CSX Corp (CSX) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CSX Corporation fourth-quarter 2015 earnings call.

(Operator Instructions)

For opening remarks and introductions, I would like to turn the call over to Mr. David Baggs, Vice President, Treasurer, and Investor Relations Officer for CSX Corporation.

Thank you, Carlos, and good morning, everyone. And again, welcome to CSX Corporation's fourth-quarter 2015 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 investor section. In addition, following the presentation, the webcast 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 Frank Lonegro, our Chief Financial Officer. In addition, Cindy Sanborn, our Chief Operating Officer; and Fredrik Eliasson, our Chief Sales and Marketing Officer, along with Clarence Gooden, our President, will be available during the question-and-answer session.

Now before I 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 on 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 and out of respect for everyone's time, including our investors, I would ask as a courtesy for you to please limit your inquiries to one question and if necessary, a clarifying question on that same topic. 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. Good morning, everyone. Yesterday, CSX reported fourth-quarter net earnings of $466 million, or $0.48 per share, down 2% from the same period in 2014. Revenue declined 13% in the quarter, as strong pricing was more than offset by the impact of lower fuel recovery, a 6% volume decline, and the continued transition in the Company's business mix. Expenses also decreased 13%, primarily the result of lower fuel prices, lower volume-related costs, and efficiency gains. As a result, operating income decreased 12% to $791 million, while the operating ratio improved 20 basis points to 71.6%. In addition, CSX remains an industry leader in safety, and service measures continue to progress well as we enter 2016. In fact, Chicago operations have now been fluid for nearly 12 straight months.

Now turning to the next slide, I'll discuss full-year performance. Over the past five years, CSX has transformed its business to continue delivering solid results, despite the global energy transition. As you can see on the left side of the chart, during that period, CSX coal revenue alone declined from $3.7 billion to $2.3 billion, a cumulative reduction of $1.4 billion. CSX has overcome that loss by significantly diversifying its market mix, improving service, and investing in long-term growth opportunities. As a result, in 2015, coal represented only 19% of CSX's revenue, down from more than 30% in 2011. During that same period, shareholder returns, including dividends and repurchases, have continued to reward the owners of our Company, reflecting the steady growth in earnings per share, which reached $2 in 2015.

Our 2015 performance was achieved despite the challenges in the energy market, low commodity prices, and a strong US dollar that impacted many of our markets. Revenue of $11.8 billion reflected growth in intermodal, automotive, and minerals, that partially offset the continued declines in coal. Improving service, aligning resources and costs against a lower demand environment, and driving efficiency gains of more than $180 million helped generate operating income of nearly $3.6 billion and our first sub-70 full-year operating ratio at 69.7%. Those results reflect the employees' relentless focus on safety and delivering service that supports strong pricing and ever-increasing operational efficiency, as well as the benefit of lower fuel prices. We will continue to leverage our core strategy, superior network reach, and diverse market mix to create long-term value for our shareholders.

Now, I'll turn the presentation over to Frank, who will take us through the quarterly results and future outlook in more detail. Frank?

Thank you, Michael, and good morning, everyone. Let me begin by providing some more detail on our fourth-quarter results. As Michael mentioned, revenue was down 13%, or $411 million versus the prior year. This was driven mainly by $198 million decline in fuel surcharge recoveries and about $175 million from the impact of lower volume.

At the same time, core pricing gains were more than offset by the impact of negative business mix. Volume decreased 6% from last year, with coal driving the majority of the decline. Low natural gas prices, coupled with the impact of significant flooding in South Carolina, impacted domestic coal volumes, while low commodity prices and the strong US dollar challenged export coal in many of our merchandise markets. We continue to see strong core pricing, which for the fourth quarter was up 4.1% overall and 4.5% excluding coal.

Other revenue increased $19 million from last year, driven primarily by unfavorable adjustments to revenue reserves in the prior-year period. Expenses decreased 13% versus the prior year, driven mainly by $117 million in lower fuel prices, $107 million in lower volume-related costs, and $59 million in efficiency gains.

In order to further drive efficiencies, we closed two facilities in our coal network and completed a new union labor agreement in the fourth quarter. As a result of these actions, we incurred a $48 million, or $0.03 EPS impact in the quarter. These short-term restructuring costs will drive future benefits as we gain greater workforce flexibility and continue to adjust to lower demand in our coal market. Operating income was $791 million in the fourth quarter, down 12% versus the prior year.

Looking below the line, interest expense was up slightly from last year, with higher debt levels partially offset by lower rates. As we highlighted on our last earnings call, a property sale closed in the fourth quarter for a gain of $80 million, or a $0.05 benefit to earnings per share. This gain was associated with a nonoperating property and was booked below the line in other income. And finally, income taxes were $275 million in the quarter, with an effective tax rate of about 37%. Overall, net earnings were $466 million, down 5% versus the prior year, and EPS was $0.48 per share, down 2% versus last year.

Now let me turn to the market outlook for the first quarter. Looking forward, we expect volumes to decline in the first quarter. We expect a challenging freight environment to continue as the headwinds associated with coal, low commodity prices, and a strong US dollar more than offset the markets that will show growth. Automotive is expected to grow consistent with light vehicle production, and especially in comparison to a year ago when the auto network experienced weather and service-related congestion. Minerals will benefit from continued highway and nonresidential construction activity and new business.

Intermodal is neutral, as continued secular domestic growth and our strategic network investments that support highway to rail conversion are essentially offset by customer losses in international. Agricultural products is unfavorable due to low corn prices, coupled with weakness in export grain and import sourcing in ethanol, driven by a strong US dollar. While core chemicals is expected to again be flat, the overall chemicals market is expected to be down, as energy markets continue to reset to an environment marked by low crude oil prices and challenging spreads.

Domestic coal will continue to be unfavorably impacted by low natural gas prices and an inventory overhang due to mild weather. For 2016, we expect domestic coal volume to be around 19 million tons per quarter. Export coal will continue to be pressured by the strong US dollar and global oversupply. Our full-year outlook for export coal volume is around 20 million tons with some downside sensitivity.

Metals is unfavorable, as the strong US dollar and high levels of imports continue to negatively impact steel production levels. Overall, despite a slow growing economy, the freight environment continues to have pronounced challenges with low commodity prices, low natural gas, and a strong US dollar.

Turning to the next slide, let me talk about our expectations for expenses. Overall, we expect first-quarter expense to benefit from the low fuel price environment, as well as continued productivity and volume-related cost savings.

Looking at labor and fringe, we expect the first-quarter average headcount to be down approximately 2% on a sequential basis, driven primarily by the structural changes in our coal network that we announced in the fourth quarter. This reflects about a 10% reduction from the prior year. We expect labor inflation to be around $25 million per quarter throughout 2016, in line with the levels seen here in the fourth quarter.

