CSX (CSX) Earnings Report: Q4 2014 Conference Call Transcripts.t.st/media/xtranscript/2015/Q1/13011419.pdf · Event Description: Q4 2014 Earnings Call ... CSX (CSX) Earnings Report:

CompanyName:CSXCorpCompanyTicker:CSXSector:Services

Industry:Transportat ionEventDescription:Q4 2014 EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 25

CSX(CSX)EarningsReport:Q42014ConferenceCallTranscriptThefollowingCSXconferencecalltookplaceonJanuary14,2015,08:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

DavidBaggs;CSX;VP-CapitalMarkets,IRMichaelWard;CSX;Chairman,President,CEOFredrikEliasson;CSX;CFOClarenceGooden;CSX;ChiefSalesandMarketingOfficerOscarMunoz;CSX;COO

OtherPart icipants

TomWadewitz;UBS;AnalystAllisonLandry;CreditSuisse;AnalystRobSalmon;DeutscheBank;AnalystKeithMori;Barclays;AnalystThomasKim;GoldmanSachs;AnalystBillGreene;MorganStanley;AnalystKenHoexter;MerrillLynch;AnalystBenHartford;RobertW.Baird;AnalystCherilynRadbourne;TDSecurities;AnalystDavidVernon;Bernstein;AnalystChrisWetherbee;CitiResearch;AnalystJohnLarkin;StifelNicolaus;AnalystBaskinMajors;SusquehannaFinancial;AnalystJeffKauffman;BuckinghamResearch;AnalystScottGroup;WolfeResearch;AnalystJasonSeidl;Cowen&Co;AnalystMattTroy;Nomura;AnalystCleoZagrean;MacquarieCapital;AnalystKeithSchoonmaker;Morningstar;AnalystJustinLong;Stephens;AnalystDonaldBroughton;AvondalePartners;AnalystJohnMims;FBRCapitalMarkets;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

Goodmorning,ladiesandgentlemen,andwelcometotheCSXCorporationfourthquarter2014earningscall.Asareminder,today'scallisbeingrecorded.Duringthiscall,allparticipantswillbeinalisten-onlymode.

Foropeningremarksandintroduction,IwouldwithliketoturnthecallovertoMr.DavidBaggs,VicePresidentofCapitalMarketsandInvestorRelationsforCSXCorporation.

DavidBaggs (VP-CapitalMarkets,IR):




Thankyou,Wendy,andgoodmorning,everyone.Andagain,welcometoCSXCorporation'sfourthquarter2014earningspresentation.Thepresentationmaterialthatwe'llreviewthismorning,alongwithourexpandedfinancialquarterlyreportandoursafetyandservicemeasurements,areavailableonourWebsite,atCSX.com,undertheInvestorsection.Inaddition,followingthepresentationthismorning,awebcastandpodcastreplaywillbeavailableonthesameWebsite.

Thismorning,ourpresentationwillbeledbyMichaelWard,theCompany'sChairman,PresidentandChiefExecutiveOfficer,andFredrikEliasson,ourChiefFinancialOfficer.Inaddition,ClarenceGooden,ourChiefSalesandMarketingOfficer,andOscarMunoz,ourChiefOperatingOfficer,willbeavailableduringthequestion-and-answersession.

LetmeremindeveryonethatthepresentationandotherstatementsmadebytheCompanycontainforward-lookingstatements.YouareencouragedtoreviewtheCompany'sdisclosureontheaccompanyingpresentationonslide2.Thedisclosureidentifiesforward-lookingstatements,aswellastheuncertaintiesandrisksthatcouldcauseactualperformancetodiffermateriallyfromtheresultsanticipatedbythesestatements.

Inaddition,attheendofthepresentation,wewillconductaquestion-and-answersessionwiththeresearchanalysts.Withabout30analystsnowcoveringCSX,Iwouldask,asacourtesyforeveryone,topleaselimityourinquiriestooneprimaryandonefollow-upquestion.

Andwiththat,letmeturnthepresentationovertoCSXCorporation'sChairman,PresidentandChiefExecutiveOfficer,MichaelWard.Michael?

MichaelWard(Chairman,President,CEO):

Well,thankyou,David,andgoodmorning,everyone.Yesterday,CSXreportedfourthquarterearningspershareof$0.49,up17%from$0.42inthesameperiodlastyear.ThisrepresentsanewfourthquarterrecordfortheCompany.Revenuegrew5%inthequarter,to$3.2billion,alsoafourthquarterrecord,withbroadbasedgrowthacrossnearlyallofourmarkets,reflectingcontinuedeconomicmomentum.

Furthermore,thetimelyadditionofoperatingresourcesenhancementsthroughthefallpeakhavesupportedstrongvolumegrowth.Asaresult,operatingincomeincreased11%,toanewfourthquarterrecordof$901million,andtheoperatingratioimproved140basispoints,to71.8%.Thisquarter'sperformanceisfurtherevidenceofCSX'sabilitytocapitalizeoneconomicgrowththatishelpingtodrivestrengthacrosstheCompany'sdiversemarkets.

Turningtothenextslide,I' lldiscussourfull-yearperformance.ThepastfouryearshavebeentransformativeforCSX,andwehaveemergedastrongercompanyforourcustomersandshareholders.Thatstrengthdrovenewfull-yearrecordsin2014forrevenue,at$12.7billion,operatingincome,at$3.6billion,andearningspershareof$1.92,andtheoperatingratioremainedessentiallystableat71.5%.

That'sanextraordinarytestamenttotheworkoftheCSXemployees,becauseitfollowsaperiodduringwhichwelostnearly$900millionofcoalrevenue,asthecountrytransitionedthroughchangesintheenergysector.

Atthesametime,thediversityofCSX'sbusinessmixgeneratedrevenuemorethanoffsettingthosecoallosses.Thatgrowth,combinedwithinflationpluspricing,efficiencygains,andcashdeploymentforsharebuybacks,generatedmodestearningsgrowthfortheshareholdersduringthistransitionperiod.

ThesefinancialresultsarecontinuedevidencethattheCompany'semployees,corestrategy,anddiversebusinessmixcancreatesustainablevalueforshareholders,eveninanevolvingandchallengingbusinessenvironment.Withstrategicinfrastructureinvestments,locomotives,andoperatingemployeescomingonline,weexpectservicelevelstograduallyimprovethroughout2015tosuperiorlevels.




Withthat,I' llturnthepresentationovertoFredrik,whowilltakeusthroughthetopandbottomlineresultsinmoredetail.Fredrik?

FredrikEliasson(CFO):

Well,thankyou,Michael,andgoodmorning,everyone.Letmebeginbyprovidingasummaryofourfourthquarterresults.AsMichaelmentioned,revenueincreased5%versustheprioryearon6%highervolume,drivenbybroadbasedstrengthacrossmerchandise,intermodalandcoal.Expensesincreased3%versuslastyear,drivenprimarilybyhighervolume,andincludeda$39millionG&Aworkforcereductioncharge.Operatingincomewas$901million,up11%or$88millionversustheprioryear.

Lookingbelowtheline,interestexpenseandotherincomewereslightlyfavorableversustheprioryearperiod.Andincometaxeswere$284millioninthequarter,reflectinghigherpre-taxearningsforaneffectivetaxrateofapproximately37%.Overall,netearningswere$491millionandEPSwas$0.49pershare,up15%and17%,respectively,versustheprioryearperiod.

Nowletmeturntothemarketoutlookforthefirstquarter.Lookingforward,weexpectapositivedemandenvironmentinthefirstquarter,withstabletofavorableconditionsfor96%ofourmarketsandunfavorableconditionsfortheremaining4%.

Lookingatsomeofthekeymarkets,chemicalsisfavorable,aswecontinuedtocaptureopportunitiesinthedomesticoilandgasindustry.Housingstartsareexpectedtoriseconsiderablyin2015,whichshoulddriveafavorableoutlookacrossourconstructionmarkets,forestproducts,minerals,andwasteandequipment.Automotiveisfavorable,drivenbygrowthinNorthAmericanlightvehicleproductionandtherecoveryofvolumelosttotruckinglastyear.

