CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q42015EarningsCallMarketCapasofEventDate:23.11BPriceasofEventDate:22.35
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Csx(CSX)EarningsReport:Q42015ConferenceCallTranscriptThefollowingCsxconferencecalltookplaceonJanuary13,2016,08:30AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
DavidBaggs;CSXCorp;VicePresidentTreasurerandIROfficerMichaelWard;CSXCorp;ChairmanandCEOFrankLonegro;CSXCorp;CFOFredrikEliasson;CSXCorp;ChiefSalesandMarketingOfficerCindySanborn;CSXCorp;COO
OtherPart icipants
KenHoexter;BofAMerrillLynch;AnalystBrandonOglenski;BarclaysCapital;AnalystBrianOssenbeck;JPMorgan;AnalystChrisWetherbee;Citigroup;AnalystTomWadewitz;UBS;AnalystAllisonLandry;CreditSuisse;AnalystRobSalmon;DeutscheBank;AnalystAlexVecchio;MorganStanley;AnalystJasonSeidl;CowenandCompany;AnalystMattTroy;NomuraSecurities;AnalystCherilynRadbourne;TDSecurities;AnalystBenHartford;RobertW.Baird&Co.;AnalystDavidVernon;SanfordC.Bernstein&Co.;AnalystJohnLarkin;StifelNicolaus;AnalystBascomeMajors;SusquehannaFinancialGroup;AnalystJeffKauffman;BuckinghamResearch;AnalystScottGroup;WolfeResearch;AnalystJustinLong;StephensInc.;AnalystCleoZagrean;MacquarieResearchEquities;AnalystKeithSchoonmaker;Morningstar;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometotheCSXCorporationfourth-quarter2015earningscall.
(OperatorInstructions)
Foropeningremarksandintroductions,IwouldliketoturnthecallovertoMr.DavidBaggs,VicePresident,Treasurer,andInvestorRelationsOfficerforCSXCorporation.
DavidBaggs (VicePresidentTreasurerandIROfficer):
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q42015EarningsCallMarketCapasofEventDate:23.11BPriceasofEventDate:22.35
©2014TheStreet,Inc.Al l R ightsReserved Page2of27
Thankyou,Carlos,andgoodmorning,everyone.Andagain,welcometoCSXCorporation'sfourth-quarter2015earningspresentation.Thepresentationmaterialthatwe'llbereviewingthismorning,alongwithourquarterlyfinancialreportandoursafetyandservicemeasurements,areavailableonourwebsiteatCSX.comundertheinvestorsection.Inaddition,followingthepresentation,thewebcastreplaywillbeavailableonthatsamewebsite.Thismorning,ourpresentationwillbeledbyMichaelWard,theCompany'sChairmanandChiefExecutiveOfficer;andFrankLonegro,ourChiefFinancialOfficer.Inaddition,CindySanborn,ourChiefOperatingOfficer;andFredrikEliasson,ourChiefSalesandMarketingOfficer,alongwithClarenceGooden,ourPresident,willbeavailableduringthequestion-and-answersession.
NowbeforeIturnthepresentationovertoMichael,letmeremindeveryonethatthepresentationandotherstatementsmadebytheCompanycontainforward-lookingstatements.YouareencouragedtoreviewtheCompany'sdisclosureontheaccompanyingpresentationonslide2.Thisdisclosureidentifiesforward-lookingstatements,aswellastheuncertaintiesandrisksthatcouldcauseactualperformancetodiffermateriallyfromtheresultsanticipatedbythesestatements.Inaddition,attheendofthepresentation,wewillconductaquestion-and-answersessionwiththeresearchanalysts.Withnearly30analystscoveringCSXandoutofrespectforeveryone'stime,includingourinvestors,Iwouldaskasacourtesyforyoutopleaselimityourinquiriestoonequestionandifnecessary,aclarifyingquestiononthatsametopic.Andwiththat,letmeturnthepresentationovertoCSXCorporation'sChairmanandChiefExecutiveOfficer,MichaelWard.Michael.
MichaelWard (ChairmanandCEO):
Wellthankyou,David.Goodmorning,everyone.Yesterday,CSXreportedfourth-quarternetearningsof$466million,or$0.48pershare,down2%fromthesameperiodin2014.Revenuedeclined13%inthequarter,asstrongpricingwasmorethanoffsetbytheimpactoflowerfuelrecovery,a6%volumedecline,andthecontinuedtransitionintheCompany'sbusinessmix.Expensesalsodecreased13%,primarilytheresultoflowerfuelprices,lowervolume-relatedcosts,andefficiencygains.Asaresult,operatingincomedecreased12%to$791million,whiletheoperatingratioimproved20basispointsto71.6%.Inaddition,CSXremainsanindustryleaderinsafety,andservicemeasurescontinuetoprogresswellasweenter2016.Infact,Chicagooperationshavenowbeenfluidfornearly12straightmonths.
Nowturningtothenextslide,I'lldiscussfull-yearperformance.Overthepastfiveyears,CSXhastransformeditsbusinesstocontinuedeliveringsolidresults,despitetheglobalenergytransition.Asyoucanseeontheleftsideofthechart,duringthatperiod,CSXcoalrevenuealonedeclinedfrom$3.7billionto$2.3billion,acumulativereductionof$1.4billion.CSXhasovercomethatlossbysignificantlydiversifyingitsmarketmix,improvingservice,andinvestinginlong-termgrowthopportunities.Asaresult,in2015,coalrepresentedonly19%ofCSX'srevenue,downfrommorethan30%in2011.Duringthatsameperiod,shareholderreturns,includingdividendsandrepurchases,havecontinuedtorewardtheownersofourCompany,reflectingthesteadygrowthinearningspershare,whichreached$2in2015.
Our2015performancewasachieveddespitethechallengesintheenergymarket,lowcommodityprices,andastrongUSdollarthatimpactedmanyofourmarkets.Revenueof$11.8billionreflectedgrowthinintermodal,automotive,andminerals,thatpartiallyoffsetthecontinueddeclinesincoal.Improvingservice,aligningresourcesandcostsagainstalowerdemandenvironment,anddrivingefficiencygainsofmorethan$180millionhelpedgenerateoperatingincomeofnearly$3.6billionandourfirstsub-70full-yearoperatingratioat69.7%.Thoseresultsreflecttheemployees'relentlessfocusonsafetyanddeliveringservicethatsupportsstrongpricingandever-increasingoperationalefficiency,aswellasthebenefitoflowerfuelprices.Wewillcontinuetoleverageourcorestrategy,superiornetworkreach,anddiversemarketmixtocreatelong-termvalueforourshareholders.
Now,I'llturnthepresentationovertoFrank,whowilltakeusthroughthequarterlyresultsandfuture
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q42015EarningsCallMarketCapasofEventDate:23.11BPriceasofEventDate:22.35
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outlookinmoredetail.Frank?
FrankLonegro (CFO):
Thankyou,Michael,andgoodmorning,everyone.Letmebeginbyprovidingsomemoredetailonourfourth-quarterresults.AsMichaelmentioned,revenuewasdown13%,or$411millionversustheprioryear.Thiswasdrivenmainlyby$198milliondeclineinfuelsurchargerecoveriesandabout$175millionfromtheimpactoflowervolume.Atthesametime,corepricinggainsweremorethanoffsetbytheimpactofnegativebusinessmix.Volumedecreased6%fromlastyear,withcoaldrivingthemajorityofthedecline.Lownaturalgasprices,coupledwiththeimpactofsignificantfloodinginSouthCarolina,impacteddomesticcoalvolumes,whilelowcommoditypricesandthestrongUSdollarchallengedexportcoalinmanyofourmerchandisemarkets.Wecontinuetoseestrongcorepricing,whichforthefourthquarterwasup4.1%overalland4.5%excludingcoal.
Otherrevenueincreased$19millionfromlastyear,drivenprimarilybyunfavorableadjustmentstorevenuereservesintheprior-yearperiod.Expensesdecreased13%versustheprioryear,drivenmainlyby$117millioninlowerfuelprices,$107millioninlowervolume-relatedcosts,and$59millioninefficiencygains.Inordertofurtherdriveefficiencies,weclosedtwofacilitiesinourcoalnetworkandcompletedanewunionlaboragreementinthefourthquarter.Asaresultoftheseactions,weincurreda$48million,or$0.03EPSimpactinthequarter.Theseshort-termrestructuringcostswilldrivefuturebenefitsaswegaingreaterworkforceflexibilityandcontinuetoadjusttolowerdemandinourcoalmarket.Operatingincomewas$791millioninthefourthquarter,down12%versustheprioryear.
Lookingbelowtheline,interestexpensewasupslightlyfromlastyear,withhigherdebtlevelspartiallyoffsetbylowerrates.Aswehighlightedonourlastearningscall,apropertysaleclosedinthefourthquarterforagainof$80million,ora$0.05benefittoearningspershare.Thisgainwasassociatedwithanonoperatingpropertyandwasbookedbelowthelineinotherincome.Andfinally,incometaxeswere$275millioninthequarter,withaneffectivetaxrateofabout37%.Overall,netearningswere$466million,down5%versustheprioryear,andEPSwas$0.48pershare,down2%versuslastyear.
Nowletmeturntothemarketoutlookforthefirstquarter.Lookingforward,weexpectvolumestodeclineinthefirstquarter.Weexpectachallengingfreightenvironmenttocontinueastheheadwindsassociatedwithcoal,lowcommodityprices,andastrongUSdollarmorethanoffsetthemarketsthatwillshowgrowth.Automotiveisexpectedtogrowconsistentwithlightvehicleproduction,andespeciallyincomparisontoayearagowhentheautonetworkexperiencedweatherandservice-relatedcongestion.Mineralswillbenefitfromcontinuedhighwayandnonresidentialconstructionactivityandnewbusiness.Intermodalisneutral,ascontinuedseculardomesticgrowthandourstrategicnetworkinvestmentsthatsupporthighwaytorailconversionareessentiallyoffsetbycustomerlossesininternational.Agriculturalproductsisunfavorableduetolowcornprices,coupledwithweaknessinexportgrainandimportsourcingandethanol,drivenbyastrongUSdollar.Whilecorechemicalsisexpectedtoagainbeflat,theoverallchemicalsmarketisexpectedtobedown,asenergymarketscontinuetoresettoanenvironmentmarkedbylowcrudeoilpricesandchallengingspreads.
