin target like you did, I think, back in 2010 or 2011, when we said we're going to be at a 65% OR by 2015?

On the first part of your question about the margin expansion, I think that if you look at the underlying business that we have, that has actually been expanding over the last couple years. But the headwind from almost $1 billion loss of coal has offset that. So we're comfortable when we look at the underlying core earnings power of our Company, that it's clearly capable of continuing to expand margin over time, similar to what you heard earlier.

In terms of setting a target out there and so forth, I think what we have said before, and as I think you know, in 2011 we set a target for 2015 of mid-60%s. And with the exception of what happened in our coal business that is clearly outside of our control, we would have been there.

What I've said repeatedly has been that I think what we need to do right now is to establish some progress here -- and hopefully, we'll do that this year -- of sustained margin expansion and some earnings growth. And once we have that track record behind us, I think we can step back and say -- hey, are we comfortable now to put another target out there? But I think right now our focus is margin expansion this year, and continued earnings growth.

Thank you.

Our next question here comes from Brian Ossenbeck, JPMorgan.

Good morning, Brian.

Hey, good morning. Thanks for taking the call.

You mentioned that frac sand volumes were down in the first quarter, and highlighted the reduced energy-related drilling activities. Would you expect to have a similar decline in the second quarter from sands, or will it accelerate throughout the rest of the year as the E&Ps take in their CapEx plans?

Can you also just give us a mix of the basins that you serve again, as a reminder?

What was the last part of your question -- the mix of what?

The basins -- the shale basins that you serve -- just so we have a sense of where the sand is going?

Okay. Our frac business was down about 10% in the first quarter. We would see a number maybe similar to that in the second quarter.

It's probably a little too soon for us to speculate on that for the rest of the year, because one of the formations that we serve, which is both the Marcellus and underneath that, the Utica, is a different type of formation in the fact that it deals in a lot of wet gases as opposed to oil-type formations. And so some of the fracking has continued into those areas.

And we also are shipping frac to some of the other formations that are not as active. And our volumes that we ship to those formations are not in the quantities that other rail carriers are shipping to those formations. And those formations are western formations.

And what was the first part of your question involving crude?

No, I think that basically covered it. But if you want to, I guess, give an update on crude, given potentially some of the more safety issues -- the tank car standards, which we'll probably see out in the next month or so ago -- any further initiatives on track inspections -- if you can kind of bring us up to the current operating environment, that would be helpful.

Yes, this is Oscar. I think what you hear and read is very accurate. Our process of attempting to prevent any of the accidents through inspections and a host of other initiatives continues to be a very, very strong initiative, not just at CSX but across the industry. And to some degree, a very strong alliance with the petroleum producers.

On the tank car standards, we are very anxious to have that standard out there. It's going to take some time to get those cars out of the system. So the sooner the government can release those standards and we can begin to manufacture those, I think will be critical. Because I think on the mitigation of when an incident happens, that car and that standard of car is going to be very, very helpful in that process. So we look forward to the government's decision on that.

Right, okay.

And just one quick one on intermodal: You mentioned that the west coast congestion was impacting east coast volumes. Can you give us an update just how that's improved? Or maybe it hasn't since the labor negotiations have settled there, so maybe what's going on in March and early April?

And then also when you think about east coast taking potential share, is there a lot of infrastructure expansion that needs to be done at those ports or on the CSX network to potentially handle some of that when it does start to land on-shore?

Brian, I'm certainly not as good an expert on the west coast as a Western rail carrier is going to be on answering the questions on the west coast. I would tell you that it's better today than it was yesterday, and it was better yesterday, obviously, than it was a few weeks ago. But there's still certain amount of congestion on the west coast, and a certain amount of backup that still exists on the west coast that is going to take a few more weeks ahead of us to get straight.

In regards to the east coast, we still have congestion on a lot of ports on the east coast. It's going to be a requirement for a lot of the infrastructure improvement on the east coast to handle the larger vessels -- the deeper water requirements that are going to be required for the larger ships. And that's going to take place over the next several years.

A lot of ports, as you're aware, already have plans in place to do that. Some have plans, but no financing in place to do that. And then, of course, there's going to be a need to have a lot more infrastructure on the land side that support the ports themselves to be able to handle the type of volumes that come into that.