Strongintermodalgrowthwillcontinue,asourstrategicnetworkinvestmentsupporthighwaytorailconversions.Weexpectdomesticcoalvolumegrowthwillbestronginthefirstquarter,attributabletocyclingweakerfirstquarter2014volumeandanewironorefacility.

Exportcoalvolumeisexpectedtobesignificantlylowerinthefirstquarter,throughreflectedcontinuedsoftglobalmarketconditions.Forthefullyear,ourbestestimateatthistimeisaround30milliontons.Overall,weanticipatehighdemandlevelsforourservicewillcontinueinthefirstquarter.

Turningtothenextslide,letmetalkaboutourexpectationsforexpensesinthefirstquarter.Beginningwithlaborandfringe,despiteG&Aworkforcereductions,weexpectfirstquarteraverageheadcounttoincreasesequentiallyby1%,aswecontinuetorampupoperatingemployeestoaccommodatehighervolumes.Thisrepresentsa4%increaseversustheprioryear.

Weexpect2015laborinflationtobearound$35millionperquarterinthefirsthalfandthenmoderatetoaround$25millionperquarterinthesecondhalf.Thisrepresentsanincreasefromthe$20millionperquarterlevelsseenin2014,drivenbyunionwageinflationandpayrolltaxes.

TheunioncomponentisconsistentwithwhatyoushouldexpecttoseeacrosstheindustryasaresultofnationalbargainingandreflectsboththecarryoveroftheJuly1,2014wageincrease,aswellasaJanuary1,2015increase.Inaddition,youwillrecallthatweamendedalocomotivemaintenanceagreementinJuneof2014,whichresultedina$15millionshiftbetweenlaborandtheMS&Oexpenselinesinboththethirdandthefourthquarters.Thistrendwillcontinuein2015andwewillbecyclingtheexpenseshiftduringthefirsthalfoftheyear.

LookingatMS&Oexpense,weexpectthefirstquartertobedrivenbyinflationandvolumegrowthinlinewiththetrendsseenduring2014.Fuelexpenseinthefirstquarterwillbedrivenbylowercostpergallon,reflectingthecurrentpriceenvironment,highervolume,andcontinuedfuelefficiencythroughtechnology




andprocessinitiatives.

Weexpectdepreciationtoincreasearound$10millionversustheprioryearineachquarterin2015.Thisreflectstheongoinginvestmentinourbusinesspartiallyoffsetbyanassetlifestudyconductedinthefourthquarter.Finally,equipmentandotherrentsinthefirstquarterisexpectedtoincreaseyear-over-year,drivenbyhigherfreightcarratesandincrementalvolume.

Nowletmetalkaboutourcapitalinvestmentplanfor2015.In2015,CSXplanstoinvest$2.5billioninourbusiness.Thisrepresentsamoderateincreasefromthe2014level,andcoreinvestmentisexpectedtobeabout17%ofrevenue.

Inthechartontheleft,youcanseethatabouthalfthecapitalinvestmentwillbeusedtomaintaincoreinfrastructuretohelpensureasafeandfluidnetwork.OurequipmentinvestmentinlocomotivesandfreightcarsensureCSXhasanappropriatelevelofrollingstocktosupportcommercialdemandandimproveon-timeperformancelevels.

Inaddition,wewillcontinuetofocusonstrategicinvestmentsthatsupportlong-termprofitablegrowthandproductivityinitiatives.In2015,weareprioritizinginfrastructureprojectsthatwillincreaselineofroadcapacityonthenortherntiertoimprovefluidityandsystemvelocity.

Finally,lookingatourinvestmentinPositiveTrainControl,wehaveinvested$1.2billionthroughtheendof2014andplantoinvestanadditional$300millionin2015.AstheimplementationofPTCextendsoveralongerperiodoftime,weanticipatespendingatleast$400millionbeyond2015.Asaresult,ourcurrentestimateforthetotalcostofPTCisatleast$1.9billion.

Nowletmewrapuponthenextslide.Overall,CSXdeliveredsolidfinancialperformancein2014,withrobustvolumegrowthoffsettingtheimpactoflastyear'sweather,networkperformance,andaweakcoalpricingenvironment.

Wecontinuedtoseebroadbasedstrengthacrossourdiversebusinessportfolio,andthestrengthistranslatingintomorevisibleandmoremeaningfulearningsimprovement.CSXachieveddoubledigitearningsgrowthinboththethirdandthefourthquarters,andincrementaloperatingmarginsexpandedthroughouttheyear.

Forthefullyear2015,CSXstillexpectstoachievedoubledigitEPSgrowth.Evenaswecyclestrong2014volumegrowth,weexpectmerchandiseandintermodaltoagaingrowatafasterpacethanthebroadereconomy.Wecontinuetotargetpricingaboveinflation,ascapacityremainstightacrossallmodesoftransportation,andweexpecttodeliverproductivitysavingsapproaching$200millionin2015.

Domesticcoalvolumesshouldremainrelativelystablein2015,whiletheexportcoalmarketremainschallenged.Thatsaid,wewillbekeepingaclosewatchonnaturalgaspricesandheatingandcoolingdegreedaysaswemovethroughtheyear.

Finally,weexpectmarginexpansionstoresumein2015,whichreflectimprovingservicelevels,astrongpricingenvironment,andcontinuedeconomicexpansion.Overthelongerterm,wecontinuetotargetanoperatingratiointhemid60's.Withthat,letmeturnthepresentationbacktoMichaelforhisclosingremarks.


Well,thankyou,Fredrik.Thestrong2014demandreinforcedtheimportanceoffreightrailindustryandCSXinsupportingtheglobalsupplychainandAmericancompetitiveness.Theeconomicandenvironmentalbenefitsoffreightrailnetworkincreasinglyserveacountrywithagrowingpopulationandacriticalneedfortransportationinfrastructure.




Tocontinuedeliveringthesebenefitsandcreatingvalueforitsshareholders,CSXhastransformeditselfbyforgingnewcapabilitiesalignedwithopportunitiesinenergy,manufacturing,agriculture,andglobalcommerce.We'regeneratingrecordresultsbyleveragingthemostdiversebusinessmixintheCompany'shistorywithnewopportunitiesacrossnearlyallofthemarketsweserve.

Weremainfocusedonexecutingourcorestrategyofdeliveringserviceexcellenceforourcustomers,whichdrivesourabilitytogrowmerchandiseandintermodalbusinessesfasterthantheeconomy,priceaboveinflation,andcontinuetodriveimprovementsinassetutilization.TheCompanyispoisedforabrightfutureofstrongfinancialreturnsandexpansion,andwethankyouforyourownershipofandinterestinCSX.Nowwe'llbegladtotakeyourquestions.

QUESTIONS&ANSWERS

Operator:

Thankyou.

(OperatorInstructions)

ThefirstquestionisfromTomWadewitzwithUBS.


Goodmorning,Tom.

TomWadewitz (Analyst-UBS):

GoodmorningMichael,Fredrik,David.Wantedtoseeifyoucouldtalkabitaboututilitycoal,andIguessyourvisibilitytostockpilesandalsohowmuchriskyouseeifnaturalgaspricesstayatcurrentlevelsorgobelow,intermsofswitchingfromcoaltogasandhowthatmightaffect.

ClarenceGooden(ChiefSalesandMarketingOfficer):

Goodmorning,Tom.ThisisClarence.


Hello,Clarence.


Weseethestockpiles,bothintheNorthandSouth,areprettymuchwhereweexpectedthemtobe.They'reatnormallevelsinboththeNorthandtheSouth.Wethinkthecompsinthefirstquarterwillbeveryfavorableforuswhenyoulookatwhattheweatherwaslastyearversuswhattheweatheristhisyear.

Ifthesegaspricesstaywheretheyarenow,whicharearound$3.00orsub$3.00,therecouldbesomedownsideriskoutinquarterstwoandthree,fromwhatwehaveplanned.Butfromrightnow,itlookstousliketherestoftheyearshouldbearoundflatgoingforward.


Okay,great.Andthenthefollow-upquestion,thatwe'vehadsuchadramaticmoveinoilprices,Ithinkit'shardtogetyourarmsaroundwhattheimpactcouldbeacrossyourbook.