Looking at MS&O expense, we expect inflation to be offset by efficiency gains and volume-related savings, in line with the trends we have seen in the second half of 2015. In addition, the first quarter will reflect a shift in our Northern Ohio coal operations. Here we took action early in the fourth quarter to consolidate freight from a facility in Ashtabula to CSX's Toledo docks, which further streamlines our coal operations.

Fuel expense in the first quarter will be driven by lower cost per gallon, reflecting the current price environment, volume-related savings, and continued focus on fuel efficiency. We expect depreciation in the first quarter to increase around $15 million versus the prior year, reflecting the ongoing investment in the business. Finally, equipment and other rents in the first quarter is expected to stay relatively flat to last year, with higher freight car rates offset by improved car cycle times.

Now let me talk about our capital investment plan for this year. In 2016, CSX's total capital investment will decline over $100 million from the 2015 level to $2.4 billion, which includes $300 million for PTC. Similar to 2015, we expect 2016 core capital investment to be higher than our long-term guidance of 16% to 17% of revenue due to our locomotive purchase commitment. This investment in new locomotives expands our ability to run longer trains and we will continue storing older locomotives to maximize the efficiency of the fleet.

Looking at our capital allocation for 2016, you can see that over half the investment will be used to maintain infrastructure to help ensure a safe and fluid network. The majority of our 2016 equipment investment is focused on upgrading our locomotive fleet. We took delivery of 200 new locomotives in 2015 and expect to receive another 100 new locomotives in 2016, which will complete our existing locomotive purchase commitment.

In addition, we will continue to focus on strategic investments that support long-term profitable growth and productivity initiatives. Here we are prioritizing these investments in our intermodal business, infrastructure projects that support network fluidity, and technology initiatives to enable productivity.

Finally, looking at our investment in Positive Train control we have invested $1.5 billion through the end of 2015 and we plan to invest an additional $300 million in 2016. CSX is committed to meeting the new legislative time line for PTC. As we look at the path to achieving this goal and with PTC now extending over a longer period of time, we now believe the total cost of PTC implementation will be about $2.2 billion.

Now let me wrap up on the next slide. Overall, CSX delivered solid financial performance in 2015, despite significant market challenges. Full-year EPS increased 4% from the prior year, while our operating ratio improved 180 basis points to 69.7%. Revenue in 2015 was lower than we initially expected, with volume declining 2% for the full year. But our continued focus on pricing for the relative value of rail service, driving efficiency gains, and aligning resources to the softer demand environment helped to offset those volume headwinds.

Looking ahead, we expect the coal headwinds to continue in 2016. As I mentioned earlier, domestic coal volume in 2016 is expected to be around 19 million tons per quarter, while full-year export coal volume is expected to be around 20 million tons, again, with some downside to the export estimate. In addition, for the full year, we will be operating in a more challenging freight environment than we saw in 2015. Natural gas and broader commodity prices are expected to remain at low levels, and the strength in the US dollar is expected to persist during the year.

Furthermore, in 2016, we will be cycling a couple large items that benefited our 2015 results. Namely, we received about $100 million in liquidated damages and had an $80 million property gain in 2015, which are not expected to recur in 2016. As a result, we currently believe that 2016 earnings per share will be down from last year.

Looking at our expectations for 2016, we will continue to right size resources with lower demand and pursue structural cost opportunities across our network. In addition, we expect to deliver productivity savings of around $200 million in 2016, which builds on the $184 million of productivity that we achieved in 2015. Overall, we remain intensely focused this year on delivering a service product that meets or exceeds our customers' expectations, achieving strong pricing to support reinvestment in the business and driving efficiencies across our entire cost structure.

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

Well, thank you, Frank. CSX has continued to deliver solid results for its shareholders, despite the transformational decline in the energy environment and the challenging market conditions. The efforts of our dedicated employees, combined with the diversified business mix and the premier network in the east, have helped us overcome the significant losses in coal.

As Frank mentioned, 2016 will be a more challenging year. Volume in the first quarter and for the full year will decline, as growth in some markets continues to be offset by the significant impact of continued coal declines, low commodity prices, and a strong US dollar. We are taking necessary actions to manage our business in that environment, including making structural and network-wide changes to match resources and costs with business demand, driving further efficiency gains, and remaining focused on strong pricing that reflects the value of CSX's service.

In response to the further challenges expected in 2016, we've also decreased the capital budget by more than $100 million. We expect to invest $2.4 billion this year as we remain competitive to preserving safety, service, and efficiency for customers and communities alike, while positioning CSX for the future.

As we look to the future, this Company will continue to transition its business toward long-term profitable growth opportunities in the merchandise and intermodal markets. In that regard, we remain focused on achieving a mid-60s operating ratio longer term, as we execute our core strategy of meeting or exceeding customer needs to support strong pricing for the value of our rail service and continuously improving operational efficiency. With those efforts, we are confident that CSX will continue to be a preferred service provider for customers who face a growing population; a more integrated global economy; and the need for more reliable, more sustainable supply chains. Now, we will be glad to take your questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Ken Hoexter from Merrill Lynch.

Good morning, Ken.

Hi, good morning. Michael, good job in a difficult environment. If I can just talk to you about the outlook here. When you think about earnings going down, can you -- do you have comfort when you look at the economy putting any scale on that? And within that, it seemed like coal and intermodal rate declines were over 8%. I understand fuel and mix were a big part of that.

But can you talk about the competitive losses? Is that something where you're seeing increasing price pressure with that? Are we seeing the competition increase their focus on pricing to win some of those intermodal contracts that you noted had been lost? Because it seems like the volume or amount of those had been accelerating. Maybe you could just talk a little bit about that and the outlook.

Good, broad question there, Tom. Ken, I'm sorry. So Fredrik, maybe address some of the market conditions.

Sure. In terms of the pricing for the quarter, as you saw, our ex-coal pricing actually improved from the third quarter, went from 4.4% in the third quarter to 4.5% here in the fourth quarter. All-in went down, and there really is a reflection of what we did in export coal market here as we're now in a position to actually have some surplus asset. Again, as we get the network running a lot better and very strong service performance, we do have some excess locomotives.

We've seen the export market deteriorate, and as a result of that, we felt this was a time when we went back and revisited what we could do to optimize our bottom line. This is one market where we actually don't have fuel surcharge in, and as a result, this fuel price has declined throughout the year.

We did feel that there was still an opportunity to do a little bit more there and still make money on that. What you're seeing on the pricing side in the all-in is really the reflection of what we're doing in the export coal market. The core pricing actually sequentially improved quarter over quarter.