Domesticcoalwillcontinuetobeunfavorablyimpactedbylownaturalsgaspricesandaninventoryoverhangduetomildweather.For2016,weexpectdomesticcoalvolumetobearound19milliontonsperquarter.ExportcoalwillcontinuetobepressuredbythestrongUSdollarandglobaloversupply.Ourfull-yearoutlookforexportcoalvolumeisaround20milliontonswithsomedownsidesensitivity.Metalsisunfavorable,asthestrongUSdollarandhighlevelsofimportscontinuetonegativelyimpactsteelproductionlevels.Overall,despiteaslowgrowingeconomy,thefreightenvironmentcontinuestohavepronouncedchallengeswithlowcommodityprices,lownaturalgas,andastrongUSdollar.
Turningtothenextslide,letmetalkaboutourexpectationsforexpenses.Overall,weexpectfirst-quarter
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q42015EarningsCallMarketCapasofEventDate:23.11BPriceasofEventDate:22.35
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expensetobenefitfromthelowfuelpriceenvironment,aswellascontinuedproductivityandvolume-relatedcostsavings.Lookingatlaborandfringe,weexpectthefirst-quarteraverageheadcounttobedownapproximately2%onasequentialbasis,drivenprimarilybythestructuralchangesinourcoalnetworkthatweannouncedinthefourthquarter.Thisreflectsabouta10%reductionfromtheprioryear.Weexpectlaborinflationtobearound$25millionperquarterthroughout2016,inlinewiththelevelsseenhereinthefourthquarter.
LookingatMS&Oexpense,weexpectinflationtobeoffsetbyefficiencygainsandvolume-relatedsavings,inlinewiththetrendswehaveseeninthesecondhalfof2015.Inaddition,thefirstquarterwillreflectashiftinourNorthernOhiocoaloperations.HerewetookactionearlyinthefourthquartertoconsolidatefreightfromafacilityinAshtabulatoCSX'sToledodocks,whichfurtherstreamlinesourcoaloperations.Fuelexpenseinthefirstquarterwillbedrivenbylowercostpergallon,reflectingthecurrentpriceenvironment,volume-relatedsavings,andcontinuedfocusonfuelefficiency.Weexpectdepreciationinthefirstquartertoincreasearound$15millionversustheprioryear,reflectingtheongoinginvestmentinthebusiness.Finally,equipmentandotherrentsinthefirstquarterisexpectedtostayrelativelyflattolastyear,withhigherfreightcarratesoffsetbyimprovedcarcycletimes.
Nowletmetalkaboutourcapitalinvestmentplanforthisyear.In2016,CSX'stotalcapitalinvestmentwilldeclineover$100millionfromthe2015levelto$2.4billion,whichincludes$300millionforPTC.Similarto2015,weexpect2016corecapitalinvestmenttobehigherthanourlong-termguidanceof16%to17%ofrevenueduetoourlocomotivepurchasecommitment.Thisinvestmentinnewlocomotivesexpandsourabilitytorunlongertrainsandwewillcontinuestoringolderlocomotivestomaximizetheefficiencyofthefleet.
Lookingatourcapitalallocationfor2016,youcanseethatoverhalftheinvestmentwillbeusedtomaintaininfrastructuretohelpensureasafeandfluidnetwork.Themajorityofour2016equipmentinvestmentisfocusedonupgradingourlocomotivefleet.Wetookdeliveryof200newlocomotivesin2015andexpecttoreceiveanother100newlocomotivesin2016,whichwillcompleteourexistinglocomotivepurchasecommitment.Inaddition,wewillcontinuetofocusonstrategicinvestmentsthatsupportlong-termprofitablegrowthandproductivityinitiatives.Hereweareprioritizingtheseinvestmentsinourintermodalbusiness,infrastructureprojectsthatsupportnetworkfluidity,andtechnologyinitiativestoenableproductivity.Finally,lookingatourinvestmentinPositiveTraincontrolwehaveinvested$1.5billionthroughtheendof2015andweplantoinvestanadditional$300millionin2016.CSXiscommittedtomeetingthenewlegislativetimelineforPTC.AswelookatthepathtoachievingthisgoalandwithPTCnowextendingoveralongerperiodoftime,wenowbelievethetotalcostofPTCimplementationwillbeabout$2.2billion.
Nowletmewrapuponthenextslide.Overall,CSXdeliveredsolidfinancialperformancein2015,despitesignificantmarketchallenges.Full-yearEPSincreased4%fromtheprioryear,whileouroperatingratioimproved180basispointsto69.7%.Revenuein2015waslowerthanweinitiallyexpected,withvolumedeclining2%forthefullyear.Butourcontinuedfocusonpricingfortherelativevalueofrailservice,drivingefficiencygains,andaligningresourcestothesofterdemandenvironmenthelpedtooffsetthosevolumeheadwinds.
Lookingahead,weexpectthecoalheadwindstocontinuein2016.AsImentionedearlier,domesticcoalvolumein2016isexpectedtobearound19milliontonsperquarter,whilefull-yearexportcoalvolumeisexpectedtobearound20milliontons,again,withsomedownsidetotheexportestimate.Inaddition,forthefullyear,wewillbeoperatinginamorechallengingfreightenvironmentthanwesawin2015.Naturalgasandbroadercommoditypricesareexpectedtoremainatlowlevels,andthestrengthintheUSdollarisexpectedtopersistduringtheyear.Furthermore,in2016,wewillbecyclingacouplelargeitemsthatbenefitedour2015results.Namely,wereceivedabout$100millioninliquidateddamagesandhadan$80millionpropertygainin2015,whicharenotexpectedtorecurin2016.Asaresult,wecurrently
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q42015EarningsCallMarketCapasofEventDate:23.11BPriceasofEventDate:22.35
©2014TheStreet,Inc.Al l R ightsReserved Page5of27
believethat2016earningspersharewillbedownfromlastyear.
Lookingatourexpectationsfor2016,wewillcontinuetorightsizeresourceswithlowerdemandandpursuestructuralcostopportunitiesacrossournetwork.Inaddition,weexpecttodeliverproductivitysavingsofaround$200millionin2016,whichbuildsonthe$184millionofproductivitythatweachievedin2015.Overall,weremainintenselyfocusedthisyearondeliveringaserviceproductthatmeetsorexceedsourcustomers'expectations,achievingstrongpricingtosupportreinvestmentinthebusinessanddrivingefficienciesacrossourentirecoststructure.
Withthat,letmeturnthepresentationbacktoMichaelforhisclosingremarks.
MichaelWard (ChairmanandCEO):
Well,thankyou,Frank.CSXhascontinuedtodeliversolidresultsforitsshareholders,despitethetransformationaldeclineintheenergyenvironmentandthechallengingmarketconditions.Theeffortsofourdedicatedemployees,combinedwiththediversifiedbusinessmixandthepremiernetworkintheeast,havehelpedusovercomethesignificantlossesincoal.
AsFrankmentioned,2016willbeamorechallengingyear.Volumeinthefirstquarterandforthefullyearwilldecline,asgrowthinsomemarketscontinuestobeoffsetbythesignificantimpactofcontinuedcoaldeclines,lowcommodityprices,andastrongUSdollar.Wearetakingnecessaryactionstomanageourbusinessinthatenvironment,includingmakingstructuralandnetwork-widechangestomatchresourcesandcostswithbusinessdemand,drivingfurtherefficiencygains,andremainingfocusedonstrongpricingthatreflectsthevalueofCSX'sservice.Inresponsetothefurtherchallengesexpectedin2016,we'vealsodecreasedthecapitalbudgetbymorethan$100million.Weexpecttoinvest$2.4billionthisyearasweremaincompetitivetopreservingsafety,service,andefficiencyforcustomersandcommunitiesalike,whilepositioningCSXforthefuture.
Aswelooktothefuture,thisCompanywillcontinuetotransitionitsbusinesstowardlong-termprofitablegrowthopportunitiesinthemerchandiseandintermodalmarkets.Inthatregard,weremainfocusedonachievingamid-60soperatingratiolongerterm,asweexecuteourcorestrategyofmeetingorexceedingcustomerneedstosupportstrongpricingforthevalueofourrailserviceandcontinuouslyimprovingoperationalefficiency.
Withthoseefforts,weareconfidentthatCSXwillcontinuetobeapreferredserviceproviderforcustomerswhofaceagrowingpopulation;amoreintegratedglobaleconomy;andtheneedformorereliable,moresustainablesupplychains.
Now,wewillbegladtotakeyourquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
KenHoexterfromMerrillLynch.
MichaelWard (ChairmanandCEO):
Goodmorning,Ken.
KenHoexter (Analyst-BofAMerrillLynch):
Hi.Goodmorning.Michael,goodjobinadifficultenvironment.IfIcouldjusttalktoyouabouttheoutlook
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q42015EarningsCallMarketCapasofEventDate:23.11BPriceasofEventDate:22.35
©2014TheStreet,Inc.Al l R ightsReserved Page6of27
here?
Whenyouthinkaboutearningsgoingdown,canyou--doyouhavecomfortwhenyoulookattheeconomyputtinganyscaleonthat?
Andwithinthat,itseemedlikecoalandintermodalratedeclineswereover8%.Iunderstandfuelandmixwereabigpartofthat.
Butcanyoutalkaboutthecompetitivelosses?Isthatsomethingwhereyou'reseeingincreasingpricepressurewiththat?Areweseeingthecompetitionincreasetheirfocusonpricingtowinsomeofthoseintermodalcontractsthatyounotedhadbeenlost?Becauseitseemslikethevolumeoramountofthosehadbeenaccelerating.Maybeyoucouldjusttalkalittlebitaboutthatandtheoutlook.
MichaelWard (ChairmanandCEO):
Good,broadquestionthere,Tom.Ken,I'msorry.SoFredrik,maybeaddresssomeofthemarketconditions.
FredrikEliasson (ChiefSalesandMarketingOfficer):
Sure.Intermsofthepricingforthequarter,asyousaw,ourex-coalpricingactuallyimprovedfromthethirdquarter,wentfrom4.4%inthethirdquarterto4.5%hereinthefourthquarter.All-inwentdown,andtherereallyisareflectionofwhatwedidinexportcoalmarkethereaswe'renowinapositiontoactuallyhavesomesurplusasset.Again,aswegetthenetworkrunningalotbetterandverystrongserviceperformance,wedohavesomeexcesslocomotives.
