CSX Corp (CSX) — Q1 2015 Earnings Call Transcript

Thank you and good morning everyone. And welcome again to CSX Corporation’s first quarter 2015 earnings presentation. The material that we'll be reviewing this morning along with our expanded quarterly financial report and our safety and service measurements, are available on our Web site this morning at csx.com under the Investor section. In addition, following the presentation a webcast and podcast replay will be available on that same Web site. This morning, our presentation will be led by Michael Ward, the Company’s Chairman and Chief Executive Officer; and Fredrik Eliasson, our Chief Financial Officer. In addition Oscar Munoz, our President and Chief Operating Officer; and Clarence Gooden, our Chief Sales and Marketing Officer will be available during the question-and-answer session. Now before we turn the presentation over to Michael, let me remind everyone that the presentation and other statements made by the Company contain forward-looking statements. You are encouraged to review the Company’s disclosure in the accompanying presentation on Slide 2. This disclosure identifies forward-looking statements as well as the uncertainties and risks that could cause actual performance to differ materially from the results anticipated by these statements. In addition, at the end of the presentation we will conduct a question-and-answer session with the research analysts. With nearly 30 analysts covering CSX today, I would ask as a courtesy for everyone to please limit your inquiries to one primary and one follow-up question. And with that let me turn the presentation over to CSX Corporation's Chairman and Chief Executive Officer, Michael Ward.

Well, thank you David and good morning everyone. Yesterday CSX reported first quarter earnings per share of $0.45 up 13% from $0.40 reported in the same period last year. The Company also generated double-digit growth in operating income, net earnings and earnings per share. Revenue in the quarter was $3 billion with continuing broad based demand for freight transportation. We see better pricing vibrancy than in previous years and we’re pursuing new growth opportunities in the merchandised and intermodal markets. These efforts are helping to offset the headwinds in coal, the impact of a stronger U.S. dollar and lower fuel recovery. In addition, lower fuel prices and cost-saving initiatives decreased expenses in the quarter. As a result, operating income increased 14% to $843 million and the operating ratio improved 330 basis points to 72.2. While operations remain stable sequentially during the quarter, we expect sustained improvements going forward driven by the combination of resource investments coming online, asset utilization adjustments and the extraordinary efforts of our employees. Specifically, we expect the positive trends we’ve seen over the past few weeks to gain momentum in the second quarter and accelerate in the second half of the year as we progress towards the record levels of service we saw in 2012 and 2013. These efforts will drive our ability to continue pricing ahead of rail inflation, growing merchandised and intermodal faster than the economy and improving efficiency which is expected to produce savings approaching $200 million this year. With that foundation, we took action just yesterday to reward our shareholders with a 13% dividend increase and a new $2 billion share buyback program that we expect to complete over the next 24 months. Now, I will turn the presentation over to Fredrik who will take us through the top and bottom line results as well as our shareholder actions in more detail.

