CSX Corp (CSX) — Q1 2017 Earnings Call Transcript

Thank you, Sherlyn, and good morning everyone. On behalf of the management team I would like to welcome you to our first quarter earnings call, and also thank you for your interest in CSX Corporation. This morning we are being represented by our Chief Executive Officer, Hunter Harrison; our Chief Marketing Officer, Fredrik Eliasson; our Chief Financial Officer, Frank Lonegro; and our Chief Operating Officer, Cindy Sanborn. Now, before we begin the formal part of our presentation this morning, let me remind everyone that the presentation materials, our safety and service measures, our quarterly financial report, and our press release announcing our new guidance and dividend and share repurchase are all found on our website at CSX.com under the investors section. In addition, following this presentation later today, our webcast replay and the 10-Q will be filed. And so now let me turn your attention to Slide 2 of our presentation. Here are our forward-looking disclosure statements outlining the risks and uncertainties of forward-looking statements. There will be a number of them this morning during our presentation, and I imagine quite a few during our question-and-answer session. So I would encourage you to take those forward-looking statements in the full context of this disclosure statement. On Slide 3 is our non-GAAP disclosure statement. While CSX does file all of its financials in accordance with US GAAP, we are providing some non-GAAP financial measures in addition to the GAAP financial measures to help you better understand the business. But these measures are not a substitute for GAAP. Finally, I would say that we have close to 30 analysts this morning, and so I would encourage everyone to play nicely in the sandbox, so to speak. You will have one primary and one follow-up question, so that everyone can be heard and we use everyone’s time wisely. And before I turn the presentation over to the team, let me also remind you that the earnings call today is limited to discussions of the earnings and the business of CSX only, and we will not touch upon matters that are currently the subject of the company’s annual meeting. And with that, it is my great pleasure and privilege to introduce our President and Chief Executive Officer, Hunter Harrison.

Thank you, David, and thanks to all of you for joining us this morning. I guess my first comment would be I am back. I didn't think this was going to happen, but I consider this my last leg on this journey that I have taken on this railroad. In the 50 years, did I ever think that I would finish in Jacksonville with a group of railroaders with the talent that they possess and the franchise that is before us? I am very excited about the opportunity. I met yesterday with the first board meeting, formally with our board. I think it is safe to say that all of us were pretty excited about the opportunities going forward. As I found here, there is a group of dedicated railroaders. There might be a little shift in direction, but this company is going to achieve things that some of you might not think could be achieved. I'm not going to spend a lot of your time on the first quarter because I was only here for 30 days, and the three leaders here, with their team, produced those results and they will spend some time going through that with you. I certainly think it was a pretty outstanding quarter, and as an outsider looking in, it builds the foundation for us to go forward on with our plans for the future. I would say that I was reflecting this morning on what I might say here today, and I know if you look at the various groups that we deal with, certainly our investors are represented and certainly our employees are represented. The one group that is so important to us but is not represented directly is our customers, and I am extremely excited. If you look at our service offering as it is today, there is a lot yet to learn but I think we are doing a pretty good job in our bulk movement and cycles. We do a good job in the intermodal area. I think all of us would say that in our core merchandise category, we can make some significant improvements. I think the majority have already started down that road. And I think you will see what I would characterize as some pretty dramatic changes in our cycles, and you will see things like from Chicago to Florida markets where we will take two and three days out of that as a result of some strategies you're going to hear about today. So I think that is pretty exciting for the customer base. So without me taking additional time, let me turn it over to the team here, and let Frank give us some observations on the results in the quarter.

Thanks Hunter, and good morning everyone. Consistent with the transformation that we are undertaking through Precision Scheduled Railroading under Hunter’s leadership and knowing that you are eager to ask questions this morning, we are going to be very efficient in the way that we discuss the numbers. So with that as a backdrop, let us turn to Slide 7. The safety of our employees and the communities that we serve will continue to be a top priority for CSX and for this leadership team. While the personal-injury frequency index was 9% higher year-over-year, the absolute number of injuries was down slightly, and that is part of our continuing drive towards the ultimate goal of zero injuries. Our train accident frequency index was 25% improved, with substantially fewer reportable incidents. In terms of efficiency, we are continuing to drive both train length improvements and fuel efficiency gains, while our service levels remain stable on a year-over-year basis.