We'veseentheexportmarketdeteriorate,andasaresultofthat,wefeltthiswasatimewhenwewentbackandrevisitedwhatwecoulddotooptimizeourbottomline.Thisisonemarketwhereweactuallydon'thavefuelsurchargein,andasaresult,thisfuelpricehasdeclinedthroughouttheyear.
Wedidfeelthattherewasstillanopportunitytodoalittlebitmorethereandstillmakemoneyonthat.Whatyou'reseeingonthepricingsideintheall-inisreallythereflectionofwhatwe'redoingintheexportcoalmarket.Thecorepricingactuallysequentiallyimprovedquarteroverquarter.
MichaelWard (ChairmanandCEO):
Frank,youwanttoaddresssomeofthe--
FrankLonegro (CFO):
Yes,Ken,ontheEPSfortheyear,you'reright,wedidguidetoEPSbeingdownonareportedbasisversustherecord$2asharethatwedeliveredin2015.Wetriedtogiveyouguidanceintermsoftheone-timeitemsthatwe'recyclingintermsoftheliquidateddamagesandthepropertysale,thecontinuedtransformationintheenergysector.Soweupdatedthecoalguidancebothonthedomesticsideandtheexportside.
Andthentriedtogiveyousomeviewintothebroadereconomy.Andclearly,thoseareontheindustrialsidebeingsuppressedbyacombinationoflowcommoditypricesandthestrongUSdollar.
ButthisCompanyhasremainedrelentlesslyfocusedondrivingthethingsthataremostwithinourcontrol.Asyousawourperformancethisyear,or2015Ishouldsay,intermsoftheright-sizingthatwedidandtheefficiencygainsthatwedeliveredin2015andtheprojectionsof$200millionaswegetinto2016,we'vegotanimprovingserviceproduct.
Fredrikjustmentionedthestrongpricingforourshareholders.It'slikelygoingtobeauniqueyearforus
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q42015EarningsCallMarketCapasofEventDate:23.11BPriceasofEventDate:22.35
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in2016,andafterthat,wefullyanticipateEPSgrowthtowardthatpathofmid-60slongerterm.
FredrikEliasson (ChiefSalesandMarketingOfficer):
AndthenKen,inthisoneverybroadquestionthatyouasked,I'llcomebacktotheinternationallossesthatwereferredto.We'vehadseveralnowoveraperiodoftimethatwillbewithusthroughout2016.Andaswethinkaboutwhereweare,we'regrowingwithourexistingcustomersverywell,buttherehasbeensomecustomersthatwelost.
Andclearly,fromourperspective,wefeelthatwehaveaverystrongserviceproductrightnow.Wehavewhatwethinkisasuperiornetworkreach.Sotheonlythingwecanassumeisthattherearefactorsoutsideofourcontrolthathasallowedustolosethattraffic.
KenHoexter (Analyst-BofAMerrillLynch):
Great.Appreciatethetimeandinsight.Thankyou,guys.
Operator :
BrandonOglenskiofBarclays.
MichaelWard (ChairmanandCEO):
Goodmorning,Brandon.
BrandonOglenski(Analyst-BarclaysCapital):
Goodmorning,everyone.Thankyoufortakingmyquestion.Andsimilarly,prettygoodresultsinthedifficultenvironment.Socanwetalkmorebroadlyaboutwhatcouldbecomeamanageablelevelofvolumedeclinewherewecouldthinkearningsgetbacktoflat,wecangetbacktooperatingratioimprovement,ormaybeyou'renotevensuggestingyoucan'tgetoperatingratioimprovementthisyear.Butcanyoutalktolevelsinthenetworkwhereyou'dfeelcomfortablesayingourcostperformanceandourefficiencyplancangetearningstorightsize,ifnotevengoupalittlebit?
MichaelWard (ChairmanandCEO):
Ithinkona2016basis,obviously,asImentioned,it'sgoingtobeabitofauniqueyear,continuingresetsintheenergyenvironment.Andontheoperatingratioquestionfor2016,obviously,it'sgoingtobedifficulttosustainasub-70performance,especiallygivenwhatwe'recyclingandthecoalprojectionsthatwe'vegivenyouandtheuncertaintyintheindustrialeconomy.
Butthenagain,it'sJanuarythe14th.It'sthemiddleofthefirstmonthoftheyear.We'vegotagreatnetwork,asFredrik'smentioned.We'vegotatrackrecordofsuccess.Wehaveimprovingserviceproducts.
Sowe'regoingtoberelentlessintermsofourfocusonthethingsthataremostwithinourcontrol.Andsothosearethethingstakegiveusconfidencethatthefuturebeyond2016isapositiveone.
BrandonOglenski(Analyst-BarclaysCapital):
Isthereanywaythoughtoquantifyforfolksonthecalljustatabroadlevel,ifvolume'sdownlowsingledigitsormidsingledigits,doesthatbecomemoreproblematic?I'mtryingtoquantifyforfolkswherethelossinearningscouldstop.
MichaelWard (ChairmanandCEO):
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q42015EarningsCallMarketCapasofEventDate:23.11BPriceasofEventDate:22.35
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Brandon,nottoberepetitive,butobviously,theonetimers,clearlythosecouldbeeasilydefined.Ithinkwe'vegivenverystrongguidanceastowhereweseethecoalmarketthisyear.Obviously,alittlebitofpotentialdownsideintheexport.It'salittlehardtogaugethisearly.
Ithinkprobablythewildcardistherestoftheeconomy,anditisveryearlyintheyeartotrytogaugethat.Obviously,Ithinkifyoulookatmostprognosticators,they'resayingthefirsthalfoftheyearprobablylooksweakontheindustrialside,butpotentially,itrecovers.Andwedon'treallyhaveabettercrystalballthanthatacoupleweeksintotheyear,andthat'sprobablythewildcardintheentirething.
We'regoingtodrivetheefficienciesover$200million.Wewilltakeactionstoalsoreflectthelowervolumes,whichwillbeinadditiontowhatwedoontheproductivityside.AndIthinkwiththoseparameters,itshouldbeabletogiveyousomerelativeideaofwhattheexpectationscouldbe.
BrandonOglenski(Analyst-BarclaysCapital):
Okay,guys,thankyou.
Operator :
BrianOssenbeckofJPMorgan.
MichaelWard (ChairmanandCEO):
Goodmorning,Brian.
BrianOssenbeck(Analyst-JPMorgan):
Goodmorning.Thankyoufortakingmycall.Iwascurious,inthe19milliontonsperquarterguidanceyouhaveindomestic,whatlevelofdestockingfrominventoriesdoyouhavereflectedinthere?
You'veoutlinedsomedownsiderisktoexportcoal.Iwasjustwonderingwhatyourthinkingisonthedomesticsidefromtheutilitystockpileandalsowhatlevelyouthinknaturalgaswouldbe?
FredrikEliasson (ChiefSalesandMarketingOfficer):
Obviously,wedon'tforeseenaturalgasreboundingsignificantthanfromwhereitistoday.Andasaresult,mostlikelyfortherestoftheyear,weexpectourcoalplantsthatweservetobedispatchedlast.Weareseeingobviouslyexcessstockpilesrightnow.Ifwelookatwhereweare,we'reprobablyinthe110sorsointermsofthesouthandmoreinthe80rangeinthenorthernpartofournetwork.Weshouldprobablybeinthe55to70range.
Soaswethinkaboutthat19millionofdomesticcoal,itreallybreaksdownintotwocomponents.Oneisthatutilitycoal,whichisabout14milliontonsandsteelindustrial,about5milliontons,tomakeupthe19.Wedidabout13.6hereinthefirstquarter.Andsowe'reessentiallysayingwewillcontinuethatrunrate.
Weexpectsomedestockingtooccurovertheyear,buthowmuchreallywillbedependentontheweathersincewenowaredispatchedlast,we'reessentiallypeakers,sowe'reverymuchweatherdependent.Ifyouhavefavorableweatherconditionsfromarailroadperspectiveorutilityperspective,thenyoucanseeamoresignificantdestocking.
Ifyouhavecontinuedthesortofweatherpatternwesawinthefourthquarterwhereheatingdegreedayswereactuallyoffbyabout25%to30%offnormal,thenthatwillbemuchmorechallenging.Buthopefully,wewon'tseethatandwewillseesomedestockingoccurwithintheguidancethatweprovided.
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q42015EarningsCallMarketCapasofEventDate:23.11BPriceasofEventDate:22.35
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BrianOssenbeck(Analyst-JPMorgan):
Okay,thankyou.Andtheotheronerelatedtogas,thatwouldbecoaltogasswitching,difficulttotellbutfromastructuralperspective,arethereanypocketsinthenetwork,perhapsinthenorthneartheMarcellusandUticaShalewhereyouwouldexpecttoseesomemoregasplantsbeingbuiltthatcouldperhapsprovidealittlebitofincrementalpressureontheresttothenetwork?
FredrikEliasson (ChiefSalesandMarketingOfficer):
No,IthinkthatalltheswitchingthatcanoccuralreadyoccurredbackinMarchorApriloflastyear.Whatwehaveseenisinsomeinstances,weareseeingsomeofthecoalburnersactuallynowburningsomenaturalgasinconjunctiontocoalfiringitwithnaturalgas,thathashadalittlebitofanincrementaladditionalnegativeimpactonus.Butalltheswitchingthatcanoccurhasalreadyoccurred,andwearebeingdispatchedlastortheutilitiesthatweservearebeingdispatchedlast.
BrianOssenbeck(Analyst-JPMorgan):
Okay.Thankyouforyourtime.
Operator :
ChrisWetherbeefromCiti.
ChrisWetherbee (Analyst-Citigroup):
Thankyou,goodmorning.Wantedtoaskaboutthecoalnetworkandwhereyouareintermsofpotentialstructuralchangesthatyou'redoing.Yousaidsomeactionsinthefourthquarter.I'mcuriouswhatelsecanbedoneasyoumoveforwardthrough2016giventheoutlook.
Andthenmaybehowthattiesintoproductivityandbenefitsthatyou'regettingandthegreatrunrateinthefourthquarter.I'mcuriouswhatyoucouldpotentiallybetheupsidetothat200numberin2016.
CindySanborn (COO):
Okay,Chris.Goodmorning,thisisCindy.Asfarasstructuralcosts,youdidmentiontheactionsthatwetookinthefourthquarter.AndasItalkedinourthird-quarterrelease,everythingisonthetable,notjustinourcoalnetworkbutalsoinourbroaderfootprint.Andouropportunitiesthatwe'relookingforaretodrivedensity,maximizeassetutilization,anddriveoutcost.