Thank you, Michael, and good morning everyone. Let me begin by providing some more detail on our first quarter results. Top line growth slowed in the first quarter with revenue slightly up versus the prior year and volume up 1%. These results reflect weaker market conditions in domestic coal, a stronger U.S. dollar and the impact of winter weather which together suppress volume growth across the industry. Revenue per unit was flat in the first quarter and includes the impact of lower fuel surcharge revenue which declined $89 million versus the prior year. Core pricing for the quarter was 1.6% overall and 3.4% excluding coal. Other revenue increased $23 million versus the prior year driven mainly by higher liquidated damages. However, we incurred a similar year-over-year increase in train accident costs stemming from the Mount Carbon derailment, which essentially offset the gain in other revenue. Expenses decreased 4% versus last year driven primarily by the impact of lower fuel prices. Operating income was $843 million up 14% over $104 million versus the prior year. Looking below the line interest expense and other income were similar to the prior year period and income taxes were $261 million in the quarter, reflecting an effective tax rate of approximately 38%. Overall net earnings were $442 million and EPS was $0.45 per share up 11% and 13% respectively versus the prior year period. Now let me turn to the market outlook for the second quarter. Looking forward we expect a generally flat demand environment in the second quarter as we cycle the strong surge in pent-up demand during last year's second quarter then volume increased 8%. Overall we are projecting favorable conditions for 49% of our markets in the second quarter and stable to unfavorable conditions for the remaining 51%. We expect strong intermodal growth to continue as our strategic network investments support highway to rail conversions and growth with existing customers. Increased infrastructure development products are driving a favorable outlook for minerals. Agriculture is neutral as strengthened domestic grain shipments are offset by weakened export grain markets resulting from the strong U.S. dollar. Automotive is expected to grow modestly driven by projected North American light vehicle production. The outlook for the chemicals market is also neutral due to a reduction in drilling activities stemming from the low commodity price environment. As a result we expect crude volumes for the remainder of the year to hold relatively flat to the level we saw in the first quarter. We have sustained low natural gas prices under $3 and domestic coal volumes were adversely impacted in the first quarter and we expect volume to decline in the second quarter and to be down at least 5% for the full year. Export coal volume is expected to be lower in the second quarter reflecting oversupply and the strong U.S. dollar. While volumes have held up relatively well in the first quarter, we still expect about 30 million tons for the full year. The strong U.S. dollar is particularly impacting the metals market where U.S. steel production is down 12% year-to-date. Overall the key drivers for a flat demand outlook in the second quarter are the change in commodity prices, the cycling of a period of strong pent-up demand during last year's second quarter and a strengthening U.S. dollar. Turning to the next slide, let me talk about our expectations from expenses in the second quarter. Beginning with Labor and Fringe, we expect second quarter average headcount to be essentially flat sequentially. On a year-over-year basis this represents a 3% increase driven by T&E employees added over the course of the last 12 months to support service. We expect second quarter labor inflation to be around $35 million similar to the level seen in the first quarter and then moderate to around $25 million per quarter in the second half. As we saw in the prior quarters, there will be a $10 million to $50 million shift between the labor and MS&O expense lines in the second quarter as a result of the locomotive maintenance agreement we amended in June of 2014. This will be the last quarter that we are cycling this expense shift. Looking at MS&O expense, we expect the second quarter to be driven primarily by inflation and higher resource levels versus the prior year, partially offset by efficiency savings. Fuel expense in the second quarter will be driven predominantly by lower cost per gallon reflecting the current price environment and a continued focus on fuel efficiency. We expect depreciation in the second quarter to increase around $10 million versus the prior year reflecting the ongoing investment in the business. Finally, equipment and other rents in the second quarter is expected to stay relatively flat to last year with higher freight car rates offset by improving cycle times. Turning to the next slide, as Michael mentioned, CSX will be increasing its dividend. The company will pay a dividend of $0.18 per share starting in the second quarter, which represents a 13% increase. This builds on 13 dividend increases we've made over the last 10 years and a 26% CAGR over that period and reflects the underlying strength in our core business. Our second quarter dividend increase will result in a payout ratio of 36% of trailing 12 months earnings. Going forward we're expanding our target payout range to 30% to 40% which reflects our confidence in the future earnings power of the company. In addition to the dividend increase CSX is also initiating a new share buyback program. CSX remains committed to utilizing share buybacks to return cash to investors, and as such we have announced a new $2 billion buyback program which is double the size of our previous program. We expect the program to be completed by the end of the first quarter 2017. This program will be conducted on a pro-rata basis during that period and is expected to be funded by debt, excess cash and free cash flow from the business. Going forward, we expect to sustain our current BBB+, BAA1 credit profile with balances our financial flexibility and cost of capital through the business cycle while targeting a debt to EBITDA ratio in the low 2s. Now let me wrap up on the next slide. Overall CSX delivered strong bottom line results in the first quarter, and this is now a third consecutive quarter of double-digit EPS growth while top-line growth was lower than our initial expectations due to volume headwinds, productivity gains and improved pricing contributed to strong earnings growth this quarter. While we continue to see strength across many of our merchandise and intermodal markets, headwinds in coal are greater than we anticipated at the start of the year. Domestic coal volumes are being impacted by the low natural gas price environment and we now expect volumes to be down at least 5% this year. In addition, export coal continues to be challenged by soft global market conditions, and we’re maintaining our full year guidance of 30 million tons. Looking at the second quarter, as we previously mentioned, we will be cycling a very strong demand environment from last year resulting in an overall flat volume outlook. In addition, since we do not expect to see the full benefits from the resources until later this year, we now project second quarter EPS to be flat to slightly up on a year-over-year basis. Looking at the full year 2015 earnings with our first quarter results being less robust than originally expected and with our new projections for the second quarter, double-digit EPS growth has clearly become more challenging. As a result, we’re updating our guidance to mid to high single-digit EPS growth for the full year. While our growth expectations this year are diminished, we still expect to have strong margin expansion by remaining focused on pricing above inflation, delivering efficiency savings approaching $200 million and driving a stronger service product for our customers. Bottom line, CSX is committed to delivering the full earnings potential of the business and maximizing value for shareholders. Our second quarter dividend increase and a new $2 billion buyback program reflects our confidence in the company’s future. With that, let me turn the presentation back to Michael for his closing remarks.