Thanks Frank. Let me just add a little bit. First of all, it is very exciting to be working with Hunter here and as the operating leader, I spend a lot of time with him. I will talk a little bit about the quarter, but I will also talk about going forward and how we are working on some of the items that Hunter has briefly alluded to this morning. First of all, as you would expect, and has always been the case for CSX, safety is our highest priority. We will continue to focus on not only employee injury performance, but train accidents in order to improve or ensure that the communities that we operate through, we operate through safely. Turning to productivity, in the first quarter we delivered $123 million worth of savings. Significant resource productivity drove this. Continued train length opportunities and reduction in crew starts, and we also saw some other support costs, particularly in engineering and mechanical labor costs also positively affecting us in the quarter. But I think what we really want to hit on here is how we think about our business going forward to drive this. In the past six weeks we have done a couple of key things I will highlight this morning. One, we have adapted our operating plans to incorporate some of our unit train business into our merchandise business. This allows us to do a couple of things. As you think about our 28-hour train dispatch, our variable train dispatch, we did that in order to improve our train length and we have done that and been very successful with it. Also, as we look at our quarter one measurements, our network performance measurements we are seeing as we have implemented some of these changes I am talking about, improved dwell time and improved velocity across the network. We think that will compound the effect of some of the changes we are making, leading us to feel very comfortable moving forward that we will actually have record productivity in 2017 following our previous record productivity in 2015. Overall, I think the team is doing very well and coming together with some significant changes as we adjusted to the reductions in management headcount as part of our first quarter initiative. We saw a lot of change there and we are continuing to see change, and we are driving that effectively, and we believe we will continue to do so incorporating that into our business model going forward.

Thanks Cindy. Those are great insights for the analysts and for the investors. Going forward as we implement Precision Scheduled Railroading, you will see what we believe is a powerful combination of improved safety, improved service, and improved efficiency that exemplifies a great railroad. We believe that this powerful combination will benefit employees, customers, and shareholders alike. Turning to Slide 8, the GAAP view of our income statement highlights the 10% year-over-year top-line improvement, which has been achieved through a combination of volume growth, higher fuel surcharge recoveries, favorable mix, and value pricing. The charge of the combined impact of increased fuel prices, inflation, and volume, were nearly offset by the $123 million of efficiency savings that you heard Cindy reference. The focus on cost control in a rising volume environment produced incremental margins of over 70%, excluding the charge. Bottom line, excluding the charge, CSX delivered a record first-quarter operating ratio of 69.2%, operating income of $885 million, and a record first quarter EPS of $0.51. Turning to Slide 9, these financial results drove over $1 billion in operating cash flow, a nearly $300 million year-over-year improvement. This improvement carried through to free cash flow before dividends of $630 million. Earlier this morning, we announced a free cash flow target of around $1.5 billion for the year, which takes into consideration the combined impact of our earnings trajectory and a Capex reduction of over $100 million. We continue to remain focused on returning capital to shareholders through a balanced deployment strategy. In the quarter, we distributed $166 million to shareholders in the form of dividends while repurchasing $258 million of CSX shares. Having now completed the two-year $2 billion program we commenced in April 2015, we are pleased to announce a new one-year $1 billion buyback program earlier this morning. While ROIC was stable on a year-over-year basis, we fully expect that it will inflect more positively going forward as we continue to increase efficiency and reduce the asset intensity of our railroad. Debt-to-EBITDA was also relatively stable as we continue to appropriately utilize our balance sheet and remain committed to a BBB+ Baa1 credit rating. Turning to Slide 10, the volume outlook for the second quarter is largely positive, with nearly 70% of our markets in the favorable category and over 20% of our markets in the neutral activity. Only domestic coal is expected to be unfavorable in the second quarter.

To just add a little color to that, if you look at the macro environment, several indicators support continued growth. Obviously, the economy continues to grow at a modest pace, with GDP in the 2% to 2.5% range for the full year, and probably a similar pace in the second quarter itself. Consumer sentiment continues to be at high levels, which helps many of our markets, especially the intermodal market. At the same time, though, the truck market right now continues to see excess capacity. But as we move through the year, we do expect that to gradually improve in the second half and into 2018. And then, of course, on the favorable side, export coal had a very strong year in the first quarter, with 8.7 million tons that we moved. We do expect that to taper off as we move through the year, but we still think that an upper 20 million range in terms of tons for the full year on the export side is a good estimate at this point. As we think about some of the headwinds, we think that auto production is clearly flattening out, and we think for the rest of the year it is probably going to be relatively flat. It is a good place to think about the auto business, and while the core chemical market continues to grow at a nice pace, we expect crude by rail to continue to decline both year-over-year and sequentially as we move through the rest of 2017. Of course, on the unfavorable side, we see our domestic coal business. We talked about it in the fourth quarter; we lost some short-haul business but despite that we did about 15 million tons here in the first quarter and we expect a similar pace in the second quarter. But as you saw in the first quarter, the quality of the revenue and the impact to the bottom line is still very strong and we expect that to continue as we move through the year. It is obviously reflected in our RPU. So I would say overall we feel good about the top line. We continue to expect our merchandise and intermodal business to grow at or above the economy as a whole, and it is nice to see coal revenue growing a little bit here this year as well. Lastly, echoing Cindy’s comments earlier, we are very excited about what this operating model can do for CSX not just in terms of the bottom line, but really what it can do for our customers. We are already seeing that from a service perspective both in terms of transit time, reliability, and recoverability. So we feel very good about this change.