Facilitiesarestill--maybesomeopportunitiesthere.Ithinklinesegmentswilltakealittlebitmoretime.Theyinvolvecustomersandotherconstituenciestherethatmakethosealittlebitmorelongerterm,butwearelookingatallofthese,andaswefindopportunitiesandmakeannouncements,we'llobviouslysharethatpublicly.Butwehavenotgivenuponcontinuingtofindwaystomakeourfootprintmuchmoreconsistentwiththedemandthatisputonit.
Andyouaskedanotherquestionaboutproductivity.CouldIaskyoutorepeatthat.
ChrisWetherbee (Analyst-Citigroup):
Sure,justwantedtogetasenseofmaybehowthecoalnetworktiesintotheproductivity,the$200millionofproductivity?Andthengiventherunratethatyouhadinthefourthquarterwhichwasabitabovethatlevel,howdoyouthinkaboutmaybepotentialupside?Istheremorethatwecouldseefromproductivityin2016?Thankyou.
CindySanborn (COO):
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
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Sothinkingaboutproductivity,we'vesaidwe'regoingtobeabletoachieve$200millioninproductivitysavingsinadditiontotheright-sizingactionsthatwe'retaking.Ithinkwhenyoulookatthe$200millionofproductivity,about$100millionisalready--thoseinitiativeshavealreadybeencompleted,andwefeelreallygoodaboutthat.Andtheotherinitiativesareinflightandwefeelgoodaboutthat.
Thereisn'tnecessarilyatieornon-tietothecoalnetwork.It'sall--it'sbroad-basedandit'severywhere.Andasfarastheright-sizinginitiatives,justI'llcommentonthat,eventhoughit'snotnecessarilyyourquestion;itmightbesomethingyou'rethinkingabout.Thewaytothinkaboutthatisthefourthquarteristhepastis[prologue].Wewillberelentlessondrivingoutcoststhatarevolume-relatedasweseedemandgodown.Andthenintheopposite,asMichaelmentioned,asweseeopportunitieswheredemandcomesback,wewillbeabletobringbackthoseresources.
ChrisWetherbee (Analyst-Citigroup):
That'shelpful.Thankyouforthetime.Appreciateit.
Operator :
TomWadewitzfromUBS.
MichaelWard (ChairmanandCEO):
Goodmorning,Tom.
T omWadewitz (Analyst-UBS):
Yes,goodmorning.Wantedtoaskyouhowmaybetrainstarts,justabrieffollow-ononthat.Andmaybeonpricing,Idon'tknowifyouwanttogivemeatwoforoneornot.
Thetrain,Cindy,justaquick,howmuchweretrainstartsdowninfourthquarterandmaybewhatthatcouldbein2016?Andthenonthepricing,Idon'tknowifyouansweredthisone,Kenwasonearlier,butdidyougiveusasenseofwhatcorepriceorsame-storepricemightbein2016oristhatsomethingthatyoucancommenton?Thankyou.
FredrikEliasson (ChiefSalesandMarketingOfficer):
Letmejusttakethepricingquestion,becausethat'sprobablythesimplestone.Wereallydon'tforecastpricing.We'regoingtoprovideyoueachandeveryquarterwherewecomeout.Thekeythingisthatyoushouldknowthatwe'realwaysfocusedonpriceandmakingsurewegettheappropriatevaluesowecontinuetoreinvestinourbusiness.
Aswethinkaboutourpricingrightnow,wehaveanincrediblystrongserviceproduct.It'simprovedsignificantlyoverthelastsixmonths,aswenowhavetheresourcesinplace.There'salotofcontractsthatwestillhaven'tbeenabletotouchsincereallythestep-functionchangethatoccurredinearly2014.
Thecontractsideonthetruckingsideisstillholdingupokay,eventhoughthespotmarketisverysoft.Andtheykeythingforourteamistocontinuetosellthroughthisdowncycleandmakesureweprovidevaluetoourcustomersbysellingalonger-termcommitmentintermsofmakingsuretheyhaveaccesstoournetworkandsothatweworkthroughthisdowncyclerightnowandsellforthelongterm.
CindySanborn (COO):
Tom,onstarts,Iwouldsayprobablyabout1,000startsperweekthatarescheduledstartsareout,andobviouslystartswillcomeoutthatarevolumerelatedmoreontheunittrainside.
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T omWadewitz (Analyst-UBS):
Canyougivethatatpercentagechange,likewhatpercenttrainstartsweredownmaybeinfourthquarterandwhattheymightbein2016?
CindySanborn (COO):
Idon'thaveapercentagerightinfrontofmethere,Tom,butIcantellyouthatourtrainlengthinitiativeshaveobviouslydrivenalotofthisopportunityand--
FrankLonegro (CFO):
Fromwhat,fromthebeginningoftheyear,Cindy,about15%.
CindySanborn (COO):
Forthetotalyearof2015they'reup8%,from2014versus2015,andinthefourthquarterthey'reup14%fromthefourthquarterof2014tothefourthquarterof2015.
T omWadewitz (Analyst-UBS):
Thedeclinesyearoveryearintrainstartsyou'resaying?
CindySanborn (COO):
I'msayingtrainlengthsintermsof--
T omWadewitz (Analyst-UBS):
Trainlengths,okay,gainintrainlengths.Okay,sorry.
CindySanborn (COO):
Whichthentranslatesinto1,000startsperweekwhichwetalkedabout.Soitgivesyouapercentageandgivesyousomesenseofwherewestandonapercentagebasis.
T omWadewitz (Analyst-UBS):
Okay.Yes.Thosearestronggains,especiallygiventhevolumeheadwinds.Okay.Allright.Thankyouforthetime.
Operator :
AllisonLandryfromCreditSuisse.
MichaelWard (ChairmanandCEO):
Goodmorning.
AllisonLandry(Analyst-CreditSuisse):
Goodmorning.Thankyou.SogivenallthedebatesurroundingM&Aandbothoftheeasternrailstalkingaboutgettingtoa65ORoverthenextfewyearsandsomeotherssaying60shouldbethebogie.First,couldyouhelptobookendatimeframeforwhenyouthinkyoucanachievethe65?Andwhat,ifany,yourplanisfromalonger-termperspectivetoclosethegapwithyourpeerstoultimatelyachievea60OR?
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FrankLonegro (CFO):
Hey,Allison.It'sFrank.Obviously,wecan'tcommentonwhatotherrailroadsareprojectingintothefuture.Butthechallengingenvironmentthatweseein2016doesnotinanywaydiminishourconfidenceintheabilitytodeliverthemid-60soperatingratiolongertermthatwehaveguidedyoutowardinthepastandagaintoday.Asyouknow,we'vegotanawfullygoodnetwork,aworld-classnetworkintheeast,andyou'veseenoursuccessovertime,bothintermsofdeliveringmarginimprovementandthecosttakeoutthatCindyreferenced,inadditiontotheoperatingsideontheG&Aside.
Theeffortsthatwe'retakingnow,especiallyinanimprovingenvironmentinthefuture,isgoingtohelpusimprovemarginsinameaningfulbasisasthatimproves.Butaswesitheretoday,basedontheforwardviewof2016,itjustseemsalittleinappropriateforustoguideonaspecifictimeframerightnow.
AllisonLandry(Analyst-CreditSuisse):
Okay.Andjustaclarificationquestion,doyouthinkthatatsomepointinthefuture,isthereanythingstructuralthatwouldpreventCSXfromachievinga60OR?
FrankLonegro (CFO):
Wedon'tseeanythingstructuralthatwouldimpedeusfromgettingtothemid-60sandthroughthemid-60s.Obviously,it'sgoingtodependonawholehostofthings.Andagain,asMichaelsaid,thecrystalballisalittlecloudyin2016,andobviouslyasthatclarityimproves,we'llbeabletogiveyoumoreguidancearoundthat.
AllisonLandry(Analyst-CreditSuisse):
Great.Thankyouforthetime.
Operator :
Thankyou.ThenextquestionwillbecomingfromRobSalmonfromDeutscheBank.
MichaelWard (ChairmanandCEO):
Goodmorning,Rob.
RobSalmon (Analyst-DeutscheBank):
Hey,goodmorningandthankyouforthequestion--Thankyoufortakingmyquestion.Fred,ifIcouldtakeitbacktotheintermodaldiscussion.Youhadalludedtoinsomeinternationalcontractlossesthathavehappenedthroughtheyear.
Intheguidanceit'simplyingaroughly70,000-unitsequentialdecline,whichismuchmorethannormalwewouldseeinQ1versusQ4.Wasthereanincrementalcontractlossinthefourthquarterorareyouguyscontemplatingadditionalinventorydestockingthatweshouldbethinkingaboutinthefirstquarter?
FredrikEliasson (ChiefSalesandMarketingOfficer):
I'mnotsurewhichguidanceyouarelookingat.Wehavethefactthatwehavetheintermodalbusinessflat,isthatwhatyou'rereferringto?
RobSalmon (Analyst-DeutscheBank):
Yes,it'saninaggregate,intermodalcarloadsbeingroughlyflat.Iwasjusttakingaflattishnumberand
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comparingthatsequentiallytothefourth-quartercarloadsthatwesawandjustcuriouswhat'sdrivingtheworse-than-normaldropoffinQ1,whetherit'sanincrementalinternationallossorsomeinventorydestockingthatyou'vegotcontemplatedorsomethingyou'rehearingfromcustomers?
FredrikEliasson (ChiefSalesandMarketingOfficer):
Sequentially,fourthquartertofirstquarterisaverydifferentstory,obviouslywiththepeakthatwe'reseeinginthefourthquarter,especiallyaroundsomeofourpartialbusinessandsoforth.Ithinkthat'smoreofanormalthing.
Ifyouthinkaboutourintermodalbusiness,there'stwocomponentstoit.We'vetalkedabouttheinternationalsidewherewehavehadsomecompetitivelosses,andyou'regoingtocontinuetoseethatthroughout2016.However,onthedomesticside,wearehavinggoodcontinuedsuccesswithourH2Rinitiative,andwe'realsoseeingsomeadditionaloutsizegrowthhereoverthelastprobablysixmonthsandwillprobablycontinuethefirsthalfofnextyear.
