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CSX Corporation (NYSE:CSX)

Q1 2013 Earnings Call

April 17, 2013 8:30 am ET

Executives

David Baggs - Vice President of Capital Markets and Investor Relations

Michael Ward - Chairman of the Board, President, Chief Executive Officer

Clarence Gooden - Chief Commercial Officer, Executive Vice President - Sales & Marketing

Fredrik Eliasson - Chief Financial Officer, Executive Vice President

Oscar Munoz - Chief Operating Officer, Executive Vice President

Analysts

Ken Hoexter - Bank of America Merrill Lynch

Brandon Oglenski - Barclays Capital

Chris Wetherbee - Citi Research

Chris Ceraso - Credit Suisse

Robert Salmon - Deutsche Bank

Thomas Kim - Goldman Sachs

Thomas Wadewitz - JPMorgan

Bill Greene - Morgan Stanley

Scott Group - Wolfe Trahan

Jason Seidl - Cowen Securities

Ben Hartford - Robert W. Baird

David Vernon - Sanford Bernstein

John Larkin - Stifel, Nicolaus

Jeff Kauffman - Sterne, Agee & Leach

Anthony Gallo - Wells Fargo

Peter Nesvold - Jefferies

Keith Schoonmaker - Morningstar

Walter Spracklin - RBC Capital Markets

Operator

Good morning, ladies and gentlemen and welcome to the CSX Corporation first quarter 2013 earnings call. As a reminder, today's call is being recorded. During the call, all participants will be in a listen-only mode.

For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation.

David Baggs

Thank you, Marianne, and good morning, everyone, and again, welcome to CSX Corporation's first quarter 2013 earnings presentation. The presentation material that we will review this morning along with our quarterly financial report and our safety and service measurements are available on our website at csx.com under the Investors section. In addition, following the presentation this morning, a webcast and podcast replay will be available on that same website.

Here, representing CSX Corporation this morning are Michael Ward, the company's Chairman, President and Chief Executive Officer, Clarence Gooden, Chief Sales and Marketing Officer, Oscar Munoz, Chief Operating Officer, and Fredrik Eliasson, Chief Financial Officer.

Now before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to review the company's disclosure in the accompanying presentation on slide two. This disclosure identifies forward-looking statements as well as risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements.

In addition, let me also remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With 30 analysts covering the CSX, I would ask as a courtesy for everyone to please limit your enquiries to one primary and one follow-up question.

With that, let me turn the presentation over to CSX Corporation's Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Michael Ward

Well, thank you, David and good morning everyone. Last evening CSX reported record first-quarter earnings per share of $0.45 with another excellent productivity performance by the team and a couple of unique items that helped the quarter. The underlying strength of our business continues even with the transition that is taking place in the domestic coal market.

Looking at the top line, revenue was $3 billion essentially flat versus last year with gains in merchandise, intermodal and other revenue offsetting the declines in coal. The operating team is producing industry-leading results in safety and is driving excellent service and efficiency for our customers and you, our shareholders. Bottom line we set record first-quarter for operating income at $875 million and for operating ratio at 70.4%.

We also issued new financial guidance reflecting our confidence in the future and rewarded shareholders with another increase in the quarterly dividend and a new share repurchase program. As the team walks you through the results this morning, I think you will see evidence of a company that is doing very well in the current environment and is well-positioned to achieve even greater results longer-term as the economy eventually accelerates, the domestic coal market begins to stabilize and the industry fundamentals continue to evolve.

With that let me turn the presentation over to Clarence to review what we are seeing in the broader economy, how this relates to our top line results and more importantly what this means for the outlook ahead. Clarence?

Clarence Gooden

Thank you, Michael, and good morning. Looking at the key economic indicators that continue to point to a slow steady growth in the U.S. economy. Starting on the left side of the chart, the purchasing manager's index registered a rating of 51.3 in March reflecting a modest expansion of U.S. manufacturing. At the same time, the customer's inventories index registered a rating of 47.5 indicating respondents believe their inventories are still slightly below normal levels.

Looking at the right side of the chart, both GDP and IDP rates reflected expansion in the quarter. Forward projection show continued slow growth in the near-term with improved growth rates later in the year. Overall, transportation demand in the markets we serve was mixed in the first quarter, consistent with the broader economic environment.

Now, let's look at overall revenue. Total first quarter revenue of nearly $3 billion was essentially flat compared to the prior year. Starting to the left, the combination of rate and mix was favorable by $28 million in the quarter. Here, core pricing gains and liquidated damages, which increased $32 million year-over-year, were partially offset by the unfavorable mix impact related to the growth in intermodal versus the decline in coal.

Moving to the right, volume had an unfavorable impact of $39 million in the quarter as volume growth in chemicals and intermodal was more than offset by declines in coal and agricultural products. Finally, fuel recovery increased $3 million in the quarter as diesel fuel prices were relatively stable year-over-year.

Now, let's turn to pricing. Core pricing on a same-store sales basis remained solid across nearly all markets. Recall that same-store sales are defined as shipments with the same customer, commodity and car type, and the same origin and destination. These shipments represented 76% of CSX's traffic base for the quarter.

Looking at the chart, overall pricing shown on the blue bars, increased 0.3% in the first quarter which reflects the more challenging export coal market. The gold bars, which exclude export coal, show pricing gains of 4.1% in the quarter exceeding rail inflation and consistent with the performance in prior quarters. Looking forward, a strong service product provides a solid foundation for pricing above rail inflation over the long-term. Given our confidence in the value of our product offering and the need for the ongoing reinvestment in the business, we remain focused on profitable growth.

Let's turn to the next slide and take a closer look at the volume. Total volume declined 2% in the quarter versus the same period last year, the mixed performance across the diverse markets we serve. Intermodal and the industrial sector delivered solid growth in the quarter. High service levels helped generate growth in domestic intermodal markets and capture opportunities in domestic manufacturing in the growing oil and gas industry. Growth in these sectors was more than offset by declines in the construction, agricultural and coal sectors, where market fundamentals remain challenged.

Now, let's look at the individual markets in more detail starting with coal. Coal revenue declined 13% to $726 million. Although the demand for electricity grew and natural gas prices rose at the end of the quarter, domestic volume declined 14% as inventory levels at the utilities remained high. Export coal volume declined 3% as demand for thermal coal softened, particularly in Europe, where broader economic conditions remained weak. Total revenue per unit was down 3% as lower export pricing more than offset core pricing gains in the domestic markets.

Looking ahead, domestic coal headwinds persist, although we expect volume to be relatively stable on a sequential basis. For the full year, we continue to anticipate domestic volume will decline about 5% to 10%. At the same time, our best estimate for 2013 export coal volume remains about 40 million tons and year-over-year pricing decline should moderate throughout the year.