Andobviously,therecouldbesomeriskaccruedbyrailorfracsandandpipeandsoforth.Butgivenwhatyouseerightnow,ifyoulooktosecondhalfoftheyear,wouldyouexpectthattocomethroughanddrive




weaknessinthoseareas,orhowwouldyoulookatmaybenotjustfirstquarterbutoutalittlebitmore,intermsofeffectiveloweroilpricesonyourbookofbusiness?


Rightnow,aswelookoutthrough2015,wedon'tseeanysignificantimpactatallinourcrudeoilbyrailintotheEasternmarkets.Andcertainlyinourfracsandmarketswherewegoin--wherewe'removingintotheUticaandtheMarcellusarea--wherethenaturalgasandthenaturalgasliquids,wedon'tthinkitwillimpactthefracsandthatwe'removingintothoseareasatall.


Okay,great.Thanksforthetime.

Operator:

Thankyou.ThenextquestionisfromAllisonLandrywithCreditSuisse.


Goodmorning,Allison.

AllisonLandry(Analyst-CreditSuisse):

Goodmorning.Thanksfortakingmyquestion.FollowinguponTom'squestion,howareyouthinkingaboutthebroadereconomictailwindsthatresultfromloweroilprices?Andifwethinkaboutascenariowhere,let'sjustsayforargument'ssake,thatcrudeandanythingshellrelatedevaporates,howdowethinkaboutwhereyoucouldseeupsideinintermodalorsomeofyourotherlinesofbusiness?


Allison,wefeelverypositiveaboutit.There'sbeensomestudiesthatcomeoutthatessentiallyonly10stateshaveemploymentthat'sdirectlyimpactedbytheoilboom.It'slessthan2%oftheUSpopulation.

Forus,thecrudebyrailislessthan2%ofourbusiness.FortheaverageUStax,USperson,it'slikegettingataxbreakofalmost$2,000ayear,soitputsalotofdollarsintotheeconomy.Fromanyindicationthatwesee,it'sapositiveexperiencefortheAmericantaxpayer,fortheAmericaneconomy.SoIthinklowercrudeoilpricesisaverypositiveforoureconomyandverypositiveforCSX.


Okay,great.Andthenasmyfollow-upquestion,the$200millionofproductivitygains,that'squiteabithigherthanwhatyou'vegeneratedinthelastfewyears,whichhasaveraged,Ithink,$130millionto$140million.Isthisinclusiveoftheincrementalorunusualweatherexpensethatyousawlastyear,oristhatontopofthe$200million?

OscarMunoz (COO):

Allison,thisisOscarMunoz.Ithinkaportionofthatnumberisweather,althoughnotassignificantasyoumightthink,probably15%ofthatnumber,roughly.


Sojusttoclarifyonthe$200million,sowhatwehaveistheoperationsnormaltargetofabout$130millionto$150million,pluswehaveabout$50millionthatislinkedtotheG&Aworkforcereductionprogramthatweoutlined,theseverancechargeinourfourthquarter.





Okay.Andthentherestwouldbeweather.


Partoftheoperationsproductivitysavingsistocyclewhatwecycledlastyear,asOscaroutlined.


Okay,great.Thankyousomuch.

Operator:

Thankyou.ThenextquestionisfromRobSalmonwithDeutscheBank.


Goodmorning,Rob.

RobSalmon(Analyst-DeutscheBank):

Hello.Goodmorning,guys.Asafollow-uptoAllison'squestion,couldyougiveusasenseintermsofwhatsortofnetwork,howquicklyyou'reexpectingthenetworktoreturntonormal,andwhatsortofkeyvelocityanddwellmetricsweshouldbelookingforaswe'rethinkingaboutthat$200million?

OscarMunoz (COO):

Thanks,Rob.Sotheproductivityinitiativesarebroadacrossalotofdifferentaspects,volumeabsorption,specificinitiatives,certainlyweather,wintersortofoverlap.ButIthink,ifyouthinkoftheincrementalresourcesthatarecomingonline,it'sgoingtojustreestablishthedisciplinethatwe'vehadoverthepastthreeorfouryearsaroundtheinternaloperationsofbothscheduledandtheunschedulednetworks.

Andspecifically,whilevelocitywillbeabitofalaggingindicator,aswilldwell,thepublicmeasuresyousee,Ithinkdwellinparticularwillbeakeymetrictowatch.Internally,wehaveintermediateandhometerminaldwellthatwe'remonitoring.ButIthinkthedwell,Ithink,willbeanareathatyoucanfocusonandthat,whenitstopsdwellingthere,itincreasescostinabigway,andthatwillbethefirstfocusandbenefitfromtheincrementalresources.


That'shelpful.Anddidyouguysquantifythesavingsexpectationsfortheemployee--themanagementworkforcereductionprogram,andwasanyrealizedinthefourthquarter?


Sotheestimateisabout$50millionfortheoverallprogram,whichlaboristhelargestpartofthat,butthere'salsosomeotherMS&Osavings.Andtothequestionaroundanythingwasrealizedonthefourthquarter,no,nonewasrealizedreallyinthefourthquarter.


Perfect.Thankssomuchforthetime,guys.

Operator:

Thankyou.ThenextquestionisfromThomasKimwithGoldmanSachs.



©2014TheStreet,Inc.AllRightsReserved Page8 of 25


Goodmorning,Thomas.

ThomasKim(Analyst-GoldmanSachs):

Goodmorning.Ijustwantedtoaskaboutthefuelsurcharges.Andifwegobackthroughhistory,thelasttimeoilpricescollapsedthewaythattheydid,yourrecoverywasquiteeffectiveincapturingthefuelcostsavings.Andaswelookforwardtothisyear,withobviouslytheprecipitousdrop,doyouthinkthatyourfuelsurchargesarewellplacedtoensurethatyou'reabletofullyneutralizetheimpactoflowersurchargeswiththedropinfuel?


ThisisFredrik.Yes,wedothinkwehaveafuelsurchargemechanismthatiseffective.It'snotaprofitdriver,butitmakesusneutraltofuelpricevolatility.Thereareperiods,suchaswhenthepricesdecline,thatwegetthelagbenefitwhichwesawhereinthefourthquarter.

Andlikewise,whenfuelrises,ourfuelsurchargemechanismlagsalittlebit,sowehavealittlebitofadetrimentthere.Butoverall,thefuelsurchargeisworkingwell.Andwethinkthatweareneutraltoanysortofpricevolatility,withtheexceptionofthelageffect.


That'sgreat.That'sveryhelpful.AndIguessjustintermsofthisdecrease,obviouslycertainlybeneficialforcustomers,howdoyouthinkthatthishelpsyouintermsofyourabilitytopushthroughhigherGRIsduringthecourseoftheyear,whereyou'reseeinggeneralpricing?


Well,Thomas,thisisClarence.Ithinkthatit'sapositiveforus.It'slesscost,obviously,overallinthepackagetothecustomer.Soaswepushforourpriceincreases,itmakesitmorepowerfulaswegotothecustomerandtheoverallpackage.


Great.Thanksverymuch.

Operator:

Thankyou.ThenextquestionisfromBillGreenewithMorganStanley.


Goodmorning,Bill.

BillGreene (Analyst-MorganStanley):

Hello.Goodmorning.Clarence,canIaskyoutofollow-upalittlebitonthatpricingcomment?SoIwouldguessthatwe'regoingtostartlappingsomeofthebigexportcoalpricedeclines.Sothat'sgoingtomakeourcomps,Iwouldthink,abiteasierinFY15.Andofcourse,theoverallmarketisalotstronger,particularlyonthetruckside,soIthinkthatwouldbehelpfultoyourpricingdynamic.SoisthereanyflawinthelogictothinkthatpricingforCSXinFY15shouldbestrongerthanitwasinFY14?





No,Ithinkyou'reabsolutelycorrect.Ithinkyou'llseemuchstrongerpricinginFY15thanyoudidinFY14,absolutely.


Okay.AndthenmaybeforFredrikorforOscar.Aswethinkaboutthecoststructureinsofarasvolumesdisappointusthisyear--sothey'reunexpectedlyweak--howmuchofyourcoststructureisvariable?

Howmuchcanyousortoftweakthat$200millionhigher,ifyouhadto,andhowmuchismorefixedsuchthatasyoudedicatetheseresources,locomotives,employees,tomovethecurrentvolume,weruntheriskthatwecreateahighercoststructureinthesecondhalf,let'ssay?