Frank, you want to address some of the --

Yes, Ken, on the EPS for the year, you're right, we did guide to EPS being down on a reported basis versus the record $2 a share that we delivered in 2015. We tried to give you guidance in terms of the one-time items that we're cycling in terms of the liquidated damages and the property sale, the continued transformation in the energy sector. So we updated the coal guidance both on the domestic side and the export side and then tried to give you some view into the broader economy.

And clearly, those are on the industrial side being suppressed by a combination of low commodity prices and the strong US dollar. But this Company has remained relentlessly focused on driving the things that are most within our control. As you saw our performance this year, or 2015 I should say, in terms of the right-sizing that we did and the efficiency gains that we delivered in 2015 and the projections of $200 million as we get into 2016, we've got an improving service product.

Fredrik just mentioned the strong pricing for our shareholders. It's likely going to be a unique year for us in 2016, and after that, we fully anticipate EPS growth toward that path of mid-60s longer term.

And then Ken, in this one very broad question that you asked, I'll come back to the international losses that we referred to. We've had several now over a period of time that will be with us throughout 2016. And as we think about where we are, we're growing with our existing customers very well, but there has been some customers that we lost.

And clearly, from our perspective, we feel that we have a very strong service product right now. We have what we think is a superior network reach. So the only thing we can assume is that there are factors outside of our control that has allowed us to lose that traffic.

Great. Appreciate the time and insight. Thank you, guys.

Thank you. Our next question will be coming from Brandon Oglenski of Barclays. Your line is open.

Good morning, Brandon.

Good morning, everyone. Thanks for taking my question. And similarly, pretty good results in the difficult environment. So can we talk more broadly about what could become a manageable level of volume decline where we could think earnings get back to flat, we can get back to operating ratio improvement, or maybe you're not even suggesting you can't get operating ratio improvement this year. But can you talk to levels in the network where you'd feel comfortable saying our cost performance and our efficiency plan can get earnings to right size, if not even go up a little bit?

I think on a 2016 basis, obviously, as I mentioned, it's going to be a bit of a unique year, continuing resets in the energy environment. And on the operating ratio question for 2016, obviously, it's going to be difficult to sustain a sub-70 performance, especially given what we're cycling and the coal projections that we've given you and the uncertainty in the industrial economy.

But then again, it's January the 14th. It's the middle of the first month of the year. We've got a great network, as Fredrik's mentioned. We've got a track record of success. We have improving service products.

So we're going to be relentless in terms of our focus on the things that are most within our control. And so those are the things take give us confidence that the future beyond 2016 is a positive one.

Is there any way though to quantify for folks on the call just at a broad level, if volume's down low single digits or mid single digits, does that become more problematic? I'm trying to quantify for folks where the loss in earnings could stop.

Brandon, not to be repetitive, but obviously, the one timers, clearly those could be easily defined. I think we've given very strong guidance as to where we see the coal market this year. Obviously, a little bit of potential downside in the export. It's a little hard to gauge this early.

I think probably the wild card is the rest of the economy, and it is very early in the year to try to gauge that. Obviously, I think if you look at most prognosticators, they're saying the first half of the year probably looks weak on the industrial side, but potentially, it recovers. And we don't really have a better crystal ball than that a couple weeks into the year, and that's probably the wild card in the entire thing.

We're going to drive the efficiencies over $200 million. We will take actions to also reflect the lower volumes, which will be in addition to what we do on the productivity side. And I think with those parameters, it should be able to give you some relative idea of what the expectations could be.

Okay, guys, thank you.

Thank you. Our next question will be coming from the line of Brian Ossenbeck of JPMorgan. Your line is open.

Good morning, Brian.

Good morning. Thanks for taking my call. I was curious, in the 19 million tons per quarter guidance you have in domestic, what level of destocking from inventories do you have reflected in there?

You've outlined some downside risk to export coal. I was just wondering what your thinking is on the domestic side from the utility stockpile and also what level you think natural gas would be?

Obviously, we don't foresee natural gas rebounding significant than from where it is today. And as a result, most likely for the rest of the year, we expect our coal plants that we serve to be dispatched last. We are seeing obviously excess stockpiles right now. If we look at where we are, we're probably in the 110s or so in terms of the south and more in the 80 range in the northern part of our network. We should probably be in the 55 to 70 range.

So as we think about that 19 million of domestic coal, it really breaks down into two components. One is that utility coal, which is about 14 million tons and steel industrial, about 5 million tons, to make up the 19 million. We did about 13.6 million here in the first quarter. And so we're essentially saying we will continue that run rate.

We expect some destocking to occur over the year, but how much really will be dependent on the weather since we now are dispatched last, we're essentially peakers, so we're very much weather dependent. If you have favorable weather conditions from a railroad perspective or utility perspective, then you can see a more significant destocking.

If you have continued the sort of weather pattern we saw in the fourth quarter where heating degree days were actually off by about 25% to 30% off normal, then that will be much more challenging. But hopefully, we won't see that and we will see some destocking occur within the guidance that we provided.

Okay, thanks. And the other one related to gas, that would be coal to gas switching, difficult to tell but from a structural perspective, are there any pockets in the network, perhaps in the north near the Marcellus and Utica Shale where you would expect to see some more gas plants being built that could perhaps provide a little bit of incremental pressure on the rest to the network?

No, I think that all the switching that can occur already occurred back in March or April of last year. What we have seen is in some instances, we are seeing some of the coal burners actually now burning some natural gas in conjunction to coal firing it with natural gas, that has had a little bit of an incremental additional negative impact on us. But all the switching that can occur has already occurred, and we are being dispatched last or the utilities that we serve are being dispatched last.

Okay. Thanks for your time.

Thank you. Our next question will be coming from Chris Wetherbee from Citi. Your line is open.

Thanks, good morning. Wanted to ask about the coal network and where you are in terms of potential structural changes that you're doing. You said some actions in the fourth quarter. I'm curious what else can be done as you move forward through 2016 given the outlook.

And then maybe how that ties into productivity and benefits that you're getting and the great run rate in the fourth quarter. I'm curious what you could potentially be the upside to that $200 million number in 2016.

Okay, Chris. Good morning, this is Cindy. As far as structural costs, you did mention the actions that we took in the fourth quarter. And as I talked in our third-quarter release, everything is on the table, not just in our coal network but also in our broader footprint. And our opportunities that we're looking for are to drive density, maximize asset utilization, and drive out cost.

Facilities are still -- maybe some opportunities there. I think line segments will take a little bit more time. They involve customers and other constituencies there that make those a little bit more longer term, but we are looking at all of these, and as we find opportunities and make announcements, we'll obviously share that publicly. But we have not given up on continuing to find ways to make our footprint much more consistent with the demand that is put on it.

