CSX Corp (CSX) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CSX Corporation first quarter 2016 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 and Investor Relations Officer for CSX Corporation.

Thank you, Nicole, and good morning everyone and welcome again to CSX Corporation's first quarter 2016 earnings presentation. The presentation 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 at CSX.com under the investor section. In addition, following the presentation this morning, a 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 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 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?

Thank you, David. Good morning, everyone. Yesterday CSX reported first-quarter earnings per share of $0.37 compared to $0.45 per share in the same period last year. Revenue declined 14% in the quarter, as strong pricing across nearly all markets reflecting an improving service product was more than offset by the impact of lower fuel recovery, market conditions that drove a 5% volume decline including a 31% decline in coal and a $95 million year-over-year decline in liquidated damages.

Turning to operations, CSX remained an industry leader in safety and service measurements continued to advance in the quarter consistent with our service excellence initiative to meet and exceed customer expectations.

Expenses improved 12% driven by lower fuel prices as well as efficiency gains and lower volume related costs, reflecting CSX's ongoing drive to aggressively reduce its cost structure as we continue to reshape the Company in the face of this challenging market environment.

Including the impact of these cost-saving actions, find in liquidated damages, operating income decreased $139 million to $704 million for the quarter. At the same time, the operating ratio increased 90 basis points year-over-year to 73.1%.

Now I will turn the presentation over to Frank, who will take us through the results and second-quarter outlook in more detail.

Thank you, Michael, and good morning everyone. Let me begin by providing more detail on our first-quarter results. As Michael mentioned, revenue was down 14%, or $409 million versus the prior year. With coal declining 31%, total volume decreased 5% from last year which impacted revenue by a about $140 million. In addition, fuel surcharge recoveries declined $139 million. We continue to see strong core pricing from an improving service product which for the first quarter was up 3.1% overall and 4.0% excluding coal. However, these gains were more than offset by the impact of negative business mix in the quarter.

Other revenue decreased $85 million driven mainly by cycling higher liquidated damages from last year which totaled $105 million versus $10 million in this year's first quarter. Expenses decreased 12% versus the prior year driven mainly by $133 million in efficiency gains, $78 million in lower fuel prices and $64 million in lower volume related costs.

Operating income was $704 million in the first quarter, down 16% 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 while other income was relatively flat to the prior year. And finally, income taxes were $212 million in the quarter with an effective tax rate of about 37%. Overall net earnings were $356 million down 19% versus the prior year and EPS was $0.37 per share down 18% versus last year.

Now let me turn to the market outlook for the second quarter. Looking forward we again expect volumes to decline in the second quarter. The challenging freight environment will continue as headwinds in coal, energy and metals volume are expected to more than offset the markets that will show growth. Automotive is expected to grow as light vehicle production continues to be a bright spot in the economy. Minerals will benefit from the continued ramp up of a new fly ash remediation project and continued highway construction driving aggregates movement.

Intermodal is expected to be neutral as we continue to cycle competitive international losses. This will be offset by secular domestic growth driven by strategic investments supporting highway-to-rail conversion. Chemicals volume is expected to decline as energy markets continue to be marked by low crude oil prices and reduced drilling activity which will impact our shale-related products more significantly in the second quarter. At the same time the core chemical markets remain healthy.

Domestic coal will continue to be unfavorably impacted by low natural gas prices currently around $2 and high levels of coal inventory at the utilities. As a result, we expect second-quarter tonnage to be around 18 million tons. In addition, we anticipate a similar quarterly run rate for the second half recognizing domestic coal volume will be largely dependent on weather. Export coal remains pressured by the strong US dollar and global oversupply. As a result we believe second-quarter tonnage will be around 4 million to 5 million tons and expect a similar run rate for the remainder of the year.

For the full year we now expect around 18 million to 20 million tons of export coal in 2016. Despite a slowly recovering domestic steel production environment, metals is expected to be unfavorable year-over-year as the market works off excess supply from a strong US dollar and imported product. Overall, we are still facing significant coal headwinds and a freight environment that continues to experience pronounced challenges associated with historically low crude oil, natural gas and other commodity prices and a strong US dollar. As a result, we expect second-quarter volume to decline in the mid to high single-digit range year-over-year.

Turning to the next slide, let me talk about our expectations for expenses in the second quarter. We expect second-quarter expense to benefit from the low fuel price environment and our ongoing focus on driving efficiency gains and rightsizing resources as we continue to reshape the Company. Over the course of the last 12 months, we have taken aggressive cost actions with headcount down nearly 4500 versus the prior year. These actions include our train length initiative, closing facilities in the coal network, consolidating a division headquarters and streamlining mechanical and operations support functions.

These actions along with cycling the impact of winter weather last year drove high efficiency gains in excess of $130 million seen here in the first quarter. And for the full year we now expect to deliver efficiency gains of around $250 million.

Looking at labor and fringe, we expect second-quarter average headcount to stay relatively flat sequentially. We expect labor inflation to be around $25 million in the second quarter in line with the level seen here in the first quarter.