Well,andIthinkifyougobackto2008,2009timeframe,youcanseewhatwedidtherewhichwasprettyremarkableintermsofvariablizingthecoststructureandinthescenariothatwedon'tthinkyou'regoingtobecorrectedpredictingorforecastingbutifvolumewouldbesofterthanwearecurrentlyanticipating,wedohavetheopportunitytotakecostoutmorethanwhatwehaveinthecurrentmoneyandwe'veproventhatinthepastourcoststructureismorevariablethanperhapssomepeoplemightthink.


ButIthinkit'simportanttonotethatvolumeisnotweak.


We'reansweringahypotheticalquestion,Bill.SpecificallywhenyouthinkoflocomotivesisprobablythemostexpensiveaspectI'vegotroughlyathousandpeopleinthepipelineandroughlyathousandpeoplepotentialattrition,sothatIthinkoffsetsitselfandthenonthelocomotivesidewe'vegotleasereturnswecanworkthroughsoIthinkcitingbacktotheolddaysof08&09wherewedidthemathimprovedvariabilitythathascomeintothisindustry,sowemonitorthatveryclosely.


Yes,nothingslookstrongobviously.It'smorejustfolksworriedistheoilpriceindicativeofsomeweakeningthat'sboundtocomesojusttryingtothinkthroughwhatyourflexibilityis.Thanksforthetime.

Operator:

Thankyou.ThenextquestionisfromKenHoexterwithMerrillLynch.


GoodmorningKen.

KenHoexter(Analyst-MerrillLynch):

Goodmorning.Justaquickquestiononexportcoal.Clarencecanyoutalkaboutwhatisleftoncontractwithintheexportsideandwhatisstillvariablejustlookingatthemarket-rateseemslikestuffthattheexportcoalsidejustshouldn'tbemovingatthesepricessomaybejustsomethoughtsontheexportside?


Well,wehaveabout40%oftheexportcontractsarecurrentlyexportcoalmovementsarecurrentlyundercontract.Therestofitisupfornegotiation.Doesthatansweryourquestion?





Yes,isthatkindoftypicalatthe40%orareweseeingincreasingamountscomingonto?


Iwouldsaythatit'sfairlytypicalthisearlyinthecycle.Mostofthosemetallurgicalcontractsasyou'reawaretendtogomoreonquarterlybasisbutstilltendtofollowthetraditionallineofthinking,whichprettymuchsettlesinMarch/April.


Okay,andthenjustafollow-upontheservicemetricsissue.Youhitonthedwellandvelocity.Oscarcanyoutalkabouttheontimeperformance?Justseemslikeitcontinuestoremainatthat50%level.Whatneedstohappentogetthatback?Isthatdecreasingcongestion?Isitjustfixingsomethinggettingmorelocomotivesandcrew?Canyouwalkusthrewthatalittlebit?

OscarMunoz (COO):

Yes,wereallyaredowntothatpointKenthatlocomotivesarethebiggestlastsortofaspectofthisandwe'vegot200overthecourseof2014androughly100hereintheFirstQuarter,another150orsointheSecondQuarterandourservicemeasuresandalotofthingswillbealmostprettysignificantlycorrelatedtothearrivalofthoselocomotives.

Crewshavebeentricklinginoverthecourseoftheyearsowe'reinprettydecentshapethere.Itisapowerissueupagainstthisgreatvolumethatwe'regetting.It'simportantthough,weareinessenceopenforbusinessorfluidityhasgottenalittlebitbetteracrossthenetwork.Ourcoststructureisimproving.Thespanaroundourmissesisalittlebitnarrower.We'vegotcrewsandlocomotivescomingonlineandtheinfrastructurethatwe'vebeenbuildinghasimprovedfluidity,sowearefeelinggoodaboutwherewearestartingtheyear.


Wonderful.Appreciatethetime.

Operator:

Thankyou.ThenextquestionisfromBrandonOglenskiandwithBarclays.


Goodmorning,Brandon.

KeithMori(Analyst-Barclays):

Higoodmorning,thisisKeithMorionforBrandon.Couldyougiveusanideaofthecostsassociatedwithimprovingservicelevelsthisquartertiedtotherecoveryandkindofwhenshouldwethinkthesecostsstarttogoaway?Oscar,youmentionedthatservicelevelsarestartingtoimprove,thecoststructureisstartingtoimprove.Shouldwestarttothinkthat'safirsthalfevent?


Yes,sothisisFredrik.IthinkifyougobacktotheThirdQuarterweweresomewherearound15-$20millionofwhatwecallservicerelatedcausebecausethenetworkwasn'tperformingatthelevelwewanted,thefluiditywasn'ttheresoextraovertimeandsoforth.




HereinthefourthquarterprobablyprettysimilartothatandasOscaroutlinedaswegettheadditionallocomotives,weshouldseethefluidityimproveandthereforseeareductioninovertimeinimprovementinourequipmentrents,etc.andthat'sgoingtocomegradually.

Ithinkit'sunrealistictothinkthatit'sgoingtobemeaningfulhereintheFirstQuarterbecausewhiletheweatherhascooperatedsofar,we'renotthroughityetandgenerallyasyougettotheSecondQuarteryougettothebruntoftheequipmentspecifictothelocomotivesthatweareexpecting.IthinkatthatpointandlateintheSecondQuarterIthinkyoushouldstartseeingsomesignificantimprovements.


OkayandthenIguessthefollow-up,whatkindofinspiredtherecentworkforcereductionprogram?Whenyoulookacrosstheoperations,arethereanyotherstrategicinitiativesthatyoucankindofpointtoortalkaboutthathavesimilartypecostimpacts?


Well,IthinkintermsoftheG&Aworkforcereductionitsimplywasanopportunityforustostreamlinesomefunctions,stopdoingsomeofthethingswehavebeendoingandjustprocesschangesallowedustobealittlebitmoreaggressivethere.We'vehadaprograminplaceforsix,sevenyearsnowtotrytooffsetinflationandwe'vebeenabletodothatbutthiswasjustawaytobealittlebitmoreaggressiveonthatside.

WethroughthepipelineofproductivityinitiativesthatwehaveasaCompanynotjustfor15,and16,and17,wherewetriedtogetthat130-150ayear,wecontinuetoworkveryhard.It'sabigpartofthevalueequationforCSXandhasbeenoverthelastdecade.It'sgoingtocontinuetobeoverthenextdecade.


Thankyouforthetime.

Operator:

Thankyou.ThenextquestionisfromChrisWetherbeewithCitiResearch.


Goodmorning,Chris.

ChrisWetherbee (Analyst-CitiResearch):

Goodmorningguys,thanks.Whenyouthinkaboutthedoubledigitearningsgrowthfor2015,youlookatsortofthevariousbucketsoftheopportunitiesthatarepresented,wheredoyouthinkthepotentialriskcouldcomefrom?

Clarence,youtalkedaboutthedomesticcoalsideupintheFirstQuarterandimplieddowninQ2,Q3andQ4basedonflatforthefullyear.

Doesitcomefromthereifnaturalgaspricesstayattheselevelsordipdown?Iwantaroughsensitivityofthevariabilityofthemodel.Iknowyoutalkaboutcosttoosojustcolorwouldbegreat.


SurewithanymoneythatyouputtogethertherearechallengesandthereareopportunitiesandIwouldsaythatthechallengeswe'reseeingisonthecoalsideandthecrudeside.Rightnowwefeelthatonthedomesticsidethatwhatwethinkflatistherightplacetobethere'sprobablymoredownsidethanupsidetothat.




Exportweoutlinedthatweexpectexportvolumestodropcloseto25%fortheyearandcrudewhilewe'renothearingfromourcustomersthatthereareanychangeintheshippingpatternsclearlywe'remonitoringthatcloselyaswell,butifyoulookatopportunityside,Ithinkyou'veheardaboutourproductivityinitiativescloseto$200million.

Weexpecttogrowournon-coalbusinessfastintheeconomyasawholeandthepricingenvironmentcontinuestogetstrongerandstrongerfranklysowhenyouaddallthatup,wefeelthatdoubledigitistherightplacetobe.Ithinkthatit'saslamdunkbecauseitwouldn'tbemeaningfulguidanceifitwasbutitissomethingIthinkwecanachievement.