Next, let's look at merchandise. Overall merchandise revenue increased 2% to over $1.7 billion. Chemicals was the key driver in the industrial sector growing 11% on strength and energy related products, including crude oil, liquefied petroleum gas and frac sand. In the agricultural sector, feed grain shipments to the Southeast were lower as a result of last year's severe drought in the Midwest. In addition, ethanol shipments declined as a result of lower production, increased competition from imports and lower gasoline demand.

Regarding the construction sector, building products and aggregates increased on the strength of a slowly improving housing environment. However, this was partially offset by lower shipments of paper products as the use of electronic media continues to replace paper. Looking at the second quarter, in the industrial sector, we continue to see growth opportunities in chemicals, particularly in commodities related to the oil and gas drilling.

The automotive market will remain strong although we are now cycling tougher comparables. We expect the agricultural sector to remain soft with lower grain shipments and continued weakness in ethanol, more than offsetting increased fertilizer demand. Finally we anticipate a slow steady recovery in the construction sector will drive growth in building products and aggregates.

Moving to the next page, let's review intermodal. Intermodal revenue increased 4% to $404 million. Domestic volume was up 5% driven by growth with our existing customers and highway to rail conversions. International volume was essentially flat as growth with existing customers and from new service offering was offset by volume lost due to a carrier port shift. Total intermodal revenue per unit increased 1% due to core pricing gains.

Looking forward, we continue to make strategic investments in our network that drive profitable growth. During the first quarter, we began work on a new terminal in Valleyfield near Montréal. This terminal will expand our network reach and when combined with the capabilities of our Northwest Ohio hub, will allow these service offerings to drive growth. In addition we began an expansion of our Fairburn terminal in Atlanta to support robust growth in this key market.

At the same time, we continued to generate growth opportunities through our highway to rail or H2R initiative. We are working jointly with our channel partners to market the compelling value of intermodal rail transportation to targeted customers and further tap into an estimated 9 million truckload opportunity.

Let's turn to the outlook for the second quarter. Looking forward, we expect stable to favorable conditions for 86% of our markets. Although the overall volume outlook for the second quarter is neutral, we expect continued growth in chemicals as we capture opportunities created by the expanding domestic oil and gas industry. Intermodal growth will continue at a similar rate in the second quarter as our strategic network investments and service reliability continue to support highway to rail conversions. In forest products and minerals, we expect a continued recovery and demand for construction and building materials.

Automobile and light truck production will remain strong but year-over-year comparisons are now more difficult. Although headwinds persist, the outlook for domestic coal volume in the second quarter is neutral due to easier year-over-year costs. We still expect the full year volume will be 5% to 10% lower year-over-year. The overall outlook for agricultural products remains unfavorable with low corn supply and high prices caused by last year's drought impacting shipments to feed mills and ethanol shipments impacted by lower demand and production. Finally export coal volumes will be lower on softer demand for thermal coal.

Now I will wrap up on the next slide. Looking at the state of the economy, the indicators we follow point to a steady expansion. Overall the second quarter volume outlook is stable. While the outlook for 86% of our markets is neutral to favorable we anticipate total volume will be flat year-over-year with declines in unfavorable markets offsetting gains in favorable markets. Domestic and export coal markets still face challenges.

High stockpiles will continue to impact domestic shipments and softening demand for U.S. thermal coal will have an unfavorable impact on the export market. At the same time, we expect our merchandise in intermodal markets to grow at a rate that is above the general economy as we continue to deliver high levels of service which creates compelling value for customers and will drive long-term profitable volume and revenue growth for shareholders.

Thank you and now I will turn the presentation over to Oscar to review our operating results.

Oscar Munoz

Thank you, Clarence, and good morning everyone. I am pleased to please report again that CSX's operating results for the first quarter are very strong. Safety results remain at or near all-time record levels and service continues to improve and set new records. Additionally, resource adjustments and improved asset utilization in the first quarter provided a great start and we are now on a path to exceed $150 million of efficiency gains in 2013. Bottom line, with sustained high level of operating performance, CSX remains very well positioned to deliver a compelling service product for customers while ensuring value for shareowners.

Now let's review the operating results for the first quarter. On the safety side, I am happy to report that CSX once again produced industry-leading results. Reviewing those measures on the left, the FRA personal injury rate was at a record first quarter level of 0.66, representing an 18% improvement year-over-year. The chart on the right shows the FRA train accident rate which improved 31% to 1.54% and represents a record level. Now, before moving on, and I think it's important to note that, and to thank our employees in the field at all levels for their truly outstanding and continued commitment to safety and that is evidenced by these great results.

So, let's turn to next slide and review on-time performance. Here you can see on-time originations on the left and on-time arrivals on the right. Both measures were all-time high in the first quarter with on-time originations at 91% and on-time arrivals at 85%. Both on-time measures also represent sequential improvement, which is particularly meaningful given first quarter volumes higher and weather was more challenging than it was in the fourth quarter. These results represent strong collaboration between our customers, sales and marketing and the operating team. Setting new records for service demonstrates employee commitment to a share purpose both, found on service actions.

Turning to system performance on the next slide, as we all know a capital-intensive industry like ours requires a strong focus on maximizing the productive use of our assets, the result that has been top priority as we look to further improve shareowner return.

Looking to the chart on the left, CSX drove an 8% improvement in terminal dwell for the quarter at a record low 22.2 hours. This means cars are spending less time sitting in terminals and thus more time in productive freight service. Velocity also showed improvement up 5% to 23.4 miles per hour with improvement across all three networks, coal, merchandise and intermodal. Record on-time performance, dwell and velocity mean customers are receiving great service. And as a result, return on asset is improving.

Now, turning to slide 20, let's turn our attention to operating efficiency, which is we are proving and not mutually exclusive great service. Looking at crew efficiency in merchandise and intermodal markets, overall volume was up 1% with 3% fewer crew starts. Growth is largely been absorbed onto existing trains, meaning there is no need to add locomotives and crews to handle increasing volume. In coal, crew start reductions have more than kept up with volume decline. By actively managing the workforce and increasing coal tons per car and cars per train, the company has been able to continue to drive crew efficiency in the coal market.

Now let's turn to the next slide and discuss employment levels. The chart on the left represents the total active train and engine workforce with the blue portion of the bars representing full-time employees and the gold portion representing employees on furlough retention boards. On a year-over-year basis active T&E employees was down 4% with volume down 2%. In addition to lower T&E employment, the company continue to deliver strong operating efficiency. Here, overtime hours were down 11% and relief crews were down 9% for the quarter.