And you asked another question about productivity. Could I ask you to repeat that?

Sure, just wanted to get a sense of maybe how the coal network ties into the productivity, the $200 million of productivity? And then given the run rate that you had in the fourth quarter which was a bit above that level, how do you think about maybe potential upside? Is there more that we could see from productivity in 2016? Thanks.

So thinking about productivity, we've said we're going to be able to achieve $200 million in productivity savings in addition to the right-sizing actions that we're taking. I think when you look at the $200 million of productivity, about $100 million is already -- those initiatives have already been completed, and we feel really good about that. And the other initiatives are in flight and we feel good about that.

There isn't necessarily a tie or non-tie to the coal network. It's all -- it's broad-based and it's everywhere. And as far as the right-sizing initiatives, just I'll comment on that, even though it's not necessarily your question; it might be something you're thinking about. The way to think about that is the fourth quarter is the past is prologue. We will be relentless on driving out costs that are volume-related as we see demand go down. And then in the opposite, as Michael mentioned, as we see opportunities where demand comes back, we will be able to bring back those resources.

That's helpful. Thanks for the time. Appreciate it.

Thank you. Our next question will be coming from Tom Wadewitz from UBS. Your line is open.

Good morning, Tom.

Yes, good morning. Wanted to ask you how maybe train starts, just a brief follow-on on that. And maybe on pricing, I don't know if you want to give me a two for one or not.

The train, Cindy, just a quick, how much were train starts down in fourth quarter and maybe what that could be in 2016? And then on the pricing, I don't know if you answered this one, Ken was on earlier, but did you give us a sense of what core price or same-store price might be in 2016 or is that something that you can comment on? Thank you.

Let me just take the pricing question, because that's probably the simplest one. We really don't forecast pricing. We're going to provide you each and every quarter where we come out. The key thing is that you should know that we're always focused on price and making sure we get the appropriate value so we continue to reinvest in our business.

As we think about our pricing right now, we have an incredibly strong service product. It's improved significantly over the last six months, as we now have the resources in place. There's a lot of contracts that we still haven't been able to touch since really the step-function change that occurred in early 2014.

The contract side on the trucking side is still holding up okay, even though the spot market is very soft. And they key thing for our team is to continue to sell through this down cycle and make sure we provide value to our customers by selling a longer-term commitment in terms of making sure they have access to our network and so that we work through this down cycle right now and sell for the long term.

Tom, on starts, I would say probably about 1,000 starts per week that are scheduled starts are out, and obviously starts will come out that are volume related more on the unit train side.

Can you give that at percentage change, like what percent train starts were down maybe in fourth quarter and what they might be in 2016?

I don't have a percentage right in front of me there, Tom, but I can tell you that our train length initiatives have obviously driven a lot of this opportunity and --

From what, from the beginning of the year, Cindy, about 15%.

For the total year of 2015 they're up 8%, from 2014 versus 2015, and in the fourth quarter they're up 14% from the fourth quarter of 2014 to the fourth quarter of 2015.

The declines year over year in train starts you're saying?

I'm saying train lengths in terms of --

Train lengths, okay, gain in train lengths. Okay, sorry.

Which then translates into 1,000 starts per week which we talked about. So it gives you a percentage and gives you some sense of where we stand on a percentage basis.

Okay. Yes. Those are strong gains, especially given the volume headwinds. Okay. All right. Thank you for the time.

Thank you. Our next question will be coming from Allison Landry from Credit Suisse. Your line is open.

Good morning.

Good morning. Thanks. So given all the debate surrounding M&A and both of the eastern rails talking about getting to a 65 OR over the next few years and some others saying 60 should be the bogie. First, could you help to bookend a time frame for when you think you can achieve the 65? And what, if any, your plan is from a longer-term perspective to close the gap with your peers to ultimately achieve a 60 OR?

Hey, Allison. It's Frank. Obviously, we can't comment on what other railroads are projecting into the future. But the challenging environment that we see in 2016 does not in any way diminish our confidence in the ability to deliver the mid-60s operating ratio longer term that we have guided you toward in the past and again today. As you know, we've got an awfully good network, a world-class network in the east, and you've seen our success over time, both in terms of delivering margin improvement and the cost takeout that Cindy referenced, in addition to the operating side on the G&A side.

The efforts that we're taking now, especially in an improving environment in the future, is going to help us improve margins in a meaningful basis as that improves. But as we sit here today, based on the forward view of 2016, it just seems a little inappropriate for us to guide on a specific time frame right now.

Okay. And just a clarification question, do you think that at some point in the future, is there anything structural that would prevent CSX from achieving a 60 OR?

We don't see anything structural that would impede us from getting to the mid-60s and through the mid-60s. Obviously, it's going to depend on a whole host of things. And again, as Michael said, the crystal ball is a little cloudy in 2016, and obviously as that clarity improves, we'll be able to give you more guidance around that.

Great. Thank you for the time.

Thank you. The next question will be coming from Rob Salmon from Deutsche Bank. Your line is open.

Good morning, Rob.

Hey, good morning and thanks for the question -- Thanks for taking my question. Fred, if I could take it back to the intermodal discussion. You had alluded to in some international contract losses that have happened through the year.

In the guidance it's implying a roughly 70,000-unit sequential decline, which is much more than normal we would see in Q1 versus Q4. Was there an incremental contract loss in the fourth quarter or are you guys contemplating additional inventory destocking that we should be thinking about in the first quarter?

I'm not sure which guidance you are looking at. We have the fact that we have the intermodal business flat, is that what you're referring to?

Yes, it's an in aggregate, intermodal carloads being roughly flat. I was just taking a flattish number and comparing that sequentially to the fourth-quarter carloads that we saw and just curious what's driving the worse-than-normal drop off in Q1, whether it's an incremental international loss or some inventory destocking that you've got contemplated or something you're hearing from customers?

Sequentially, fourth quarter to first quarter is a very different story, obviously with the peak that we're seeing in the fourth quarter, especially around some of our partial business and so forth. I think that's more of a normal thing.

If you think about our intermodal business, there's two components to it. We've talked about the international side where we have had some competitive losses, and you're going to continue to see that throughout 2016. However, on the domestic side, we are having good continued success with our H2R initiative, and we're also seeing some additional outsize growth here over the last probably six months and will probably continue the first half of next year.

We have one domestic customer that is continuing to shift additional traffic to us, which is really a decision that they have made; there's nothing that we have done to incentivize that. They seem to have wanted to diversify their portfolio. And as a result, we think the domestic business will continue to be strong, at least for the first half of the year and probably beyond that. We still think there's opportunity to grow even if that shift subsides.

Got it. And as a follow-up, when do you lap the final piece of the international competitor losses? Should I think about that as Q4 of 2016 or earlier?