Thanks, Fredrik. A very helpful commentary for the investors and for the analysts. Let us finish up on Slide 11, with our first quarter results we are off to a very good start in 2017 and expect to accelerate the transformation to Precision Scheduled Railroading in the coming quarters. Earlier this morning you saw that we issued full year guidance, excluding restructuring charges. To that end, in 2017 CSX expects to achieve a mid-60s operating ratio, record efficiency gains that you heard Cindy mention, EPS growth of around 25% off of 2016’s reported EPS of $1.81 and free cash flow before dividends of around $1.5 billion. In issuing these expectations, we assume, of course, that the coal markets and the overall economy will remain stable. This morning we were also pleased to announce an 11% or $0.02 increase in the quarterly dividend along with a new one-year $1 billion share buyback program. Finally, we look forward to sharing our longer-term plans with you in the second half of the year. With that we will be delighted to take your questions this morning.

Thank you. Good morning. I appreciate you taking my call. Hunter, my first question is regarding the longer-term plan that we are scheduled to hear more about later this year. Based on the initial impressions shared in the call, could you provide some context regarding the significant opportunities to streamline the network? You mentioned monetizing real estate as a target—do you have any specifics on that? Additionally, do you believe there is an excess of track with too few services utilizing it, and do you see opportunities to improve network density and design in the coming years?

I don’t believe this franchise is significantly different from others where we've applied this model. Cindy has mentioned many of these points, and internally we don't have exact figures on headcount or pump closures. We'll proceed with what's sensible. I haven't spent extensive time with Cindy and her team yet. The first step was reducing a lot of bureaucracy. We're moving from nine divisions to possibly just a couple. This adds costs, and we're aiming to streamline operations. We're working on placing the right leadership in the appropriate roles. Currently, we have nine dispatching offices, which is uncommon for railroads, and we will address that. Initiatives are underway to enhance productivity; I anticipate that by summer, we will have around 550 locomotives back in service and about 25,000 freight cars ready, along with the associated costs such as labor, materials, locomotive fuel, and improvements in velocity and dwell time at terminals. Some of our facilities may have been overbuilt historically, particularly the auto railroad. However, this railroad has faced unique challenges due to previous mergers involving more companies than any other major railroad. When considering placements, having four or five yards is justifiable due to the financial aspects related to those common points. We're making changes; for instance, we have four yards in [location], and with Cindy's assistance, we expect to reduce that to one major operation. There’s also a plot of land there that represents significant value. Hence, we will look at asset monetization. This will involve continuing our efforts, possibly at an accelerated pace, capitalizing on larger opportunities.

Okay, great. Thanks Hunter. So, just one quick follow-up just on the coal side, Frank or Fred, if you could just give us a sense is that the export market price and that really spiked pretty much after the quarter ended. So, just want to see if you thought that the mix, the favorable benefit that you saw in the first quarter is something that you would also be able to capture in the second and third quarters? Thank you.

Well, thank you. We don't forecast size, but we have said overall, over time that we do have indexes on our contracts on the export side that when things go well, we share some of those economics, and when things aren’t as well, we take some of that pain. Clearly this quarter, it wasn’t just export pricing that helped. We also see some pretty favorable mix, and a lot of that mix we do expect to continue, but it of course, depends on where we see the utility business, for example, go in terms of resale replenishment of inventories through the years. So, I think there's a favorable mix story and favorable sort of going forward, but I think it's unclear at this point how favorable it's going to be through the year.

Hi, great. Thanks, and good morning.

Good morning.

I want to touch on the volume side, Hunter. If you could just sort of give your initial impressions on what you give sort of volume opportunities that are out there for CSX. Obviously, playing in the E3 automatically kind of think of the intermodal market and efficiency obviously played big into being able to gain share from truck as well as your rail competitors. Can you give us a sense as to what your initial impressions are about sort of the franchise there and how you think about that going forward?