Looking at MS&O expense, we expect inflation and the cycling of an operating property gain from last year to more than offset efficiency gains and volume related savings. Fuel expense in the second 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 second quarter to increase around $15 million versus the prior year reflecting the ongoing investment in the business.

Finally, equipment and other rents in the second quarter is expected to increase moderately from last year with higher freight car rates and the increase in volume-related costs associated with automotive growth more than offsetting improved car cycle times.

Now let me wrap up on the next slide. CSX's first-quarter results reflect challenging freight conditions with low commodity credit prices in the strong US dollar continuing to impact most markets resulting in a 5% volume decline this quarter. However, as we continue to reshape the Company, our focus on pricing for the relative value of rail service, driving efficiency gains and aligning resources to the softer demand environment help to offset those volume headwinds.

Looking ahead we expect macroeconomic and coal headwinds to continue this year. Low commodity prices and the strength of the US dollar are expected to continue impacting many of CSX's markets. In particular, we now expect total coal volume to decline around 25% for the full year.

Looking at our expectations for the second-quarter and full-year, the impact of current market conditions on CSX's volume particularly in coal is expected to outweigh the positive momentum we are seeing in service which drives pricing efficiency and rightsizing initiatives.

In the second quarter we expect mid to high single-digit volume declines with efficiency gains moderating from the level seen here in the first quarter. For the full year in addition to the liquidated damages we cycled during the first quarter as we previously discussed, we will also be cycling a significant property transaction in the fourth quarter. As a result we continue to expect second-quarter and full-year 2016 earnings per share to be down from last year.

That said, we remain intensely focused on achieving strong pricing that reflects the value of CSX's service product, rightsizing resources with lower demand and pursuing structural cost opportunities across the network. In particular, the aggressive cost actions we have taken over the last 12 months have helped to mitigate the challenging freight environment and weaker volumes. As a result of these initiatives, we now expect to deliver efficiency savings of around $250 million in 2016.

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

Thank you, Frank. As I think about CSX's first-quarter performance it's clear that the Company's core earnings power remains strong even in an environment in which macroeconomic forces are putting significant pressure on most of our markets. We know 2016 will be a challenging year and we are focused on delivering the highest level of performance and results possible. In this environment CSX continues to reshape its business and network for the economy of tomorrow, maximizing growth opportunities in merchandise and intermodal while also improving the profitability of those markets to help offset the loss of coal.

As we look forward, this team is resolute in its commitment to further transform today's Company. The CSX of tomorrow is built on the strength of a premier network reaching diverse merchandise and intermodal markets. It is focused on delivering service excellence for customers to support pricing that allows us to continue investing for the next generation and drive ever more efficient operations.

And we will leverage technology to further improve safety, service and efficiency as we continue to evolve our business for the realities of tomorrow's economy. As we make decisions today to make that vision of tomorrow a reality, we remain focused on achieving a mid-60s operating ratio longer-term and delivering compelling value for you, our shareholders.

Now we would be glad to take your questions.

Thank you. (Operator Instructions). Ravi Shanker, Morgan Stanley.

A question on the productivity savings. Clearly your first-quarter performance was pretty amazing with the [133] compared to the full-year run rate. You did bump up the full-year by less than you exceeded your prior guidance for 1Q. Can you just talk about the cadence for the rest of the year and why that appears to step down so much versus the first quarter number?

Sure. This is Cindy. I think we are off to a great start, which reflects a lot of hard work by all of our team to bring the $130 million of productivity in the first quarter. And as I think about how 2015 progressed, we had a lot of initiatives that we started in the beginning of the second quarter and on into the third quarter around rightsizing of our coal facilities as well as our train length initiative, so we will be bumping up against those comps going forward. And I also would say there was some benefit to a milder winter this year than what we had in 2015 in the first quarter.

That said, we are never done in working on our productivity initiatives and the pace of change here has intensified, accelerated and we will continue to bring everything to the bottom line that we can keeping in mind that we have to balance that with serving our customers and we won't compromise safety in that effort.

And as we go forward and you think about the run rate going forward of $40 million to $50 million in the next three quarters, that is higher than our historical run rate with the exception of 2015 in terms of productivity that we will be able to deliver. So if there's more to get we will absolutely get it and we will be able to update you on that if we see that in future conversations either on the quarterly or on Frank's roadshows.

That's great color. If I can ask one question on coal. Just what is your outlook for the rest of the year? Obviously you've given us your guidance but going into 2017 and 2018, just any new thoughts on the outlook for coal in the medium-term?

Sure. This is Fredrik. So we guide you to about 25% down for the full year. We did on the domestic side here in the first quarter did about 17 million tons and our view is as we think about the next couple quarters we like to think that we are going to be at that maybe 17 million to 18 million ton range on the domestic side and on the export site we did almost 6 million tons in the first quarter. Traditionally the first quarter is a little bit stronger than the other quarters, at least it's been like that the last couple of years.

We also enjoyed some spot moves here in the first quarter that we don't necessarily see in the remaining three quarters, so maybe 4 million to 5 million tons a quarter on the export side. So that gives us that $22 million to $23 million range for coal guidance per quarter as we move through the year versus the 23 million tons we did in the first quarter.