We certainly think that the rails, both Eastern rails, play a big part in what happens in the rail infrastructure that serves the ports. So I think it's still a couple of years away of being able to see how it will finally shake out on how the infrastructure that's needed to support that growth on the east occurs, and exactly where on the east coast that growth occurs.

Okay. Thanks for all the details. Appreciate your time.

Our next question comes from Matt Troy, Nomura Securities. Your line is now open.

Good morning, Matt.

Good morning. I wanted to talk about the variables you can identify with some specificity in coal. Specifically, was curious if you have any updated thoughts on your internal work, or studies you may have commissioned about what kind of capacity -- be it tonnage, be it volume, maybe coming offline in 2015 over the next three-year period, as some of these older coal-fired plants are required to shut down? Is there a tonnage-at-risk number or a business-at-risk number you've developed internally that might help us understand at least what that baseline number might be, away from the variables that are harder to predict, that are more tied to things like nat gas and other things?

I think what we have said -- this is Fredrik. I think what we've said in the past is -- as we looked at 2015, we identified about 4 million tons that we moved in 2013 that were going to be impacted by the MATS or CSAPR rules. And then, beyond that, we had another 3 million tons that we moved in 2013 that were going to be falling out in 2016 and 2017.

I think that's our best estimate for impact from those regulations. I think in longer term, we have to understand and better study, and see what ultimately comes out of the proposed CO2 regulation.

(multiple speakers) That's true, but you also need to be aware that there's a lot of capacity at the remaining plants that will be able to pick up a lot of that slack that as it comes out of that system. So it's not as if the capacity in total goes away.

Understood. I just wanted to double check to make sure there hadn't been a change, in light of some of the pricing in gas and the differentials there.

I guess the second question, the follow-up, would be -- simply with gas now down-ticking to the $2.50 range, what's your sense as you look across your customer base -- the potential impact from switching? Is it fully felt at this point, and can't get much worse? Or if we take another $0.25, $0.50 down, and hit that -- reach an historical low of $2 -- is there an added or incremental hit to the coal business for those utilities that at that point it becomes just too compelling not to switch to gas? Are we feeling the full effect now?

I think all the utilities that can switch to gas at the low rates are switching to gas have already switched to gas that could conceivably do it, number one. I think, number two, when you start seeing gas prices get into those type ranges, the utilities themselves get nervous about that because what utilities look for is stability, not for extreme price changes or price ranges.

Got it. Okay. Thank you for the color, Clarence.

Our next question comes from Ben Hartford, Robert W. Baird. Your line is now open.

Hey, good morning, guys. I just wanted to get some context to your demand outlook here in the second quarter. You talked about flat volumes year over year. I assume that's all-in.

If so, given the coal headwinds, and anticipated declines in the second quarter, it would suggest a fairly healthy and above-seasonal ramp through the quarter, comparable to what we saw a year ago. And I'm wondering what you are anticipating as it relates to the sequential improvement in volumes on the merchandise and on the intermodal side? Will it look like 2Q 2014? And what are your customers saying as it relates to some of the pent-up demand in the context of what we experienced a year ago -- some perspective there would be helpful.

Well, this is Clarence. I think our view is on the slide that you saw there toward the end of the presentation, where, that in 49%, almost half of our markets, we saw as very favorable in the food and consumer, intermodal, minerals, and waste and equipment markets, and neutral in about 22% of the markets. So, our ag products -- we still have a large carry-out from the last year's crop. In fact, one of the largest that we have ever recorded in the United States.

The South American soybean crop in particular is strong this year. And given the fact we have a strong US dollar, it's impacting the US's ability to export soybeans. We'll still have, by historical standards, a fairly strong export.

Automotive on a year-over-year basis will essentially be flat with North American light-vehicle production at 17.4 million this year versus 17 million last year. Still a large year, by historical standards; one of the largest since 2000, but flat on a year-over-year basis.

Our chemical business -- the chemical side of it being relatively flat; but with petroleum products still being up, it will be a flat year in a year-over-year basis, but flat at a high level. And where we're down is in some of the bulk commodities -- the coal, export coal, some of the forest products, the metals, which, as Michael pointed out yesterday on CNBC, are being heavily influenced by the imports coming into this country.

Steel consumption is very high in the country, but US mill utilization is not high in the country. And by our phosphates and fertilizers that are due to both high inventories, and a strong US dollar that's allowing some imports into the country. So, while we're saying flat, it's flat at a very high level.