Thank you, Fredrik. Before I begin my closing remarks, on behalf of all CSX employees, I want to extend our heartfelt sympathies to the family, friends and colleagues of one of our employees who was fatally injured in the switching yard earlier this month. His death is a tragic reminder of why safety is and will remain our first and highest priority. Turning to our closing thoughts on the quarter, we continue our work to transform this railroad by consistently expanding the most diverse business mix in company history. We’re investing in growth markets, technology to improve safety, service and efficiency, and innovative ways to collaborate with our customers. As we’ve said, the foundation of that transformation and those innovations is service excellence which creates value for our customers and enhances our ability to price above rail inflation, grow merchandised and intermodal faster than the economy, and improve efficiency and asset utilization. In short, these are the actions that will drive CSX to the mid-60s operating ratio. We are relentlessly focused on that goal and the shareholder actions we’ve announced clearly underscore our confidence. CSX is committed to maximizing new opportunities as we continue our critical role in serving a growing American population and expanding global supply chain, all while creating sustainable value for you, our shareholders. And now we will take your questions.

I was wondering if you could maybe talk a little bit bigger picture about sort of the balancing of resources relative to the sort of the volume outlook. It seems from a volume perspective a little bit more of a sluggish sort of outlook for this year across the industry and as we’re kind of recovering from a service perspective over the last year or so. Obviously, you have more resources coming on board. Taking a step back, do you think that the network is balanced enough or sort of when do you reach that point where you can kind of think a little bit more strategically about sort of the resources you bring on to network relative to the outlook of the volumes?

Christian, it’s Oscar, it’s probably appropriate for me to take that one since we do think a lot about that. And again I think a couple of things about how you think about regards to the moderating volume forecast. We still have quite a strong baseline from the growth we had last year. So there is from an operational perspective quite a bit of work to do. So I’ll have comment what happened to last year with that kind of growth. We are actually glad to be in a position where we may indeed have a slightly higher level of resources than we need. But again with the increased volatility we’re facing and all the other issues, I think we’re pretty comfortable with that. I might take the entire listening group to back to '09 where we did some extensive work around the variability of the industry and certainly CSX. And I think those facts and data there prove to be again a rough order of magnitude of a third of a third of a third where a third is relatively fixed and you really can’t get out of it other than over a very long period of time. But two-thirds of that we bifurcated into sort of a short-term variable aspect which is immediate unit trains we can shut down, but we kind of went through this long-term variable cost aspect of that where we can take steps. And as we think about this very question and you hear about something like variable train scheduling, which is an initiative we kicked off a month ago, that’s part of a long-term variable cost adjustment that we’re working through. So the obvious results or the obvious initiatives that we can take when volume moderates is we can put our locomotives into storage very quickly, we talked about that a couple of years ago, and certainly the furlough aspect is available to us. So we think about it, we think about it hard, we have some strategy around it. We do not see that coming into play over certainly the next couple of quarters with the kind of baseline growth we have from the prior year.