Justafollow-upthinkingabilitythepricingdynamicyoumentionedseemslikeit'sfirmingupinto15.Whenyouthinkaboutintermodalandrelationship,withdecliningfuelsurchargesitwouldstillseemit'stheabilitytopricethatbusinessupatareasonablepacegivenwhat'sgoingoninthetruckmarketbutjustwantedroughsense.Doyoufeelacaptosomeextentifweseepricescontinuingtofallfromwheretheyarecurrently?


Chris,thisisClarence.Ithinkthere'saverypositivetrendintheintermodalpricing.Weseethatthetruckissuesstillremainthereevenwiththe34hourrulethat'sbeenturnedback.There'scapacityissues,driverissues,evenwithClass8truckordersbeingupthere'sstilltheissuesofbeingabletogetthedriverstomovethebusiness,sowethinkthatthere'salotofpricingopportunitiesinintermodalitself.


Okay,perfect,thanksforthetimeguysIappreciateit.

Operator:

Thankyou.ThenextquestionisfromBenHartfordwithRobertW.Baird.


Goodmorning,Ben.

BenHart ford(Analyst-RobertW.Baird):

Goodmorningguys.Justturningtheattentiontolongertermmarginoutlookandthereiterationthereandalotoffocuson15butifwecanput15aside,whatiscontemplatedintermsofwhat'srequiredtogettothemid60stargetlongtermifyoucouldspeakinkindofbroadstrokesasitrelatestocoalandcrudeandbasepricingandproductivitygainsandservicenormalizinginthosetypesofitems?Howareyouthinkingaboutthecalculustogettothatmid60starget?


ThisisFredrik.Clearlyweexpecttostartmovingtowardsthemid60sherein2015afterhavingabsorbedthatcloseto$900millionfromcoallossoverthelastcoupleyears--goingtomakesomemeaningfulimprovements.

Aswethinkaboutthethreecomponents,it'sultimatelyprice,volumeandproductivity,thelastdecadeitwasmorepriceandproductivityandaswethinkaboutthenextdecadeit'smoreevenlysplitbetweenthethreeaswecontinuetoseegoodvolumeopportunitiesforus,wecontinuetohaveastronghealthypipelineofproductiveitinitiativesnotjustfor2015butintheyearsbeyondthat,aswellandthenpricingenvironment




afterhavingbeenalittlebitsloweroverthelastcoupleyearsIthinkisbecomingmorevibrantaswellsothreeofthosecomponentstogetherwithcontinuedgoodcashdeploymentoftheFreeCashFlowisthewaywegetthere.

Itcontinuestodoblockingandtacklingwe'vedonethelastcoupledecadesthatgotusfromthehigh80sdowntothelow70swe'llcontinuetopushgoingforward.


Acouplespecificquestions,doesitrequireastrengtheningofthepricingenvironmentfromcurrentlevelsandfromacoalstandpoint,doesitrequireanyimprovementinthecoalMarketsrelativetowhateverthebaselineisfor15?Iguessthosearethetwokeyconcernsintermsofthesensitivitythatwehave.


Yes,Ithinkwe'regoingtotrytostayawayfromtoomuchofthedetailaroundspecificpiecesbecausegenerallyasIsaidbefore,wheneveryouputaplantogether,Ithinkitwillbeobsoleteassoonasyouputtheplantogetherbutintermsofpricingspecificallyinflationpluspricingiscriticaltoeverythingthatwedo.Wearenotnecessarilybankingoncoalonthedomesticsidecomingbackspecificallyfromwhereitistoday.

Itwouldbenicetoseebutnotnecessarilyanythingwe'rebankingon.Exportcoal,we'reinadowncycleatthemomentandtwoyearsfromnowwhoknowswhatit'sgoingtobebutwethinkthere'senoughotherfactorswithinourbusinesstodrivethatearningsgrowthwithoutjustfocusingtoomuchonthecoalbusinessitself.


Okaythat'shelpfulandrealquickifIcouldgetjustaclarificationonthetaxsidewhatareyouassumingforataxratefor2015?


Generallyweseeataxraterightaround37.5.Itwasalittlebitlowerthisquarterbecauseofsometaxcreditsthatwegotbutgenerallyabout37.5.


Okay,thankyou.

Operator:

Thankyou.OurnextquestionisfromCherilynRadbournewithTDSecurities.


Goodmorning,Cherilyn.

CherilynRadbourne (Analyst-TDSecurities):

Thanksverymuchandgoodmorning.ItwascertainlynicetoseeyourpricingimprovesequentiallyandIjustwondergiventhenatureofthecontractyouhaveinplace,howlongshouldweexpectittotakebeforethetightnessintransportationcapacitywhichreallyemergedinQ214ismorefullyreflectedinyoursame-storepricing?


Well,ourpricingis--thankyoufornoticingbythewaythatitimprovedsequentially.It'slikesometimes




watchingpaintdrytowatchthosenumbersgoup.Ithinkyou'regoingtoseeitameverimprovesequentiallyeachquartergoingforward.Wehavemomentuminit.

Weareconstantlywatchingwhathappensinthatpricing.About20%ofourcontractswillrenewintheFirstQuarter.WeexpecttogetverystrongpricingintheFirstQuarter,astheyearprogresses,Ithinkyou'llseeitimprovesequentiallyineachofthosequartersparticularlyinournon-coalbusiness.


Okay,that'shelpfulandjustaquickfollow-up.YourquarterlymaterialsmentionedthatResourceconstrainsimpactedyouragshipmentsinQ4.Justcuriouswhethertherewereotherareaswhereyoumissedoutonthefullvolumeopportunitybecauseofresources?


Mainlyinouragbusinessandinaggregates,ourstonebusiness,wewereconstrainedinboththoseareasinthefourthquarter.ThathasimprovedsignificantlyhereintheFirstQuarter.OuraggregatebusinessintheFirstQuarter,exceptinsomeofournorthernareaswhereitsbeenweatherimpactedhassignificantlyimprovedaswellasinouragbusiness.


Great,thankyou.That'sitforme.

Operator:

Thankyou.ThenextquestionisfromDavidVernonwithBernstein.


Goodmorning,David.

DavidVernon(Analyst-Bernstein):

Goodmorningandthanksfortakingthequestions.Fredrik,givenwhatweknowrightnowaboutfuelpricesandobviouslygiventheoutlookforkindofflatdomesticanddownexportcoal,wouldyouexpectfullyearrevenuetobeupordownrelativeto14?


Iwouldexpectittobeupbutclearlythatdependsonultimatelywhatyouthinkaboutthefuelitself,butwedoexpectasIsaidouroverallmerchandiseandintermodalbusinesstogrowfasterintheeconomyasawholeandthedomestictobeflatandtheexportcomingdown,butIstillthinkwehaveanopportunitytogrowtherevenue.

Thekeyparthereisthefuelsurchargeisreallyapassthroughforussoeveniftheoverallrevenuenumbercomesdownbecauseofthefuelsurchargereallyitdoesn'timpactthebottomlineexceptforthelagasIsaidearlier.


Okay,andthenmaybejustasaquickfollow-up,howdoestheservicemetricsandstufflikethatplayintothepricingenvironment?ObviouslyClarenceyou'vemadethepointherethatyou'reexpectingpricingtoacceleratenextyear.Isthatinlinewiththeservicerecoveryorareyouexpectingtobeabletotakethatrateupindependentoftrucksmaybegettingalittlemorecompetitiveandtheservicelevelstillbeingweak?





Ithinktheanswerisyestobothquestions.Ithinkjusttheoverallcapacityissuesinallofthemodesoftransportationwherethere'sbarge,truck,orrailhasgivenusapositivepricingenvironmentandcertainlyasourservicesimproveandI'dliketopointoutthatwehadapointofinflationlastsummer.

Ourservicehasbeencontinuallyimprovingsincelastsummer.InfactthisFall,inourFallpeakwithUPSforexample,beingoneofourprimepremiumservicepartners.Ourservicehasbeencontinuallyimprovingandthatmakesitmucheasierforoursalesforcetogooutandgettheratesup.