Okay. And you pointed to that slide, if we look at that same slide from a year ago, you had 83% of the volume in the favorable category, now it's 49%, which, just to react to that, it doesn't seem as though you have the same type of favorable pent-up demand bias here in the second quarter of 2015 as you might have had in 2014. And so, you won't have the same degree of seasonal improvement in 2Q 2015 as you might have had a year ago, as weather improves and as we work through some of these port congestion issues. Is that fair?

That's fair. We won't see the surge that Michael spoke of.

Okay. That's helpful. Thank you.

Our next question comes from Cherilyn Radbourne, TD Securities. Your line is now open.

Good morning, Cherilyn.

Thanks very much. Good morning.

Just one question from me, and it's on price: I guess what I'm wondering is -- one of the reasons that pricing has been accelerating, and expected to continue to accelerate has been that capacity has been tight across the transportation industry. And I'm just wondering: Now that volumes are coming in a bit lower than expected, can you just address whether you think capacity is still tight enough to support the kind of increases that you've been expecting?

This is Clarence. Yes, we still see capacity as being very tight. For example, housing is still robust, and that's a positive for us. If you notice, our minerals business was up, I think around 11% or so, based on a lot of highway infrastructure projects going on, particularly in the region of the country that we serve.

So, we're seeing truck capacity staying relatively tight. Coast-wise, barges have been very strong, and in strong demand. So we still see capacity fairly tight, and we still see a strong need for transportation.

Pricing, to us, seems to be very robust. If you look at the spot truck-load market, it is remaining fairly strong. So we see that it's still a very strong, robust pricing environment.

Perfect. That's helpful. Thank you.

Thank you. And our next question comes from David Vernon, Sanford Bernstein. Your line is now open.

All right, thanks for taking the question.

Maybe Fredrik or Oscar, a question for you on the network itself: With respect to the coal business becoming a little bit lower density, are there any opportunities to create efficiency by rationalizing some of that, what is now lower-density pieces of track? Or is it too integrated into the network to make that type of cost action feasible?

Yes, this is Oscar. We took a lot of those actions, clearly, when we first started to see the coal declines. It's one of our more variable cost structure businesses -- coal is. And so as that volume decreased, we're able to decrease the train starts fairly quickly.

The infrastructure is a little bit more difficult. It is part of a broader network. And the way the rules of the land work is, if you run a certain amount of tonnage, it has to be maintained at a certain level. And we've not really gotten down our tonnage in those routes much below what would constitute a large reduction in the capital reinvestment and maintenance that's required.

So, we've done a lot. We'll continue to manage and monitor that. But it is a little bit of integrated into the network, as you suggest.

Okay. And then maybe just as a quick follow-up: Could you give us an update on the Virginia Avenue Tunnel, and when the double stacking there is going to be cleared? And if you guys have tried to figure out what kind of impact that could have on the intermodal profitability?

We're really pleased. There was a group that tried to have an injunction against us proceeding. And, fortunately, the federal court in DC denied that injunction request last week, which is going to allow us to commence with construction. We got a few permits we have to get, which we think will come pretty quickly.

We think the first tunnel will be done within 18 months, and that both tunnels will be done within a three-year time frame. So, that is the last piece of our national gateway, obviously, that dramatically improves the economics out of the Mid-Atlantic ports because we can then double stack versus single stack. So, a great increase in our efficiency and our ability to move the traffic; so we're very excited.

It's been a long process. We've been at it for five years now. Looks like we're finally going to start moving some dirt, and get this thing moving.

All right, thanks very much, guys.

Thank you. The next question comes from John Larkin, Stifel Nicolaus. Your line is now open.

Hey, good morning, gentlemen. Thanks for taking the time here this morning.

Clarence, you laid out a pretty attractive ramp in same-store sales pricing growth, starting with the third quarter, all the way through the first quarter. You said that would continue. And when you said it would continue, did that imply that it would level off at somewhere between 3% and 4%? Or do you see the potential for that to go higher -- part number one.

Part number two, given that you have 3% more people working on the railroad to provide service, and given that you've got some inflation embedded in the labor contracts, how high does that number need to be to absorb the 3% more labor and, what I'll call, rail inflation? Are you more than covering that with the 3.4%, or do you need a little bit more?