Great. Thank you.

Ken Hoexter, Merrill Lynch.

Just wanted to follow up on the employees. Great job on the larger than expected reduction, down 14%, but maybe you can walk us through why was the average cost per employee up? The last few quarters I guess we've seen it down 5% to 9%. This quarter it was up. Maybe you can talk a little bit about what's in that number? Is there incentive comp or anything else that drives and what should we look forward for that going forward? Thanks.

You are right. Headcount was down about 13%, 14% while the labor and fringe line was down about 9% or 10%, so your comp per employee is about 4% or 5% higher. There's a couple of drivers. Some of those are industry related and some of those are CSX specific. Clearly you have general wage inflation of say 4% a year.

And then what probably is the biggest driver for us is health and welfare inflation. As the industry is reducing resources you've got fewer employees to spread the health and welfare cost over. So both of those are industry in nature. In terms of maybe some CSX-specific dynamics, as you furlough employees generally those are going to be your less tenured employees with lower all-in wages.

And then maybe as a last point, Ken, when you look at a year-over-year number of employees in training, there were significantly more employees in training in the year-ago quarter than there are currently just given sort of where we are on the resource side. And training pay is less than marked up pay, so you've got three or four moving parts in there. That hopefully answers your question.

That does. That's a great follow-up. I'm sorry I missed David's comment, are we allowed one follow-up, or is it one question?

Yes, you can have a follow-up.

Okay, so just on the coal market, Michael, can you look forward and tell us -- I know you've talked in the past about the [Madison-Casper] plant closings that were mandated in 2015 and 2016. Is there something that now is done and we should see that pace decelerate as you look forward? I just want to understand -- that was a great answer by Fredrik on what we are seeing now -- but I just want to understand is there something else that is going to continue to drive this? Is this just market dynamics as far as closings, or are there more that's going to structurally change the market and continue the pace we seen on the decline?

Sure Ken, this is Fredrik. Frankly based on these very low demand levels we are seeing as we go through plant by plant and look at the closures that we expect in 2016, 2017 and 2018 which really covers all the announced closures that we have on the network, based on the outlook that we have for the rest of the year now which is consistent with the guidance, there's only less than 1 million tons that we have in for those plants that have announced to close which means that the closure side of things is really behind us to a very large degree as we move forward because of the fact that the demand levels are so low.

Really helpful. Appreciate the feedback. Thanks, guys.

Brandon Oglenski, Barclays.

Difficult environment right now. Can you guys help us on the top line? So I know you talked about mid- to high-volume declines for 2Q. But how do we think about the contribution from price and then the headwinds from mix? Does that get easier or more challenging as we progress through the year?

Yes, the second quarter and probably even third quarter are going to be challenging quarters from a volume perspective. It is not really until we get to the fourth quarter where we have a little bit easier comparisons year-over-year both on the coal side and on the general merchandise side on intermodal as well.

We are going to have a negative mix with us as long as our coal business is declining as fast as it is and our intermodal business is growing as fast as it is. Clearly, we are very transparent about what we are doing from a pricing perspective and that's going to continue to be helpful as we move through the year.

I guess what I was getting at is more from a top-line perspective, should we be thinking a similar outcome then where mix is -- I think you even included is in the prepared remarks that mix might offset the favorable impact from pricing looking forward then so top line could be down a little bit more than volume?

As you try to model out what we are doing, we have kind of given you the individual components and the one piece we haven't talked about is of course fuel as well. So you can put this pieces together yourself. We are very explicit in terms of what we are seeing in each individual market. We certainly expect continued strong pricing as we move forward and then of course we have the variance of fuel whatever that is going to do.

Okay. Thank you.

Brian Ossenbeck, JPMorgan.

Good morning; thanks for taking my call. Had a quick question on just the impact of the dollar. The trade-weighted index was about 5% off from the peak. You are still calling out some pretty negative headwinds for the near-term on commodity prices both on the exports and on disruptive imports. Do you think if it stays at this level, Fredrik, that you'd start to see some relief towards the end of the year, or do you think you need another 5% down move to really get some relief in some of these commodity markets?

Well, the dollar is still well above its 10-year average or so forth. But it is clear that it's been helpful in certain areas, the fact that it has taken a step back the last two months or so. One area where we have seen that is in the export coal side on the metallurgical side with a benchmark actually has stepped up a little bit from I think the low point $81 in the Queensland Index to $84 and I think the bench where the sort of spot moves are actually higher than that at this point. And we are also seeing while it's not directly dollar related, some of the potential tariffs and countervailing duties that we are seeing in the metals business we are starting to see drive down some of the imports into the country which is starting slowly but surely I think to heal our metals business as well.

But it is fair to say that even with that sort of relief over the last two months on the dollar, you are looking into the fourth quarter I think until you are going to start seeing meaningful improvements in the volume performance.

Okay, great. Thanks. And then on the productivity side, you mentioned that the train length initiative is basically approaching the one-year anniversary, so comps are going to get a little bit tougher but maybe if you can this we recap the last year, some of the accomplishments and what you think is reasonable for in that context for some of the goals looking out through the rest of this year and into 2017?