Across all our operating graphs, employment levels were down 5%, reflecting reductions in the mechanical and engineering departments as we drove further efficiencies in these areas as well. Next, looking at where we stand with furlough and furlough retention boards, at the end of the quarter there were over 600 T&E employees on full furlough and approximately 150 on furlough retention boards. The furlough retention board count came down over the course of the first quarter as CSX put employees back to work to replace attrition and handle modest sequential business growth.

Let me now turn to locomotives on the next slide. Looking at the chart on the left, you can see that the active locomotive count is down 8% versus the first quarter of 2012, so up modestly on a sequential basis to accomplish seasonal increases in volume. Locomotive efficiency as measured by gross ton miles per horsepower hour improved 8% on a year-over-year basis. The team has been working diligently to minimize the time it takes to put locomotives into or take them out of storage resulting in the ability to react more dynamically to customer demand, thus driving greater operating efficiency.

Now let me quickly wrap up on the next slide. The outstanding first quarter personal injury and train accident results demonstrate company's commitment to keep our employees and the communities we work in safe. This commitment is why CSX is a leader in one of the nation's safest industries. The operating team continues to sustain record service in 2013, serving customers efficiently with fewer resources.

The sustained service improvement is evidenced by both, what we are hearing directly from customers as well as the record levels of satisfaction reported by our customers and third-party surveys. Given the strong start for the year, we expect to deliver over $150 million efficiency savings through improved service, growing with your assets and spinning those assets more quickly to maximize return. In this dynamic environment, CSX remains committed to providing flexible solutions for customers to enable growth and drive significant long-term value for shareowners.

With that let me turn the presentation over to Fredrik to review the financials.

Fredrik Eliasson

Thank you, Oscar, and good morning everyone. Looking at the top of the chart, revenue was essentially flat for the first quarter as declines in coal revenue were offset by gains in merchandise, intermodal and other revenue including the $32 million of liquidated damages year-over-year that Clarence mentioned earlier. Expenses improved 1% aided by a $20 million deferred gain, which I will speak to in a coming slide. Excluding this gain, expenses were slightly down versus last year as CSX was able to more than offset inflation and higher depreciation through improved efficiency. Operating income was $875 million, up 2%, versus the prior year.

Looking below the line, interest expense was $147 million reflecting slightly higher debt levels year-over-year. Other income was negative $3 million and income taxes were $256 million in the quarter. While the effective tax rate was 36.7%, we continue to expect a 38% tax rate going forward. Overall, net earnings was $459 million, up 2%, versus last year and EPS was $0.45 per share, up 5%, reflecting growth in net earnings and the impact of last year's share repurchase program.

As we turn to the next slide, let's briefly discuss how fuel lag benefited the quarter. On a year-over-year basis the effect of the lag in our fuel surcharge program was $10 million favorable. This reflects $5 million of negative in quarter lag during the first quarter of this year versus $50 million of negative in quarter lag for the same period last year.

Turning to the next slide, let's review our expenses. Overall expenses were down 1% in the quarter. I will talk about the top three expense items in more detail on the next few slides but let me briefly speak to the last two on the chart. Depreciation was up 5% to $270 million due to the increase in the net asset base. Going forward we continue to expect depreciation to increase sequentially a few million dollars each quarter reflecting the ongoing investment in our business. Lastly, equipment rent was down 2% to $95 million as a result of improved utilization and fewer leased locomotives.

Now let's discuss labor and fringe in more detail. Labor and fringe expense was down $3 million versus last year. Looking at the chart on the left, total headcount was down 4% versus last year and down 1% sequentially, reflecting favorable crews starts to our performance and reductions in mechanical and engineering that Oscar discussed earlier.

Moving to the table on the right. The table on the right. Efficiency and volume related cost savings of $20 million reflects the financial benefit of the year-over-year improvement in crew starts in overtime as well as lower mechanical, engineering and training expenses.

Moving down the table, labor inflation was up $30 million favorable to our guidance as lower cost of health and welfare programs partially offset wage inflation but remained above 3%. Rounding out the table, other costs were $4 million higher primarily driven by higher incentive compensation. Looking at the second quarter, headcount should remain relatively constant on a sequential basis although as we have demonstrated over the past several quarters, to continue driving efficiency we will adjust accordingly as business conditions warrants. In addition we expect labor inflation will rise approximately $15 million to $20 million year-over-year for the remaining quarters and incentive compensation will become more material headwind with the year-over-year variance of about $15 million in the second quarter.

Next, we will review MS&O expenses on slide 29. AS&O expenses decreased 6% or $35 million versus last year with the key driver shown in the table on the right. Total deferred gains reduced MS&O expenses by $30 million reflecting two items. The first relates to $20 million deferred gain associated with a five-year conveyance of a formerly owned company, the details of which can be found in the quarterly financial report. The second related to continuing SunRail gain, which was $29 million in the period, or $10 million favorable year-over-year. Looking at the second quarter, we expect to recognize another $14 million of SunRail, which will be down from the $20 million we recorded in the second quarter of last year. For the balance of 2013, no further gains are expected to be realized.

Turning to the operating activities, efficiency in volume related cost savings reduced MS&O expenses by $22 million compared to last year. This was driven by materials and repair cost savings enabled by an 8% reduction in active locomotive count as well as other initiatives. Moving down the table, inflation increased by $11 million while other MS&O costs increased by $6 million.

Moving to the next slide, let's discuss the impact of fuel. Total fuel cost remained flat versus last year. Looking at the table to the right, fuel efficiency was favorable by $10 million reflecting a 2% year-over-year improvement in gallons consumed per gross ton mile. Next, as shown in the chart on the left, CSX average cost per gallon for locomotive fuel increased to $3.26, up 3% versus last year and driving increase of $40 million as seen in the chart on the right. Rounding out the table, lower volume drove $4 million decrease in volume and other expenses with gross ton miles down 1%. That concludes the expense review for the first quarter.

Now, let's turn to slide 31 and review our new financial targets along with our dividend and share repurchases announcements. You may recall that I mentioned last quarter that we would update you on our longer term financial expectations after we completed a detailed review of our strategic plan with our board. With this review complete and taken into account, the new coal environment we are updating our financial targets to reflect the expectations for our business.

As I stated before, we expect 2013 to be another transition year for CSX as utilities work off, work to reduce inventories to adjust to the new environment where natural gas remains cheap and abundant. That said, we continue to expect domestic coal headwind to sit side by the end of 2013, setting the stage for both earnings growth and operating ratio improvement in 2014 and 2015. Over those two years, we are targeting average annual earnings per share growth of 10% to 15% of the 2013 base. Including our first quarter earnings per share of $0.45, we now expect full-year EPS to be flat to slightly down from 2012 as we continue to face headwinds in coal and cycle one-time favorable items from the prior year.