On the first part of that question, John, I think we have the potential to -- not the potential -- we will take that number higher each sequential quarter going forward. I don't know how to be any more emphatic and straightforward than that.

Okay. Thank you.

(multiple speakers) Fredrik or Oscar, could you comment on the second half of the question?

Yes, John, and my job is to not let those increased resources and costs sit idly by. And we create efficiency that way. So that, again, we maximize what he can get on the top line, with that increasing margin story on the bottom line.

Got it. So, there will be plenty there to drive some margin expansion.

And then secondly, as a follow-on, I did read an article yesterday that talked about some of the operational changes that are going on within the Company. I've not seen this before. But there was some discussion of running what used to be daily trains every 28 hours, so that you ended up running six trains, where there were seven per week in the past.

From an operational point of view, how is that working out? Are you seeing the savings that you hoped to see, and has there been any degradation in service as a result of this?

Hey, John, it's Oscar. And I think I've thrown it out a couple times over the course of the calls. The early returns are great. It's part of our merchandise network. It's about 100 trains that we're working through this.

And, frankly, we've seen an immediate reduction, and certainly, in the crew starts, and addition to the train length that we're gaining. We've also freed up about 50 locomotives. And the operating measures that we work through from trains held for power to just velocity and dwell, actually have followed positively.

Now, certainly, milder weather has helped; a little bit of volume reduction has helped out. So, we don't attribute it all to that. But we're very encouraged by the early signs of this.

And with regard to any potential concerns, I think one of the things you worry about, about running less trains in a given week, is that you start messing with your flow-through in your terminals and yards. And we've not seen that anywhere significantly. So, at this point, again, a good month into it, we've seen all the great, positive results, and very little degradation in the other measures. So we'll continue that for the near future.

Sounds like a win-win. Thank you for taking my questions.

Thank you. Our next question comes from Bascome Majors, Susquehanna. Your line is now open.

Yes, good morning. Just curious: Where do you think you might be on the OR without the almost $1-billion loss in coal that you've seen since 2011?

This is Fredrik. I think that -- and, obviously, there's some other assumptions goes into that, too -- but if you take $1 billion, and add it back and you -- the appropriate margin on that -- I think you're pretty close right around that 65%, which we had originally outlined to be at, at this point.

Okay. And to follow up on that, presumably the profitability on what's left in coal has certainly declined from that period, both because of the export cuts, but lower utility volumes on the network. Could you refresh us, directionally speaking, on where the margins in your segment sit, by segment, from both an absolute standpoint and the incremental margins you see on volume growth here?

Well, so, I think we've said publicly before that if you look at our Business overall across the 10 or 11 markets, I think coal, because of its very -- the way that we operate, coal has always been at the top end of the margin, also chemicals because of the risk profile. I think those two. And then I think the good news is the rest of our Business is very homogeneous, in terms of the contribution to the bottom line. And we generally look at this from a long-term economic perspective, including asset recovery charges.

Incrementality is a little different depending on whether it's unit train versus batch. Clearly, we think that the intermodal margins, from an incremental perspective, is very attractive, as is adding stuff to the batch network -- the scheduled network as well. And then, obviously, when you add unit trains, that does require additional resources wholesale to move that unit train.

So, overall, I would say that we feel good about where we are in terms of contribution. Clearly, though, coal is still at the high end, and as is chemicals because of its risk profile.

Thank you for the time this morning.

Our next question comes from Jeff Kauffman, Buckingham Research. Your line is now open.

Thank you. And thank you for taking my question. Congratulations in, I think, a very challenging quarter.

Wanted to focus a little bit on the operating metrics that may accompany service improvement, if you're able to hit your goals and targets here. I guess, question one: Is it as simple as locomotives? Or are we going to require stronger infrastructure in the track, whether it's sidings or double track or extra track?

And then, I guess, secondly, if we look at some of the key operating metrics, such as average system speed, dwell time, where do you believe, if you're successful, these metrics can be by the fall, and should be within, say, 12 to 24 months? And what does that do for you in terms of equipment utilization or ability to grow without incurring incremental cost?

Jeff, it's Oscar. With regards to locomotives versus infrastructure, I think we've done -- and, again, we've talked about it over the course of the year, of all the infrastructure investments that we've made, different routing protocols, different interchange points. All of that, by and large, has been invested with regards to the volume we've seen, and we've [able], so we've worked through that part fairly quickly. On the crew side, we've been hiring madly, and those folks have gone. Right now, it gets down to the locomotive space.