Sure, Brian. Thanks. We, over the year of 2015 saw 16% gains in our train lengths and we are up to about 6500 feet, 6400 feet in total. We saw probably the smallest incremental change in the fourth quarter as we had really largely put in place all that we felt comfortably we could in maintaining service to our customers. And we are bumping up against challenges in the single-track territory where our siding length is a bit of a limiter for us.

Going forward and in this year, we are planning to increase siding lengths in our corridor from Nashville to Cincinnati. That is presently limited to 6500 feet, so we are making some structural adjustments to help us continue it and we should see those investments be in place and available to us in the back half of this year.

So I would also say that one of the benefits of the initiative that we've seen is the ability to flex as seasonality impacts volumes. So in summer months we feel that with a little bit less volume that's typically out there that we will be able to continue to utilize train length in terms of reducing our costs. That gives us the ability to variablize where we haven't before. And certainly if anything changes either up or down, we will be able to adjust accordingly to maintain train length. So we feel really good about the initiative, and our team in the field has done a fantastic job putting it in place.

Okay. Thanks a lot for your time.

Chris Wetherbee, Citi.

Thanks. Good morning, guys. Maybe a question for Cindy just following up on the productivity. When you think about the increase from the $200 million to the $250 million, if you could maybe break down those specific components a little bit. Just sort of looking at the puts and takes on some of the expenses. I'm just kind of curious where that comes from, maybe how much is whether, maybe how much is headcount. Wanted to get a sense there.

As far as going forward, let me make sure I understand your question. Going forward, or (multiple speakers)?

The incremental between $200 million and $250 million for the target for the full year.

Well, I think a lot of it is the initiatives that we already have in place. I think the benefit to potentially go higher is to be able to continue to rightsize and streamline, which has also been a big part of our initiatives. So we've got technology and Michael mentioned in his prepared remarks, utilizing that in automation. So it will be some additional benefits to headcount, I believe.

Okay. That's helpful. I appreciate it. And then, Fredrik, maybe a question for you on the market outlook I guess. Putting coal aside for a moment, it seems like we are still maybe a bit weaker than seasonally expected, at least as far as the outlook for the second quarter. Just want to get a sense the last couple of weeks we seen some challenges. Intermodal has sort of slipped back again. I just want to get a sense of how you feel about where we stand with volumes, the economy and just generally outside of some of the specific pressure points like coal?

Sure. Taken at the highest level from where we see the economy, I think we still see the overall economy progressing in that 2%, 2.5% range, kind of uninspiring growth. Clearly we are still dealing with the aftermath of what we saw last year both on the energy side and also the strength of the dollar and the low commodity prices. And as I said earlier, that's going to be with us for at least another two quarters and it is also why we guided to volumes to be down a little bit more year-over-year sequentially in the second quarter.

Specifically the last couple of weeks to your question, we looked at our four key markets, merchandise, intermodal, coal and auto. Our merchandise business has stayed probably some of the two strongest weeks frankly the last two weeks but then we have seen some weakness in our coal markets, which is consistent with our guidance. We also had some operational issues with some of the terminals we serve on the export side that impacted our volumes. Our auto business was very strong early on in March. We probably had 65% of our cars under load and that's cycling through that right now, but we continue to see good strength there for the rest of the year.

And yes, we have seen a little bit of weakness in the intermodal space over the last few weeks but I don't think anything that has structurally changed there. So it's going to be a tough second quarter but I don't think it's a reflection of where the economy is heading or anything like that.

Okay. That's very helpful. Thanks for the time, guys.

Tom Wadewitz, UBS.

Good morning. Wanted to ask either Michael or Fredrik on pricing. You continue to get very good pricing in merchandise and intermodal and then I guess the total is a bit less. How do you think that changes? Is that something that you sustain through the full-year? And is there a point where if you say rail traffic -- you are saying it's going to be weak for a couple of quarters, is there -- does the same-store price you are getting decelerate through the year and it's somewhat of a timing impact, or would you say hey, look, we can just keep doing this and we are kind of immune to softness in truck, we are immune to excess rail capacity? Just wonder if you can kind of talk about that because the numbers look pretty good or very good in intermodal and merchandise, but it just seems like there's a lot of excess capacity out there.

Yes, we are certainly not immune to what's going on in the marketplace and I think you've seen reflection of that here in the quarter versus the fourth quarter as you seen a sequential downtick in our pricing. There obviously are specific drivers of that. We work with our customers on a deal by deal basis to understand their needs and what opportunity to drive price is. A critical component of supporting our price right now is of course the fact that our service product has improved significantly and I think our customers value a long-term access to our network and the markets that we provide. Clearly the market is softer now than it was a year ago but yet our pricing is frankly up year-over-year as well.

And so we are going to work with our customers. Our price is going to reflect what the market allows us to do. At the same time, it's critical for us to be able to price so we can reinvest in our business and that's been a strategic imperative of ours for a long time, but underlying all our pricing is service excellence for our customers.

So, that having been said, do you think it's more likely that you see stability through the year in your same-store price, or do you think there's some risk that you see deceleration in that as you look forward?