Yes, that is correct, Q4 of 2016.

And is that the end or beginning?

No, no, so we will have one account that we're just really kicking in and having lost here in the first quarter, so you will see it [the whole] through all of 2016.

Okay, that makes sense. Thanks for the time.

Thank you. The next question will be coming from Alex Vecchio from Morgan Stanley. Your line is open.

Alex, good morning.

Good morning, thanks for taking the time. My question is with respect to the guidance for earnings to be down next year. You had called out about $180 million of tailwinds in 2015 from property gains and liquidated damages, which is roughly $0.11 to $0.12 a share. So my question is if we were to normalize for those numbers, would you still expect your core, if you will, EPS to be down in 2016 or would it be roughly flat if we were to normalize for those figures?

So I think we gave you a couple other data points to look at. Clearly, we gave you new coal guidance today that is down from what we had telegraphed on the third-quarter call. So that's clearly something to think through. And then on the broader merchandise side with the industrial sector a little sluggish here, so that's some thoughts.

But then again, on the other side, continued strong pricing for an improved service product and the efficiencies and right-sizing, so there's going to be some pluses and minus as we go forward. But in terms of your original way of thinking about it, you do have to normalize it, and then really look at the pluses and minuses from there.

The other thing I would add to that, Alex, is obviously over the last couple years, we've been able to grow our other markets to offset the time the decline in coal, so we're going to have continuing decline in coal here and an uncertain industrial economy. So again, that's the piece that's least clear, but I think it really depends on what happens with the rest of that market.

We know we'll get the productivity. We know we'll continue to network size properly. We know we'll do the pricing. So really the wild card in that question would be what does the rest of the economy do.

That makes sense. That's helpful. Just a quick follow-up on the first-quarter guidance. Can you maybe help us quantify a little bit how much of a year-over-year tailwind you'd expect the lower incentive comp to be on the labor expense line in the first quarter and maybe through 2016?

Yes, so obviously on the incentive comp, the plan resets at the beginning of every year. So we had favorability in the back half of 2015 as the year played out differently than we had originally projected, and we disclosed that to you on a quarterly basis, so be on the lookout for that one.

In terms of the Q1 EPS, obviously based on the cycling of the $100 million in liquidated damages and a different demand environment of the first quarter of 2015 versus the first quarter of 2016, especially in coal, that's going to impact us. And then the demand environment that we talked about. Again, you're going to have to look at the improved service and the right-sizing and the efficiencies and the pricing performance, and that will ultimately help us give some guidance in terms of how far quarter one of 2016 will be down versus reported 2015.

Okay, that makes sense. Helpful. Appreciate the time. Thank you.

Thank you. Our next question will be coming from Jason Seidl from Cowen. Your line is open.

Good morning, Jason.

Good morning, gentlemen, how is everyone?

Great.

Fred, I want to go back to something I think you commented about, your truck competitive pricing. You mentioned that although truck spot pricing was down, contract was holding up. If contract starts to roll over to meet where spot is, how much pressure is that going to put on intermodal pricing? How should we look at that?

I do think that we are holding up okay. It's clearly gotten softer throughout the year, even on the contract side, and intermodal side is where we do see most of that direct pressure. Now, you know that still we have a probably 10% to 15% gap between what the truck prices are and where our prices are.

One of the key things in the intermodal space is a strong service product. And as we think about our service product here this year entering into 2016, it is clear that it's very different than it was a year ago, and that is also going to be very helpful as we approach contract season and we put new contracts in place.

Okay. But in terms of if you just say you make some service improvements and you see the truck pricing take a step down, is it going to be tougher to maintain your pricing, even with a superior service product?

I think it's too early to tell. I think we've tried to stay away from forecast pricing, but directionally, you're right. Obviously, the longer this softness is there, the harder it is going to be to maintain.

The key challenge for our team is to make sure that our customers are aware that while there's a softness here right now in 2016, I think all of us still know that the macro drivers that we talked about for a long time are still prevalent.

As we think about some of the productivity challenges that the trucking industry will face as we get to 2017 with the electronic logs, as unemployment continues to come down it's going to be harder to retain the drivers with outsized increases in driver pay, so we are facing a softness. I think also though, our customers are acknowledging that is probably temporary, as some of these macro factors will come back into play.

Fantastic, and my follow-up, Michael, given the recent comments by the STB on mergers and also the proposed merger or the talked about merger between CP and NS, what's the likelihood that you see that the current Board would approve a combination?

That's a very timely and difficult question to answer, Jason. As you know, there hasn't been any mergers under the current regulatory environment. That is a really complicated question; it's probably better addressed by the STB. But as you saw by their letter last week, they're going to be very focused on, one, the public interest of the potential merger, potential downstream effects. And I think the thing that's probably the most uncertain, but probably going to be there for sure, the question of extent, is what regulatory costs will be put on this merger.

Okay. I appreciate the time as always, gentlemen.

Thank you. Our next question will be coming from Matt Troy from Nomura Securities. Your line is open.

Good morning, Matt.

Thank you. Good morning, everyone. Just wanted to ask with respect to pricing, obviously rails peripherally or tangentially tied to the commodities super cycle, which is winding down. You've got some more bearish people out there talking about rail pricing being vulnerable, anecdotes of carriers cutting price to incent volume.

I just wanted to hear from you or confirm with you that you still remain committed to inflation-plus type pricing, consistent with similar years and that there hasn't been a change in thought or philosophy that perhaps price might be a lever you might use to incent volume in 2016.

I think our philosophy is still there, hasn't changed in terms of making sure that we do value pricing that reflects the value price of our customers and being able to continue to reinvest in our business. At the end of the day, it goes back to what is the second-best option for our customers, from a service and a price perspective. As we think through each one of them, we still think that we have an opportunity to continue to make sure we get the pricing that we need to continue to reinvest in our business, which benefits both our shareholders but also our customers, as we continue to strengthen our infrastructure.

There is one market where we have consistently said that it makes sense in this commodity downturn to be flexible, because we've seen we've got additional demand by doing so and that's our export coal market. And we've taken some additional action here in the fourth quarter to reflect the very, very difficult and challenging environment for them.

But in the rest of the markets, we work with our customers in partnership and try to figure out what the best service product is. And at the same time, also make sure we get the appropriate price. So I would say that nothing has changed in terms of the philosophy that you've seen here from CSX for more than a decade.

Great answer and thank you. And my quick follow-up would be the intermodal growth, obviously, you spoke at length about the loss in international, but the domestic up 14% was a fantastic number. You have a tale of two railroads. When you look at average volumes in fourth quarter, you were up mid single digits, your competitors were down. So obviously, domestic, you alluded to a contract moving over on its own, not you incenting it.