Long-term, from a strategic perspective, there's always issues around infrastructure, siding as we run longer trains, for instance, some technology to get to our hump yards a little bit faster and quicker with the merchandise train. That's [mix] that's got to be obviously worked. But for right now, it is a big issue around locomotives, which is why this variable train thing, freeing up 50 locomotives, is a very important part of our initiative.

I think, as you think, with regards to our operating metrics that you see, as you know, those are very top line. There's many, many metrics that we watch inside the Company.

But all in, I think what we've said is that they'll continue to progress forward in the near term to certainly get above prior year. That's our first goal. Then, as we progress longer term, you said 12 to 24 months, I think inching up to, again, the record year we had back in 2013, and that is always going to be our goal over the long term.

Okay, well, thank you very much. I know it's been a long call.

Our next question comes from Scott Group, Wolfe Research. Your line is now open.

Good morning, Scott.

Hey, thanks. Morning, guys. So, flat to slight earnings growth in the second quarter -- times get tougher in the back half of the year, just on a year-over-year basis. What's the offset there, where you think you see an acceleration in earnings growth in the second half?

Well, I think, as we outlined before, the number-one priority right now for us is to restore or put the service back to where it needs to be, in order to be able to get the asset fluidity that we've been lacking here for essentially five quarters. And as that happens, we know that there is a lot of embedded cost that will come out.

You also heard Clarence talk about where we are from a pricing, and the fact that we expect increased pricing. So, it's really about pulling those two levers harder. And the foundation in order to be able to do that is getting the service level back to where it needs to be, because we know a lot of good things happen from that.

If not, as I think you're implying in your answer, as much of a volume story right now, because of the fact that we're cycling, for the rest of the year, frankly, very strong volumes. So, it is pricing, and it is productivity.

Okay. That's helpful.

And then, other revenue, what was the drop in the adjustments to revenue reserves? Is that a one-time thing or is there any ongoing impact there?

I know it's early, but is there any way to think about liquidated damages in 2016? If coal is down a lot this year, do they go up? Or at some point, I'm guessing they need -- they'll come down, but I'm not sure if that's in 2016.

So, taking your last part of your question first, I think it's a little too early to think about that. I think we'll have to see where volumes come out before that. But I don't expect as much liquidated damages in 2016 and 2017 as we've seen over the last couple years. But we will have a better view of that as we get closer to that year.

In terms of the other revenue, that's simply just a reflection of the fact that the network slowed down in the first quarter. And we have something called in-transit reserve; and the biggest factor of that decline in supplemental revenue was because of that.

So, as the network -- at a very high level, if the network slows down, you have more of your cargo on the network when you end the quarter and, therefore, you have more in reserve to reflect that. And the network improves, it actually comes out the other way. So, that's essentially all it is.

So, we shouldn't have that as a negative impact in the future quarters as the comps?

No, you should not.

Okay. Thank you, guys.

Our next question comes from Jason Seidl, Cowen & Company. Your line is now open, sir.

Thank you. Gentlemen, thanks for the time.

Two quick questions: One, Clarence, getting back to intermodal and, obviously, some of the shifting that's gone on with the west coast issues, how should we think about yields as some of the freight may move back to the west coast on the intermodal product?

I would expect, if it moves entirely back, you're talking about international traffic on a trans-con basis?

Yes.

I would expect the yields to improve -- to go up.

Okay. That's what I was assuming.

And I guess my follow-up question: The STB reauthorization bill that's out there -- Michael, I was wondering if you had any thoughts about that? And what are the potential impacts that might come onto the rail industry?

Jason, we're actually supportive of that bill. We think that it strikes a good balance between some of the things some of our customers would like to see, and also our need to continue to make sufficient money to reinvest in this Business.

So, we're supportive of it. Of course, you don't like everything in every bill, but I think, all in all, it's a good balance. And we're hopeful that the House, who is generally supportive of the rail industry, will take up similar legislation.

Thank you for the color. I appreciate the time as always, guys.

Thank you. The next question comes from Cleo Zagrean, Macquarie Capital.