We really don't forecast price. You'll have an opportunity to see price as we disclose our earnings each and every quarter. But strong pricing is important to what we are trying to do strategically and we are going to work with our customers to make sure that they get the service that they need to be successful in their marketplace and at the same time we need to be able to continue to reinvest in our business.

Okay. Do you just have a quick thought on where domestic coal inventories are?

Yes, our domestic inventories are at very high levels. If we look at the north it's well above 100, 112 days I think is the latest data that we have. In the south, it's even higher than that about 170 days or so versus a normal range of 55 to 70 days of burn. And so we've got plenty of inventory at our customers which will take a fairly significant time I think to get down to more normalized levels. It's going to depend both on of course where natural gas prices are but also dependent on where we see the summer here in terms of how much burn we get since we've been moved towards kind of a peaker and kind of that incremental demand levels, we are even more weather dependent than we've been in the past to try to work some of these stockpiles down.

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

Allison Landry, Credit Suisse.

Good morning. Thank you. So following up on I think it was Ken's question earlier, a lot of puts and takes on the labor line but as I think about total labor and fringe expense in the second quarter, typically we see it decline on a sequential basis, but should we think about it being roughly flat versus the first quarter, or would you expect it to be a little bit higher?

Allison, I think if you look at where we are on an absolute headcount basis, what we've guided to is sequentially flat, which is down about the same percentage on a year-over-year basis that you saw in the first quarter. Clearly, the inflation will continue to impact as will the health and welfare piece there. So I'd say flat to up slightly would probably be the right thing to look at.

Okay, great. And then thinking about the service metrics, in particular train speed, it seems that CSX is lagging the other rails in terms of returning to levels seen in 2013. Is there anything specific driving this and when would you expect to get back to peak productivity levels?

Allison, in terms of service, we are constantly working with Fredrik and his team and making sure we are providing that service product that our customers need and we are really never satisfied with where we are. So the balancing act here is how to trade that off with productivity and efficiency and make sure that back to what Fredrik was talking about, we are earning the ability to reinvest in our business.

So I think when I look at it as to where we are, I alluded to it a little bit earlier, we have some opportunities. We are seeing great performance in our double-track territories. It is a little bit more challenging in the single-track territory and we are making some investments to improve that in one of the core routes that we have between Nashville and Cincinnati. And we will continue to work on making adjustments as necessary to serve our customers well.

And the train-length initiative has some impact as well, right?

That's what's driving the single-track challenge.

Got it. Thank you for the clarification.

Rob Salmon, Deutsche Bank.

Good morning. I guess following up with Tom's question, we are certainly seeing some really strong pricing across the overall network. If I look last quarter, the delta between the same-store sales pricing, which obviously includes coal and the merchandise and intermodal which kind of strips it out, expanded last quarter. Can you help us better understand what drove that? Was this unique to the quarter, or should we -- was there adjustments that were made across the network that are going to impact the duration of the year as well?

Make sure I understand your question a little bit better, Rob.

If I'm looking at the delta between same-store sales at 3.1 and the core merchandise intermodal pricing at 4.0, it's about 90 basis points. If I look back to the fourth quarter, the split was about 40 basis points. Should I think about -- what drove that step up in that split last quarter? Was it something unique because of some closures, or just how the volumes were coming on within intermodal -- sorry -- within your coal network, or were there underlying adjustments that we should be thinking about having an impact for the duration of the year as well?

The delta there is pretty much exclusively driven by the fact that we have taken some pretty significant action in our export coal business that is a reflection of what the marketplace allows us to do, or forces us to do right now to optimize our bottom line. So that's really driven by export coal more than anything else the fact that that spread has increased.

Got it. And so inherent in the guidance is export coal volumes coming down, so we should see less of a headwind as I look forward?

Yes, that's one way of looking at it. Yes, that's probably one way of looking at it.

That helps. And I guess also to get a little bit more color in terms of the intermodal RPU, the sequential decline obviously fuel had an impact there. But I would imagine the bigger impact in terms of the first quarter was just the declines, the mix of the business with international being under so much pressure in the uptick in domestic. Was there any impact in terms of looser truckload market impacting intermodal RPU as well, or were these two factors the entire explanation of the sequential decline here?

Yes, most of the impacts were because of fuel. We also did see some mixed impact in the quarter in both international and in our domestic shorter length of haul that impacted as well. But most of our business intermodal space is under long-term contracts. So while the spot market does affect a portion of the business, most of it is really impacted by longer-term trends, not these shorter-term issues that we are facing. So while there were some challenges in the quarter, our pricing in the intermodal space is still positive.

Appreciate the color.

Scott Group, Wolfe Research.

Thanks. Good morning, guys. So I'm not sure if you can help us frame the earnings guidance a little bit better. I don't know if year-over-year is the right way to look at it but if reported earnings were down 18% in the first quarter, are you expecting similar declines in the second quarter, maybe less negative, more negative? And I know that you had tough comps on the liquidated damages, so maybe sequentially is the right way to think about it? I don't know, but if you can help frame that guidance a little bit closer?