Looking at the company's operating ratio for this year, we expect to regain the momentum we had prior to the recent transition in coal driven by our continued focus on pricing above inflation, profitable volume growth and efficiency. As a result, we now expect to achieve high 60s operating ratio by 2015, and we continue to target the mid-60s longer-term. Because of our continued confidence in the company's core earning power, we remain committed to deploying cash within a balanced framework that prioritizes investment in the businesses drive long-term value creation along with dividends and share repurchases that also provide value for shareholders.

First, our capital investment remains unchanged for 2013, a $2.3 billion. Long-term, we continue to expect to invest 16% to 17% of revenue in our business plus an overlay for PTC. We view capital investment as a key driver of long-term shareholder value as infrastructure and rolling stock investment allows CSX to sustained high safety and service levels, enhance the efficiency and capitalize on strategic growth opportunities that produce superior returns.

Second, CSX remains committed to a dividend payout range of 30% to 35% of trailing 12-months earnings. In accordance with this policy, we have announced that 7% increase in the quarterly dividend to $0.15 per share reflecting a payout at the high end of our target range.

Third, CSX remains committed to utilize the share buybacks as an important tool to return cash to investors. As such, we announced a new $1 billion buyback program, which is expected to be completed over the next 24 months. This new program is expected to be primarily funded by excess cash and free cash flow.

Finally, within the context of these announcements, we continue to target an improving credit profile that balances between financial flexibility and cost of capital through a full business cycle. In summary, CSX's business remains fundamentally strong. Our recent financial performance and future free cash flow prospects continue to provide the basis for increased shareholder distributions. Through prudent capital investment and executing well on the things more in our control CSX will be able to continue to create long-term value for our shareholders.

With that let me turn the presentation back to Michael for his closing remarks.

Michael Ward

Thank you, Fredrik. Over the last several years, CSX has consistently delivered strong results over a wide range of economic conditions. Producing record first-quarter earnings after experiencing yet another sharp decrease in coal revenue is emblematic of our ability and our resolve. While we know that our stakeholders are more interested in tomorrow than yesterday and the guidance in shareholder actions we outlined show our confidence in both the near and long-term.

Over the next several months we envision a transition period where coal begins to stabilize at a lower level and more importantly where the 80% plus of our business that is not related coal provides opportunities for the team to deliver vibrant results. Our diverse portfolio, far-reaching network and dynamic operating platform will allow the company to optimize its performance and any momentum that would occur in the economy with increased opportunities further.

Put another way, we believe that CSX has emerged from yet another period of multiple challenges even stronger than before just as it did after the global recession and in the quarter just completed. These achievements add to our confidence in this team's ability to produce double-digit earnings growth and a high 60s operating ratio by 2015 and a mid 60s operating ratio longer-term. CSX stands for how tomorrow moves and the employees of this company have once again quietly and diligently backed up that promise with excellent service product and consistently strong financial results.

Thank you for your interest in CSX and we look forward to answering your questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ken Hoexter of Bank of America Merrill Lynch.

Ken Hoexter - Bank of America Merrill Lynch

Good morning. Fredrik, if we could just follow-up on that outlook a bit, or Michael, looking at that 10% to 15% growth, the midpoint, it looks like a bit slower, if you include the full $0.45, as you mentioned. So maybe just talk about what are in the assumptions there? Are you looking at coal, maybe, being worse than targeted? Is the profit/loss from that just too great to overcome? Is pricing on export coal getting more aggressive? Maybe if you can just give us some parameters around what's in that 10% to 15% thought process?

Fredrik Eliasson

Sure, Ken. So, well obviously now we have a detailed plan after we have reviewed it with our board that is behind this guidance. Clearly, as you know, seldom does long-term plan exactly end up as the way that you expect them to when you put them in place. So we are going to have to continue to be flexible and adapt, just like we have over the last couple years to produce these sort of results through whatever economic environment that we are seeing.

I would say, overall, underlying those assumptions, is essentially a flat coal environment versus what we are seeing basically between export and domestic an overall flat environment. On the overall economy, I would say the same thing we are going to see slowly a recovering economy. Nothing more than what we have seen here over the last year or so. You couple that with continued inflation plus pricing and the productivity focus that we have shown here over the last two years, that is really the foundation for our long-term guidance.

So we know that we are going to continue to be flexible and adapt to whatever environment we have and then continue to push the same sort of leverage that we have over the last few years.

Operator

Our next question comes from Brandon Oglenski of Barclays Capital.

Brandon Oglenski - Barclays Capital

Fredrik, maybe if I can just follow-up on that. So just to be clear, you guys are assuming that coal demand flattens out in the 2014, 2015 period?

Fredrik Eliasson

Over this period of time, between domestic and export, clearly there could be periods where one is up but one is down but overall, I would say that our view is that between the two it will be flattish during this period of time

Brandon Oglenski - Barclays Capital

And that's coming off of the negative guidance you have for '13, right?

Fredrik Eliasson

That's correct.

Brandon Oglenski - Barclays Capital

Okay. Then if I just ask one on the energy markets for Clarence. What are some of the opportunities or where do you have facilities on your network today that can accept crude oil, and are you willing to put out some growth targets potentially for this segment of business?

Clarence Gooden

Well, thanks, Brandon. We have about four different facilities right now in the East that we have the capability of serving directly, and we are currently doing that through the average of about seven and nine trains a week. The limiting factor on what the long-term growth of that will be as you are aware is the production capabilities, particularly in the Bakken in the eastern market. So it's, for us is going to be driven by what the production capabilities are, not by what the demand is.

Operator

Our next question is from Chris Wetherbee of Citi Research.

Chris Wetherbee - Citi Research

Thanks. It's a question on coal yield as I think sequentially in the second quarter through the fourth quarter, Clarence, how should we be thinking about the coal yield. Are you still looking for kind of flattish yields on a full year basis for 2013? Should they be getting better I guess sequentially?

Clarence Gooden

Chris, we are looking for those coal yields to be flat on a basis going forward and that's subject to any fluctuation that we could have in the fuel surcharge application that’s' coming in.

Chris Wetherbee - Citi Research

Okay. Then just a quick follow-up to that, when you think about the met coal settlements for the second quarter coming in a little bit higher than where they were in the first quarter, does that give you some support to potentially bring that number up a little bit or does it at least provide you some downside support, so there is no further decline. Just want to get a sense of kind of how much flexibility you have within that.