Wehaveonedomesticcustomerthatiscontinuingtoshiftadditionaltraffictous,whichisreallyadecisionthattheyhavemade;there'snothingthatwehavedonetoincentivizethat.Theyseemtohavewantedtodiversifytheirportfolio.Andasaresult,wethinkthedomesticbusinesswillcontinuetobestrong,atleastforthefirsthalfoftheyearandprobablybeyondthat.Westillthinkthere'sopportunitytogrowevenifthatshiftsubsides.
RobSalmon (Analyst-DeutscheBank):
Gotit.Andasafollow-up,whendoyoulapthefinalpieceoftheinternationalcompetitorlosses?ShouldIthinkaboutthatasQ4of2016orearlier?
FredrikEliasson (ChiefSalesandMarketingOfficer):
Yes,thatiscorrect,Q4of2016.
RobSalmon (Analyst-DeutscheBank):
Andisthattheendorbeginning?
FredrikEliasson (ChiefSalesandMarketingOfficer):
No,no,sowewillhaveoneaccountthatwe'rejustreallykickinginandhavinglosthereinthefirstquarter,soyouwillseeit[thewhole]throughallof2016.
RobSalmon (Analyst-DeutscheBank):
Okay,thatmakessense.Thankyouforthetime.
Operator :
Thankyou.ThenextquestionwillbecomingfromAlexVecchiofromMorganStanley.
MichaelWard (ChairmanandCEO):
Alex,goodmorning.
AlexVecchio (Analyst-MorganStanley):
Goodmorning,thankyoufortakingthetime.Myquestioniswithrespecttotheguidanceforearningstobedownnextyear.Youhadcalledoutabout$180millionoftailwindsin2015frompropertygainsand
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liquidateddamages,whichisroughly$0.11to$0.12ashare.Somyquestionisifweweretonormalizeforthosenumbers,wouldyoustillexpectyourcore,ifyouwill,EPStobedownin2016orwoulditberoughlyflatifweweretonormalizeforthosefigures?
FrankLonegro (CFO):
SoIthinkwegaveyouacoupleotherdatapointstolookat.Clearly,wegaveyounewcoalguidancetodaythatisdownfromwhatwehadtelegraphedonthethird-quartercall.Sothat'sclearlysomethingtothinkthrough.Andthenonthebroadermerchandisesidewiththeindustrialsectoralittlesluggishhere,sothat'ssomethoughts.
Butthenagain,ontheotherside,continuedstrongpricingforanimprovedserviceproductandtheefficienciesandright-sizing,sothere'sgoingtobesomeplusesandminusaswegoforward.Butintermsofyouroriginalwayofthinkingaboutit,youdohavetonormalizeit,andthenreallylookattheplusesandminusesfromthere.
MichaelWard (ChairmanandCEO):
TheotherthingIwouldaddtothat,Alex,isobviouslyoverthelastcoupleyears,we'vebeenaabletogrowourothermarketstooffsetthetimethedeclineincoal,sowe'regoingtohavecontinuingdeclineincoalhereandanuncertainindustrialeconomy.Soagain,that'sthepiecethat'sleastclear,butIthinkitreallydependsonwhathappenswiththerestofthatmarket.
Weknowwe'llgettheproductivity.Weknowwe'llcontinuetonetworksizeproperly.Weknowwe'lldothepricing.Soreallythewildcardinthatquestionwouldbewhatdoestherestoftheeconomydo.
AlexVecchio (Analyst-MorganStanley):
Thatmakessense.That'shelpful.Justaquickfollow-uponthefirst-quarterguidance.Canyoumaybehelpusquantifyalittlebithowmuchofayear-over-yeartailwindyou'dexpectthelowerincentivecomptobeonthelaborexpenselineinthefirstquarterandmaybethrough2016?
FrankLonegro (CFO):
Yes,soobviouslyontheincentivecomp,theplanresetsatthebeginningofeveryyear.Sowehadfavorabilityinthebackhalfof2015astheyearplayedoutdifferentlythanwehadoriginallyprojected,andwedisclosedthattoyouonaquarterlybasis,sobeonthelookoutforthatone.
IntermsoftheQ1EPS,obviouslybasedonthecyclingofthe$100millioninliquidateddamagesandadifferentdemandenvironmentofthefirstquarterof2015versusthefirstquarterof2016,especiallyincoal,that'sgoingtoimpactus.Andthenthedemandenvironmentthatwetalkedabout.Again,you'regoingtohavetolookattheimprovedserviceandtheright-sizingandtheefficienciesandthepricingperformance,andthatwillultimatelyhelpsusgivesomeguidanceintermsofhowfarquarteroneof2016willbedownversusreported2015.
AlexVecchio (Analyst-MorganStanley):
Okay,that'makessense.Helpful.Appreciatethetime.Thankyou.
Operator :
JasonSeidlfromCowen.
MichaelWard (ChairmanandCEO):
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
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Goodmorning,Jason.
JasonSeidl(Analyst-CowenandCompany):
Goodmorning,gentlemen,howiseveryone?
MichaelWard (ChairmanandCEO):
Great.
JasonSeidl(Analyst-CowenandCompany):
Fred,IwanttogobacktosomethingIthinkyoucommentedabout,yourtruckcompetitivepricing.Youmentionedthatalthoughtruckspotpricingwasdown,contractwasholdingup.Ifcontractstartstorollovertomeetwherespotis,howmuchpressureisthatgoingtoputonintermodalpricing?Howshouldwelookatthat?
FredrikEliasson (ChiefSalesandMarketingOfficer):
Idothinkthatweareholdingupokay.It'sclearlygottensofterthroughouttheyear,evenonthecontractside,andintermodalsideiswherewedoseemostofthatdirectpressure.Now,youknowthatstillwehaveaprobably10%to15%gapbetweenwhatthetruckpricesareandwhereourpricesare.
Oneofthekeythingsintheintermodalspaceisastrongserviceproduct.Andaswethinkaboutourserviceproductherethisyearenteringinto2016,itisclearthatit'sverydifferentthanitwasayearago,andthatisalsogoingtobeveryhelpfulasweapproachcontractseasonandweputnewcontractsinplace.
JasonSeidl(Analyst-CowenandCompany):
Okay.Butintermsofifyoujustsayyoumakesomeserviceimprovementsandyouseethetruckpricingtakeastepdown,isitgoingtobetoughertomaintainyourpricing,evenwithasuperiorserviceproduct?
FredrikEliasson (ChiefSalesandMarketingOfficer):
Ithinkit'stooearlytotell.Ithinkwe'vetriedtostayawayfromforecastpricing,butdirectionally,you'reright.Obviously,thelongerthissoftnessisthere,theharderitisgoingtobetomaintain.
Thekeychallengeforourteamistomakesurethatourcustomersareawarethatwhilethere'sasoftnesshererightnowin2016,Ithinkallofusstillknowthatthemacrodriversthatwetalkedaboutforalongtimearestillprevalent.
Aswethinkaboutsomeoftheproductivitychallengesthatthetruckingindustrywillfaceaswegetto2017withtheelectroniclogs,asunemploymentcontinuestocomedownit'sgoingtobehardertoretainthedriverswithoutsizedincreasesindriverpay,sowearefacingasoftness.Ithinkalsothough,ourcustomersareacknowledgingthatisprobablytemporary,assomeofthesemacrofactorswillcomebackintoplay.
JasonSeidl(Analyst-CowenandCompany):
Fantastic,andmyfollow-up,Michael,giventherecentcommentsbytheSTBonmergersandalsotheproposedmergerorthetalkedaboutmergerbetweenCPandNS,what'sthelikelihoodthatyouseethatthecurrentBoardwouldapproveacombination?
MichaelWard (ChairmanandCEO):
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That'saverytimelyanddifficultquestiontoanswer,Jason.Asyouknow,therehasn'tbeenanymergersunderthecurrentregulatoryenvironment.Thatisareallycomplicatedquestion;it'sprobablybetteraddressedbytheSTB.Butasyousawbytheirletterlastweek,they'regoingtobeveryfocusedon,one,thepublicinterestofthepotentialmerger,potentialdownstreameffects.AndIthinkthethingthat'sprobablythemostuncertain,butprobablygoingtobethereforsure,thequestionofextent,iswhatregulatorycostswillbeputonthismerger.
JasonSeidl(Analyst-CowenandCompany):
Okay.Iappreciatethetimeasalways,gentlemen.
Operator :
MattTroyfromNomuraSecurities.
MichaelWard (ChairmanandCEO):
Goodmorning,Matt.
MattT roy(Analyst-NomuraSecurities):
Thankyou.Goodmorning,everyone.Justwantedtoaskwithrespecttopricing,obviouslyrailsperipherallyortangentiallytiedtothecommoditiessupercycle,whichiswindingdown.You'vegotsomemorebearishpeopleouttheretalkingaboutrailpricingbeingvulnerable,anecdotesofcarrierscuttingpricetoincentvolume.
Ijustwantedtohearfromyouorconfirmwithyouthatyoustillremaincommittedtoinflationplus[type]pricing,consistentwithsimilaryearsandthattherehasn'tbeenachangeinthoughtorphilosophythatperhapspricemightbealeveryoumightusetoincentvolumein2016.
FredrikEliasson (ChiefSalesandMarketingOfficer):
Ithinkourphilosophyisstillthere,hasn'tchangedintermsofmakingsurethatwedovaluepricingthatreflectsthevaluepriceofourcustomersandbeingabletocontinuetoreinvestinourbusiness.Attheendoftheday,itgoesbacktowhatisthesecond-bestoptionforourcustomers,fromaserviceandapriceperspective.Aswethinkthrougheachoneofthem,westillthinkthatwehaveanopportunitytocontinuetomakesurewegetthepricingthatweneedtocontinuetoreinvestinourbusiness,whichbenefitsbothourshareholdersbutalsoourcustomers,aswecontinuetostrengthenourinfrastructure.
Thereisonemarketwherewehaveconsistentlysaidthatitmakessenseinthiscommoditydownturntobeflexible,becausewe'veseenwe'vegotadditionaldemandbydoingsoandthat'sourexportcoalmarket.Andwe'vetakensomeadditionalactionhereinthefourthquartertoreflectthevery,verydifficultandchallengingenvironmentforthem.
Butintherestofthemarkets,weworkwithourcustomersinpartnershipandtrytofigureoutwhatthebestserviceproductis.Andatthesametime,alsomakesurewegettheappropriateprice.SoIwouldsaythatnothinghaschangedintermsofthephilosophythatyou'veseenherefromCSXformorethanadecade.