This is Fredrik, I think that all depends on your assumption about coal, but I think you’ve seen that we just have three quarters in a row where we had double-digit earnings growth, though we think that it is certainly possible for us to do that. It just depends on how much the headwind is on coal. We’ve had three years of very significant headwinds in coal that clearly has impacted our earnings growth. But at some point, we believe that’ll moderate and when it does, we do feel that what we have lined out in terms of our inflation, plus pricing continue to drive productivity in excess of 130, 150 a year and continue to grow with the economy as the markets allow. I think we have an opportunity to continue to get back to very strong earnings growth going forward.

I would like to ask you a question about utility coal. Fredrik, I believe you mentioned a decline of 5% or more in utility coal. That has been your comment for about six weeks now. Could you provide more insight into your assessment of stockpiles in the southern and northern regions of your network? How much visibility do you have on that five percent decline? It seems like five could be an optimistic estimate given the current natural gas prices. I would appreciate any additional details you can share about the utility coal situation and possibly the rest of that 5% decline.

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

I mean if stockpiles are that high, I would guess your normal target is something like what, 60 or 65 days or maybe.

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

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

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

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

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

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

So flat, year-over-year for other revenue or…

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

I wanted to actually ask about how we should be thinking about the progression of coal yields for the balance of the year, and is there a possibility that RPU could be up in spite of fuel and sort of the things that I'm thinking about are lapping of the export coal rate concessions which I believe happens in 2Q, correct me if I'm wrong. And then thinking about the new fixed variable contract structure on a meaningful portion of the domestic book with volume declines, I would expect the yields to rise on that. Am I thinking about that correctly? What are some of the other factors that would move that up or down?

This is Fredrik, I'll start with then I'll let Clarence add any thoughts there. I think that from a fuel perspective, I think you're going to continue to see pressure in the remaining three quarters of the year. We benefitted a little bit here in the first quarter from the lag, so you're going to continue to see that impact in RPU for the full year, at least based on where we're seeing fuel today and probably more so than we saw in the first quarter. You were right that as we get through the second quarter we are lapping the decreases that we took last year for export coal, and that should be beneficial as we get to the second half. And I always point our investors to looking at the same-store sale, that’s where we provided there because I think that’s a much more meaningful number to look at because that gives you true indications of what’s going on from a pricing perspective. And with the fuel surcharge mechanism that is designed to make us neutral to fuel price volatility with exception of lag. I think when you look at that perspective, I think that gives you a better view of it, but fuel surcharge revenue will be low and it will year-over-year it is going to impact the yields negatively throughout the year.

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

I think it will be helpful but I am not sure it’s going to be enough to offset the impact we’re seeing from fuel.

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

Yes, so if you look at the different line items in our quarterly flash, you will see that if you added up between labor, MS&O and fuel, that it was about $38 million in the quarter. In total and that is obviously the first quarter of our target to get to something that approaches $200 million for the year.

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

No, Rob, this is Clarence; I think you can expect to continue to see our pricing increase. I think we've mentioned in the fourth quarter that we had begun fairly aggressive pricing earlier in the year. Our third quarter same-store sales pricing in our merchandise area was 2.5, in the fourth it was 2.7. In this quarter as you saw it was 3.4, so I think you can continue to see a continual increase in our same-store sales pricing and in our business as we move throughout 2015.