Clarence Gooden

I think it's the latter. It provides us support against any further downward movement. Those prices that it's just been announced at Queensland, an effort by the producers to push the rates up what actually settles in the market traditionally has been slightly lower number.

Chris Wetherbee - Citi Research

Okay. That that's helpful thank you.

Operator

Our next question is from Chris Ceraso of Credit Suisse.

Chris Ceraso - Credit Suisse

Thank you. Good morning. There was a comment on slide number 10 about stronger domestic pricing coal. Was that just from inflation adjustment on existing contracts or we are successful in getting price increases on anything that may have turned over in the quarter?

Clarence Gooden

It's both.

Chris Ceraso - Credit Suisse

Okay. Then just as a follow-up, I think you have kind of spoken to this. The guidance for domestic coal for the rest of the year of down 5 to 10 suggest that things are down only small single-digit for the rest of the year. Is that just the effect of comps getting easier or are you actually seeing increased demand because of where gas prices are?

Clarence Gooden

The comps in the second quarter are actually better, because we had a terrible second quarter last year in domestic coal. The third and fourth quarters tend to even out a little bit more.

Chris Ceraso - Credit Suisse

But are you seeing any sort of response, any kind of demand response to where gas prices are or are you still eating into existing inventories?

Clarence Gooden

In the North, we've seen some response to the gas prices, particularly where Powder River basin and Northern Appalachian coals are being used. In the South, the inventory levels are still at persistently high levels, and so that's going to be determined mainly by the weather and by the price of natural gas, but we expect those stockpiles to stay fairly high throughout the year.

Operator

Our next question is from Justin Yagerman of Deutsche Bank.

Robert Salmon - Deutsche Bank

Good morning, guys. It's Rob on for Justin. Clarence, you had sounded little more cautious on the export thermal coal outlook on coal. Are you implying that that 2013 outlook is now below that the 20 million tons you've been talking to in Q4, or are you just highlight that year-over-year comps are growing more challenging as we move out to the second quarter?

Clarence Gooden

It's the latter that the year-over-year comps are growing a little bit more challenging as we go forward. It is a fact that the API 2 index numbers as you are aware come down, but we think they are starting to stabilize and actually the forward curve on the API 2 through the second, third, fourth quarters and through 2014 is actually increasing.

Robert Salmon - Deutsche Bank

I guess, Clarence, while we are talking about the API 2, could you discuss a little bit in more detail about your export thermal coal contracts? How much of that book of business is linked to metrics like the API 2 in terms of the contracts and I guess you know what percentage of that book again is tied to a take-or-pay commitment volume?

Clarence Gooden

Well not all, but a [part of is] [ph] of the thermal exports, particularly in to Europe, are tied to the API 2 index. Our rates don't go up as fast nor do they go down as fast as the API 2 index does. A large percentage of our contracts would be on a take-or-pay basis although there is a certain amount of those thermal contracts that are on a spot market basis.

Operator

Our next question is from Thomas Kim of Goldman Sachs.

Thomas Kim - Goldman Sachs

If I could ask Clarence just with regards to the intermodal side, you mentioned that there is a 9 million truckload opportunity. I was wondering if you could perhaps give us the path towards that's opportunity being realized?

Clarence Gooden

Well, we have the highway initiative called highway to rail conversion, in which we go out with a specialized sales force that we have to the beneficial cargo owners and through our other intermediary channels and we discuss with him our profits, our opportunities. We have an optimizer that can take their freight and determine what is best suited for either long-term, short-term, rail - term being to find the distance. So we are doing that initiative.

We are opening up new markets, the Montréal market that we discussed on the call, will be we think a very lucrative market for us on the domestic side serving over 7 million people. Our expansion at Fairburn has been indicative of what we see happening in our domestic growth. We will be opening a new terminal in Winter Haven, Florida, here before long that will expand further in that central and lower central Florida market which is very fast-growing.

We have got new construction happening now in Baltimore, as we speak. We have expansions in Columbus that we just completed. New terminal in Louisville, Kentucky that we just completed, which I am pleased to announce is almost at capacity and has been wildly successful for us. So a combination of all those factors leads us to believe that we are going to have a good continued growth in our intermodal market.

Thomas Kim - Goldman Sachs

Great, and if I can just ask a separate question. Thus far, we have only heard a few companies talk about the sequester impacting transport companies and they happen to be within the airline space. But I noticed in your outlook that you had commented that this sequester could have some impact. Now I was just wondering if you might be able to provide a little bit of color in terms of what the impact might be?

Clarence Gooden

I don’t remember saying anything about the sequestration. We haven't seen any impact from it that I am aware of.

Thomas Kim - Goldman Sachs

Okay, sorry I guess I should clarify. It was on page 13 where you said comments with regard to budget uncertainty impacting military shipments. I apologize with the terminology.

Clarence Gooden

Our military shipments have been down. This is second, almost third year in row, that our military shipments have been down. They are mainly being impacted, on a year-over-year basis, by the war material that we were sending overseas. Unfortunately because of the, say fortunately, it depends on your perspective, but from mine, as an American, bringing down our troops abroad has been a positive thing for the country and but negatively impacted our numbers.

Michael Ward

So it's not much a sequestration as to a war.

Clarence Gooden

As the war effort.

Operator

Your next question is from Thomas Wadewitz of JPMorgan.

Thomas Wadewitz - JPMorgan

Clarence, I have got one for you, and then one Fredrik as well. You mentioned, four terminals that you are now can serve in the East that are online or coming online for crude by rail and you are doing about seven to nine trains a day. What do you think is the most realistic expectation for second half? Would you think that you can get to two rails a day versus roughly one now? How do you view as the likely ramping crude by rail in second half of this year?

Clarence Gooden

Tom, first, good morning. It is good to talk with you. Number two is, we are not having seven to nine a day. Its seven to nine a week.

Thomas Wadewitz - JPMorgan

Sorry about that. That’s yes.

Clarence Gooden

I would like to handle seven to nine a day.

Thomas Wadewitz - JPMorgan

I misspoke, right, clearly. So roughly one train a day. But how would that look in second half, you think?

Clarence Gooden

I think that it will increase in the second half. We feel very positive about it with the discussions that we have but as I pointed out earlier, at the end of the day, the production levels in the Williston basin the Bakken is going to determine what we have. And the sort of a joke we have internally if everybody got to two trains a day that they won't. I mean, the numbers will be out the roof and it's just unrealistic to expect, so I would think of it more in terms of the Bakken producing the 700,000 barrels a day that they producing is 70,000 barrels a day the train itself can hull sort of back into what you think the potential numbers are going to be given the fact that all of that oil is not going to come east. That makes sense to you?