Allright,thankyou.

Operator:

Thankyou.ThenextquestionisfromJohnLarkinwithStifelNicolaus.


Goodmorning,John.

JohnLarkin(Analyst-StifelNicolaus):

Goodmorning,gentlemen.Thanksfortakingthequestion.Justwiththeservicelevelshavingremainedstablebutmaybenotwhereyou'dliketoseethemoryourcustomerswouldliketoseethem,whatwasthedecisionthinkingbehindkeepingyourCapExjustalittlebitgreaterthanlastyear,therewasonerailroadintheWestthatdramaticallyincreasedtheirCapEx.Whydidn'tyoudecidetodothattotryandacceleratetheservicerecovery?


Well,Ithinkwetookitupslightlyandthat'sreallyareflectionofthefactthatwedoneedtogetthepowerandthat'swherethebiggestareaisforopportunitytomakeanimpactontheservicerecoverysomaybewecouldhavegottenmorelocomotivesbuttherealityiswecan'tgetmorelocomotivesrightnow.

Butevenwiththelocomotiveswe'regettingandourinternalrepairopportunitybecausewedohaveafairamountoflocomotivesinternallythatwe'rebringingbackintherevenueservicethatperhapsotherrailroadsmightnothavethatopportunityandthat'sacheaperformofcapacitythanbuyingnewones.


Gotit,thanksandthenasafollowontotheservicerelatedissues,someoftheserviceproblemsIguessarecausedbyissuesbeyondyourcontrol,alltheconnectingtrafficoverChicago.CanyoutalkalittlebitabouthowChicagoisoperatingnowandhowtherailroadshaveworkedtogethertotryandincreasethefluidityoverthatcriticalhub?

OscarMunoz (COO):

John,it'sOscar.Youknow,alot.We'vehadknockonwoodagoodalmost11plusweekswhereChicagohasbeenonwhatwecallanormalalertlevelandsothat'sthegoodnews.Thecommunicationandcoordinationyoureferredtowe'vealwaysknownit'sbeencritical.

ItsbeenrampedupbothatthemostseniorlevelsoftheindustrybutalsoatthelocallevelwiththatChicagoterminalcoordinatingofficeandtheeffortsaroundthatandsoeverybodyisworkingcloselyaroundthat.We'vehadacouplesystemstarts.Chicagowasincrediblycoldlastweek.Wemusteredthroughthat.




Wealltakeourturnsinthebarrelstrugglingthroughvariousinterchangepoints.Butbyandlarge,theentireindustry,isworkingverycloselyandverywellsofarwiththat.Now,thenextfewweekswe'lltestagainandofcoursewhenvolumereturnsintheSpringpeak,Week9orsowe'llfocusonthatbutsofarsogood,John.


Appreciateit,thankyou.

Operator:

Thankyou.ThenextquestionisfromBaskinMajorswithSusquehannaFinancial.

BaskinMajors (Analyst-SusquehannaFinancial):

Goodmorning.You'vetalkedbeforeabouttheintermodalmarginsandportfoliorisingtofairlylevelinlinewiththerestofyourbusinesswiththeexceptionofcoalandchemicals.Canyoujustgiveusanupdatewhereintermodalmarginsaretrackingdirectionallyversusyourotherbusinessestodayandwhetherornotthebigdropindieselpriceswillimpacttheprofitabilityofintermodalgoingforward?


ThisisFredrik.Yes,soifyoulookatthemarginswhenyouexcludechemicalsandcoalit'sprettymuchinlinewiththerestofourmerchandisebusiness.Becauseofthefuelsurchargethatwehaveinplaceinintermodalbusinessitessentiallymirrorsthetruckingindustry.

Whenyouseepricevolatility,whenpricescomesdownastheyhavedonehereonthefuelside,whathappensisnotsomuchthatthisisavolumeplayfortheindustry.It'sreallythefactthatourmarginsandintermodalbusinessgetsalittlesqueezedbecausewearemorefuelefficientsomoreofthedollarsfromfuelsurchargeinintermodalgoestothebottomline.

Net-netforCSX,that'snotthecasebutjustonintermodalbusinessitself,sothereissomemarginsqueezewhenfuelcomesdownbutit'snotsignificantandthestatementthatit'sinlinewiththerestofourbusinessisstillatruestatement.


Okay,thankyouforthatcolorandjustonequestiononexportcoalandotherpricingcompsgetmucheasieryear-over-yearaswegoforward.WhatdoyouexpectsequentiallyinQ1aswethinkaboutthatbusiness?


Whatdoweexpectsequentiallyin...


Inexportcoalpricing?


Asfarasthepricinggoeswethinkit'sgoingtobeflat.


Thanksforthetimeguys.

Operator:




Thankyou.ThenextquestionisfromJeffKauffmanwithBuckinghamResearch.


Goodmorning,Jeff.

Jef f Kauf fman(Analyst-BuckinghamResearch):

Goodmorning,everybody.Thankyoufortakingmyquestion.Mike,IhaveaquestionaboutacommentyoumadeonyourCNBCinterviewyesterdaywhereyouhadmentionedthatthesuppliersthatyouwereworkingwithoutofBakkentoshipthecrudebyrailtotheEastCoast,youhadthoughtthatat$35oiltheycouldbecompetitive.Youobviouslyunderstandalittlemoreaboutthisthanwedo.

Couldyouhelpusunderstandbecauseyoumentionedthefracsandvolumeswerejustfine.Thecrudebyrailismovingfine.Whatgivesyouconfidencethatyouwouldcontinuetoseethesetypesofvolumesat$35crude?


Welloneit'snotat35butwethinktheycouldcontinuewiththeexistingfacilitiestobecompetitive.Asyouknowonceyoumadethatinvestmentyoucouldgetbackinthereandrefracthoseandgetadditionalwiththatadditionalhugecapitaloutlayssowethinkthatit'sshortandintermediatetermwhichcertainlyincludesallof15.

Wethinktheshipmentswe'vebeenseeingroughly3.5trainsperdaycontinuesandmaybeevengrowsalittlebit.Longertermifthepricesstayatthoselevels,there'squestionswhetherthecapitalwillgobackinfornewfacilities,Jeff.

Jef f Kauf fman(Analyst-BuckinghamResearch):

Okay,noIjustwantedsomeclarityonthat.Mike,thankssomuchandcongratulations.


Thankyou.

Operator:

Thankyou.ThenextquestionisfromScottGroupwithWolfeResearch.


Goodmorning,Scott.

Scot t Group(Analyst-WolfeResearch):

Higoodmorningguys,wantedtojustclarifyacouplethingsoncoal.Howmuchistheironore,thenewironorebusinessandisthatinclusiveinyourcommentaryonflatdomestic?

Andthenwhenyouthinkaboutthosemovingpartsofironore,lessexportcoal,fixedvariableonthedomesticsidehowshouldwethinkaboutyieldsin2015incoal?Positiveornegative.


Well,theironoreisalargemove.It'sbothapriorandsubsequentmovemeaningthattherawmaterialcomesin,it'sprocessedandthenitgoesoutasafinishedproductofironoreandtheyields,youshouldconsidergoingforwardtobeverypositive.



©2014TheStreet,Inc.AllRightsReserved Page18 of 25


Asincludedinyourdomestic.


Butitisincludedinthedomesticcoal,yes.


Okay,that'shelpfulandthenjustoneforyou,Fredrik.Thepastfewquartersyou'vegivenuskindofsomeroughparametersorguidelinesforhowyouthinkaboutearningsinthecurrentquarterandthisisFirstQuarterisatougheronejustbecauseofthecompsandweatherlastyear.

AnycolororcommentsyouwanttogiveusonFirstQuarterearnings?I'mguessinggiventhecompsit'sgoingtobebetterthanjustdoubledigitearningsgrowthbutanyadditionalcoloryouhavewouldbehelpful.


Yes,Ithinkthat'swhatwetriedtolayoutthekeyassumptionsbyexpenseiteminthepresentationitselfsoyouknowhowwe'rethinkingaboutit.Igaveyousomeofthecomponentsthere.Clearlyyou'rerightthattheFirstQuarterIthinkwillbeastrongquarterandsupportiveofourdoubledigitearningsgrowthfortheyear.