That's really helpful. Clarence, you mentioned speaking positively about the potential for international intermodal conversions to the East. Could you share your updated thoughts on what that opportunity looks like for 2015 and also provide a longer-term perspective?

I think the water is a little muddy and unclear given the situation is and ongoing in the West. I continue to believe that there will be diversions to the Gulf and East Coast as more and more customers get comfortable with what is going to finally emerge with the canal and with the post-West Coast strike. It's just too early to see how that's going to settle out and as you know there is a lot of congestion up and down in the East Coast so that's going have to settle down for people to make decisions, but I think you'll see more than what even we had anticipated seeing as time moves on over the course of the next couple of years.

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

Yes, that is in all view, yes.

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

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

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

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

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

I think it's what we've been saying for the last almost year. The amount of growth that came onto our structured and disciplined one plan was missing the amount of resources in order to run it. And I think we've been fairly consistent with saying, as those resources arrived well trained and well manufactured we can put them to good use and start to spin again. And that's exactly what's been happening over the last month along with our own initiatives and the efforts of our employees. The really last saving kind of grace is this locomotives arrival that are beginning to trickle in here, some in the first quarter and second quarter. That's the big factor in the whole business, and I think again we've been consistent with this second quarter being sort of the vital point and then the increasing level of service that we'll get in the back half of the year and then again trying to approach the record levels we had just a couple of years ago.

So the crew basis where you think it should be now, is that correct?

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

Oscar and Michael I know you sort of are aware of this, and we look at the eastern rails, the margins have sort of moved towards the lower end of the group. And I'm curious your thoughts on, I realize there's a priority of things we have to do. So coal has been a challenge recently and we want to get the service right. But when do you sort of come back and say, let's take pen to paper here and let's really figure out how we're going to get the costs out? Because coal may never come back and while the pricing can accelerate maybe there's a lot more we can do on costs. How do you think about 2016 or '17 or even longer term about addressing that and getting you guys back toward these long-term targets, mid-60s, to try to accelerate that as best you can? How do you think about doing that from a cost standpoint?

This is Michael, and I think you're quite right. As we look forward the coal has been a challenge to both the eastern roads. And I think as we look forward it's about how do we grow the other businesses intermodal or merchandize above the rate of the general economy which we have been doing. Price above inflation which, that is actually accelerating and start getting new costs out. As you know we targeted $200 million this year, and we think the combination of those three, some modest growth, pricing above inflation and good cost discipline and efficiency will drive us towards those mid 60s.

And Bill, I would add at the trailing part of your question you specifically mentioned how that relates to cost, and I think Michael's concept is a great one. It's not just about one thing, it's about pulling all the levers we pull historically, but specifically to address the cost aspect of it. It's the normal productivity we've been able to achieve plus some, and so the plus some is initiatives and objectives that probably border on more innovative and potentially in the world of railroading a little bit more risky, people think. So these variable scheduling things that we've done, I mean as you read the press about that, half the people are supportive and the other half are, oh my god, they're going to tank the whole place by doing all this crazy stuff. You got to understand the things that we do we think through very thoroughly, we plan through it and we'll communicate to our folks. And that particular program right now is just really, it's freed up 50 locomotives in a month. Our metrics are starting to go up for a lot of different reasons including that. But I guess my point on the cost side is it's an efficiency play it's not just necessarily a wholesale reduction in people. Efficiency creates productivity and productivity creates the economic value that you're coming. So pull all the levers, the cost one's a big one, the rate that we're increasing this year is probably a rate that we'll keep thinking about in the next future years to get to that mid 60s.

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

Yes, in a way, because when we talk about growing faster than the economy you may remember last year the second quarter we surged 8%. We don't do surge as well we do 2% to 3% growth very well. So, our hope is that we can modestly grow at a little bit above the inflation. We can adjust to that kind of growth, there are just surges; we don't do well Bill. But I agree with you it's clear to the pricing and productivity are more under our control, and obviously we are going to focus intensely on those, but we do think that third equation, some growth above inflation will create shareholder value.