Well, I'm obviously in 30 days, I've limited amount of knowledge. I will say that I think one of these starting things going forward with this organization as well as rail overall is the opportunity that lies before us to get this off the hour. We're set up in almost a perfect storm here to take advantage of that. If you look at the strong base we have to begin with, with great markets that we serve up and down the East Coast and Chicago, Florida, and some really growth areas, where there is congestion, and the highway systems aren’t going to be able to handle everything. From an environmental standpoint, from an energy standpoint, the opportunity is great. And we have an organization that is going to be able to take a combination of dual times and terminals by limiting terminals, which lowers cost. We take dual times down from an average of 25 to 26 hours, down to about 18 and we skip some terminals and you start to look at really what we used to talk about the strong competitive advantage we have, it's not just competitive, it's better than our competitors. Now, the issue is the change and trying to take that to the marketplace and to sell it and convert it and change it. But that's where we look at the individual markets, I mean this can be just as we guess more competitors out there, we'll stretch and fight and win the business there. The real opportunity has been in the high wall.

Okay, that's very helpful. I appreciate that. And then just a follow-up thinking about some of the guidance and we had to think about it a little bit beyond 2017. So, mid-60s for this year, we're having pulled forward some of the benefit, but clearly some of the things you are going to be doing are going to be gaining traction as the year progresses. Presumably you'll be entering 2018 at a better run rate. So, obviously I'm trying to jump the gun here a little bit and get some of this forward. Look, before you might be ready to give it but when you think about 2018, and I think you got it right in the respect that it is sort of natural that some of the benefits you're acquiring in 2017 will be playing out in 2018 and maybe we're thinking about something like the low 60s or show a warning in 2018?

Please send me your email, Chris, and I'll provide the information. I believe you're correct. This is not the first time we've encountered this situation. We see opportunities, but they won't materialize overnight, nor will they follow a perfect linear path. There will be a gradual approach. Are there any obstacles here? Yes, there are structural issues that we need to discuss. We cannot repeat past actions, and we can even go beyond that. There are no reasons preventing us from doing so.

Got you, that makes sense. Thanks very much, it's worth the shot. I appreciate it.

Yes, good morning.

Good morning, Tom.

Hunter, I wanted to see if you could offer some thoughts on the opportunity at CSX versus what you saw at CP. I think of your approach being one of the things you do is simplify the flow of traffic and reduce work events. If CSX has a greater complexity and the network than CP, that might indicate a greater opportunity for cost takeout in or as you take out that complexity. So, that's the right framework and I wanted to see if you could comment on that and maybe compare the opportunity you see so far at CSX versus what you had at CP.

Well, I mean, Tom, they're totally different franchises. The maker, the market. Generally speaking, a lot of roads are in North America. So, you look behind your belt and you say look what is the best way to operate and run this franchise. I think that there is a lot of talk about this not being a simple operation, that it got all the complexities and the density and the spaghetti bowls. Well, the waiting hampers the operation and gets in the way of it. One of the things we've done, is at the same time we work diligently to make sure that we're not going through terminals and processes just because the terminals are there. It's almost kind of the old term we used before - motocross: let's streamline this franchise. The last time I was there I talked to the group, the last stop yard was built in North America in my view, and the other one was in the mid-80s. Markets have changed dramatically since the mid-80s. Demand for traffic that's bulk, that is intermodal, that is very narrow, it has to be sold in a specific way, so we adopt that year your operating strategies to the market. I just think that there's much more of a natural fit to make some of the changes that we need to make here that will present even more opportunities. Both your point for the complexity we have built in and simplified. I think this franchise has more potential than anyone will admit to.

Okay, great, that's helpful, I appreciate it. Then the second question of the follow-up would be, CSX approached intermodal has benefited different than I think what is typical. If you look at Norfolk, they have a corridor strategy, I think that will be more characteristic maybe of the Canadian road. But CSX has this Baltimore Ohio hub strategy, and has talked about one in the South East. Do you think that is the right approach to continue or do you think on the intermodal network is their opportunity to simplify and go towards more of an origin to destination as opposed to sending it to the hub that you have in Baltimore Ohio? Thank you.

Well, Tom, I don’t want to get into that. I'm sure the people here they’ve have potentially a different better strategy given what they had to work with. The operating group's challenge is to present velocity and speed in customer requirements to the marketing sales group, and then given how well that service fits to the market, that will change the job into this end of service to take that to the market. I think a better product that Wendy and the team can produce gives more latitude, and it will give us the ability to compete. We will pass our competitors and they’re going to be looking in their rear view mirror at that point, we’ve got to win the business. Yes.

Good morning. Thanks for taking my question. Hunter, Chicago has always been at the forefront of your mind, and historically you've made comments that CSX used the Chicago belt and perhaps the Indiana belt for switching more than any of the other rails. So, now that you're in arguably a much better position to affect change. Do you have any plans to pick Chicago, and if so could you provide some context surrounding that?