Thank you for your patience. Both of my questions relate to pricing; the first one is on coal. Could you please share some insight into same-store price for coal excluding fuel in the quarter? And your thoughts on the outlook for pricing, given volume challenges for each of domestic and exports? And if you envision taking some action there if the volume drop should be stronger than 5% -- thank you -- for the domestic utilities?

So, the first part of your question was same-store sales for pricing?

Coal.

Trying to get a sense for pricing, ex the fuel noise in the quarter, for coal.

This is Fredrik. Just to clarify: Our same-store sales that we publish excludes the impact of fuel. And there are two numbers that we show in there. One is the overall pricing same-store sales, and one is the ex-coal. So, implied in that is that if you look at the delta, I think you can get a sense of what the same-store sales is for coal. Does that make sense?

Okay, yes. I thought somehow fuel was in the same-store impact. Okay. Thank you.

And then the second question: With the strong focus on pricing that we're hearing from you, should we expect to see a tradeoff in volume growth against a potentially softer stance from peers, and maybe continued adjustment in network resources in response to a more moderate volume growth scenario? Thank you.

I don't think so, necessarily. I think that the value that we are offering our customers. I think at the service levels that we have that are improving.

I think, given the fact that capacity, particularly on the truck side of the Business is -- with the highway congestion, with the driver issues that our customers are facing, with the overall value proposition that rail is offering, I think that our pricing and the value that we're offering, I think we can retain the volumes that we have, and continue to grow and expand our Business. I think when you see it, for example, in this quarter, our pricing in same-store sales and our merchandise, which includes our intermodal, being at the 3.4% and the fact that our domestic intermodal grew at 9% supports that theory.

Thank you very much.

Our next question comes from Keith Schoonmaker, Morningstar. Your line is now open.

Thanks. A quick follow-on to that comment, Clarence: Concerning that strong domestic intermodal volume growth, you cited as drivers both have a conversion and growth with new customers. Would you estimate what portion of recent growth stems from each?

I really don't know from the standpoint of new customers, because we use multiple channels of sales. And it would be difficult to define what some of those new customers are.

But I would tell you that a large portion of that has been the result of a couple of programs we have, both with beneficial cargo owners, as well as our highway-to-rail conversion programs that we have in our intermodal product. And it has been an extremely -- both programs have been an extremely successful program that we've had.

Okay. And then a quick question on coal pricing: You've mentioned the negative impact of both export rate pressure and of fixed/variable contracts in the period in domestic. Was export by far the most powerful influence? Or were these factors similarly significant, would you say, in the period?

I would say both factors were similarly significant.

And could you elaborate just a bit more on the mechanism of how fixed/variable affected the period?

Fixed/variable -- it affects in the period where we have -- whereas the customers take larger shipments of coal. That the larger the shipments that they take, based on what their fixed price is, the average rate for that coal shipment comes down.

The fixed portion is shared over more tons, and that lowers the rate.

It lowers the rates.

Thank you.

Thank you. Our next question here comes from Justin Long, Stephens. Your line is now open.

Good morning. Thanks for taking the question. I know it's been a long call.

I wanted to ask -- your Eastern competitor said this week that it expects to get back to 2012, 2013 service levels by the back half of the year. For your network, do you think that's an achievable target, just given the significant, or significantly more crews and more locomotives? Is that something you have pretty clear line of sight to, at this point? And if not, what are the risks to getting back to those service levels?

This is Oscar. I think, again, being consistent with what we've said, we see, certainly, an acceleration towards those levels in 2013, which were, for CSX, very much record levels. And again, in full transparency, I think we'll gradually improve to those levels. And I think every bit of improvement will have a nice bottom-line impact. I'm not quite ready to give you a sense that we're going to be back to those record levels in this year, certainly striving for a bit longer term.

Okay, fair enough. And then just one quick follow-up: Thinking about your second-quarter guidance, could you talk about your volume assumption for coal in the quarter?

Well, I think, as Fredrik has articulated, we expect our coal to be down in the 5% range. It could be slightly worse than the 5% range; but at least at 5%.

Okay. I just didn't know if that was any different for the quarter versus the full year. But you're sticking to the same guidance.

Yes, that's for the full year. We haven't given a specific number for the second quarter. But for the full year, we think that that's the right place to be.

Okay. Thank you very much.

At this time, I don't have any questions on the queue.

Thank you. And we'll talk to you again next quarter.

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