Okay,thankyouguys.

Operator:

Thankyou.ThenextquestionisfromJasonSeidlwithCowen&Co.


Goodmorning,Jason.

JasonSeidl(Analyst-Cowen&Co):

Higoodmorning,howareyoutoday?


Great.


Justwanttofocusalittlebitonsomeofthenon-coalexportside.Obviouslywe'veseensortofRussiainandoutofthewheatmarketandthenthismorning,IthinkShellreceivedsomefavorableproductclassificationrulingsforcondensateexport.Couldyoutalkaboutthingsthatcouldprovideupsidetothenumbersontheexportsideforyouguys?


Youtalkingaboutexportintermsofcondensateorexportintermsofcoal?


Exportintermsofanything.





Non-coal.


Non-coal.


Mostofthecondensatethat'sgoingtothatI'mawareofthat'sbeingexportedoutofthiscountryismostlybeingexportedovertheGulfsoforexample,,MexicoandtheUnitedStates,acoupleofdaysagohaveamajorexchangeofcondensatesandheavypetroleumproductsthatarebeingexportedinexchangemainlythroughtheTexasrefinerysothat'swhereyou'llseemostofit.

TheEastCoasthassomecondensatesthatwillbeexportedthroughworkdown,buttheyareverysmallnumbersthatimpactussowearen'tseeingalotofthatactivityyoudescribeinthecondensates.


Okayandanythingontheexportagside?


ThesoybeanmarketisprettyheavymainlyoutofNorfolkandMobileandweareseeingquiteabitofactivityinthoseareas.


Andasafollow-upguys,gettingbacktopricing,wesawitinoursurveythatwedototheshippingcommunitythatwepublishedyesterday,whenyou'retalkingaboutanaccelerationthroughouttheyear,I'massumingthisisobviouslygoingtobeex-coalbutwhereareyougoingtogetthemostbangforyourbuck?Isthisprimarilyinyourtruckcompetitivebusiness?


Onthepricingside?


Yes.


Ithinkwe'regettingitacrossallsegmentsofourmarketplace.Ifyoulook,bargesaretightrightnow,sowe'reabletogetpricinginthoseareasandourbulkcommodities.We'reabletogetpricingparticularlyinthetrucksideofthebusinessiscomingup,sopricingrightnowisverymuchinfavorofthecarriers.


Okay,gentlemen,thankyouforyourtimeasalways.

Operator:

Thankyou.OurnextquestionisfromMattTroywithNomura.





Goodmorning,Matt.

Matt Troy(Analyst-Nomura):

Goodmorningguys.Question,alotofpeopleouttheretalkingaboutthedeclineinfuelprices,loweringtheabsolutepermilecostpertrucking.Obviouslyintermodalratesaregoingtogodownaswellasthesurchargesdeclinetherebutjustcuriousacademicallyorinpracticeareyouhearingfromanyofyourcustomersaboutadesiretoswitchfromintermodalbacktotrucking?

Somefolksarespeculating.Iwouldthinkjustcan'tswitchawholebunchofbusinessintoanindustrythatdoesn'thavecapacitybutgiventhatpriceshavecomeinIfiguredI'daskthequestion.Doyouseeitasarisktointermodalin2015?


Weabsolutelydonot.Thebigissuethathasbeenintruckingremainsthebigissueintruckingandthatisdriveravailability.MostpeoplethatI'mawareofdon'twanttheirsonstogrowuptobetruckdriverssotruckdriversbecomeanissue.

Peopledon'twanttobeawayfromhomefive,six,sevendays.There'sissuesinpassingthedrugtesttogetacommercialCDL,therearebarrierstoentrynowinbecomingatruckdriverandgettingnewClass8truckspurchasedandthecostofgettingintothebusinessismuchhigher,soit'smorethanjusthavingthecapacityitself.

It'salltheissuesthatsurrounditsoweseeintermodalinfactgrowing.OurintermodalbusinessgrewfasterlastyearthantheGDP.Thecountrydid.IfyoulookattheAARdataintermodalingeneralgrewfasterthantheeconomydidlastyear,soIthinkwhatyou'rereadingintheperiodicalsispeoplewritingthatdon'thaveanythingtowriteabout.


Rightthatisthegreatestacademicobservation.Lowerfuelsurchargesdon'tcreatedrivers.Iguessmysecondfollow-upquestionwouldbenaturalgasifyoulookatthefuturescurveit'simplyingprettymuch$3fortherestoftheyearorwellintotheyear.Justwondering,IknowtheAppalachiancoalandfromaswitchingperspectivehasbeenoutofthemoneyforsometime.

ShouldwejustthinkaboutthevulnerabilityinyourdomesticcoalbusinessbeingIllinoisbaseatcurrentlevelsat$3andhaveyoutriangulatedinyourguidanceaNatgaspriceassumptioninyourearliercommentsaboutQ1flatfortheyear,justwonderingwhatmightbeatriskbecauselasttimewesawgasdownherestockpileswereNorthof200milliontonsandwe'reatasixyearlowat130milliontonssothatobviouslywon'thurt.Justtryingtotriangulatewhatmightbevulnerableifwestayatthree?Thanks.


Well,about47-48%ofourcoalbusinesstodaycomesoutofnorthernAportheIllinoisBasin,sowetrytolookaround$3or$3.50naturalgasasanumberthatifyougetmuchunderthat,westarttohurtalittlebitinourburnsothosearethenumbersthatwetriangulateagainst.


AndIllinoisBasin,youaren'thearinganythingaboutswitchingfromthosecustomersyet?


Well,I'mnotsureexactlywhatyou'reaskingbutwhatwe'reseeingisalotofourcustomersaremovingtothe




IllinoisBasinincoalwhichisgoodforusbecauseitgivesusalongerlengthofhaul,itishigherRPU,anditisagoodthingforus.


IwasjustmoretalkingabouttheswitchingsensitivitiesofthevarioussourcingBasinsbutI'vegotit.Okay,thankyou.

Operator:

Thankyou.OurnextquestionisfromCleoZagreanwithMacquarieCapital.


Goodmorning,Cleo.

CleoZagrean(Analyst-MacquarieCapital):

Goodmorningandthankyou.HappyNewYear.Myfirstquestionisalsowithregardstothedomesticcoalbusiness.CanyouhelpusthinkjustmorespecificallyaroundthesensitivityofEPSfor15toplusorminus5%orwhicheverwayyouthinkisgoodfordomesticcoalvolumearoundthatbasecaseofflatforthisyear,whatwouldplusorminus5%domesticcoaltoEPSfor15giventheprofitabilityinthenewprofitsetup,thenewmix,andalsogiventhefixedvariablestructurethatwe'veseenaffectearningssofar,thankyou.


ThisisFredrik.Ithinkintermsoffixedvariablethere'slessofanissue.Intermsofsensitivityclearlythereissensitiveitifcoalcomesdownandisnotflatit'sgoingtobesensitivitiestoourEPSguidancebutatthesametimeaswesaidthereareopportunitiestooffsetthatsothere'salotofdifferentpiecesthatgoesintoourguidancesoIthinkthere'salittlebitisolatingspecificpieces.

Whenweaddallofthethingsupaswedidearlierandthinkaboutthebusinessasawholeandsomeofthevacancywe'reseeingincertainmarketsandsomeoftheproductivityopportunities,thepricing,wefeelwecanabsorbsomeofthosesensitivitiesonthecoalsidebutwe'llhavetowaitandseeandgetacouplequartersunderthebeltuntilwegetfullvisibilityintowhatisdoableandwhat'snotdoablefortheyear.


Thankyou.Andmysecondquestioniswithregardstooperatingratioexcludingfuel.You'vehighlightedthatyouliveapassthroughsoIwouldappreciateanyhelpyoucangiveustothinkabouttheperformanceofthebusinessexthenoiseintherevenueandexpenseline.AreyoulookingatapathForEx-fuel,anykindofprogressionthatyouhaveinmindthatyoucansharewithussowecantrackperformanceonthatbasis?Thankyou.