Thomas Wadewitz - JPMorgan

Yes. It does. I mean, I guess, we will see as it plays out there will be some meaningful growth and we will kind of see as it happen how large it is and what production does. So, thank you for that.

Then Fredrik, your share buyback essentially $500 million a year for the next two years, if I look at that in historical context, so if I take out 2009 and look at the prior five years you did on average $1.5 billion a year of buyback, and I am just trying to get my arms around why the number you have the next two years is quite a bit smaller than that.

Obviously your coal franchises is very different today than it was, but it also seems like you are seeing some stability in that and especially when you look beyond 2013. So, is that temporarily conservative and improved credit little bit or is it just the capability for share buyback a lot less than it was in the past? How would you frame that and why such a conservative approach on buyback?

Fredrik Eliasson

Thomas, you know that our prioritization is pretty straight forward. First it's about investing in our business. Second is the dividend and third is our share repurchase program. And based on available cash flow that we have, we think we are going to have coupled with some use of our balance sheet within the context of improving credit profile. That's how we determine the amount of share buyback that we will do. When we look at the next few years, we see two things that is impacting the sizing of the program specifically, first of all is the fact that our PTC spending is ramping up a little bit more and that is impacting the size of the program and then second we are also are seeing the reversal starting to happen, because the last couple of years for bonus depreciation.

So, bonus depreciation has been a wonderful tailwind for the last couple years in terms of free cash flow and we are now getting to the point where we are starting to see that minimizing the impact of the positive impact of that. In fact as we get into '14 and '15 are going to see the negative impact from that, so that is considered in that sizing of that program.

Thomas Wadewitz - JPMorgan

Okay. Great. Thanks for the time.

Operator

Our next question is from Bill Greene of Morgan Stanley.

Bill Greene - Morgan Stanley

Hi, there. Good morning. I just wanted to back to some of the underlying assumptions on the long-term guidance and I want to sort of ask Oscar about the cost side of it, because you've done a great job in the last few quarters on getting these costs out particularly on looking at the labor numbers, but even MS&O and stuff like this. It's been very impressive, so what we've seen at some of the other rails over time is they sort of come at the cost in a very aggressive way and they have gotten them out in a way that essentially says no matter what the macro hands us, we are going to get these operating ratios lower, and I was wondering if you can sort of talk about your ability to flex up on that if these macro assumptions that Fredrick outlined don't payout like that. Is a lot of this is in your control even beyond the macro that we get these numbers through cost alone if we need to?

Oscar Munoz

Bill, so you've said a lot and I think that the heart of your question is that are we going to increase our productivity targets by year?

Bill Greene - Morgan Stanley

Yes. And really like I guess I kind of look at this and say you've demonstrated an ability to get out a lot when the macro is not helpful. Fredrik outlined the macro that's kind of neutral. But it's not that good, can you still get at these numbers through productivity anyway?

Oscar Munoz

Absolutely. I mean if you think of the way we've been getting at these numbers, I mean we get them through asset utilization, technology improvements, resource planning sort of dynamic communication tools that allow us to sort of literally use a lot less resources in the critical first and last mile with our customers and we think there is ample opportunity there within our existing structure regardless of what happens in the macro environment, so that our future view on our productivity targets is very solid and will continue.

Bill Greene - Morgan Stanley

All right, and then just one follow-up for Clarence on the competitive dynamics, can you help us understand sort of how it's playing out right now in the East? It feels a little bit like the growth rates by you and your competitor are a little bit different on volume. Is that because there is some much more aggressive pricing environment that you seem to be seeing in recent years or do you feel like that’s just some of the geographies playing out and not too much to pay attention to?

Clarence Gooden

Well, first I think it's great to see that the rail industry in general is doing well. That's a positive thing for all of us. If you look in the East, what you will essentially see between the two carriers is that we have some issues in our coal franchise versus NS and their intermodal growth rates have been higher than ours. As I outlined to you earlier, we have terminal expansions in place. We will have over 90% of our network doublestack cleared here very soon. So we feel very positive about what our growth rates are. I think with the 9 million truckload opportunity in the East, there is a lot of business out there for everybody.

Operator

Our next question is from Scott Group of Wolfe Trahan.

Scott Group - Wolfe Trahan

So just want to clarify a couple of things on the export side, particularly met. So the guidance of a 40 million tons, I think if I remember from last quarter, it was split relatively pretty equally between met and thermal on the export side. So we were a good amount above that run rate for met in first quarter. Does that suggest that there is upside to the 40 million tons or that that 7 million run rate for med in first quarter isn’t sustainable? Then just longer-term, the high 60s OR target for '15, do we need export to stay above 40, at or above 40 million tons or is there some cushion if that starts dropping below 40? I know there are a couple of things there.

Clarence Gooden

Okay, Scott, I will go first and Fredrik will go second. On the export tons, as we mentioned earlier, we expect it still to be about 40 million. We told you originally, that the split will be about 50-50. It came in this quarter about 57-43. As we forecast throughout the year, we expect it to be somewhere in the 50-50 range, if its anything it could tend towards being more favorable to the met.

Fredrik Eliasson

Scott, in regards to coal and what expectations are, I outlined earlier that we think that it's going to be flattish overall, clearly, from where we are here in 2013 and the guidance we have provided. But we also said seldom do the plans actually work out exactly that you expect. So we are going to continue to be flexible and if one of those markets are a little bit weaker, we will have to find other opportunities either on the top line or on the cost side to try to offset that.

Scott Group - Wolfe Trahan

Okay, that’s great and just one follow-up on crude by rail. As the business really starts to ramp up on the next year or so, should we be thinking about a big positive mix impact on yields, like we have seen with some of the other rails. I guess I am just not sure how to think about the pricing necessarily in the East and some of the refineries are a little bit more competitive between the rails. How do we think that and just the impact of that maybe the brent and WTI spread tightening a bit on pricing?

Clarence Gooden

I would tell you, first off on the brent and WTI and the Bakken spreads that are all pretty tightening up. That’s a commodity-based number that’s going to do what its going to do on a worldwide global basis. So its just very difficult to predict that that’s going to be. On the profit margins for the crude, it is very profitable for us. It's probably not what a lot of people think. Its not coal, if that's the question that you're asking but it is a very profitable part of our business for us.

Operator

Our next question is from Jason Seidl of Cowen Securities.

Jason Seidl - Cowen Securities

A couple of questions. I guess I will focus on the pricing side. One, you obviously mentioned a little bit of weakness on the export side. I don’t think that’s of any surprise. I don’t know if you could split out some comments between thermal and met. Two, just to clarify one of the question, I think Bill asked about some of the pricing dynamic in the East. It just doesn't seem, at least from your results, that there is any aggressive pricing between you and the NS going along right now. I just wanted to make sure that that is the case.