I don’t know how quickly we will pick Chicago. But Chicago is a special issue. If you noticed in a lot of our discussions, it hadn’t included Chicago, but those we are here affectively carved out and are taking a different special type of look at. Chicago has some real challenges to this North American infrastructure. Chicago cannot survive as it is today. You got lawsuits now, the imminent domain, had you want to take rail infrastructure to replace it with that one. Everybody wants to grow in Chicago. And it’s not going to work. Now, the plus for us is this. We own a lot of assets in Chicago, and we can be a more significant player than we’ve been in the past. The reality is that one move could change things in Chicago, and so people have to be aware of it and not just read anything they want but just a stroke of a pen in a partnership could shift a lot of track away from Chicago. Show me people think they need a lot in Chicago and it will be needed. For example, if you look at Kansas City today. Kansas City used to be a Chicago and we were a little late in the real business and built tons of infrastructure. And now you look at Kansas City, and it's pretty much rail business relative to that infrastructure. So, Chicago is going to be gravy on top of this plan of what we eventually decide we're able to do with our partners and fellow owners and all the other entities that want to be part of Chicago. So, it’s a real opportunity that we're taking a special look at.

Okay. And when you refer to the stroke of a pen of a partnership, is that a single partnership that you have in mind or could it be multiple?

Look, I don’t have anything in mind. I have a four-year contract, I want to go CSX in green, with a blue and gold jersey running under the goal posts. If I want to do something after that, it's up to them. I'm only pointing out that one of the challenges that's brought to my attention, almost every time I’ve been with a big customer is rail consolidation. In spite of the fact that which you might hear, in proper statements, we must get to LA to a customer in South and West of adding service to New York and I'll talk to you about half of it. They don’t want to hear about half of it; they want to hear about all of it. Until one easy control movement, rail is never going to have the competitive alternative to the highway. But for a lot of these reasons, Chicago was kind of a wild card.

Okay. And then, as a follow-up question, how are you thinking about the coal network or other areas of the network that don't have as much density as you would like? I know there was a question earlier in this round. But ask a little bit differently, is there any opportunity to short line some of this business and are there any carriers or holding companies that you think would be a good fit?

I believe that if you trust what we say we will accomplish, you won't need to focus on short lines constantly. Our domestic coal movement operates differently than what I am traditionally familiar with, utilizing a disciplined, closed-loop unit train operation that enhances efficiency. It's not effective to move unit trains for three days, park them for two, and then run them again. Such practices lead to higher costs. Our objective is to work with our superstores to promote a more disciplined strategy. By using fewer locomotives, we can become more competitive and provide the consistent coal supply they require. If we establish the reliability necessary, everything will align.

Okay. Thank you. Good morning. Thanks for taking the question. The first one is just on the operating expectations for this year. It looks like the OR target of the mid-60s implies around 800 million year-over-year on your profit improvement. It just seems by our estimate that only about 300 million of that will come from revenue growth and improved fixed cost absorption, which leaves about half a billion dollars of absolute reduction in the cost base. So first of all, is that the type of cost take out that you hunter and the team are targeting this year and just for my own avocation, how does one achieve sort of half a billion dollars of cost take out without maybe driving a significant amount of disruption at least in the near term? Thank you.

Amit, let me, it's Frank. Let me take that one first, and then turn it over to Hunter for additional commentary. In the targets that we gave you, one of the things that we mentioned was record productivity embedded within that is obviously the prior record of $427 million in 2016, so clearly you can have your own estimate in terms of how much we will exceed that. We had a very good start in terms of the $123 million of efficiency. I think from just a line item perspective other than fuel you should expect us to continue to drive costs out across the board in terms of the various items there. When you look at improved service, better productivity, the ability to absorb volume with literally no additional cost associated with that you get huge flow through from what your expectations are on the revenue side. So we are kicking one off cylinders here in terms of the volume side, the pricing side, and the efficiency side so that's what gave us the confidence to put out the targets that we did this morning.

I don't want to add more examples that might seem odd just to reach a goal. We took the initiative for the 1000 positions, which were largely voluntary. There is a store room that we are focusing on that has not been affected by the prior issues, and we plan to use our internal workforce. We are very aware of your comments regarding disruption and morale, which we recognize is somewhat elevated. If you had the information from a team member, I believe the potential exists that by the end of the first half of the year, we may see a similar reduction in positions. However, we did not implement any cuts that would impact service, safety, or other areas. These are just alternative approaches we are taking. We are bringing some jobs back home; we have about 250 or 300 positions in India that we are assessing to bring back here, but I'm currently more focused on our operations in America. There are numerous opportunities available, and I don’t believe there has been any failure in the way we perform our jobs—we have the capability to achieve our goals.

Okay, one other point on the folks in India, there are contractors not employees, but obviously we're going to insource that work and really look to absorb that with the existing workforce. I know Cindy also had some points she wanted to make here.