Just wondering if you could talk about that 14%, really high level directionally. How much of that growth would be that singular contract, which you've seen shift and how much of it would be what I'd refer to as more organic highway to rail conversion? Thank you.

It is a significant portion of that growth. I think that prior to last year, we've been growing our domestic intermodal business about 7%, and we've guided long term to about 5% to 10%. And with the softer market, we're probably at the low end of that range, if you exclude this kind of shift.

But nothing has changed in terms of our opportunity to convert what we've said is over 9 million units in our network territory that we think over time can be converted to rail-based solution in partnership with our truckers. And so we think it's softer right now, but as I said to previous -- answer to previous question, the macro environment still favors a rail-based solution longer term.

All right. Thanks for the time, everybody.

Thank you. Our next question will be coming from Cherilyn Radbourne from TD Securities. Your line is open.

Good morning, Cherilyn.

Thanks very much and good morning. My first question is on your variable train scheduling initiative and just how much of an impact that had on the increase in train length that you saw and what inning you think we're in terms of realizing the whole benefit.

Good morning, Cherilyn. I think as far as the variable trains, which that applies to our merchandise network, I think we've seen the biggest increase in train size in the merchandise side. So in the fourth quarter, we saw increases in train size of 23%.

So I think what the variable schedule does for us going forward is as we see softer demand, we are able to right-size that network more effectively. In terms of what the components are of variable train that are in place, we pretty much got them in place, but it does allow us to continue to shift, and expand, and contract on a more effective way than we've been able to do in the past in our merchandise network.

You're doing a lot more in the bulk.

Yes, well we are also continuing train length initiatives on the bulk side as well. We've seen increases in train length across coal, grain, and others in the 5% to 10% range also over the quarter.

So it's not just a merchandise -- train length is not just a merchandise initiative. It also follows the rest, but merchandise has seen the biggest benefits.

Great, and then to the extent that you expect earnings to decline in 2016 and see some volume uncertainty, can you just comment on whether that will have any impact on the pace at which you expect to execute on your share buyback program?

Hey Cherilyn, it's Frank. You saw us repurchase nine million shares in the quarter for just under $260 million, which was essentially the same rate that you saw us in the third quarter. It's consistent with the $2 billion program that we announced back in April, and we currently expect to complete that program ratably over the next five quarters using balance sheet cash, free cash flow, and debt. So I think you're going to continue to see us, based on what we see now, to continue on that ratable program.

Thank you. That's my two.

Thank you.

Thank you. Our next question will be coming from Ben Hartford from Baird. Your line is open.

Good morning, Ben.

Good morning. Just a quick question on the export coal side. In your mind, what is the risk to further downside? You obviously talked about some downside risk to the 20 million tons number this year, but what provides any sort of comfort that you have line of sight to a floor and that we shouldn't be thinking about the early 2000s levels of a number less than half this guided 2016 number? Or even something above and beyond the 2002, 2003 levels.

Is there any way to frame it? Obviously the market's uncertain, but is there any way to frame up the likelihood of a 50% or even deeper cut to the export coal number over the course of the next few years?

Sure. I think that over the last couple years, as we provided you guidance at the beginning of the year, we've been actually very, very close to those numbers. And while these are unchartered territory in terms of the underlying commodity prices, both on the thermal side and the met side, we do work very closely with our customers, both on the producer side and also with some of the agents that sell for us and really try to go over and understand the markets themselves.

And as we think about 2016 right now, out of the 20 million, we probably have about 6 million that we have very good visibility to, probably a little bit lower than you normally would have at this time of the year. But we still think that there's an opportunity to get to that about 20 million tons for the year. And one of the drivers here is also that you do have such a large excess surplus of domestic coal where the producers are very eager to push that out into the world market, and that is helpful as well as we move through 2016.

Okay. That's helpful. We'll just watch how that develops through the year. Frank, the share buyback, what is the thought process there this year, and then I want to confirm something on the CapEx side, the $307 million from the 113 locos that were purchased late last year, is that in the 2016 CapEx budget of $2.4 billion?

The answer to your last question is yes. And on the buybacks, it's the same ratable methodology that you've heard us talk about previously, and so the $2 billion program was intended to be over a two-year period. And as we currently see things, we'll continue to do it at about $260 million a quarter.

Okay. Thank you.

Thank you. The next question will be coming from David Vernon from Bernstein. Your line is open.

Good morning, David.

Good morning, and thank you for taking the question. Fredrik, maybe just to put some more numbers on the issue around utility coal pricing. If you look back over the last couple years when you've seen the utility business get cut by half or so, can you talk about the trend you guys have seen in your distance neutral rate per ton?

Has that been moving up or have you seen some weaker years when because of the lower gas price? Like I'm just trying to put some numbers around the utility coal pricing.

So clearly, in mid part of last decade, there was a significant opportunity to touch legacy pricing, and that probably lasted from 2005 to 2011 or so. Then since then, it's been much more normalized pricing.

As natural gas prices now have come down as much as they have, there really isn't much that we can do to incentiveize incremental burn. We look at each and every contract when they come up to see if there are opportunities to optimize the bottom line by being more flexible in pricing. If there is, we'll do that. But generally, at these natural gas prices, there isn't really anything we can do to improve the burn rate, with maybe one or two exceptions.

Okay. And then maybe, Frank, just as a follow-up on the productivity, can you talk a little bit about how dependent the level of productivity you're getting right now is on the CapEx budget? It sounds like some of the new locomotives that you're getting are necessary to run the longer trains. I'm just wondering about how much more upgrading of the fleet may be required over the next few years, and when that CapEx number can get down to 16%, 17%.

Right, David. So on the locomotive piece, obviously, we'll complete the deliveries in 2016, as Cindy has or will mention, we've certainly looked at right-sizing the fleet and taking out the bad actors and the high fuel burn locomotives. So it certainly helps, but you're talking about 300 engines on a 4,000 engine base.

On your tie between productivity and CapEx, there's always some in the CapEx budget that relates to productivity, and it's really I'd say a dog's breakfast, right. You've got structural changes in the coal network. You've got G&A restructuring and downsizing. You've got terminal efficiencies. You've got train length, which gives you lower crew starts. As we've mentioned earlier in the call, you've got technology initiatives, which are funded through the CapEx process that relate into some of the productivity initiatives.

So I think you're looking at a lot of things that we did in 2015 that will carry over into 2016, and then there is a little bit of a tie between CapEx and productivity. But it's small in the grand scheme of things, David.

In terms of long-term and getting back down to 16% to 17%, if you were to just normalize this year's capital budget for the $300 million in locomotive payments, you'd be at that range now. So it's certainly something that on a long-term basis we're going to continue to look at. Fuel surcharges that's come down, has obviously been a bit of a headwind for us in the past as we look at that 16% to 17%.