Yes, you are right. We did guide that the second quarter would be down on a year-over-year basis. You are also right that when you look at the second quarter of last year, it was an all-time record for us in terms of operating income, EPS operating ratio, so we have a significant comp that we have to work through in the second quarter. We tried to give you as much granular guidance as we could as we look out over the next three months. Certainly we gave you some very specific tonnage guidance around coal and then overall volumes in the mid to high single-digit range just given the softness in the economy and certainly the coal headwinds play into that.

And we are going to continue to focus on the things that we have the most impact on. Certainly safety and service productivity. Cindy mentioned a run rate of $40 million to $50 million in the second quarter and improving service product as well as continued strong value pricing. So you add all of that up and we come to the conclusion that earnings are going to be down. If you want to talk sequentially, generally speaking, second-quarter earnings are better than first quarter earnings, if you just look historically at that.

I guess what's trickier and if you look at the past couple of years, you've seen significant increases in earnings first quarter to second quarter. If you go back further it's more smaller increases in earnings. I guess I'm struggling with the right way to think about the seasonality.

Like I said, I think you'll see sequential earnings improvement. We have not sized that but I think you'll see a typical seasonal pattern unless of course coal disappoints even further.

Okay. And just one quick follow-up. So I think on one of your earlier questions you said that total labor costs should be flattish 1Q to 2Q. So that implies like a 10% increase in comp per employee in the second quarter year-over-year. I just want to make sure that that's right?

No, I think what I was trying to do was to help Allison see that on a flat headcount number with the inflation that's fairly typical in a moderating productivity environment that it would be essentially flat to up a little bit.

In terms of total labor?

Total labor in fringe, that's right. Comp per employee.

All right. Thank you, guys.

Jason Seidl, Cowen and Company.

Good morning, guys. I want to think a little bit longer-term here. Could you talk about rightsizing the network beyond just furloughs and repurposing maybe some locomotives. Where are you at in that stage and what really can be done in some of the network that might be just losing just too much traffic for you?

Well, if you will indulge me here a little bit, Jason, I think the changes that we are making in our Company are not short-term reactions to temporary economic conditions, so everything is on the table in terms of how we look at our network. I think what you've seen us do is rightsizing the coal fields with some specific facility reductions that we've made starting in the third quarter last year which would be Erwin, Tennessee, Corbin. We announced consolidation of a division in Huntington, or from Huntington's other divisions and also reducing our yard operation and car operation in Russell, Kentucky.

On the rest of our network, and we will continue to work in the coal network and in the coal fields on making the right decisions while still serving the customers that we have there. When you look at the rest of the network, we are focusing very hard on density which is part of our train length initiative, really kind of the underlying component of train length initiative. So as we look at our main arteries, how can we continue to drive density there which then also allows us to streamline some facilities around that. So you've seen us do that with some of the mechanical reductions that we announced that we were going to make in some of our car facilities.

And then going forward too beyond just simply network type of actions, our technology implementation that allows us to automate. So we are looking at this as the ability from my perspective to create the plan and execute a plan that helps CSX thrive in a rail industry that is fundamentally changing.

And so we will continue to drive all of these initiatives and look for ways to tweak them to get even better efficiency while still -- and I have to say -- it's very important to us to serve our customers and have a service product that meets or exceeds their expectations.

So is what you can do in the coal network done right now, or is there more to come in terms of rightsizing that particular piece of your network?

I would say we are never done in any of this and we've taken some really large steps. We will continue to look at as the demand for our services changes, and it will change, we will take the appropriate steps to take out the costs that need to come out. You have also seen us publicly put into the STB some discontinuance of service on routes where the mines are shut down and we will continue to do those types -- take those types of actions. But we will be aggressive with it but keeping in mind that it is a very profitable business for us and we want to serve the customers that need our service.

You may want to mention that the change in some of our pricing on the origin side?

Sure. Obviously we work hand-in-hand with Cindy's team here to help her drive productivity, not just in the coal fields but elsewhere in terms of train-length initiative and so forth. But specifically to Michael's point, we have changed the way we price our coal in the coal fields to drive efficiencies, so we've gone away from pricing zones so to speak, a rate district, toward specific point-to-point pricing that better reflects the reality of operating into certain (inaudible) and so forth and the maintenance that has to occur there. And we will price more efficient loading points differently going forward, which is tough discussions to have with our customers but at the same time I think there's an understanding in this sort of a transformational change you need to do something different. So there are a lot of things that we are doing cooperatively with Cindy to try to help drive out costs but still protect our service going forward.

Got it. That's great color and I appreciate it. My follow-up is on the intermodal side. Clearly there's slack capacity in the truckload marketplace. In fact, you could argue it probably got a little more slack here in 1Q. When you talk to your intermodal customers, how are they viewing that? Are they viewing that slack capacity in the trucking market as just a temporary blip where they will maybe take advantage of it, or are they viewing this as longer-term they want to play the spot market maybe a little bit more than they have in the past?