I just put it in a couple of broad categories as I think about it. Frank mentioned the reduction in management that took place last month, I think as you think about conversions and so forth, those types of actions I would call core operations and we expect to do more of that. Volume absorption, we are seeing our outlook with a higher level of volume for us to move, and we think we can absorb that more efficiently than putting resources back one for one. I would also say that looking back and some of the improvements that we have made other railroads, I would call it network efficiency, cars online, velocity, those types of things, we think we will see improvement improvements there. So I would call that just network efficiencies going forward. When you put all that together, that's what's given us our confidence to move forward with another record here.

Right. Well thanks for all that. Let me just ask one follow-up if I could. Frank, on your comments about productivity, maybe I'm thinking about incorrectly, but I feel like productivity is different from absolute reduction in the cost structure? Because productivity is in my view, the way I understand it, you're optimizing the cost structure to maximize the incremental, may be minimized to detrimental but it doesn't necessarily mean the cost structure is declining. So, you guys achieved 72% incremental operating margin in the quarter which is unbelievably great. Is there a way to understand or help us in terms of what was actual fixed cost absorption? What was that actual absolute reduction of the cost structure?

So, when we think about productivity and how, I would say keep score internally, we do look for structural cost reductions. So a big part of that record productivity is structural cost reductions meaning each line item in the expenses is going to get lower again I'm excluding fuel just given the price environment that we're in but we are focused on fuel efficiency as well. I think there as you can see from an incremental margin perspective, we're also a very good start with about 72% incremental for the first quarter when you understand what we're trying to do on the cost side and you will understand what the volume outlook looks like. I would estimate that the incremental margins were actually improve throughout the year, which is going to give you the bottom line to flow through the revenue that we are bringing up.

That's great. Hunter, one last one for me if I could. Can you just comment on your relationship with the union so far? You have the company has over 20,000 union employees, can you just talk about those initial meetings and conversations and just in the context of all the operational changes to come? That’s it for me. Thank you.

Well, I hope it's pretty good. I've worked most of my career alongside the various roles that now make up CSX and those people are incredibly passionate. I mean, I've had some terrific conversations exploring new opportunities with those individuals. It's not common for a new CEO to engage confidently. I don’t care what your name is in the labor leaders bringing in a new approach, but at the same time, I have been approached unofficially at least about potentially discussing something like hourly agreements that has been extended in some part of the US system and now the Canadian national we developed. It is very encouraging to say that there are dialogues like this, and one of the things that the beauty of that would be, a couple of things: that those agreements guarantee people position that’s important today—they have jobs and they certainly have job guarantees and that’s very important for people. At the same time, for us it lowers our costs potentially by 30% to 35%. So we're going to have some squabbles. They don't like to see their people disrupted, nor do I, but you've got to do what you got to do sometime. So I think we'll do fine with it.

Thanks. Good morning everyone. Hunter, just to summarize everything you said in the call so far in terms of the playbook, do you think that’s kind of directly applicable to CSX here or do you think the complexity of the network here involves changes to the way that it's been done before? Also, CSX has in recent years had a playbook of deemphasizing coal and becoming more of an intermodal rail. Do you agree with that and do you think that becomes part of your playbook as well?

Well, the question was, yes it was. I think, the more complexity there is in the network the better model you can apply to it. You can get more advantages or opportunity but if you just got a linear street line railroad, there would be a lot of people can do that into the model to that. This has certainly, those implications. Now, strategically, going down the line as far as, look, we need to understand that the world is going to continue to change, and we need to be flexible and have a plan that allows us to change with those changes, okay. We’ve got things going on as we speak from an energy standpoint- what is the future of fossil fuel, what is the future of crude? How much influence will the environment have? What are we going to do with the railroad, you go ahead inject rail, you drive and manage huge warehouse of Amazon and so the supply chain is going to change. We have to be more flexible and more creative to be able to deal with those changes.

I mean we have to emphasize coal CSX; coal has been emphasized by the utility and so we want as much business as we can what is called, but we will deploy our strategy where we can capture the growth and create the bottom line value for CSX through excellent service to our customers.

Got it and your vision of your intermodal, is this largely, I think you spoke about service initiatives a little earlier on the call, but it is largely a case of improving the service levels and gain to a point where it becomes super competitive versus truck? Or are you looking for more demand improvement from macro or kind of being able to take pricing segments? Between service, demand and pricing, which do you think is the most important level for intermodal?