MattT roy(Analyst-NomuraSecurities):
Greatanswerandthankyou.Andmyquickfollow-upwouldbetheintermodalgrowth,obviously,youspokeatlengthaboutthelossininternational,butthedomesticup14%wasafantasticnumber.Youhaveataleoftworailroads.Whenyoulookataveragevolumesinfourthquarter,youwereupmidsingledigits,yourcompetitorsweredown.Soobviously,domestic,youalludedtoacontractmovingoveronits
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own,notyouincentingit.
Justwonderingifyoucouldtalkaboutthat14%,reallyhighleveldirectionally.Howmuchofthatgrowthwouldbethatsingularcontract,whichyou'veseenshiftandhowmuchofitwouldbewhatI'drefertoasmoreorganichighwaytorailconversion?Thankyou.
FredrikEliasson (ChiefSalesandMarketingOfficer):
Itisasignificantportionofthatgrowth.Ithinkthatpriortolastyear,we'vebeengrowingourdomesticintermodalbusinessabout7%,andwe'veguidedlongtermtoabout5%to10%.Andwiththesoftermarket,we'reprobablyatthelowendofthatrange,ifyouexcludethiskindofshift.
Butnothinghaschangedintermsofouropportunitytoconvertwhatwe'vesaidisover9millionunitsinournetworkterritorythatwethinkovertimecanbeconvertedtorail-basedsolutioninpartnershipwithourtruckers.Andsowethinkit'ssofterrightnow,butasIsaidtoprevious--answertopreviousquestion,themacroenvironmentstillfavorsarail-basedsolutionlongerterm.
MattT roy(Analyst-NomuraSecurities):
Allright.Thankyouforthetime,everybody.
Operator :
CherilynRadbournefromTDSecurities.
MichaelWard (ChairmanandCEO):
Goodmorning,Cherilyn.
CherilynRadbourne (Analyst-TDSecurities):
Thankyouverymuchandgoodmorning.Myfirstquestionisonyourvariabletrainschedulinginitiativeandjusthowmuchofanimpactthathadontheincreaseintrainlengththatyousawandwhatinningyouthinkwe'reintermsofrealizingthewholebenefit.
CindySanborn (COO):
Goodmorning,Cherilyn.Ithinkasfarasthevariabletrains,whichthatappliestoourmerchandisenetwork,Ithinkwe'veseenthebiggestincreaseintrainsizeinthemerchandiseside.Sointhefourthquarter,wesawincreasesintrainsizeof23%.
SoIthinkwhatthevariablescheduledoesforusgoingforwardisasweseesofterdemand,weareabletoright-sizethatnetworkmoreeffectively.Intermsofwhatthecomponentsareofvariabletrainthatareinplace,weprettymuchgottheminplace,butitdoesallowustocontinuetoshift,andexpand,andcontractonamoreeffectivewaythanwe'vebeenabletodointhepastinourmerchandisenetwork.
MichaelWard (ChairmanandCEO):
You'redoingalotmoreinthebulk.
CindySanborn (COO):
Yes,wellwearealsocontinuingtrainlengthinitiativesonthebulksideaswell.We'veseenincreasesintrainlengthacrosscoal,grain,andothersinthe5%to10%rangealsooverthequarter.
Soit'snotjustamerchandise--trainlengthisnotjustamerchandiseinitiative.Italsofollowstherest,but
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merchandisehasseenthebiggestbenefits.
CherilynRadbourne (Analyst-TDSecurities):
Great,andthentotheextentthatyouexpectearningstodeclinein2016andseesomevolumeuncertainty,canyoujustcommentonwhetherthatwillhaveanyimpactonthepaceatwhichyouexpecttoexecuteonyoursharebuybackprogram?
FrankLonegro (CFO):
HeyCherilyn,it'sFrank.Yousawusrepurchaseninemillionsharesinthequarterforjustunder$260million,whichwasessentiallythesameratethatyousawusinthethirdquarter.It'sconsistentwiththe$2-billionprogramthatweannouncedbackinApril,andwecurrentlyexpecttocompletethatprogramratablyoverthenextfivequartersusingbalancesheetcash,freecashflow,anddebt.SoIthinkyou'regoingtocontinuetoseeus,basedonwhatweseenow,tocontinueonthatratableprogram.
CherilynRadbourne (Analyst-TDSecurities):
Thankyou.That'smytwo.
FrankLonegro (CFO):
Thankyou.
Operator :
BenHartfordfromBaird.
MichaelWard (ChairmanandCEO):
Goodmorning,Ben.
BenHartf ord (Analyst-RobertW.Baird&Co.):
Goodmorning.Justaquickquestionontheexportcoalside.Inyourmind,whatistherisktofurtherdownside?Youobviouslytalkedaboutsomedownsiderisktothe20milliontonsnumberthisyear,butwhatprovidesanysortofcomfortthatyouhadlineofsighttoafloorandthatweshouldn'tbethinkingabouttheearly2000slevelsofanumberlessthanhalfthisguided2016number?Orevensomethingaboveandbeyondthe2002,2003levels.
Isthereanywaytoframeit?Obviouslythemarket'suncertain,butisthereanywaytoframeupthelikelihoodofa50%orevendeepercuttotheexportcoalnumberoverthecourseofthenextfewyears?
FredrikEliasson (ChiefSalesandMarketingOfficer):
Sure.Ithinkthatoverthelastcoupleyears,asweprovidedyouguidanceatthebeginningoftheyear,we'vebeenactuallyvery,veryclosetothosenumbers.Andwhiletheseareuncharteredterritoryintermsoftheunderlyingcommodityprices,bothonthethermalsideandthemetside,wedoworkverycloselywithourcustomers,bothontheproducersideandalsowithsomeoftheagentsthatsellforusandreallytrytogooverandunderstandthemarketsthemselves.
Andaswethinkabout2016rightnow,outofthe20million,weprobablyhaveabout6millionthatwehaveverygoodvisibilityto,probablyalittlebitlowerthanyounormallywouldhaveatthistimeoftheyear.Butwestillthinkthatthere'sanopportunitytogettothatabout20milliontonsfortheyear.Andoneofthedrivershereisalsothatyoudohavesuchalargeexcesssurplusofdomesticcoalwheretheproducersareveryeagertopushthatoutintotheworldmarket,andthatishelpfulaswellaswemove
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through2016.
BenHartf ord (Analyst-RobertW.Baird&Co.):
Okay.That'shelpful.We'lljustwatchhowthatdevelopsthroughtheyear.Frank,sharebuyback,whatisthethoughtprocesstherethisyear,andthenIwanttoconfirmsomethingontheCapExside,the$307millionfromthe113locosthatwerepurchasedlatelastyear,isthatinthe2016CapExbudgetof$2.4billion?
FrankLonegro (CFO):
Theanswertoyourlastquestionisyes.Andonthebuybacks,it'sthesameratablemethodologythatyou'veheardustalkaboutpreviously,andsothe$2billionprogramwasintendedtobeoveratwo-yearperiod.Andaswecurrentlyseethings,we'llcontinuetodoitatabout$260[million]aquarter.
BenHartf ord (Analyst-RobertW.Baird&Co.):
Okay.Thankyou.
Operator :
Thankyou.ThenextquestionwillbecomingfromDavidVernonfromBernstein.
MichaelWard (ChairmanandCEO):
Goodmorning,David.
DavidVernon (Analyst-SanfordC.Bernstein&Co.):
Goodmorning,andthankyoufortakingthequestion.Fredrik,maybejusttoputsomemorenumbersontheissuearoundutilitycoalpricing.Ifyoulookbackoverthelastcoupleyearswhenyou'veseentheutilitybusinessgetcutbyhalforso,canyoutalkaboutthetrendyouguyshaveseeninyourdistanceneutralrateperton?
Hasthatbeenmovinguporhaveyouseensomeweakeryearswhenbecauseofthelowergasprice?LikeI'mjusttryingtoputsomenumbersaroundtheutilitycoalpricing.
FredrikEliasson (ChiefSalesandMarketingOfficer):
Soclearly,inmidpartoflastdecade,therewasasignificantopportunitytotouchlegacypricing,andthatprobablylastedfrom2005to2011orso.Thensincethen,it'sbeenmuchmorenormalizedpricing.
Asnaturalgaspricesnowhavecomedownasmuchastheyhave,therereallyisn'tmuchthatwecandotoincentiveizeincrementalburn.Welookateachandeverycontractwhentheycomeuptoseeifthereareopportunitiestooptimizethebottomlinebybeingmoreflexibleinpricing.Ifthereis,we'lldothat.Butgenerally,atthesenaturalgasprices,thereisn'treallyanythingwecandotoimprovetheburnrate,withmaybeoneortwoexceptions.
DavidVernon (Analyst-SanfordC.Bernstein&Co.):
Okay.Andthenmaybe,Frank,justasafollow-upontheproductivity,canyoutalkalittlebitabouthowdependentthelevelofproductivityyou'regettingrightnowisontheCapExbudget?Itsoundslikesomeofthenewlocomotivesthatyou'regettingarenecessarytorunthelongertrains.I'mjustwonderingabouthowmuchmoreupgradingofthefleetmayberequiredoverthenextfewyears,andwhenthatCapExnumbercangetdownto16%,17%.
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FrankLonegro (CFO):
Right,David.Soonthelocomotivepiece,obviously,we'llcompletethedeliveriesin2016,asCindyhasorwillmention,we'vecertainlylookedatright-sizingthefleetandtakingoutthebadactorsandthehighfuelburnlocomotives.Soitcertainlyhelps,butyou'retalkingabout300enginesona4,000enginebase.
OnyourtiebetweenproductivityandCapEx,there'salwayssomeintheCapExbudgetthatrelatestoproductivity,andit'sreallyI'dsayadog'sbreakfast,right.You'vegotstructuralchangesinthecoalnetwork.You'vegotG&Arestructuringanddownsizing.You'vegotterminalefficiencies.You'vegottrainlength,whichgivesyoulowercrewstarts.Aswe'vementionedearlierinthecall,you'vegottechnologyinitiatives,whicharefundedthroughtheCapExprocessthatrelateintosomeoftheproductivityinitiatives.
SoIthinkyou'relookingatalotofthingsthatwedidin2015thatwillcarryoverinto2016,andthenthereisalittlebitofatiebetweenCapExandproductivity.Butit'ssmallinthegrandschemeofthings,David.