Yes, as I said before, that we have a significant portion of our domestic business is under long-term contracts. And I think those customers that participate there in those products do value the long-term access to our network and the capabilities that we provide. There's certainly right now excess capacity which is reflected in the spot pricing. I would say though that as we look at some of the underlying drivers there, especially new orders for trucks which is coming down pretty rapidly, you still have the challenges in terms of driver retention and escalating costs there and we have probably the biggest impact I think all of you have followed and we certainly follow as well, is the [ELVs] next year and impact that that will have definitely as we get into the second half of 2017. So while this is a soft environment right now that will be with us for a couple of quarters, I think the fundamentals that we've talked about for a long time is very much intact and we are seeing that in the partnership with the truckers that we continue to build on to allow us to do the long haul and then to the pickup and the delivery which solves some of their strategic challenges.

So it is softer but we do think that's a temporary issue and that the basic thesis of our intermodal investment and our bullishness in intermodal long-term, the 9 million loads, etc., is very much intact and frankly the fact that we are getting still very much positive pricing in the intermodal space even in this environment right now I think bodes well for the long-term prospect for our intermodal business.

Thanks for the color, Fredrik, and everyone. Thank you for your time as always. It's much appreciated.

Ben Hartford, Baird.

Good morning. Maybe just taking the other side of the intermodal equation. On the international side obviously there's a lot of discussion about the implementation of SOLAS and the container with rules. But any thoughts about how that's going to look on the other side of 2016 and longer-term if and when those rules are implemented?

Yes, we are trying to understand that ourselves, frankly, and I think we are learning from our customers. It could be opportunities where people ship earlier, potentially. But at this point, I think it's a little unclear exactly what the impact will be.

Okay. That sounds good. Thanks.

Jeff Kauffman, Buckingham Research.

Good morning. Congratulations in a tough environment. My question on efficiency has been asked. But let me, Cindy, come back to you a different way. Gross ton miles are down about 9% to 10%. Where are you right now in terms of locomotive capacity, say locomotives online, locomotives in storage? And I'm surprised I'm not seeing more of a reduction in cars online, kind of flat to down 1% over the last year. Can you help explain to me some of these dynamics and what you can and can't do there?

Sure. So I'll about locomotives first. If you compare first quarter of 2015 to this quarter, we actually have about 400 less locomotives active, which is about 10% in line with the volume reductions that you talked about. Within that, vetted in that is the fact that we've got 275 stored, but there's also another 96 that are lease returns that will be returned in the second and third quarter of this year that we've already pulled out.

So we feel like we are fairly decently in line with the GTM reduction and our workload reduction and our resourced takedown as a result of that. And it also allows us if we get surprised on the upside we have the ability to pull more locomotives out.

And I would also add that we are receiving locomotives in our long-term purchase plan. We have received 26 locomotives of that 100 total in the first quarter. So that's kind of the puts and takes around locomotives and we are very obviously focused on rightsizing our resources around both locomotives, employees and cars and I will talk about cars here as well.

In terms of what you are seeing with cars online, we have about 1300 cars stored right now versus -- 13,000 stored right now -- versus 5500 this time last year. When you look at cars online, the cars that are actually stored don't come out of the count for a fairly long period of time, about 36 months. It's a standard that we all have. So if you include those additional cars that were pulled out in the first quarter, we are down about 4% in terms of cars online, if you take those out of the cars online number. So again we feel like we are fairly well resourced appropriately for the demand that we have.

Okay, that's all. Thank you very much.

Justin Long, Stephens Inc.

Good morning and thanks for taking the questions. So I know you aren't giving specific EPS guidance beyond expectations for a year-over-year decline. But there have been several puts and takes since the January call and I just wanted to get a sense if your expectation on the magnitude of that EPS decline has changed. When you put it all together, has your overall earnings outlook for this year gotten better, worse, or is it about the same as it was three months ago?

I think when you look at the full year, clearly we knew this was going to be a down year. I think in terms of the puts and the takes, coal has gotten worse on a relative basis versus what we had walked into the year with. We knew we were going to have soft volumes in the merchandise side, especially with the dollar and the commodity prices. Intermodal is hanging in there, especially on the domestic side. And then we are over delivering on productivity versus how we set out the year.

And so you add all of those up and I'd say we are pretty much in line with where we had originally thought.

Okay, great. That's helpful. And then just one quick modeling question, so I wanted to ask what you are expecting on the change in incentive comp this year just based on your current plan for 2016? Do you expect a major year-over-year change in incentive comp in the next quarter or two?

Obviously that depends on how we do against our internal plans and clearly those are designed to align with the interest of the shareholders. We reset it every year as of January 1. If you remember in 2015, we begin to roll off incentive comp in the third and the fourth quarter. So I wouldn't suggest any meaningful change in the first and the second quarter and then we will update you depending on how we are doing as the year goes on in terms of incentive comp year-over-year as we get out into the back half of the year.

Great. I will leave it at that. Thanks for the time.

Tyler Brown, Raymond James.

Good morning. Frank, I believe in your 10-K you guys mentioned that in 2016 you guys are expecting to have a 53rd week this year. Can you just talk a little bit about what the expected impact in Q4 would be? Is it basically adding that extra week of operations, an extra week of earnings? And then in a similar vein, how would it impact the optics of Q4 traffic?