As a short follow-up to that, in the number of the 300 loco that you've taken against the 4,000 fleet, if you had a capital unconstrained world and you wanted to go and push train lengths in other part of the business, would there be opportunities to go ahead and continue to upgrade that fleet and operationally find opportunities to run longer trains in other parts of the network? Or are you nearing the end of the ability to get that extra productivity from train length?

David, this is Cindy. The train length constraints really are not locomotive based, they are siding capacity based in the southern part of our network. And in terms of capital, we are looking at those types of investments going forward to allow us to unlock the value of longer trains. So it's really not locomotive based.

Excellent. Thank you a lot for the time, guys.

Thank you. Our next question will be coming from John Larkin from Stifel. Your line is open.

Good morning, John.

Thank you, Mike. Thank you for taking the question. Wanted to dig a little bit more into the stated objective of producing another $200 million in productivity savings in 2016. Can we talk a little about how that might be spread over the year and how much of that is tied to the rationalization of the coal network? And whether the rationalization of the coal network also would envision potential abandonments and/or sales to short lines on some lighter density lines in the coal network?

Good morning, John. This is Cindy. So from a productivity perspective, the $200 million is, again, as I said, initiative based. $100 million is -- pretty much those initiatives are in place. Two of those are one area that we've -- that's included is the actions that we took the fourth quarter on the reduction in volume across the Erwin gateway and the closure of the Corbin locomotive facility.

So to the extent those are obviously in the coal field, that is an impact to productivity in 2016 around both facilities, reduction in facilities and headcount reductions. That's basically the way I see 2016 looking with productivity.

As far as continued rationalization in the coal fields, as I've said, we're going to look at that not just in the coal fields but broadly, whether it's facility related and/or line segment. The line segments take a little bit longer to work through. They involve customers. They involve other constituencies. So as we make those determinations and make those decisions, we'll be very public with that information, but that's more longer term.

So the $200 million will be folded in pretty much evenly across all four quarters, is that a way to think about it?

Yes, I would say it's ratable, John, yes. I would say that's probably the easiest way to think about it.

Thanks very much.

The next question will be coming from Bascome Majors from Susquehanna. Your line is open.

Good morning and thank you for the time here. I wanted to take a directional look at the margin profile of the coal business. It looks like on your guidance tonnage is going to be -- if you're at your guidance for the year, tonnage will be down 45% or so for the entire business since 2011.

Can you just talk a little bit about the balance within the segment of the margin profile between the export business today after the price cuts you've taken over the several years? And the domestic business, where you've transitioned to the fixed variable contract structure?

And also more broadly, where is coal comping versus the rest of the book today? Is it still your premium business up there with chemicals or has the profile fallen down the ladder a bit as the revenues have fallen? Thank you.

Sure. So this is Fredrik. Back in 2012 or so, we used to say that our export and utility business was about the same level of contribution and on a margin basis. But since then, as we have adjusted the export rates significantly down, our utility book of business has a higher margin than the export business.

If you look at the overall portfolio of coal versus the rest of the business, I would say that it's still clearly more profitable because of the fact that it's such an efficient way for us to move the cargo, heavy tonnage, just unit train back at forth it's very, very efficient for us to operate that way. It's still at the high end of our business.

Thank you for that. As my follow-up here and maybe for Michael or Clarence if he's in the room, I understand you guys are railroaders, you're not economists here. But just looking at the volume declines you're seeing today, both the depth of them and the breadth, have you ever seen an environment like this in your business or careers outside of a recession?

This is Michael. I'll answer that, although Clarence is here. If you take out the recession, no, we've not seen these kind of pressures in so many different markets, because you have multiple aspects working against you, the low gas prices, the low commodity prices, the strength of the dollar, all three of those together are really pushing. And in some ways, I think you can almost think of it as a freight recession, except for say markets like automotive and housing related, you're seeing pressure on most of the markets. So clearly outside of a recession, this is one where we're seeing lots of pressure in lots of different markets.

All right. Thank you for the time this morning.

Thank you. Our next question will be coming from Jeff Kauffman from Buckingham Research. Your line is open.

Good morning, Jeff. Jeff?

I'm here. I'm here. I'm here. Good morning, I had you on mute. First of all, congratulations, just a very difficult quarter. I thought you guys did a great job on the cost side.

I wanted to zero in on the change in coal guidance for next year. If I look at what's changed, I think you were talking around a 21 million-ton domestic run rate going down to 19 million, so that's about an 8 million-ton change. But it really looks like almost half of that drop was on the coking coal and domestic met side.

So two questions. Number one, when I look at domestic, how much of that change is your view on utility versus your view on other domestic coal? And when I look at the exports, you did about 31 million this year; the guidance is for 20 million. Can I look at end markets, and can we think about it that way in terms of where has the incremental demand ebbed for your export coal geographically?

Sure. So yes, you're right, if you go back to the third-quarter guidance that we did at the call, we essentially said 21 million tons per quarter of domestic, which was 15 of domestic -- of utility and 6 of steel and industrial. And what we said then about our export was about 6 million tons a quarter for 24 in total.

We've essentially seen a deterioration in all of those three markets by about 1 million tons a quarter, and that's really a reflection of the fact that natural gas prices and the very mild fourth quarter on the utility side has dampened our expectations.

On the steel and industrial side, it's the reflection of the fact that when we look at the steel industry right now, you have a utilization of about 60% versus 75% a year ago, and we saw it deteriorate throughout the fourth quarter. And on the export market, is also just a reflection of the fact that the underlying commodity indexes are telling us that the market has gotten softer as global oversupply continues.

So in terms of where the export market is going, we did about 60/40 split here between met and thermal. It will probably be a little bit higher next year would be my guess at this point in terms of probably one-third, two-third, two-thirds in favor of met.

And traditionally, over half of our business goes to Europe, and I would say that split is probably going to continue in terms of the end market as well. And so I think it's just proportional between the markets, and I think you're going to see relatively proportional cut in terms of the end markets as well.

Okay. That's my one. Thank you.

Thank you, Jeff.

Thank you. The next question is coming from Scott Group from Wolfe Research. Your line is open.

Good morning, Scott.

Hey, thank you. Good morning, guys. So Fredrik, just wanted to ask about the coal yields. I thought that the fixed variable was supposed to help in environments like this when volumes are down so much and help the yields out. Why aren't we seeing that?

Yes, and in the third quarter they were very helpful actually. They were still helpful here in the fourth quarter but not as much, because some of this also depends on who you're actually shipping to.

And the big driver, though, in the coal yields was really the fact that we haven't made these accommodations on the export side and further adjusted our rates downward to reflect the reality of the underlying market and at the same time trying to optimize our bottom line.