Clarence Gooden

What do you mean by aggressive pricing between us and the NS?

Jason Seidl - Cowen Securities

I am saying aggressive, are you guys getting more one aggressive with trying to steal freight from one and other. I think that was sort of the crux of those questions.

Clarence Gooden

Absolutely not. As we've told you earlier, we're going to price above rail inflation. We're going to going to price above it, because, one, we think we've got a product that offers a significant value and secondly because it's necessary for us to invest in our infrastructure we've had a solid plan and worked over the last two years now nearly in which we've wanted to work on our pricing and that's what we are going to continue to do. What was the second part of your question? Met versus thermal?

Jason Seidl - Cowen Securities

Met versus thermal in terms of export pricing, I mean, you talked about pricing in general. I was wondering if you could parse out both of them.

Clarence Gooden

Well, the met obviously goes at a higher rate than the thermal does, pricing right? Because the commodity type and what demand in the marketplace in there. As you know, we've seen downward pressure on both and I would say that downward pressure has been equally between the two markets just at a different level.

Jason Seidl - Cowen Securities

Okay. And my follow up question, you talked about sort of your new intermodal program. It sounds like that's going more direct marketing. Is that the case?

Clarence Gooden

Now, it's not going more direct marketing, but is going more direct to the customers themselves. We do that jointly with our intermediaries, but we want to make sure that the bit ultimate beneficial cargo owners are very cognizant of what our capabilities are, or values that we could offer to those customers and how we can best serve them and in what markets.

Jason Seidl - Cowen Securities

Okay. I appreciate the clarifications. Thanks for the time as always, guys.

Operator

Our next question is from Ben Hartford of Robert W. Baird.

Ben Hartford - Robert W. Baird

Good morning, guys. Fredrik, can you clarify or remind us what the incentive comp headwind by quarter for the next three quarters is going to be?

Fredrik Eliasson

So here, in the first quarter incentive comp headwind was about $7 million year-over-year. And as outlined in my comments, we think it's going to be about 15 in the second quarter to reset the targets and we now have the broader application of the bonuses to include a larger portion of our union employees as well. As we look at the second half, they will be probably little bit more than that, probably closer to the 20 on average.

Ben Hartford - Robert W. Baird

Okay. That's helpful. Then a follow-up related to crew starts were down 16% in coal with volume were down 10%-ish. What's driving, I guess, the longer train length? Is it just mix of greater percentage of export coal volumes or are you seeing more activity from bigger customers at the expense of smaller customers that that may not be generating at full capacity? Can you talk a little bit about that dynamic?

Oscar Munoz

Yes. This is Oscar, Ben. I think it's a mixture of several things. Our southern utility coal normal longer haul is where our volume declined or as you think that would be shrinking, but we've got increases in export coal in Newport News, which is affecting that mix, we've got a high percentage of stuff coming from the Illinois basin which has a little bit longer haul and then in the Northeast where we are growing we have lesser declines in the Northeast in the mid-Atlantic utilities which kind of contribute to the longer haul. So, mix of all of those factors it's just traffic mix. It's nothing more sort of broader oriented development.

Ben Hartford - Robert W. Baird

That's helpful. Thanks.

Operator

Our next question comes from David Vernon of Sanford Bernstein.

David Vernon - Sanford Bernstein

Good morning. With the liquidated damages of $32 million in the quarter is that the number we should expect more [board] or is this kind of dated as far as what's on the radar screen right now?

Fredrik Eliasson

This is Fredrik. I think that we have seen the vast majority of the liquidated damage that we expect for the year in the first quarter, so I wouldn't expect to or there's no need to really build in a lot more after this. We will certainly update you and being transparent as we do get them going forward just as we have in the past.

David Vernon - Sanford Bernstein

And on the revenue, would that be sort of in that $80 million, $70 million to $80 million range then?

Fredrik Eliasson

Yes. I think that's the best place. If you look back over the last few years that seems to be the place where it normal normalizes.

David Vernon - Sanford Bernstein

Okay. Great. Then just one last follow-up for Clarence, are you guys starting to see any type of pickup in demand for drilling materials into the Marcellus with gas prices start coming back up?

Clarence Gooden

So far we have not seen any additional pickup for the drill count and sales. We are seeing an increase in the amount frac sand that we are moving into the Marcellus.

Operator

Our next question is from John Larkin with Stifel, Nicolaus.

John Larkin - Stifel, Nicolaus

Good morning. Thanks for taking my question. Just on the broader issue of seasonality, for many decades, usually the first quarter is your weakest quarter in transportation across most modes. Your guidance kind of implies that maybe there's less seasonality this year than there might be in a normal year or is it just the way that the one-time items flows. Could you perhaps illuminate us on that point?

Oscar Munoz

Well, I am not going to get into quarterly guidance but based on what we said here earlier, we had about $52 million between the liquidated damages and the close agreement associated with the conveyance of our formerly owned subsidiary that impacted us favorably this quarter. So if you adjust for that, you get to a different run rate and then as you have seen, I guess, a little bit in regards to what you are alluding to, the seasonality is perhaps not as strong as it has been in the past, but there is still seasonality especially in the second quarter and the third quarter. We know third quarter with the automotive shut down and some of the coal holidays and so forth. So there is still seasonality there but I do think you need to change the starting point and once you do that I think it makes more sense versus the historical pattern.

John Larkin - Stifel, Nicolaus

Thank you for that, and then maybe as a second question, one of the other hot topics amongst investors has been activity into and out of Mexico and while you don't touch Mexico directly, with your partner railroads, you can do business into and out of that country. Do you see that as a major opportunity that might ultimately be as big crude by rail?

Clarence Gooden

Well, John, one, we see it as a major opportunity for us. We do a lot of business today in and out of Mexico, both container riseable as well as a boxcar freight and automotive businesses in and out of the Mexico. I haven’t really thought about it terms of comparables but as crude by rail, the Mexican market, for us, is a very large market and I hope that crude by rail grows as fast as Mexico has.

Operator

Our next question is from Jeff Kauffman of Sterne, Agee.

Jeff Kauffman - Sterne, Agee & Leach

Just wanted to follow up on Tom Wadewitz' question. I see the point where you paid down about $400 million of debt in the first quarter, no share repurchases. I hear what's Fred saying as we want to keep our cash level and neutral and that's what the share repurchase is based on but it seems like you are delevering here and I would guess share repurchase would be more accretive to earnings than a debt pay down at these levels of interest rates. Can you guide me through the thinking on that?