Intermsoflong-termandgettingbackdownto16%to17%,ifyouweretojustnormalizethisyear'scapitalbudgetforthe$300millioninlocomotivepayments,you'dbeatthatrangenow.Soit'scertainlysomethingthatonalong-termbasiswe'regoingtocontinuetolookat.Fuelsurchargesthat'scomedown,hasobviouslybeenabitofaheadwindforusinthepastaswelookatthat16%to17%.
DavidVernon (Analyst-SanfordC.Bernstein&Co.):
Asashortfollow-uptothat,inthenumberofthe300locothatyou'vetakenagainstthe4,000fleet,ifyouhadacapitalunconstrainedworldandyouwantedtogoandpushtrainlengthsinotherpartofthebusiness,wouldtherebeopportunitiestogoaheadandcontinuetoupgradethatfleetandoperationallyfindopportunitiestorunlongertrainsinotherpartsofthenetwork?Orareyounearingtheendoftheabilitytogetthatextraproductivityfromtrainlength?
CindySanborn (COO):
David,thisisCindy.Thetrainlengthconstraintsreallyarenotlocomotivebased,theyaresidingcapacitybasedinthesouthernpartofournetwork.Andintermsofcapital,wearelookingatthosetypesofinvestmentsgoingforwardtoallowustounlockthevalueoflongertrains.Soit'sreallynotlocomotivebased.
DavidVernon (Analyst-SanfordC.Bernstein&Co.):
Excellent.Thankyoualotforthetime,guys.
Operator :
JohnLarkinfromStifel.
MichaelWard (ChairmanandCEO):
Goodmorning,John.
JohnLarkin (Analyst-StifelNicolaus):
Thankyou,Mike.Thankyoufortakingthequestion.Wantedtodigalittlebitmoreintothestatedobjectiveofproducinganother$200millioninproductivitysavingsin2016.Canwetalkalittleabouthowthatmightbespreadovertheyearandhowmuchofthatistiedtotherationalizationofthecoal
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network?Andwhethertherationalizationofthecoalnetworkalsowouldenvisionpotentialabandonmentsand/orsalestoshortlinesonsomelighterdensitylinesinthecoalnetwork?
CindySanborn (COO):
Goodmorning,John.ThisisCindy.Sofromaproductivityperspective,the$200millionis,again,asIsaid,initiativebased.$100millionis--prettymuchthoseinitiativesareinplace.Twoofthoseareoneareathatwe've--that'sincludedistheactionsthatwetookthefourthquarteronthereductioninvolumeacrossthe[irlingn]gatewayandtheclosureoftheCorbinlocomotivefacility.
Sototheextentthoseareobviouslyinthecoalfield,thatisanimpacttoproductivityin2016aroundbothfacilities,reductioninfacilitiesandheadcountreduction.That'sbasicallythewayIsee2016lookingwithproductivity.
Asfarascontinuedrationalizationinthecoalfields,asI'vesaid,we'regoingtolookatthatnotjustinthecoalfieldsbutbroadly,whetherit'sfacilityrelatedand/orlinesegment.Thelinesegmentstakealittlebitlongertoworkthrough.Theyinvolvecustomers.Theyinvolveotherconstituencies.Soaswemakethosedeterminationsandmakethosedecisions,we'llbeverypublicwiththatinformation,butthat'smorelongerterm.
JohnLarkin (Analyst-StifelNicolaus):
Sothe$200millionwillbefoldedinprettymuchevenlyacrossallfourquarters,isthatawaytothinkaboutit?
CindySanborn (COO):
Yes,Iwouldsayit'sratable,John,yes.Iwouldsaythat'sprobablytheeasiestwaytothinkaboutit.
JohnLarkin (Analyst-StifelNicolaus):
Thankyouverymuch.
Operator :
ThenextquestionwillbecomingfromBascomeMajorsfromSusquehanna.
BascomeMajors (Analyst-SusquehannaFinancialGroup):
Goodmorningandthankyouforthetimehere.Iwantedtotakeadirectionallookatthemarginprofileofthecoalbusiness.Itlookslikeonyourguidancetonnageisgoingtobe--ifyou'reatyourguidancefortheyear,tonnagewillbedown45%orsofortheentirebusinesssince2011.
Canyoujusttalkalittlebitaboutthebalancewithinthesegmentofthemarginprofilebetweentheexportbusinesstodayafterthepricecutsyou'vetakenovertheseveralyears?Andthedomesticbusiness,whereyou'vetransitionedtothefixedvariablecontractstructure?
Andalsomorebroadly,whereiscoalcompingversustherestofthebooktoday?Isitstillyourpremiumbusinessuptherewithchemicalsorhastheprofilefallendowntheladderabitastherevenueshavefallen?Thankyou.
FredrikEliasson (ChiefSalesandMarketingOfficer):
Sure.SothisisFredrik.Backin2012orso,weusedtosaythatourexportandutilitybusinesswasaboutthesamelevelofcontributionandonamarginbasis.Butsincethen,aswehaveadjustedtheexportratessignificantlydown,ourutilitybookofbusinesshasahighermarginthantheexportbusiness.
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Ifyoulookattheoverallportfolioofcoalversustherestofthebusiness,Iwouldsaythatit'sstillclearlymoreprofitablebecauseofthefactthatit'ssuchanefficientwayforustomovethecargo,heavytonnage,justunittrainbackatforthit'svery,veryefficientforustooperatethatway.It'sstillatthehighendofourbusiness.
BascomeMajors (Analyst-SusquehannaFinancialGroup):
Thankyouforthat.Asmyfollow-uphereandmaybeforMichaelorClarenceifhe'sintheroom,Iunderstandyouguysarerailroaders,you'renoteconomistshere.Butjustlookingatthevolumedeclinesyou'reseeingtoday,boththedepthofthemandthebreadth,haveyoueverseenanenvironmentlikethisinyourbusinessorcareersoutsideofarecession?
MichaelWard (ChairmanandCEO):
ThisisMichael.I'llanswerthat,althoughClarenceishere.Ifyoutakeouttherecession,no,we'venotseenthesekindofpressuresinsomanydifferentmarkets,becauseyouhavemultipleaspectsworkingagainstyou,thelowgasprices,thelowcommodityprices,thestrengthofthedollar,allthreeofthosetogetherarereallypushing.Andinsomeways,Ithinkyoucanalmostthinkofitasafreightrecession,exceptforsaymarketslikeautomotiveandhousingrelated,you'reseeingpressureonmostofthemarkets.Soclearlyoutsideofarecession,thisisonewherewe'reseeinglotsofpressureinlotsofdifferentmarkets.
BascomeMajors (Analyst-SusquehannaFinancialGroup):
Allright.Thankyouforthetimethismorning.
Operator :
JeffKauffmanfromBuckinghamResearch.
MichaelWard (ChairmanandCEO):
Goodmorning,Jeff.Jeff?
Jef f Kauf fman (Analyst-BuckinghamResearch):
I'mhere.I'mhere.I'mhere.Goodmorning,Ihadyouonmute.Firstofall,congratulations,justaverydifficultquarter.Ithoughtyouguysdidagreatjobonthecostside.
Iwantedtozeroinonthechangeincoalguidancefornextyear.IfIlookatwhat'schanged,Ithinkyouweretalkingarounda21million-tondomesticrunrategoingdownto19million,sothat'saboutan8million-tonchange.Butitreallylookslikealmosthalfofthatdropwasonthecokingcoalanddomesticmetside.
Sotwoquestions.Numberone,whenIlookatdomestic,howmuchofthatchangeisyourviewonutilityversusyourviewonotherdomesticcoal?AndwhenIlookattheexports,youdidabout31millionthisyear;theguidanceisfor20million.CanIlookatendmarkets,andcanwethinkaboutitthatwayintermsofwherehastheincrementaldemandebbedforyourexportcoalgeographically?
FredrikEliasson (ChiefSalesandMarketingOfficer):
Sure.Soyes,you'reright,ifyougobacktothethird-quarterguidancethatwedidatthecall,weessentiallysaid21milliontonsperquarterofdomestic,whichwas15ofdomestic--ofutilityand6ofsteelandindustrial.Andwhatwesaidthenaboutourexportwasabout6milliontonsaquarterfor24intotal.
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We'veessentiallyseenadeteriorationinallofthosethreemarketsbyabout1milliontonsaquarter,andthat'sreallyareflectionofthefactthatnaturalgaspricesandtheverymildfourthquarterontheutilitysidehasdampenedourexpectations.
Onthesteelandindustrialside,it'sthereflectionofthefactthatwhenwelookatthesteelindustryrightnow,youhaveautilizationofabout60%versus75%ayearago,andwesawitdeterioratethroughoutthefourthquarter.Andontheexportmarket,isalsojustareflectionofthefactthattheunderlyingcommodityindexesaretellingusthatthemarkethasgottensofterasglobaloversupplycontinues.
Sointermsofwheretheexportmarketisgoing,wedidabout60/40splitherebetweenmetandthermal.Itwillprobablybealittlebithighernextyearwouldbemyguessatthispointintermsofprobablyone-third,two-third,two-thirdsinfavorofmet.
Andtraditionally,overhalfofourbusinessgoestoEurope,andIwouldsaythatsplitisprobablygoingtocontinueintermsoftheendmarketaswell.AndsoIthinkit'sjustproportionalbetweenthemarkets,andIthinkyou'regoingtoseerelativelyproportionalcutintermsoftheendmarketsaswell.
Jef f Kauf fman (Analyst-BuckinghamResearch):
Okay.That'smyone.Thankyou.
MichaelWard (ChairmanandCEO):
Thankyou,Jeff.
Operator :
Thankyou.ThenextquestioniscomingfromScottGroupfromWolfeResearch.
MichaelWard (ChairmanandCEO):
Goodmorning,Scott.
Scott Group(Analyst-WolfeResearch):
Hey,thankyou.Goodmorning,guys.SoFredrik,justwantedtoaskaboutthecoalyields.Ithoughtthatthefixedvariablewassupposedtohelpinenvironmentslikethiswhenvolumesaredownsomuchandhelptheyieldsout.Whyaren'tweseeingthat?
FredrikEliasson (ChiefSalesandMarketingOfficer):
Yes,andinthethirdquartertheywereveryhelpfulactually.Theywerestillhelpfulhereinthefourthquarterbutnotasmuch,becausesomeofthisalsodependsonwhoyou'reactuallyshippingto.