I don’t know; the market would have you believe, to begin with, we are not going to sit here and let our precious service become some kind of commodity. It's just in the way we manage intermodal- get it right, from a time standpoint, if you look back and do a little history, you will see that prior it was not in our range of 20%. You let interest rates and they are going back up after, I just can’t tell you when they do; people will do move merchandise will be rewarded because caring are going to go up. The beauty is the quicker we move it, the cheaper it is, and so it goes on itself. So, we turn the equipment quicker, we give better service to the customer and we have a lower cost, and then we can make more convincing. It all fits into this model.

Good morning. Hunter, you sound well. I look forward to your tenure at CSX. If you noted you're going to be an advocate for customers in your intro remarks. Is that a change in how you're going to attack the plan? I mean after you've left obviously we heard keep talk about fixing ruffled feathers and a customer focus. So now it sounds like you start this with a little bit of a different tact. Maybe you can just talk about that a bit.

I have in my whole career, in fact, one of the reasons why I'm sitting here is I have to be an operating guy. I have got a little reputation, but look there's no one more sensitive than I am of the business that our customers yield, okay. I am the greatest advocate in the world, and you could sit in some of our meetings when we talk about service and we talk about challenges because that’s not just about creating pain and suffering for our customers which I don’t want to see created. One example of a customer who turned over a period and we are going to do a transition that sense no problem or issue from that didn’t exist, okay. So I am going to do a little coaching on some of mine and actually anticipate how to respond.

Let me just read it, something you talked about on the union because the US has changed like historically that have been a little different right in terms of all the rails coming to negotiating in one team against kind of all the unions in one group. You always had things maybe a little bit differently in Canada, can you, is that something you think you need to shift how you would address that as you move forward?

Well, I think, if you look back, we were not part of handling. So negotiated our labor agreement, and now we can do that. I think it’s important to have some dialog it appears to me, and I have had a chance to, is that some of the big- they are starting to see the world differently, and they start to see the world differently and then on one page makes a lot of sense. I think united aviation negotiations will lead us to a better future for the organization and the employee. So I think there with all those things that deal with policies we will take a look at and see how they see the world and how we see going forward, and what’s the most appropriate action.

Yes, good morning and thanks for taking my question and Hunter definitely welcome back. I know there is a lot of investors excited to see you back in the field. So surprisingly though, it just keeps coming back. We hear it a lot, the length of haul and the short length of haul from the east coast just means that the return on invested capital or the margin potential is not as high as railroads or some of the stuff going out, out west in the US. Can you just talk to that dynamic and whether or not you think length of haul plays a lot of determination in the ultimate profitability of the network?

The markets are what they are. We don't have control over them. What I do know is that as we increase our productivity and manage costs effectively, controlling inflation will benefit us. There’s a notion that operations over 800 miles can yield certain results, but that's not the case if we're functioning in the high 90s. An operating ratio of 58 is inaccurate. Therefore, I don’t necessarily think that the bottom line margin relies on whether we are engaged in long or short hauls.

And if I could, kind of also that question maybe what Ken was asking: will there be some fear that as you go through these operations changes and focus more on service that maybe some of your customers are disruptive from the way business is done in the past? Is there potential here that you see some share shift as you go through this transition period, or do you think as service improves you could actually improve the top line at the same time?

Yes. That's the story. That’s why you provide good service. It starts with your product but if you don't have the product you don't have anything. So we start with the product and the better we make that product, the more we can extract in terms of market share. This is not one set of the game. It's the revenue up and costs down and the investor getting rewarded, and it’s fun.

Hey, thanks. Good morning everyone. So maybe, Fredrik, can you isolate the strength in export pricing from the mixed benefit of losing the short-haul business and understand what bigger impact in the quarter? Can you just kind of confirm it if the guidance for the year assumes kind of export pricing stays where it is or that it does come down in the back half of the year?

So let me take your first part of your question first. I would say that the majority of the change was stable mix, with favorable mix on one hand that some of that short-haul traffic obviously went away which was short in marginal but also we saw a more replenishment of utilities in the south versus last year where if you recall not for gas prices were tremendously low for design. Then also on the export side we saw additional traffic going into Virginia which is generally little bit of an export load but that is longer length of haul so we had a couple of things that were favorable from a mix perspective that certainly helped. That was the majority of the driver that we saw. Then turning to question about the coal franchise to Hunter.

My analysis as a short-term observer does not account for major goals; if coal performs better than expected, will it impact these numbers? I don't believe it will. If coal does improve, we have significant capacity. We have executed our operational plan effectively, and that team has performed well and continues to do so. I don't think I am focused on the long term; coal is not something that railroads should rely on. Transitioning away from it will take time; it's not an overnight change, and we might see that process take another 10 to 15 years, but in the long run, I don't see coal being the energy source of the future.