So, Michael or Oscar, this marks the third or fourth year that we've reduced guidance, yet your announcement last night included a $2 billion buyback. Can you provide some context about what the board is considering regarding the buyback amidst what appears to be another challenging year, as we've discussed during this call?

Brandon I think, we've all along thought that the best way to create shareholder values is a balanced approach to capital deployment and cash deployment. So we are going to spend $2.5 billion this year, 17% above revenues investing for growth in the future. Secondly, this increase in our dividend takes us a little bit above a 2% yield which some of our shareholders value that dividend, we think we want to be a little bit above the average for the S&P 500. The share buybacks, the $2 billion we think help those shareholders alike; buybacks, so we think that balance deployment of doing all three is really the best way to create shareholder value as we've done over the past decade. So I don't view this is very different than what we have been doing and a way to create a strong shareholder value going forward.

And Brandon, this is Oscar, you kind of ask how does the board think about it. So being a board member on different places than here at our company the way board members think about it, any time you project sort of forward things like this, they’re based on a baseline of financial strength and economic viewpoint that there is growth and strength in this business and in this particular company that can actually pay for that. So it’s a very thorough review process, it’s not something that gets done very lightly. So we have a lot of potential for growth, we weathered a significant storm here over the last few months, and I know it's hard to go back to it but you lose that kind of volume stream and revenue stream and operating profit strength and make it up and stay even. That’s the strength of our business, now we got to build upon that and clearly our board sees that benefit and has approved the initiatives that we've opened up here with.

And I guess to follow up on Bill Green's question on margins, there are other U.S. carriers that do have 20% of their revenue exposure in coal, they haven't had great outcomes either on the volume side, and growth hasn't been right for the industry for the last 10 years. And yet, we've seen a lot of margin traction on price and productivity. I know that’s part of your plan. But what is changing in the forward outlook for CSX that suggests we are going to get significant margin expansion beyond just the fuel contribution in 2016 or 2017, that I assume took to the board and said it doesn't make the shares relatively attractive at this point in time? And are you willing to put out a long-term margin target like you did I think back in 2010 or 2011 when we said we are going to be at a 65 OR by 2015?

On the first part of your question about the margin expansion, I think if you look at the underlying business that we have, that has actually been expanding over the last couple of years, but the headwind from almost a billion dollars loss of coal has offset that. So we are comfortable, when we look at the underlying core earnings part of our company, that it's clearly capable of continuing to expand margin over time similar to what you've heard earlier. In terms of setting a target out there and so forth, I think what we have said before, and I think you know in 2011 we set a target for 2015 of mid-60s and with the exception of what happened in our coal business that is clearly outside of our control, we would have been there. What I've said repeatedly has been, I think what we need to do right now is to establish some progress here and hopefully we will do that this year of sustained margin expansion and some earnings growth, and hence once we have that track record behind us, I think we can step back and say, are we comfortable now to put another target out there. But I think right now our focus is margin expansion this year, and continued earnings growth.

So you mentioned that frac sand volumes were down in the first quarter and highlighted the reduced energy-related drilling activities. Would you expect kind of a similar decline in the second quarter from sands, or will it accelerate up with the rest of the year as the E&P is kind of picking there the CapEx plans? And can you also just give us a mix of the basins that you'll serve again as a reminder?

Our frac business was down about 10% in the first quarter. We will see numbers maybe similar to that in the second quarter. It's probably a little too soon for us to speculate on that for the rest of the year because one of the formations that we serve which is both the Marcellus and underneath that the Utica is a different type of formation and in fact deals in a lot of wet gases as opposed to oil type formations, and so some of the fracking has continued into those areas. And we also are shipping frac to some of the other formations that are not as active and our volumes that we ship to those formations are not in the quantities that other rail carriers are shipping to those formations and those formations are western formations.