Andthebigdriver,though,inthecoalyieldswasreallythefactthatwehaven'tmadetheseaccommodationsontheexportsideandfurtheradjustedourratesdownwardtoreflecttherealityoftheunderlyingmarketandatthesametimetryingtooptimizeourbottomline.
Scott Group(Analyst-WolfeResearch):
Okay.AndthenMichael,Ijustwanttoask,soalot'schangedinCSX,certainlyalot'schangedinthemarketfromayear,yearand-a-halfago.DoesyourvieworappetiteonM&Achangeatall,orhasitchangedatallinthatyear,yearand-a-half?
MichaelWard (ChairmanandCEO):
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Notreally,Scott.Ifyouthinkaboutit,Ithinkourpositionisthesameasitwasayear,yearand-a-halfago.Wethinkthere'stremendousopportunityforshareholdervaluecreationwithourexistingportfolio.
Andifyouthinkaboutanymergers,there'sgoingtobesubstantialregulatorycost,someofthesynergieswillbeverylimitedbecausethey'reend-to-endmergers.Soifyou'regoingtooffsetthoseregulatorycosts,you'vegottohavecompellinginterfacesandsynergies,andIreallyhaveahardtimeenvisioningwherethatwouldbeinanyrailmerger.
Scott Group(Analyst-WolfeResearch):
Sothechallengesofthemarketdon'tchangeyourviewonthat?
MichaelWard (ChairmanandCEO):
No,sir,Ithinkwe'vedonewellinpriordownperiods.Wethinkwewillinthisoneaswell,andwethinkthelong-termfuturewithourexistingcustomerbase,two-thirdsofthepopulationweserve,pressuresonthetrucking,theserviceimprovementswecontinuetomakeinthepricingallowsustocreatelotsofvaluefortheshareholdersovertheintermediateandlongterm.
Scott Group(Analyst-WolfeResearch):
Thankyoualot,guys.
Operator :
Thankyou.ThenextquestioniscomingfromJustinLongfromStephens.
MichaelWard (ChairmanandCEO):
Goodmorning,Justin.
Just inLong (Analyst-StephensInc.):
Thankyouandgoodmorning.Soyoutalkedaboutcyclingthebenefitsfromliquidateddamagesandgainsonsalethisyear,andjusttakingthoseitemsouttosomeone'spointearlier,yougettoamid-single-digitEPSdeclinein2016.Alongwithanticipatedvolumedeclines,mixheadwinds,yourcommentarythatitwillbedifficulttoimprovetheOR,isitfairtosaythatEPSshouldbedownatleastdoubledigitsorlowdoubledigitsthisyear?
FrankLonegro (CFO):
Allwe'repreparedtotalktoyouabouttodayisthedirectionalpiece.Whatwetriedtodoistogiveyousomeclarityaroundthemovingpartsthatwehave,obviouslycertaintyonthecyclingpieceandwehave,wethink,goodinsightsintothecoalsector.
It'sreallywhathappensintheindustrialspaces,especiallyaswegetoutintothesecondhalfoftheyear.Andagainit'sreally,reallyearlyintheyearinanuncertainenvironmenttoprojectafull-yearEPSwithspecificity.
Atthesametime,asyoulookatthethingsthatwe'redoing,thepricingperformance,theproductivity,theright-sizing,theserviceimprovements,allofthosethingsarethethingsthataremostwithinourcontrol,andthosearethethingsthatyou'regoingtoseeusberelentlessabout.
Just inLong (Analyst-StephensInc.):
Okay.Fairenough.Andasaquickfollow-up,IwantedtoaskaboutPTC.Youmentionedthe$300million
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ofanticipatedspendingthisyearand$2.2billionintotal.Butofthattotalamount,what'sremaining?What'sremainingafter2016?Andafteryou'vefullyinstalledthetechnology,doyouanticipateanyincrementalmaintenancecostassociatedwithPTCthatwouldbeongoing?
FrankLonegro (CFO):
SoletmegiveyouthefactsandthefiguresonPTC.So$1.5billioniswhatwespentthroughtheendof2015.We'vegivenyouthe$300millionguidancefor2016,sothatwouldtakeyouuptothe$1.8billionthroughtheendofthisyear.
Ourprojecttakesustoahardwarecompletiondateof2018andfullyoperationalby2020.Ithinkyou'llseethemajorityofthedifferencebetweenthe$1.8billionandthe$2.2billionbeingspentbetweennow--excuseme,theendof2016andtheendof2018.
IntermsofthetailonOpExandsomerefreshedCapEx,we'restillworkingthroughthat.Obviously,there'sapiecethat'sembeddedwithindepreciation,aswellasindepartmentaloperatingexpenses,andthat'sstillbeingworkedonrightnowasweunderstandthesupportagreementsthatwillgoalongwiththehardwareandthesoftware,aswellastheusefullifeonthosepiecesofequipment.
Just inLong (Analyst-StephensInc.):
Okay.Great.That'shelpful.Thankyouforthetimetoday.
Operator :
CleoZagreanfromMacquarie.
MichaelWard (ChairmanandCEO):
Goodmorning,Cleo.
CleoZagrean (Analyst-MacquarieResearchEquities):
Goodmorningandthankyouforyourtime.Sotofollowupontherecentconversation,let'simagineourselvesthistimenextyearafterthelowerearningsbasesetby2016.I'mnotaskingforguidance,butconceptually,howdoyouseetheyounewgrowthtrend?Canweseedouble-digitsustainableEPSgrowth?Orshouldwethinkofmaturingintoapatternoflowergrowth,maybemoredistributionsforshareholders?
Becausewe'vebeentalkingaboutthisstructuralchangesnotinaso-calledrecessionsuchaslowprofitabilityfromcoal,consumerspendingshiftingmoretowardsservices,probablysustainablestrongdollar,sluggishindustrialeconomy.Sowhatisthenewnormalandhowcanyougrowinthat?Thankyou.
FrankLonegro (CFO):
Thankyou,Cleo.FromjustanEPSdirectionalthinkingbeyond2016,wesee2016as,again,auniqueyear.Andclearly,weshouldbeabletoprovidestrongEPSgrowthoffofa2016baseandallowFredriktocommentonsomeofthecommercialitemsofyourquestionintermsofwheresomeofthevariouslinesofbusinessmightbegoing.
FredrikEliasson (ChiefSalesandMarketingOfficer):
Soaswegothroughthisyearandcyclesomeoftheseheadwindsthatwe'regoingtobefacing,clearlyforthefirsthalfofthisyear,andwelookatwherethemacroeconomicindicatorsareandprojectionfortheUSdollar,Ithinkwe'llstartseeingthingsstabilize,normalize,andwecanstartseeingyear-over-year
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growthaswemovethroughhopefullylatein2016andclearlymoveinto2017.Basedonwhatwe'reseeingrightnow.
AsFrankIthinkhassaidmanytimesthroughoutthecalltoday,Michaelaswell,thekeythingforusrightnowistofocusonthethingsthatwecontrolthemost,andthenthemacroheadwindsaregoingtobewhatevertheyare.Andthekeythingforusistoadjustourinfrastructuretoreflecttherealityofwhattheyprovideus.
CleoZagrean (Analyst-MacquarieResearchEquities):
Thankyou,andasafollow-up,canyoutalktousabouttherateatwhichyouseeinvestingingrowthopportunities?Andmaybewhatitwouldtakeforyoutoconsiderahighersustainabledividendyieldtoappealto,morebroadly,todividend-focusedinvestors?Thankyou.
FrankLonegro (CFO):
Onthecapitalside,clearlythere'saportionofourcapitalbudgeteveryyearthatisgearedtowardgrowthinvestments.Themajorityofthatoverrecentyearshasbeenfocusedonourgrowthengine,andthat'sontheintermodal,especiallyonthedomesticintermodalside.Soyou'llcontinuetoseeusfocusinthatarea.
Intermsofdividends,I'dsaycurrentlywhereweare,wehaveaveryhealthyyield.Wehaveguidanceoutthereintermsofwhatwe'rewillingtopayoutonatrailing12-monthsbasis,andthat'sinthe30%to40%oftrailing12-monthsearnings.Andsowelookatthateveryyear,generallyspeaking,afterthefirstquarter,andwe'llcontinuetodothatandlookatwhereweareagainstthebroaderenvironment.
CleoZagrean (Analyst-MacquarieResearchEquities):
Thankyou.Appreciateverymuch.
Operator :
ThankyouthelastquestionwillbecomingfromKeithSchoonmakerfromMorningstar.Yourlineisopen,sir.
MichaelWard (ChairmanandCEO):
Goodmorning.
KeithSchoonmaker (Analyst-Morningstar):
Goodmorning.Yourexpectationsforautomotivewereascarcebrightspot,aswereactualautoshipmentslastyear.Couldyoupleaseaddsomecolortothisgrowthexpectation,maybeparticularlocationswhereyou'reseeingsomestrengths,aswellasperhapscommentongeneralshiftsofproductiontoMexicoandhowthataffectsyournetwork.Thankyou.
FredrikEliasson (ChiefSalesandMarketingOfficer):
Sure.SoifwelookattheNorthAmericanlightvehicleproduction,Ithinkwe'reendingupabout17.5herein2015,andtheprojectionisfor18.2nextyear,sothatprovidesusgoodgrowthopportunities.USsalesalsobasedontheprojectionsthatwe'reseeingindicategoodgrowth.
TheMexicoshiftisclear,sotheNorthAmericanlightvehicleproductionnumbersareprobablyskewedalittlebitmoretowardsMexico,whichwedon'tcaptureasmuchofbutwestillcapturesomeofthat.Andsometimesthatisactuallyalengthofhauladvantageforus.Sothatishelpful.
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Sooverall,ifyougobackinhistoryoverthelast30,40years,I'msurethatyou'llfindthatourcorrelationstoNorthAmericalightvehicleproductionisprobablyinthevery,veryhigh95%,98%.Sowefollowwhattheproducerstellusandthenweadjustourfleetandserviceaccordingly,andrightnow,itlookslikewe'regoingtohaveanotheryearofgrowth.Butnotanywhereclosetowhereit'sbeensince2009,butstillnicegrowth.Andespeciallyinthissortofenvironment,weneedthesesortsofgrowthopportunities.
KeithSchoonmaker (Analyst-Morningstar):
Thankyou.
MichaelWard (ChairmanandCEO):
Thankyoueveryoneforjoiningusandwewilltalktoyouagainnextquarter.Thankyou.
Operator :
Thankyou.Thisconcludestoday'scall.
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