Fredrik Eliasson

Just a very brief answer to that. Our intent is not to delever during this period of time.

Jeff Kauffman - Sterne, Agee & Leach

Okay, so in other words, we are open-ended but we are just being conservative given the environment and matching our cash flows?

Fredrik Eliasson

Well, we are going to continue to make sure that we approach it the same way we have approached it the last couple years in regards to the balanced approach and we are going to size the share repurchase program based on whatever free cash flow that we have available including using whatever debt capacity we have and clearly as you know we also had to go into the year a significant amount of pre-funding done on our balance sheet because of taking advantage of some attractive rates last fall. So our cash balances are relatively high going into the year.

Jeff Kauffman - Sterne, Agee & Leach

Okay, and one detail question. Fred, you said the bonus depreciation traversing, does that mean that your GAAP depreciation expense levels out in 2014, 2015? Or am I thinking about that wrong?

Fredrik Eliasson

I think you should really just think about it from the relationship between deferred taxes and our GAAP taxes. So it doesn’t really impact whatever you see on the P&L side. It really does impacts the ability to continue to defer some of our taxes.

Operator

Our next question is from Anthony Gallo of Wells Fargo.

Anthony Gallo - Wells Fargo

As I understand, the export coal pricing from you is going to vary with the underlying commodity price change. Are there any other commodities on your network that had a similar dynamic? And I guess more specifically could you clarify the comment on crude? So will crude pricing by you vary as the differentials vary?

Clarence Gooden

Anthony, this is Clarence. We don’t have any other commodities that we specifically tied in other lines of business. We specifically have tied to commodity prices. And on the crude pricing it will not follow the spreads.

Operator

Our next question comes from Peter Nesvold of Jefferies.

Peter Nesvold - Jefferies

Good morning. Just a follow-up on liquidated damages, can you just maybe talk a little about how the liquidated damages provision are changing with coal industry given the underlying changes within the industry itself? Are these becoming harder to implement? Are there different ways that these provisions are being put into contracts etcetera?

Clarence Gooden

Well, I think that clearly the liquidated damages that we have in context today are different than they were a few years ago when we essentially had both min and max as sort of in contrast and that the liquidated damages today are a lot smaller than they used to be. I think that's a trend that we expect to continue going forward as well.

Peter Nesvold - Jefferies

Okay. Is that sort of a gradual evolution or is it given the significant downturn that we saw in coal volumes in 2012? Are there sort of step changes that are occurring in those provisions as you implement them now?

Clarence Gooden

This has been occurring over last couple years. We expect that to continue going forward.

Operator

Our next question is from Keith Schoonmaker of Morningstar.

Keith Schoonmaker - Morningstar

I think, to ask about coal inventory, you indicated utility inventories are high. Can you compare the levels in the past year and related just comment on maybe unique attribute of your franchise? Do you consider your ground storage capability more advantageous during periods like the present?

Clarence Gooden

Keith, this is Clarence. The coal inventories as I mentioned earlier in the North had pretty much gotten down to what would be considered historically normal levels. That's been driven by the colder winter I think we had like six more weeks colder weather than we normally had. It's also been driven by natural gas prices slightly going up and a lot of that coal that moves into that area, which is both, Powder River basin and Northern App has a lower ratio right between coal and natural gas than it does in the South.

In the South, the utilities have the tendency to burn a lot more gas. Even though electrical consumption is have a lot more gas capacity and as a result of that they went into the year again with excessively high inventories and they have stayed fairly high throughout this period. Now there are isolated cases where some utilities actually dropped and there's also isolated cases where in utilities have increased.

What was the second part of your question? Ground storage related to export?

Keith Schoonmaker - Morningstar

Yes.

Clarence Gooden

We think it gives CSX a competitive advantage. We have ground storage at all three of our major exporting terminals that allows our customers to blend the coal if they have the coal there available for immediate loading as well as the asset utilization.

Operator

Our final question comes from Walter Spracklin of RBC Capital Markets

Walter Spracklin - RBC Capital Markets

I guess my question is on the intermodal. I know Fredrik, you gave some color on coal assumptions going up there, but on the little brighter note here your truck-to-rail conversion is probably a more systemic and longer-term evolution and I am just curious as to what level of intermodal volumes are you assuming above your average levels for the rest of your business for intermodal going out to your target?

Fredrik Eliasson

I think as you've seen here over the last few years, we continue to have great success in intermodal conversion in intermodal space and we certainly expect that during this period as well.

Walter Spracklin - RBC Capital Markets

At a rate above the average, I guess

Fredrik Eliasson

I would say above average. Yes.

Walter Spracklin - RBC Capital Markets

When you look at the profitability of your intermodal, I know all the railroads was sort of termed the profitability of intermodal as average with the group, but clearly as you get growth in that segment your you train lengths become more optimal. Intuitively it would lead you to want to assume that this will be an above average growth level. Is there a certain level of volumes that you see as being a key volume level you can term that in with regards to your market share versus the truck, so the $9 million talking about or is there volume level you can point to within your own [kernel] statistics that would say, okay at this level we really start to get some good economies of scale here and get profitability above the average.

Fredrik Eliasson

Well, I do think that you're right. I think that as we continue to grow that business we do see a economies of scale that is going to be helpful. At the same time though, intermodal also is the toughest part of the business because of pricing. So you are very much dependent on making sure that you create that leverage as you move forward. As we said, intermodal is a profitable business to us. It is with par with most of our merchandise market and we want to grow as much as we possibly can. So we are excited about the opportunity. We are excited by the 9 million loads and we are going to continue to grow that market at a faster rate than the overall economy.

Walter Spracklin - RBC Capital Markets

That’s great. Thank you. I just have a housekeeping question for Oscar. Your employee base has come down quite a bit quite nicely here. How should we look at employee count going forward in terms a more flattish volume growth after the decline in coal volumes. Is this something that stabilizes or starts ticking back up now as you see that stability in coal and perhaps some growth in your merchandise in the intermodal business?

Fredrik Eliasson

This is Fredrik. We are going to continue to make sure that we are responsive to whatever market conditions we are seeing. So in a flattish environment, we expect our headcount to remain flattish. Obviously, we are going to see what we can do on the productivity side but then if we see a ramp up in volume here in the second and third and fourth quarter we are going to see some adjustments to our headcount but hopefully not a one-to-one ratio.

Operator

I will now turn it back to the speakers for closing remarks.

Michael Ward

Thank you for your attention and we will look forward to seeing you next quarter.

Operator

This concludes today's teleconference. Thank you for your participation in today's call. You may disconnect your line.

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