Wellthepositivelaginthequarteritselfhereforthefourthquarterwasabout$23millionandIthink$16millionyear-over-year,sothatwasafavorablecomingfromfuel.WealsoyousawalittlebitoffavorabilitybecausewholesalepricesIthinkcamedownfasterthantheretailpricesandit'stheretailpricethatourfuelsurchargeistiedtosowhenwepaytothepump,probablydeclinedfasterthanthefuelsurchargerevenueitself.

sothat'sanotherbenefitthatwesawherethisquarterbutoverall,franklyifyoulookatamarginexpansionandouroperatingratio,itisnotaprofitelement,iffuelpricescomedown,it'sactuallygenerallyslightlypositivetoourpathfor65%operatingratiolongerterm,butasIsaidoverall,notaprofitelement.Thereis




somelageffectsandherewesawanadditionallagperhapsinthefourthquarterorthefactthatwholesalepriceswentdownfasterthanretailpricesand--


SoI'msorry,soinalowerfuelpriceshouldweexpectthatyouarefindingiteasiertoreachthatmid60'stargetsooner?


Yes,it'simmaterialintheschemeofthingsbutifyoujustthinkaboutthefactyou'readdingforexample,$100milliontotherevenuelineandadding$100milliontotheexpenselinethisisnotaprofitdriver,theoperatingratioforthatis100%becauseyou'renotgettingamarginonthatsoasfuelpricecomesdownandyourfuelexpensegoesdown,ofcoursevolumeyouactuallygetalittlebenefitfromit.


Thankyouverymuch.

Operator:

Thankyou.ThenextquestionisfromKeithSchoonmakerwithMorningstar.


GoodmorningKeith.

KeithSchoonmaker(Analyst-Morningstar):

Goodmorning.I'dliketoaskaboutthe2%declineinchemicalsrevenueperunit.Isitsimplyamixissuewheregrowthincrudewheretheshipperprovidesatankcar[SalvatoreVitaleing]amixeffectonthisoristheresomethingelseatwork?


Absolutely.Youarecorrect.


Thusthere'snoreadthroughtolowermarginsonthisbusinessthatIcouldtrackjustfromthat?


Right,that'scorrect.


Andthenafollow-upquestionon[Moddal]shift.IthinkthecommentaryintheQuarterlyReportindicatedautomotivegrowthwasconstrainedbycustomertransportationmodeallchanges.Couldyouelaborateonthatplease?


Intheearlypartoflastyearintheheavyfreezesthatwereoccurring,someoftheautomakerspulledbusinessoffoftherailandwenttotheHollawaycarriers.TheHollawaycarrierswouldnottakethebusinesswithoutcontractdurationofaroundsixmonthsforobviousreasonsandthat'swhatyou'reseeingthere.





Thankyou.

Operator:

Thankyou.ThenextquestionisfromJustinLongwithStephens.


Goodmorning,Justin.

Just inLong(Analyst-Stephens):

Goodmorningandthanks.FirstquestionIhadwasonservice.WiththelocomotivescomingoninthenextcoupleofquartersandtheserviceimprovementsbeingcorrelatedtothisadditionalpowerasyoumentionedOscar,istheexpectationthatyoucangetbacktonormalservicelevelsthatwesawin2013bytheendoftheSecondQuarter,absentanymajorweatherevent?


Yeah,Ithinknormalservicelevels,thosewererecordservicelevelsbackthen.Ithinkwewillgraduallysteamuptothatareaasthelocomotivesarriveanditwillbegradualoverthecourseoftheyear.Notquitereadytocommittothosehigherlevelsthatquickly.

Again,wehaveaSpringpeakthatgoesfromWeek9throughWeek23throughtheendofJunesoIthinktherewillbesomelageffectbutagainIthinkyou'regoingtoseetheefficiency,theproductivityandofcoursethegrowththatwe'veseenaltogetherstarttocometogethercertainlybythesecondhalfoftheyear.


Okay,greatandsecondquestionIhadwasonpricing.Ijustwanttogetabettersenseofhowthepricingenvironmenthasimprovedandwaswonderingifyoucouldprovideanymorecoloronhowrecentrenewalshavebeentrending.Generallyspeaking,areyouseeingsomethingclosertothemidsingledigitsonrenewalsversusthe2.5-3%overallcorepricingthatyoupostedrecently?


Justin,myfriendDavidBaggstellsmenumbersarenotmyfriendsoIcan'tgiveyouaspecificnumber,butIwouldtellyouthatIamverypleasedwiththepricingthatwe'regetting.IthasbeenverypositiveandyouwillbeverypleasedwhenwereportournumbersfortheFirstQuarterthisyear.


Fairenough.Iappreciatethetime.Iknowit'sbeenalongcall,thanks.

Operator:

Thankyou.OurnextquestionisfromDonaldBroughtonwithAvondalePartners.


Goodmorning,Donald.

DonaldBroughton(Analyst-AvondalePartners):

Goodmorning,Clarence.Itturnsoutmommasaren'tsupposedtolettheirbabiesgrowuptobetruckdrivers,I




alwaysthoughtitwascowboysbutI'mgladtolearnthatthismorning.Thatsaid,ayearago,onhighwaydieselandobviouslythat'snotthepriceyouallpaybutaveraged3.96agallon.

Lookslikewe'reoncourseforittoaverage3.10agallonorlessintheFirstQuarterthisyear.Iknowyou'regettingbaseyieldandyouaredoingagreatjobtherebutjustthefuelsurchargeoverall,canyoukindofgiveussomeparameters?

Istheabsenceofthefuelsurchargeandadropfromwhatisessentially$4agallonto$3agallonoralmost,isit1%yieldheadwind,2%yieldheadwind,5%yieldheadwind?Whatdoesitrepresentforyouroverallbookofbusiness?


Idon'tthinkwehadthemathinfrontofustodothat.YoudohavethistotalfuelsurchargerevenuethatwereportedSTBthatIalsothinkisactuallyinourquarter.Youcanlookatthetotalrevenuefromfuelandthenyoucanmodelthatout,Ithinktogetasensedependingondifferenthighwaydieselpriceswhattheimpactwouldbe.

DonaldBroughton(Analyst-AvondalePartners):

AllrightI' lljustbackintoitthatwaythen,thankyou,gentlemen.


Thankyou.

Operator:

Thankyou.OurfinalquestiontodayisfromJohnMimswithFBRCapitalMarkets.


Goodmorning,John.

JohnMims (Analyst-FBRCapitalMarkets):

Goodmorning.Thanksforslippingmeinhere.Soaquestiononthechemicalbook,ifyouexcludecrudeoilandoilandgascommentsforaminuteandjustlookatmoretraditionalvolumes,canyouprovidesomecolororjustoutlookOnDemandandpricingandcontractingforyouractivitiesdownintheGulfandjustyournon-oilrelatedvolumes?


Yes.Theotherlinesofchemicalbusinessisgrownabout2-3%.That'sprettymuchinlinewithwhatthechemicalindustryhasbeengrowing.Actually,it'salittlehighontheplasticsendgrowingatabout2-3%overwhatitsbeenforthelastsixorsevenyears.

Pricinghasbeenverygoodinthechemicalsideofthebusiness,particularlyintherenewalsthathaveoccurredintheFourthQuarterandareinfactincurringintheFirstQuarter,sowe'reverypleasedwithwhatwearegettinginthepricinginthoseareas.Doesthatansweryourquestion?


Yes,itdoes.It'shelpfulandwhat'sthesplitbetweenyourtraditionalchemicalsversusyouroilandgasrightnowwithinthatsegment?





Oilandgasisamajorpartgrowingofthatportfoliobutit'stheplasticspartofthebusinessisstillthelargestbyfar.


Isthereapercentageyoucangive?Iknowyou'veputoutnumbersasfaraswhatgasisforthetotalbookbutjustwithinchemicals?


Idon'thaveitoffthetopofmyhead.


Icanjustbackintosomethingthanksalot.Otherquestionshavebeenanswered.


Thankyou.


Thankyou,everyoneforyourattentionandweappreciateit.We'llseeyounextquarter.

Operator:

Thankyou.Thisconcludestoday'steleconference.

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CSX (CSX) Earnings Report: Q4 2014 Conference Call Transcripts.t.st/media/xtranscript/2015/Q1/13011419.pdf · Event Description: Q4 2014 Earnings Call ... CSX (CSX) Earnings Report: