Operator:
Good morning ladies and gentlemen and welcome to the CSX Corporation First Quarter 2016 Earnings Call. As a reminder today's call is being recorded. During this call all participants will be in a listen-mode. For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President, Treasurer and Investor Relations Officer for CSX Corporation.
David Baggs : Vice President, Treasurer and Investor Relations Officer:
Thank you Nicole, and good morning everyone and welcome again to CSX Corporation's first quarter 2016 earnings presentation. The presentation material that we’ll be reviewing this morning along with our expanded quarterly financial report and our safety and service measurements, are available on our website at csx.com under the Investors section. In addition, following the presentation, this morning, a webcast replay will be available on that same website.
This morning, our presentation will be led by Michael Ward, the Company’s Chairman and Chief Executive Officer, and Frank Lonegro, our Chief Financial Officer. In addition, Cindy Sanborn, our Chief Operating Officer; and Fredrik Eliasson, our Chief Sales and Marketing Officer along with Clarence Gooden, our President, will be available during the question-and-answer session.
Now, before I turn the presentation over to Michael, let me remind everyone that the presentation and other statements made by the Company contain forward-looking statements. You are encouraged to review the Company’s disclosure in the accompanying presentation on Slide 2. This disclosure identifies forward-looking statements, as well as the uncertainties and risks that could cause actual performance to differ materially from the results anticipated by these statements. In addition at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With nearly 30 analysts covering CSX and out of respect for everyone’s time, including our investors, I would ask as a courtesy for you to please limit your inquiries to one question and if necessary, a clarifying question on that same topic.
And with that, let me turn the presentation over to CSX Corporation’s Chairman and Chief Executive Officer, Michael Ward. Michael?
Michael J. Ward: Chairman and Chief Executive Officer:
Well, thank you, David. Good morning, everyone. Yesterday, CSX reported first quarter earnings per share of $0.37 compared to $0.45 per share in the same period last year. Revenue declined 14% in the quarter, a strong pricing across nearly all markets, reflecting an improving service product, was more than offset by the impact of lower fuel recovery, market conditions that drove a 5% volume decline, including a 31% decline in coal and a $95 million year-over-year decline in liquidated damages.
Turning to operations, CSX remained an industry leader in safety and service measurements continue to advance in the quarter, consistent with our service excellence initiative to meet and exceed customer expectations. Expenses improved 12% driven by lower fuel prices as well as efficiency gains and lower volume related costs, reflecting CSX's ongoing drive to aggressively reduce its cost structure as we continue to reshape the Company in face of this challenging market environment.
Including the impact of these cost saving actions, find and liquidated damages, operating income decreased $139 million to $704 million for the quarter. At the same time, the operating ratio increased 90 basis points year-over-year to 73.1.
Now I will turn the presentation over to Frank who will take us through the results and second quarter outlook in more detail.
Frank A. Lonegro: Executive Vice President and Chief Financial Officer:
Thank you, Michael, and good morning everyone. Let me begin by providing more detail on our first quarter results.
As Michael mentioned, revenue was down 14% or $409 million versus the prior year. With coal declining 31%, total volume decreased 5% from last year, which impacted revenue by about $140 million. In addition, fuel surcharge recoveries declined $139 million. We continue to see strong coal pricing from an improving service product which for the first quarter was up 3.1% overall and 4.0% excluding coal. However, these gains were more than offset by the impact of negative business mix in the quarter.
Other revenue decreased $85 million, driven mainly by cycling higher liquidated damages from last year, which totaled $105 million versus $10 million in this year's first quarter. Expenses decreased 12% versus the prior year, driven mainly by $133 million in efficiency gains, $78 million in lower fuel prices, and $64 million in lower volume-related costs. Operating income was $704 million in the first quarter, down 16% versus the prior year.
Looking below the line, interest expense was up slightly from last year, with higher debt levels partially offset by lower rates, while other income was relatively flat to the prior year. And finally, income taxes were $212 million in the quarter with an effective tax rate of about 37%. Overall net earnings were $356 million, down 19% versus the prior year and EPS was $0.37 per share, down 18% versus last year.
Now let me turn to the market outlook for the second quarter. Looking forward, we again expect volumes to decline in the second quarter. The challenging freight environment will continue as headwinds in coal, energy and metals volume are expected to more than offset the markets that will show growth. Automotive is expected to grow as light vehicle production continues to be a bright spot in the economy. Minerals will benefit from the continued ramp up of a new fly ash remediation project and continued highway construction, driving aggregates movement. Intermodal is expected to be neutral, as we continue to cycle competitive international losses. This will be offset by secular domestic growth driven by strategic investments of supporting highway to rail conversion.
Chemicals volumes is expected to decline as energy markets continue to be marked by low crude oil prices and reduced drilling activity, which will impact our shale related products more significantly in the second quarter. At the same time, the core chemical markets remain healthy.
Domestic coal will continue to be unfavorably impacted by low natural gas prices currently around $2 and high levels of coal inventory at the utilities. As a result, we expect second quarter tonnage to be around 18 million tons. In addition we anticipate a similar quarterly run rate for the second half, recognizing domestic coal volume will be largely dependent on weather. Export coal remains pressured by the strong US dollar and global oversupply. As a result, we believe second quarter tonnage will be around 4 million to 5 million tons, and expect a similar run rate for the remainder of the year. For the full year, we now expect around 18 million to 20 million tons of export coal in 2016.
Despite a slowly recovering domestic steel production environment, metals is expected to be unfavorable year-over-year as the market works off excess supply from a strong US dollar and imported product. Overall, we are still facing significant coal headwinds in a freight environment that continues to experience pronounced challenges associated with historically low crude oil, natural gas, and other commodity prices and a strong US dollar. As a result, we expect second quarter volume to decline in the mid to high single digit range year-over-year.