Okay. And then Michael, I just want to ask, so a lot's changed in CSX, certainly a lot's changed in the market from a year, year and-a-half ago. Does your view or appetite on M&A change at all, or has it changed at all in that year, year and-a-half?

Not really, Scott. If you think about it, I think our position is the same as it was a year, year and-a-half ago. We think there's tremendous opportunity for shareholder value creation with our existing portfolio.

And if you think about any mergers, there's going to be substantial regulatory cost, some of the synergies will be very limited because they're end-to-end mergers. So if you're going to offset those regulatory costs, you've got to have compelling interfaces and synergies, and I really have a hard time envisioning where that would be in any rail merger.

So the challenges of the market don't change your view on that?

No, sir, I think we've done well in prior down periods. We think we will in this one as well, and we think the long-term future with our existing customer base, two-thirds of the population we serve, pressures on the trucking, the service improvements we continue to make in the pricing allows us to create lots of value for the shareholders over the intermediate and long term.

Thank you a lot, guys.

Thank you. The next question is coming from Justin Long from Stephens. Your line is open.

Good morning, Justin.

Thank you and good morning. So you talked about cycling the benefits from liquidated damages and gains on sale this year, and just taking those items out to someone's point earlier, you get to a mid-single-digit EPS decline in 2016. Along with anticipated volume declines, mix headwinds, your commentary that it will be difficult to improve the OR, is it fair to say that EPS should be down at least double digits or low double digits this year?

All we're prepared to talk to you about today is the directional piece. What we tried to do is to give you some clarity around the moving parts that we have, obviously certainty on the cycling piece and we have, we think, good insights into the coal sector.

It's really what happens in the industrial spaces, especially as we get out into the second half of the year. And again it's really, really early in the year in an uncertain environment to project a full-year EPS with specificity.

At the same time, as you look at the things that we're doing, the pricing performance, the productivity, the right-sizing, the service improvements, all of those things are the things that are most within our control, and those are the things that you're going to see us be relentless about.

Okay. Fair enough. And as a quick follow-up, I wanted to ask about PTC. You mentioned the $300 million of anticipated spending this year and $2.2 billion in total. But of that total amount, what's remaining? What's remaining after 2016? And after you've fully installed the technology, do you anticipate any incremental maintenance cost associated with PTC that would be ongoing?

So let me give you the facts and the figures on PTC. So $1.5 billion is what we spent through the end of 2015. We've given you the $300 million guidance for 2016, so that would take you up to the $1.8 billion through the end of this year.

Our project takes us to a hardware completion date of 2018 and fully operational by 2020. I think you'll see the majority of the difference between the $1.8 billion and the $2.2 billion being spent between now -- excuse me, the end of 2016 and the end of 2018.

In terms of the tail on OpEx and some refreshed CapEx, we're still working through that. Obviously, there's a piece that's embedded within depreciation, as well as in departmental operating expenses, and that's still being worked on right now as we understand the support agreements that will go along with the hardware and the software, as well as the useful life on those pieces of equipment.

Okay. Great. That's helpful. Thank you for the time today.

Thank you. Our next question will be coming from Cleo Zagrean from Macquarie. Your line is open.

Good morning, Cleo.

Good morning and thank you for your time. So to follow up on the recent conversation, let's imagine ourselves this time next year after the lower earnings base set by 2016. I'm not asking for guidance, but conceptually, how do you see the you new growth trend? Can we see double-digit sustainable EPS growth? Or should we think of maturing into a pattern of lower growth, maybe more distributions for shareholders?

Because we've been talking about this structural changes not in a so-called recession such as low profitability from coal, consumer spending shifting more towards services, probably sustainable strong dollar, sluggish industrial economy. So what is the new normal and how can you grow in that? Thank you.

Thank you, Cleo. From just an EPS directional thinking beyond 2016, we see 2016 as, again, a unique year. And clearly, we should be able to provide strong EPS growth off of a 2016 base and allow Fredrik to comment on some of the commercial items of your question in terms of where some of the various lines of business might be going.

So as we go through this year and cycle some of these headwinds that we're going to be facing, clearly for the first half of this year, and we look at where the macroeconomic indicators are and projection for the US dollar, I think we'll start seeing things stabilize, normalize, and we can start seeing year-over-year growth as we move through hopefully late in 2016 and clearly move into 2017. Based on what we're seeing right now.

As Frank I think has said many times throughout the call today, Michael as well, the key thing for us right now is to focus on the things that we control the most, and then the macro headwinds are going to be whatever they are. And the key thing for us is to adjust our infrastructure to reflect the reality of what they provide us.

Thank you, and as a follow-up, can you talk to us about the rate at which you see investing in growth opportunities? And maybe what it would take for you to consider a higher sustainable dividend yield to appeal to, more broadly, to dividend-focused investors? Thank you.

On the capital side, clearly there's a portion of our capital budget every year that is geared toward growth investments. The majority of that over recent years has been focused on our growth engine, and that's on the intermodal, especially on the domestic intermodal side. So you'll continue to see us focus in that area.

In terms of dividends, I'd say currently where we are, we have a very healthy yield. We have guidance out there in terms of what we're willing to pay out on a trailing 12-months basis, and that's in the 30% to 40% of trailing 12-months earnings. And so we look at that every year, generally speaking, after the first quarter, and we'll continue to do that and look at where we are against the broader environment.

Thank you. Appreciate very much.

Thank you the last question will be coming from Keith Schoonmaker from Morningstar. Your line is open, sir.

Good morning.

Good morning. Your expectations for automotive were a scarce bright spot, as were actual auto shipments last year. Could you please add some color to this growth expectation, maybe particular locations where you're seeing some strengths, as well as perhaps comment on general shifts of production to Mexico and how that affects your network. Thank you.

Sure. So if we look at the North American light vehicle production, I think we're ending up about 17.5 here in 2015, and the projection is for 18.2 next year, so that provides us good growth opportunities. US sales also based on the projections that we're seeing indicate good growth.

The Mexico shift is clear, so the North American light vehicle production numbers are probably skewed a little bit more towards Mexico, which we don't capture as much of but we still capture some of that. And sometimes that is actually a length of haul advantage for us. So that is helpful.

So overall, if you go back in history over the last 30, 40 years, I'm sure that you'll find that our correlations to North America light vehicle production is probably in the very, very high 95%, 98%. So we follow what the producers tell us and then we adjust our fleet and service accordingly, and right now, it looks like we're going to have another year of growth. But not anywhere close to where it's been since 2009, but still nice growth. And especially in this sort of environment, we need these sorts of growth opportunities.

Thank you.

Thank you everyone for joining us and we will talk to you again next quarter. Thank you.

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