Yes, so let us get a little deeper into the year and that's a good Q3/Q4 question for us. We hit this about every six or seven years and it's really normalized the number of days in every quarter or the number of weekend days in every quarter, the number of holidays in every quarter and it gives us a better comparable. But one of the things we have historically done and you can expect us to do going forward, we will give you the very specific revenue and expense and operating income and operating ratio numbers for that 53rd week on the fourth quarter call.

Okay, great. And then Fredrik, I am curious about this new fly ash move that you noted in minerals. Is this a result of the coal ash regulations from last year and do you think this is kind of the tip of the iceberg, or do you think this is more of a one-off project? It just seems to me that minerals has been one of the few areas of strength?

No, fly ash is a byproduct of burning coal which must be remediated by the utility plants and obviously can also be used in the production of concrete. And we do have a significant uptick in interest in looking at opportunities to move this to a variety of landfills. This is the first move that we've been able to secure and we do think there are more opportunities as we move forward to capitalize on that and put products together for our customers that makes sense.

Okay. Very interesting. Thank you.

Donald Broughton, Avondale Partners.

Good morning, everyone. Just real quick, you at least optically appear to become more and more aggressive in share repurchase in the recent quarters. Refresh us on how you think about that. Is it a fixed dollar amount you are putting towards share repurchase and so as the stock price falls you are going to buy more? Or is it some other metric that is determining the levels at which you are being aggressive at share repurchase?

No, we are being very ratable about it as a matter of fact. We have guided previously that it would be about $250 million to $260 million a quarter. So I think all you are seeing is us being the beneficiary of deploying that in a lower stock price environment and so that ratable approach will buy you more shares, obviously in a lower price environment and less shares in a higher price environment. So we are not trying to pick the stock. We are trying to run a good railroad and so as the price goes down, we will buy more. As the price goes up, we will buy fewer.

Perfect. Thanks.

John Barnes, RBC Capital.

Good morning. Thank you. Going back on Donald's question, from a share repurchase perspective and it looked like maybe CapEx in 1Q was a little bit lower end you've talked about some of the rationalization of the infrastructure and that kind of thing. Can you talk about maybe the CapEx outlook not just for this year but going forward? Should we see a continued trend lowers -- whatever the metric is, I guess percentage of revenue is probably not the right measure anymore, but should we expect it to trend lower? And if so, how do you reallocate maybe that free cash flow?

Sure. So as you know, we entered this year and put a plan together on the capital investment side that took out over $100 million on a year-over-year basis and that was just reflective of the environment that we are in. As you look forward, I think we have some significant things that will be rolling off. Positive Train Control would clearly be one of those and as we look at the asset intensity of our business, there may be some opportunities on the infrastructure and the equipment side.

At the same time as you heard Cindy mention, making sure that we can keep pace with the train length opportunities that we have and investing in sidings going forward is going to be important for us. Technology investments will also be important for us and making sure we have a good safe and reliable railroad is going to be important for us.

So I do think you'll see some moderation over time as we continue to target 16% to 17% of revenue as our long-term goal. And I think we have line of sight to that over the next few years.

So I do think you'll continue to see us deploy capital in a balanced view with capital investment being the first priority, second priority being dividends and then the third priority being buybacks. So I think you will continue to see us take that balanced approach.

Okay. Very good. And then Fredrik, just on the coal outlook and I guess longer-term, you've got a huge shift in the portfolio makeup of the Eastern Utilities. I guess Southern Company just announced other plant site for a nuclear reactor in South Georgia to go along with the two they are building at Plant Vogtle, meaning you've got this incredible amount of electricity production coming online from nuclear.

I know you've talked a little bit about the plants that are targeted for shut down from 2016 to 2018. But is there any concern that as you go out farther on that curve that you start to see additional coal facilities shutdown as a result of maybe some of this nuclear beginning to come online?

I think we have seen a lot of change over the last couple of years. Who would've thought that in four years we would lose $1.4 billion of coal revenue and we are pretty much on target here in 2016 to lose at least $500 million of coal revenue. And so clearly based on where natural gas prices are right now, there's an economic interest in diverting a lot of the utility plants away from coal towards natural gas; and in some instances like you pointed out, to also to nuclear.

We do think though that where we are at these very depressed levels both because of natural gas prices being so low and most likely an unsustainable low place and the fact that stockpiles are also very, very high that there are opportunities to see some pick-up at some point. But there's no doubt that the trend on the utility side is downward going forward. But I don't think it's anywhere close to the pace that we've seen here over the last four to five years.

So we are monitoring that very closely. We are of course also looking at the direct impact of the regulation that is going to come -- kick in here potentially as we get into 2020 and beyond, but I think as we look at the next couple of years, we have seen a significant portion of the pain behind us and right now it's about seeing where natural prices will stabilize and when do we get through this overhang and the stockpiles to get back to a more normalized level. When that happens, we will see where it is. But the general trend is obviously it is -- it's a downward path.

Okay. Thanks for your time. Appreciate it.

All right, everyone. Thank you for joining us and we will see you again next quarter.

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