Okay. Thank you. Good morning. Thanks for taking the question. The first one is just on the operating expectations for this year. It looks like the OR target of the mid-60s implies around 800 million year-over-year on your profit improvement. It just seems by our estimate at least that only about 300 million of that will come from revenue growth and improved fixed cost absorption which leaves about half a billion dollars of absolute reduction in the cost base. So first of all, is that the type of cost take out that you hunter in the team and are targeting to realize this year? And just for our own, my own avocation, how does one achieve sort of half a billion dollar of cost take out without maybe driving a significant amount of disruption at least in the near term? Thank you.

Amit, let me. It's Frank, let me take that one first and then turn it over to Hunter for additional commentary. In the targets that we gave you one of the things that we mentioned was record productivity embedded within that is obviously the prior record of $427 million in 2016 so clearly you can have your own estimate in terms of how much we will exceed that to a very good start in terms of the $123 million of efficiency. I think from just a line item perspective other than fuel you should expect us to continue to drive cost out across the board in terms of the various items there when you look at better service, you look at better productivity, you look at the ability to absorb volume with literally no additional cost associated with that, you get huge flow through from what your expectations are on the revenue side. So we are kicking one off cylinders here in terms of the volume side, the pricing side, and the efficiency side so that’s what gave us the confidence to put out the targets that we did this morning.

I don’t want to add more examples regarding the odd numbers; I just want to achieve the goal. We are taking the initiative to fill 1,000 positions, which are primarily voluntary, and there are open roles that we have not filled. We plan to utilize our internal workforce and are sensitive to your comments about disruption and morale, which are currently slightly higher than usual. While I haven't reached a deeper level of analysis, I believe there is potential for similar reductions in the first half of the year. We didn’t take any actions that would incur significant costs without affecting service or safety; these are simply different methods of operation. We are bringing some roles back home; I am aware there are about 250 to 300 positions in India that we are considering relocating. However, I am more focused on the challenges and opportunities within the United States, particularly with CSX. There is a lot of opportunity here, and I believe we can manage our jobs and achieve our goals effectively.

Okay, one other point on the folks in India, there are contractors not employees but obviously we're going to insource that work and really look to absorb that with the existing workforce. I know Cindy also had some points, she wanted to make here.

I just put it in a couple of broad categories as I think about it. Frank mentioned the reduction in management that took place last month, I think as you think about conversions and so forth those types of actions I would call core operations, and we expect to do more of that. Volume absorption, we are seeing our outlook with a higher level of volume for us to move and we think we can absorb that more efficiently than putting resources back one for one. I would also say that looking back and some of the improvements that we have made other railroads, I would call it network efficiency cars online velocity those types of things we think will see improvements there. So I would call that just network efficiencies going forward. When you put all that together that's what's given us our confidence to move forward with another record here.

Right. Well thanks for all that. Let me just ask one follow-up if I could. Frank, on your comments about productivity, maybe I'm thinking about incorrectly but I feel like productivity is different than absolute reduction in the cost structure? Because productivity is in my view the way I understand it you're optimizing the cost structure to maximize the incremental, maybe minimize the detrimental but it doesn't necessarily mean the cost structure is declining. So you guys achieved 72% incremental operating margin in the quarter which is unbelievably great. Is there a way to understand or help us in terms of what was that was actually fixed cost absorption? What was that actually absolute reduction of the cost structure?

So, when we think about productivity and how, I would say keep score internally, we do look for structural cost reductions. So a big part of that record productivity, structural cost reductions meaning each line item in the expenses is going to get lower again I'm excluding fuel just given the price environment that we're in but we are focused on fuel efficiency as well. I think there as you can see from an incremental margin perspective, we're also a very good start with about 72% incremental for the first quarter when you understand what we're trying to do on the cost side and you will understand what the volume outlook looks like I would estimate that the incremental margins were actually improve throughout the year which is going to give you the bottom line to flow through the revenue that we are bringing up.

That's great. Hunter, one last one for me if I could. Can you just comment on your relationship with the union so far? You have the company has over 20,000 union employees can you just talk about those initial meetings and conversations and just in the context of all the operational changes to come? That’s it for me. Thank you.

I hope everything is going well. I’ve spent most of my career working alongside various roles that contribute to the operations, and I’ve had some challenging conversations while exploring new opportunities with those individuals. It’s not common for a new CEO to be brought in by labor leaders, but I've been approached unofficially about the possibility of extending some hourly agreements in parts of the U.S. and the Canadian operations that we’ve developed. It's encouraging to have those discussions. One significant aspect is that these agreements would provide job security for people, which is crucial. Additionally, it could potentially reduce our costs by 30% to 35%. While there may be some disagreements, it's necessary to make the right decisions. My main focus is on the bottom line and profitability, but I also value the contributions of our employees. I believe we will manage this well.