I think that basically covered it, but if you want to I guess give an update on crude given, potentially some of the more safety issues, the tank car standards which we'll probably see in the next month and so, any further initiatives on track inspections, if you can kind of bring us up to the current operating environment that would be helpful.

This is Oscar. I think what you hear and read is very accurate, our process of attempting and to prevent any of the accidents through inspections and a host of other initiatives continues to be a very-very strong initiative not just at CSX but across the industry and to some degree had a very strong alliance with the petroleum producers. On tank car standards, we are very anxious to have that standard out there. It's going to take some time to get those cars of this system, so as soon as the government can release those standards that we can begin to manufacture those I think will be critical, because I think on the mitigation of when night an incident happens, that car and that standard of car is going to be very-very helpful in that process, so we look forward to the government's decision on that.

And just quick one on intermodal. You mentioned that the West Coast congestion was impacting East Coast volumes. Can you give us an update just how that improves or maybe it hasn't since the labor negotiations have settled there, so maybe what's going on in March and in early April? And then, also when you think about East Coast taking potential share, is there a lot of infrastructure expansion that needs to be done at those ports or on a CSX network to potentially handle some of that when it does start to land on-shore?

Brian, I am certainly not an expert on the West Coast as a Western rail carrier is going to be of answering your questions on the West Coast. I would tell you that it's better today than it was yesterday and it was better yesterday, obviously then it was a few weeks ago. But they have a certain amount of congestion on the West Coast and a certain amount of backup still exists on the West Coast that is going to take a few more weeks ahead of us to get straight. In regards to the East Coast, we still have congestion on a lot of ports on the East Coast. There is going to be a requirement for a lot of infrastructure improvement on the East Coast to handle the larger vessels, the deeper water requirements that are going to be required for the larger ships and that's going to take place over the next several years. A lot of ports that you are aware already have plans in place to do that. Some have plans but no financing in place to do that. And then of course there is going to be a need to have a lot more infrastructure on the land side that supports the ports themselves to be able to handle the type of volumes that come into that. We shortly think that the rails, both Eastern rails will play a big part in what happens in the rail infrastructure that serves the ports. So, I think it's still a couple of years away of being able to see how it will finally shake out on how the infrastructures needed to support that growth on the east occurs and exactly where on the East Coast that growth occurs.

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

I think what we have said. This is Fredrik. I think what we have said in the past is as we looked at 2015 we identified about 4 million tons that were removed in 2013 that will be impacted by the MATS or CASPR rules and then beyond that, we had another 3 million tons that we moved in '13 that were going to be falling out in '16 and '17. I think that's our best estimate for impacts from those regulations. I mean in longer terms we have to understand and better study and see what ultimately comes out of the proposed CO2 regulation.

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

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

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

This is Fred, just to clarify, so our same-store sales that we publish excludes the impact of fuel and there are two numbers that we show in there, one is the overall pricing same-store sales and one is the ex-coal. So implied in that is that if you look at the delta I think you can get a sense of what the same-store sales is for coal. So that makes sense?

Yes, we still see capacity as been very tight. For example, housing is still robust and that's positive for us. If you notice our minerals business was I think around 11% or so based on a lot of highway infrastructure projects going on particularly in the region and country that we serve, so we're seeing truck capacity staying relatively tight. Coast-wise barges have been very strong and strong demand, so we still see capacity fairly tight and we still see a strong need for transportation, pricing does seem to be very robust if you look at the spot truck load market it is remaining fairly strong. So we see that it's still a very strong, robust pricing environment.

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

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

I think the water is little muddy and unclear given the situation is and ongoing in the West. I continue to believe that there will be diversions to the Gulf in the East Coast as more and more customers get comfortable with what is going to finally emerge with the canal and with the post West Coast strike. It's just too early to see how that's going to settle out and as you know there is a lot of congestion up and down in the East Coast; that's going to have to settle down for people to make decisions, but I think you'll see more than what even we had anticipated seeing as time moves on over the course of the next couple of years.

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