Turning to the next slide, let me talk about our expectations for expenses in the second quarter. We expect second quarter expense to benefit from the low fuel price environment and our ongoing focus on driving efficiency gains and right-sizing resources as we continue to reshape the Company. Over the course of the last 12 months, we have taken aggressive cost actions, with headcount down nearly 4,500 versus the prior year. These actions include our train length initiative, closing facilities in the coal network, consolidating a division headquarters and streamlining mechanical and operations support functions. These actions, along with cycling the impact of winter weather last year drove high efficiency gains in excess of $130 million seen here in the first quarter and for the full year, we now expect to deliver efficiency gains of around $250 million.
Looking at labor and fringe, we expect the second quarter average headcount to stay relatively flat sequentially. We expect labor inflation to be around $25 million in the second quarter, in line with the level seen here in the first quarter.
Looking at MS&O expense, we expect inflation and the cycling of an operating property gain from last year to more than offset efficiency gains in volume related savings. Fuel expense in the second quarter will be driven by lower cost per gallon, reflecting the current price environment, volume-related savings, and continued focus on fuel efficiency. We expect depreciation in the second quarter to increase around $15 million versus the prior year, reflecting the ongoing investment in the business.
Finally, equipment and other rents in the second quarter is expected to increase moderately from last year, with higher freight car rates and the increase in volume related costs associated with automotive growth more than offsetting improved car cycle times.
Now let me wrap up on the next slide. CSX's first quarter results reflect challenging freight conditions with low commodity prices and the strong U.S. dollar continuing to impact most markets, resulting in a 5% volume decline this quarter. However, as we continue to officiate the Company, our focus on pricing for the relative value of rail service, driving efficiency gains, and aligning resources to the software demand environment help to offset those volume headwinds.
Looking ahead, we expect macroeconomic and coal headwinds to continue this year. Low commodity prices and the strength of the U.S. dollar are expected to continue impacting many of CSX's markets. In particular, we now expect total coal volume to decline around 25% for the full year.
Looking at our expectations for the second quarter and full year, the impact of current market conditions on CSX's volume, particularly in coal, is expected to outweigh the positive momentum we are seeing in service, which drives pricing, efficiency and right-sizing initiatives. In the second quarter, we expect mid to high single-digit volume declines with efficiency gains moderating from the levels seen here in the first quarter.
For the full year, in addition to liquidated damages we cycled during the first quarter, as we previously discussed, we will also be cycling a significant property transaction in the fourth quarter. As a result, we continue to expect second quarter and full year 2016 earnings per share to be down from last year. That said, we remain intensely focused on achieving strong pricing that reflects the value of CSX's service product, right-sizing resources with lower demand and pursuing structural cost opportunities across the network. In particular, the aggressive cost actions we have taken over the last 12 months has helped to mitigate the challenging freight environment and weaker volumes. As a result of these initiatives, we now expect to deliver efficiency savings of around $250 million in 2016.
With that, let me turn the presentation back to Michael for his closing remarks.
Michael J. Ward:
Thank you Frank. As I think about CSX's first quarter performance, it's clear that the Company’s core earning power remains strong, even in an environment in which macroeconomic forces are putting significant pressure on most of our markets. We know 2016 will be a challenging year and we are focused on delivering the highest level of performance and results possible.
In this environment, CSX continues to reshape its business and network for the economy of tomorrow, maximizing growth opportunities in merchandise and intermodal, while also improving the profitability of those markets to help offset the loss of coal.
As we look forward, this team is resolute and its commitment to further transform today's company. The CSX of tomorrow is built on the strength of a premier network, reaching diverse merchandise and intermodal markets. It is focused on delivering service excellence for customers to support pricing that allows us to continue investing for the next generation and drive ever more efficient operations. And we will leverage technology to further improve safety, service and efficiency as we continue to evolve our business for the realities of tomorrow’s economy. As we make decisions today, to make that vision of tomorrow a reality, we remained focused on achieving a mid-60s operating ratio longer-term and delivering compelling value for you, our shareholders.
Now we'll be glad to take your questions.
Question & Answer
Operator:
Thank you. We'll now be conducting a question-and-session. To ask question please press star, and then one.
Our first question comes from Ravi Shanker of Morgan Stanley. Sir your line is now open
Ravi Shanker: Morgan Stanley:
Thanks. Good morning everyone. A question on the productivity savings, clearly your first quarter performance was pretty amazing with the 133 compared to the full year run rate. You did bump up the full year by less than you kind of exceeded your prior guidance for 1Q, can you just talk about the cadence for the rest of the year, and why that appears a step down so much versus the first quarter number?
Cindy Sanborn: Executive Vice President and Chief Operating Officer:
Sure this is Cindy. I think we are off to a great start, which reflects a lot of hard work by all of our team to bring the $130 million productivity in the first quarter and as I think about how 2015 progressed, we had a lot of initiatives that we started in the beginning of the second quarter and on in to the third quarter around right-sizing of our coal facilities as well as our train length initiatives. So we'll be bumping up against those costs going forward and I also would say there was some benefit to milder winter this year than what we had in 2015 in the first quarter.
That said, we are never done and working on our productivity initiatives and the pace of change here has intensified, accelerated and we will continue to bring everything to the bottom line that we can, keeping in mind that we have to balance that with serving our customers and we won't compromise safety in that effort. And as we go forward and you think about the run rate going forward of $40 million to $50 million in the next three quarters, that is higher than our historical run rate with the exception of 2015 in terms of productivity that we'll be able to deliver. So, if there is more to get, we will absolutely get it and we'll be able to update you on that if we see that in future conversations either on the quarterly or on Frank’s roadshows.
Ravi Shanker:
That's great color. If I can ask one question on coal, what's your outlook for the rest of the year? Obviously you've given us your guidance, but going into '17 and '18, I mean just any new thoughts on the outlook for coal in the medium term?
Fredrik Eliasson: Executive Vice President and Chief Sales and Marketing Officer:
Sure, this is Fredrik. So we guided you to about 25% down for the full year. We did on the domestic side here in the first quarter about 17 million tons and our view is as we think about the next couple of quarters we like to think that we are going to be at that maybe 17 million to 18 million ton range on the domestic side, and on the export side, we did almost 6 million tons in the first quarter. Traditionally the first quarter is a little bit stronger than the other quarters; at least it's been like that last couple of years. We also enjoyed some spot moves here in the first quarter that we don't necessarily see in the remaining three quarters. So may be 4 million to 5 million tons a quarter on the export side. So that gives us that $22 million to $23 million range for coal guidance per quarter as we move through the year, versus the 23 million tons we did in the first quarter.
Ravi Shanker:
Great. Thank you.
Operator:
Thank you. Our next question comes from Ken Hoexter of Merrill Lynch. You may now ask your question.
Michael J. Ward:
Good morning Ken.
Ken Hoexter: Merrill Lynch:
Great, good morning, Michael. I just wanted to follow up on the employees, great job on the larger than expected reduction, down 14%. But maybe if you can walk us through why was the average cost per employee up? Last few quarters, I guess we've seen it down 5% to 9%, this quarter it was up, maybe you can talk a little bit about what's in that number, is there incentive comp or anything else that drives in what should we look forward for that going forward? Thanks.
Frank A. Lonegro:
Hey Ken, it's Frank. You are right, headcount was down about 13%, 14%, while a labor and fringe line was down about 9% or 10%. So your comp per employee is about 4% to 5% higher. There is a couple of drivers, some of those are industry-related and some of those are CSX-specific. Clearly you have general wage inflation of say 4% a year or so, and then what probably is the biggest driver for us is health and welfare inflation as the industry is reducing resources, you've got fewer employees to spread the health and welfare costs over. So both of those are industry in nature. In terms of maybe some CSX specific dynamics, as you furlough employee, generally those are going to be your less tenured employees with lower all-in wages. And then maybe as a last point Ken, when you look at a year-over-year number of employees in training, there were significantly more employees in training in the year-ago quarter than there are currently just given sort of where we are on the resource side and training pay is less than marked up pay. So you got three or four moving parts in there that hopefully that answers your question.
Ken Hoexter:
That does, that's a great, follow-up and I'm sorry I missed David's comment, we can have one follow-up or is it one question?
Michael J. Ward:
Yes, you can have a follow up.
Ken Hoexter:
Okay. So just on the coal market, Michael, can you look forward and tell us I know you've talked in the past about plant closings that were mandated in '15 and '16, is there something that now is done and we see that decelerate as you look forward? I just wanted say it was a great answer by Fredrik on what we're seeing now, but I just want to understand is there something else that is going continue to drive this, is it just market dynamics as far as closings or there are more that's going to structurally change the market and continue the pace we have seen on decline?
Fredrik Eliasson:
Sure Ken, this is Fredrik. Frankly based on this very low demand levels we're seeing, as we go through plant by plant and look at the closures that we expect in '16, '17 and '18, which will encompass all the announced closures that we have on our network, based on our outlook that we have for the rest of the year now, which is consistent with the guidance, there is only less than million tons that we have in for those plants that I've announced to close, which means that the closure side of things is really behind us to very large degree as we move forward because of the fact that the demand levels are so low.
Ken Hoexter:
Really helpful. Appreciate the feedback. Thanks guys
Operator:
Thank you. Our next question comes from Brandon Oglenski of Barclays. Your line is now open.
Michael J. Ward:
Good Morning Brandon.
Brandon Oglenski: Barclays:
Hey, good morning everyone and difficult environment right now. But can you guys help us on the top line, I know you talked about mid to high volume declines for 2Q. But how do we think about the contribution from price within the headwinds from mix, does that get easier or more challenging as we progress through the year?
Fredrik Eliasson:
This is Fredrik again. The second quarter and probably even third quarter are going to be challenging quarters from a volume perspective, as now really until we get to the fourth quarter when we’ll have a little bit easier comparisons year-over-year, both on the coal side and on the kind of general merchandise side and oil as well, we are going to have a negative mix with us as long as our coal business is declining as fast as it is and our intermodal business is growing as fast as it is. Clearly we are very transparent about what we are doing from a pricing perspective and that's going to continue to be helpful as we move through the year.
Brandon Oglenski:
I guess what I was getting at more from the top line perspective, should we be thinking a similar outcome then where mix is. I think you've referred this in your prepared remarks, that mix might offset the favorable impact from pricing looking forward, so top line can be down a little bit more than volume.
Fredrik Eliasson:
Well, I think that as you try to model out what we're doing, we kind of given you the individual components and the one piece we haven't talked about is of course fuel as well. So you got to put those pieces together yourself, we can be very explicit in terms of what we're seeing in each individual market, we certainly expect continued strong pricing as we move forward and then of course we have the variance of fuel whatever that is going to do.
Brandon Oglenski:
Okay, thank you.
Operator:
Thank you. Our next question comes from the line of Brian Ossenbeck of JP Morgan. Your line is now open.
Michael J. Ward:
Good morning Brian.
Brian Ossenbeck: JP Morgan:
Hey, good morning. Thanks for taking my call. So the quick question on just impact of the dollar, the trade-weighted index is about 5% off from the peak, are you still calling out some pretty negative headwinds for the near term on commodity prices both on the exports and undisrupted imports? Do you think if it stays at this level, Fredrick, that you'll start to see some relief towards the end of the year or do you think you need another 5% down move to really get some relief in some of these commodity markets?
Fredrik Eliasson:
Well, the dollar is still well above kind of its 10-year average or so forth, but it is clear that it's been helpful in certain areas, the fact that it has taken a step back the o last two months or so. One area where we have seen that is in the export coal side on the metallurgical side where the benchmark actually has stepped up a little bit from I think the low point $81 in Queensland Index to $84 and I think the bench where the some of the spot moves are actually even higher than that at this point. And we are also seeing, while it's not directly dollar-related, some of the potential tariff and accountability duties that we are seeing in the metals business, we're starting to see drive down some of the imports into the country, which is starting slow but sure, I think to heal our metals business as well. But, it is fair to say that even with that sort of a relief over the last two months on the dollar, you are looking into the fourth quarter, I think, until you're going to start seeing meaningful improvements in the volume performance.
Brian Ossenbeck:
Okay. Great. Thanks. And then on the productivity side, mentioned that the train length initiative is basically approaching the one-year anniversary, so comps are going to get a little bit tougher, but maybe if you can just recap the last year some of the accomplishments and what you think is reasonable for, in that context for some of the goals looking after the rest of this year and into 2017?
Cindy Sanborn:
Sure Brian, thanks. We are over the year of 2015 saw a 16% gains in our train lengths and we're up to about 6,500 -- 6,400 feet in total. We saw probably smallest incremental change in the fourth quarter as we had really largely put in place all that we felt comfortably we could maintaining service to our customers and we are bumping up against challenges in the single track territory where our siding length is a bit of a limiter for us. Going forward and in this year, we are planning to increase siding lengths in our corridor from Nashville to Cincinnati. That is presently limited to 6500 feet. So we are making some structural adjustments to help us continue it and we should see those investments being in place and available to us in the back half of this year.
So I would also say that one of the benefits of the initiative that we've seen is the ability to flex as seasonality impacts volume. So in summer months we feel that with a little bit less volume that’s typically out there that we'll be able to continue to utilize train length and in terms of reducing our cost gives us ability to very large that we haven't before and certainly if anything changes either up or down, we'll be able to adjust accordingly to maintain train length. So, we feel really good about the initiative and our team in the field has done a fantastic job putting it in place.
Brian Ossenbeck:
Okay, thanks for your time.
Operator:
Thank you. Our next question comes from Chris Wetherbee of Citi. Your line is now open.
Michael J. Ward:
Good morning.
Chris Wetherbee: Citi:
Great thanks. Good morning guys. Maybe a question for Cindy, just following up on the productivity when you think about the increase from the 200 to the 250, if you can maybe breakdown sort of those specific components a little bit, just sort of looking at the puts and takes on some of the expenses I'm just kind of curious kind of where that comes from, maybe how much is weather and maybe how much is headcount? Want to get a sense there.
Cindy Sanborn:
As far as going forward, let me make sure I understand your question. Going forward or --
Chris Wetherbee:
The incremental between $200 million and $250 million for the target for the full year?
Cindy Sanborn:
I think a lot of it is the initiatives that we already have in place. I think the benefit potentially hire is to be able to continue to right-size and streamline which has also been a big part of our of our initiatives. So, we've got technology and Michael mentioned in his prepared remarks, utilizing that from an automation, so it will be some additional benefits to headcount, I believe.
Chris Wetherbee:
Okay, okay, that's helpful. I appreciate it. And then Fredrick, may be a question for you on the sort of the market outlook, I guess, putting coal aside for a moment, it seems like we are still sort of may be a bit weaker than seasonally expected at least as far as the outlook for the second quarter, just want to get a sense the last couple of weeks we have seen some challenges, intermodal has sort of slipped back again. I just wanted to get a sense of kind of how you feel about where we stand with volumes, the economy, just generally outside of some of the specific pressure points like coal?
Fredrik Eliasson:
Sure, I mean, if taken to the highest level from where we see the economy, I think we still see the overall economy progressing in that 2%, 2.5% range kind of uninspiring growth. Clearly, we're still dealing with aftermath that we saw last year both on the energy side and also the strength of the dollar and the low commodity prices. And as I said earlier, that's going to be with us for at least another two quarters and it is also why we guided to volumes to be down little bit more year-over-year and sequentially in the second quarter. Specifically, the last couple of weeks, to your question, we look at our four key markets, merchandise, intermodal, coal and auto, our merchandise business has stayed probably some of the two strongest weeks frankly, the last two weeks, but then we have seen some weakness in our coal market, which is consistent with our guidance. We also had some operational issues with some of the terminals we serve on the export side that impacted our volumes. Our auto business was very strong early on in March. We probably had 65% of our cars under load and that's kind of cycling through that right now. But we continue to see good strength there for the rest of the year and yes, we have seen a little bit of weakness in intermodal space over the last few weeks, but I don’t think anything that is has structurally changed there so. It’s going to be tough second quarter, but I don't think it’s a reflection of where the economy is heading or anything like that.
Chris Wetherbee:
Okay. That's very helpful. Thanks for the time guys.
Operator:
Thank you. Our next question comes from line of Tom Wadewitz of UBS. You may now ask your question.
Michael J. Ward:
Good morning
Tom Wadewitz: UBS:
Yes, good morning. I wanted to ask either Michael or Fredrik on pricing. You continue to get very good pricing in merchandise and intermodal and then I guess the total is a bit less. How do you think that changes, I mean, is that something that you kind of sustain through the full year and is there a point where if you say rail traffic -- you are saying it’s going to be weak for couple of quarters. Is there, does the same store price you're getting decelerate through the year and it’s somewhat of a timing impact or would you say hey look we can just keep doing this and we are kind of immune to softness in truck, we are immune to access rail capacity. I just wanted to if you could kind of talk about that because the numbers are pretty good, very good in intermodal and merchandise, but it just seems like there is lot of excess capacity out there.
Fredrik Eliasson:
Yes. We are certainly not immune to what's going on in the marketplace and I think you’ve seen reflection of that here in the quarter versus the fourth quarter as you’ve seen a sequential downtick in our pricing. There obviously are specific drivers of that. We work with our customers on a deal by deal basis to understand their needs and what opportunity to drive price is. A critical component of supporting our price right now is of course that fact our service product has improved significantly and I think our customers value a long-term access to our network in the markets that we provide. Clearly the market is softer now than it was a year ago and but yes, our pricing is frankly up year-by-year as well. And so we're going to work with our customers. Our price is going to reflect what the market allows us to do. At the same time it's critical for us to be able to price, so we can reinvest in our business and that’s been a strategic imperative of ours for long time. But underlying all our pricing is service excellence for our customers.
Tom Wadewitz:
So, I mean, that having been said, do you think it’s more like you see stability through the year in your same store price or do you think there is some risk that you see deceleration in that as we look forward?
Fredrik Eliasson:
We really don't forecast price, you will have an opportunity to see price as we disclose our earnings each and every quarter. But strong pricing is important to what we’re trying to do strategically and we're going to work with our customers to make sure that they get the service that they need to be successful in their marketplace and at the same time we need to be able to continue to reinvest in our business.
Tom Wadewitz:
Okay. Do you just have a quick thought on where export -- I'm sorry, where domestic coal inventories are?
Fredrik Eliasson:
Yes. Our domestic inventories are at the very high levels. If you look at the North, it's well above a 100-112 days. I think it's latest data that we have. In the South it’s even higher than that, about 170 days or so versus kind of the normal range of 55 to 70 days of burn. And so we got plenty of inventory at our customers, which will take fairly significant time I think to get down to more normalize levels. It's going to depend both on of course where the natural gas prices are, but also dependent on where we see the summer here in terms of how much burn we get since we've been move towards kind of a peaker and the kind of that incremental demand levels, we are even more weather-dependent than we've been in the past to try to work some of these stock piles down.
Tom Wadewitz:
Okay, great. Thanks for time. Appreciate it.
Operator:
Thank you. Our next question comes from Allison Landry of Credit Suisse. Your line is now open.
Michael J. Ward:
Good morning Allison.
Allison Landry: Credit Suisse:
Good morning. Thank you. So following up on I think it was Ken's question earlier, lots of puts and takes on the labor line, but as I think about total labor and fringe expense in the second quarter, typically we see a decline on a sequential basis. But should we think about it being roughly flat versus the first quarter or do you expect it to be a little bit higher?
Frank A. Lonegro:
Allison, I think if you look at where we are on an absolute headcount basis, what we've guided to is sequentially flat which is down about the same percentage on a year-over-year basis that you saw in the first quarter. Clearly the inflation will continue to impact as will the health and welfare piece there. So, I would say flat to up slightly would probably be the right thing to look at.
Allison Landry:
Okay. Great and then thinking about the service metrics and in particular train speed. It seems that CSX is lagging the other rails in terms of returning to levels seen in 2013, is there any specific driving this and when would you expect to get back to peak productivity levels?
Cindy Sanborn:
Allison, in terms of service that we're constantly working with Fredrick and his team and making sure we are providing that service product that our customers need and we're really never satisfied with where we are. So, the balancing act here is how to trade that off with productivity and efficiency and make sure that back to what Fredrick is talking about, we're earning the ability to reinvest in our business. So I think when I look at it as to where we are, I alluded to a little bit earlier, we have some opportunities we are seeing great performance in our double track territories. It is a little bit more challenging in the single track territory and we are making some investments to improve that in one of the core routes that we have between Nashville and Cincinnati and we will continue to work on making adjustments as necessary to serve our customers well.
Michael J. Ward:
And the train length initiative had some impact as well.
Cindy Sanborn:
That's what's driving the single track challenge.
Allison Landry:
Got it. Thank you for the clarification.
Operator:
Thank you. Our next question comes from Rob Salmon of Deutsche Bank. Your line is now open.
Michael J. Ward:
Good morning Rob.
Rob Salmon: Deutsche Bank:
Hey good morning. I guess going following up with Tom's question, we're certainly seeing some really strong pricing across the overall network. If I look last quarter, the delta between the same-store sales pricing which obviously includes coal and the merchandise intermodal which kind of strips that out, expanded last quarter. Can you give us -- help us better understand what drove that, was just kind of unique to the quarter or should we -- was there adjustments that were made across the network that are going to impact the duration of the year as well?
Fredrik Eliasson:
Make sure I understand your question a little bit better, Rob.
Rob Salmon:
If I am looking kind of the delta between same store sales at 3.1 and the core merchandise intermodal pricing at 4.0, it’s about 90 basis points. If I look back to the fourth quarter, the split was about 40 basis points. Should I think about what drove that kind of step up in that split last quarter, was it something unique because of some closures or just how the volume were coming on within intermodal, within your coal network or is there — were there underlying adjustments that we should be thinking about having an impact for the duration of the year as well?
Fredrik Eliasson:
Sure, the delta there is pretty much exclusively driven by the fact that we have taken some pretty significant action in our export coal business, that is a reflection of what the marketplace allows us to do or forces us to do right now to optimize our bottom line. So that's really driven by export coal more than anything else, the fact that that spread has increased.
Rob Salmon:
Got it and so inherent in the guidance is export coal volumes coming down, so we should see less of a headwind as I look forward?
Fredrik Eliasson:
I guess that’s one way of looking at it, that's probably one way of looking at it.
Rob Salmon:
That helps and I guess also to get little a bit more color in terms of the intermodal RPU, the sequential decline, obviously fuel had an impact there, but I would imagine the bigger impact in terms of the first quarter was just the declines, the mix of the business with international being under so much pressure and the uptick in domestic. Was there any impact in terms of loser truck load market impacting intermodal RPU as well or were those two factors the entire explanation of the sequential decline here?
Fredrik Eliasson:
Yes, most of the impact were because of fuel. We also did see some mix impact in the quarter in both international and in our domestic shorter length of haul that impacted as well. But most of our business intermodal space is under long-term contract, so while the spot market does effect a portion of the business, most of it is really impacted by longer term trends, not these shorter term issues that we're facing. So, while there were some challenges in the quarter, our pricing in intermodal space is still positive.
Rob Salmon:
Appreciate the color.
Operator:
Thank you. Our next question comes from Scott Group of Wolfe Research. Your line is now open.
Michael J. Ward:
Good morning.
Scott Group: Wolfe Research:
Well, thanks, good morning guys. So I am not sure if you can help us kind of frame the earnings guidance a little bit better. I don't know if year-over-year is the right way to look at it, but if reported earnings were down 18% in the first quarter, are you expecting kind of similar declines in second quarter may less negative with more negative, and I know that you had tough comps on the liquidated damages, so may be sequentially is the right way to think about, I don't know if you can help kind of frame that guidance a little bit closer.
Frank A. Lonegro:
Hi, Scott it's Frank. Yes, you're right, we did guide that the second quarter would be down on a year-over-year basis. You're also right that when you look at the second quarter of last year, it was an all-time record for us in terms of operating income, EPS and operating ratio. So we have a significant comp that we have to work through in the second quarter. We try to give you as much granular guidance as we could, as we look out over to next three months certainly we gave you some very specific tonnage guidance around coal and then overall volumes in the mid to high single-digit range just given the softness in the economy and certainly the coal headwinds play into that and we're going to continue to focus on the things that we have the most impact on, certainly safety and service, productivity Cindy mentioned, a run rate of $40 million to $50 million in the second quarter and improving service product as well as continued strong value pricing. So, you add all of that up and we come to the conclusion that earnings are going to be down. If we want to talk sequentially, generally speaking second quarter earnings are better than first quarter earnings, if you just look historically at that.
Scott Group:
I guess what's Turkey add if you look at the past couple of years you've seen kind of significant increases earnings first quarter to second quarter if you go back further its more smaller increases in earnings and that I guess I am struggling with the right we've to do think about the seasonality.
Frank A. Lonegro:
Well like I said I think you'll see sequential earnings improvement we have not size that I think you will see typical seasonal pattern unless of course cold disappoints even further.
Scott Group:
Okay and then just one quick follow up. So I think one of your earlier questions you said that total labor cost should be kind of flattish 1Q to 2Q. So that impacts like a 10% increase in confirm employee in the second quarter year-over-year. I just want to make sure that that's right.
Frank A. Lonegro:
No I think what I was trying to do is to help Allison to see that on a flat headcount number with the inflation that's fairly typical and a moderating productivity environment that it would be essentially flat to up a little bit.
Scott Group:
In terms of total labor expense.
Frank A. Lonegro:
Total labor expenses that's right. Comp per employee.
Frank A. Lonegro:
All right. Thank you guys.
Operator:
Thank you. Our next question comes from Jason Seidl of Cowen & Company. You may now ask your question.
Michael J. Ward:
Good morning Jason.
Jason Seidl: Cowen &Company:
Good morning guys. I want think a little bit longer term here. Could you talk about rightsizing the network beyond just for low and re-purposing maybe some locomotives. Where are you in that stage and what really can done in some of the network that might just loosing just too much traffic for you.
Cindy Sanborn:
Well, if you indulge me here, Jason I think the changes that we're making and our company were not short-term reactions to temporary economic conditions. So everything is on the table in term of how we look at our network. I think what you've us to do is rightsizing the coal fields with some specific facility reductions that we've made staring in the third quarter last year which would be Erwin, Tennessee, Corbin announced consolidation of a division in Huntington, from Huntington’s other divisions and also reducing our yard operation and car operation in Russell, Kentucky
On the rest of our network and we will continue to work in the coal network and in the coal fields on making the right decisions while still serving the customers that we have there. When we look at the rest of the network we're focusing very hard on density which is part of our train length initiative’s really kind of the underlying component of train length initiative. So as we look at our main arteries, how can we continue to drive density there, which then also allows us to streamline some facilities around that. So you've seen us to do that with some of the mechanical reductions that we announced that we're going to make in some of our car facilities. And then going forward to beyond just simply network type of actions are technology implementation that allow us to automotive. So we're looking at this as the ability and from my perspective it's a great plan and executive plan help CSX drive in a rail industry that is fundamentally changing and so we will continue to drive all of these initiatives and look for ways to tweet them to get even better efficiency while still and I have to say it's very important to us as we serve our customers and had service product that needs to exceed their expectations.
Jason Seidl:
So what you can do in the coal network done right now or is there more to come in terms of rightsizing that particular piece of your network.
Cindy Sanborn:
I would say we're never done in any of this and we’ve taken some really large steps, we'll continue to look as the demand for our services changes and it will change, we will take the appropriate steps to take out the cost that need to come out, you have also seen us publicly putting in to the STB some discontinuance of service on routes where the mines are shut down and we will continue to do those types, take those types of actions, but will be aggressive with it. But keep in mind that it is a very profitable business force and we want to serve the customers that need our service.
Jason Seidl:
Okay.
Michael J. Ward:
Excuse me, you may want to mention the change in some of our pricing on the origin side.
Fredrik Eliasson:
Sure, I mean obviously we work hand in hand with Cindy's team here to help hard, drive productivity, not just in coal fields but elsewhere in terms of train length initiatives and so for the specifics that Michaels point, we have changed the way we price our coal in the coal fields to drive efficiency, so we've gone away from pricing zone so to speak -- districts towards specific point to point pricing that better reflects the reality of operating into certain brands line and so forth in the maintenance that has to occur there and we will price more efficient loading points differently going forward, which is tough discussions to have with our customers but at the same time I think this is understanding that this sort of transformational change you need to do something different. So, there are a lot of things that we are doing co-operate that we would see the to try to help drive about cost but still protect our service going forward.
Jason Seidl:
Okay guys that's great color I appreciate it. My follow up is on the intermodal side, clearly there is slack capacity in the truck load market place in fact you can argue what probably got a little more slack here in 1Q. When you talk to your intermodal customers how are they viewing that, are they viewing that slack capacity in the trucking market as just a temporary bullet or may be take advantage of it or are they viewing this is longer term they want to play this spot market may be a little bit more that have in the past?
Fredrik Eliasson:
Yes as I said before that we have significant portion of our domestic business is under long term contracts and I think those customers that participate there in those products do value the long term access to our network and the capabilities that we provide. There is certainly right now excess capacity which reflected in the spot pricing, I would say though that as we look at some of the underlying drivers there, specially new orders for trucks which is coming down pretty rapidly you still have the challenges in terms of driver retention and escalating cost there and we have probably the biggest impact and I think all of you have follow than we certainly follow as well is the yield this next year and the impact that will have definitely as we get into the second half of 2017.
So while this is a soft environment right now that with us for a couple of quarters I think the fundamentals that we've talked about for a long time is very much in tact and we are seeing that in the partnership with a truckers that we continue to build on to allow us to do the long haul and then do the pick-up and the delivery with saw some other strategic challenges. So, it is softer but we do think that's a temporary issue and that the basic thesis of our intermodal investments and our bullishness involve a long term in 9 million loads et cetera is very much intact and frankly the fact that we are getting still very much positive pricing in intermodal space even in this environment right now I think boards well for the long term prospect for our intermodal business.
Jason Seidl:
Thanks for the color Fredrick and everyone thank you for your time as always its much appreciated.
Operator:
Thank you. Our next question comes from Ben Hartford of Baird. Your line is now open.
Ben Hartford: Baird:
Good morning, yes thanks. Fredrick maybe just taking the inner side of the intermodal equation on the international side obviously there is a lot of discussion with the implementation of source and continue rules. But any thoughts about how that's going to look on the other side of 2016 and longer-term with and when those rules are implemented?
Fredrik Eliasson:
Yes. We are trying to understand that our sales frankly and I think we are leaning from our customers. It could be opportunities for people shipped earlier potentially, but at this point I think it's little unclear exactly what the impact will be.
Ben Hartford:
Okay. That's sound good. Thanks
Operator:
Thank you. Our next question comes from Jeff Kauffman of Buckingham Research. Your line is now open.
Michael J. Ward:
Good morning Jeff .
Jeff Kauffman: Buckingham Research:
Hey, good morning congratulations in a tough environment. My question efficiencies is been asked, but let me -- comeback different way gross 10 miles were down about 9% to 10%. Where are you right now in terms of locomotive capacity its say locomotives online, locomotives on storage and I am surprised I am not seeing more of a reduction in cars online kind of flat to down 1% over the last year. Can you help explain to me some of these dynamics and what you can and can't do there?
Cindy Sanborn:
Sure. So let’s talk about locomotives first. If you compare first quarter of '15 to this quarter, we actually have about 400 less locomotives active which is about 10% in line with the volume reductions that you can talked about. Within that in that is the fact that we've got 275 stores but there is also another 96 that are lease returns that will be returned in the second#~31# and third quarter of this year that we've already pulled out. So we feel like we are fairly decently in line with GTM reduction and our workload reduction and our resourced take down as a result of that and it also allows us if we get surprised on the upside we have the ability to pull more locomotives out and I would also add that we are receiving a locomotives and long term purchase plan we've received 26 locomotives of that 100 total in the first quarter.
So that's kind of puts and takes around locomotives and we are very obviously focused on rightsizing our resources around both locomotives employee and cars and I will talk about cars here as well. In terms of what you seeing with cars online we have about 1300 cars stored right now versus a 13,000 stores right now versus 5500 this time last year. When you look cars online the cars that are actually stored don't come out of account for a fairly long term period that 36 months since its standard that we all have. So if you include those additional cars that we're pulled out in the first quarter were down about 4% in terms of cars online if you take those out of cars online number.
So again we feel like we are fairly well resourced appropriately for the demand that we have.
Jeff Kauffman:
Okay. That's all. Thank you very much.
Operator:
Thank you. Our next question comes from Justin Long of Stephens Inc. Your line is now open.
Michael J. Ward:
Good morning Justin.
Justin Long: Stephens Inc.:
Good morning and thanks for taking the question. So I know you aren't giving specific EPS guidance beyond expectation for a year-over-year decline, but there have been several puts and takes since the January call and I just want to get a sense if you're expectation on the magnitude of that EPS decline is changed when you put it all together, has your overall earnings outlook for this year gotten better worst or is it about the same as it was three months ago.
Frank A. Lonegro:
Hey it's Frank. I think when you look at the full year, clearly we knew this was going to be a down year. I think in terms of the puts and the takes coal has gotten worst on relative basis versus what we had walked into the year with. We knew we were going to have soft volumes in the merchandise side specially with the dollar and the commodity prices, intermodal is hanging in there specially on the domestic side intermodal were delivering on productivity versus how we set out the year and so if you add all those up and I'd say we're pretty much in line with where we had originally thought.
Justin Long:
Okay. Great. That's helpful and then just one quick modeling question. So I wanted to ask what you are expecting on the change in incentive comp this year just based on your current plan for 2016. Do you expect a major year-over-year change in incentive comp in the next quarter or too.
Frank A. Lonegro:
Well actually that depends on how we do against our internal plans and clearly those are designed to align with the interest of the shareholders we recited every year as of January 1 if you remember in 2015, we began to roll off incentive comp in the third and the fourth quarter. So I wouldn't suggest any meaningful change in the first and the second quarter and then we'll update you depending on how we are doing as the year goes on in terms of incentive comp year-over-year as we get out into the back half of the year.
Justin Long:
Okay, great, I'll leave it at that. Thanks for the time.
Operator:
Thank you our next question comes from Tyler Brown of Raymond James. Your line is now open.
Michael J. Ward:
Good morning.
Tyler Brown: Raymond James:
Hey good morning. Hey Frank just I believe in your 10-K you guys mentioned that on 2016 you guys are expecting to have a 53rd week this year, can you just talk little bit about what the expected impact in Q4 would be, I mean is it the basically adding that extra week of operations and extra week of earnings and then in similar way how would it impact the optics of Q4 traffic?
Frank A. Lonegro:
So let us get a little deeper into the year and that's good Q3 and Q4 question for us. We hit this about every 6 or 7 years and that's really normalize the number of days in every quarter the number of week and days in every quarter the number of holidays in every quarter and give us a better comparable. But one of the things we have historically done and you can expect us to do going forward, we will give you the very specific you know revenue and expense and operating income and operating ratio on numbers for that 53rd week on the fourth quarter call.
Tyler Brown:
Okay great and then Fredrick our interest about this new flash move that you noted in minerals, is this a result of the coal ash regulations from last year and do you think this is kind of the tip of the iceberg or do you think this is more of a one off project is it just seems to me that minerals has been one of the few areas of strength?
Fredrik Eliasson:
Fly ash is byproduct of burning coal which must be remediated by the utility plants and obviously can also be used in the production of concrete and we do have a significant uptick in interest in looking at opportunities to move this to a variety of land fields this is the first move that we've been able to secure and we do think there are more opportunities as we go forward to capitalize on that and then put products together for our customer that make sense.
Tyler Brown:
Okay very interesting. Thank you.
Operator:
Thank you our next question comes from Donald Broughton of Avondale Partners . Your line is now open
Michael J. Ward:
Good morning Donald.
Donald Broughton: Avondale Partners:
Good morning everyone. Just real quick. You appear to be more and more aggressive the share repurchase in the recent quarters. Refresh us on how you think about that is, is it a fix dollar mark you're putting share repurchase and so stock price falls if you going to buy more or is it some of the metrics that is determining the levels of which you are being aggressive.
Frank A. Lonegro:
No we are being very ratable about as matter of fact. I mean we have guided previously that it would be about $250 million to $260 million of quarters. So I think all you're seeing gives us being the beneficiary of deploying that in a lower stock price environment and so that ratable approach will buy you more shares obviously in a lower price environment less shares in our price environment. So we are trying to pick the stock which on run good real road and so as the price goes down we will buy more as price goes up.
Donald Broughton:
Perfect thanks.
Operator:
Thank you. Our last question comes from John Barnes of RBC Capital. Your line is now open.
Michael J. Ward:
Good morning John.
John Barnes: RBC Capital:
Hey good morning thank you. Hey going back on Donald's question from a share repurchase perspective and that will like maybe CapEx in 1Q is little bit lower you talked about some of the rationalization of infrastructure and that kind of thing. Can you talk about maybe the CapEx outlook not just for this year but going forward, should we see continued trend lowers what have metric is I guess percentage of revenues probably not the right measure anymore but should we expected to trend lower and if so how do you reallocate that free cash flow.
Frank A. Lonegro:
Sure so as you know we ended this year and put a plan together on the capital investment side that took out over $100 million on a year-over-year basis and that was just reflective of the environment that we are in. As you look forward I think we have some significant things that are be rolling off positive train control would clearly be one of those and as we look at the asset intensity of our business there may be some opportunities on the infrastructure and the equipment side. At the same time as you heard Cindy mentioned making sure that we can keep pace with train linked opportunities that we have and investing inside going forward is going to be important for us technology investments will also be important for us and making sure we have a good safe in a reliable is going to be important for us. So I mean I do think you'll see some moderation overtime as we continue to target 16% to 17% of revenue as our long term goal and I think we have a line aside to that over the next few years. So I do think you will continue to see us deploy capital in a balanced view with capital investments being a first priority, second priority being dividends, and then third priority being buyback.
So I think you'll continue to see us take that balanced approach.
John Barnes:
Okay. All right very good and then Fredrick just on the coal out work and I guess a longer term you've got a huge shift in the portfolio makeup of the Eastern utilities. Yes southern company just announced another plan site for new -- have fair to go along with to build their plan I mean you've got this incredible amount of what you're see reproduction coming along from -- I know you've talked a little bit about the plans and the targeted for shutdown from '16 to '18 but is there any concerned that you start to see additional coal facility shutdown as a result of maybe some of these new pillars beginning to come online.
Fredrik Eliasson:
} I think we have seen a lot of change over the last couple of years who would have thought that in four years we would lose $1.4 billion of coal revenue and we are on pretty much on target here in 2016 to lose at least $500 million of coal revenue and so clearly based on what our natural gas prices are right now there is an economic interest in a diverting a lot of the utility plans away from coal towards natural gas and in some instance like you pointed out to also to nuclear. We do think though that where we are at these very#~36# depress levels both because of natural gas price is being so low and most likely an unsustainable low place and the fact that stock are also very very high that there are opportunities to see some pick up at some point but there is now doubt that the trend on the utility side is downward going forward. But I don't think it anyway close to the pace that we've seen here over the last 4 to 5 years.
So we monitoring that very close of course also looking at the direct impact of the regulation that is going to come kick in here potentially as we get into 2020 and beyond. But I think as we look at the next couple of years, we have seen a significant portion of the pain behind us and right now it's about seeing where natural gas prices will stabilize and when do we get through this overhang and this stock files to get back to more normalize level, when that happens we'll see where it is, but the general trend is obviously it is going -- it’s a downward path
John Barnes:
Okay, thanks for your time. I appreciate it.
Michael J. Ward:
Everyone, thank you for joining us and we will see you again next quarter.
Operator:
This conclude today's teleconference. Thank you for your participation in today's call. You may disconnect your line.
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