CSX's (CSX) CEO Michael Ward on Q1 2016 Results - Earnings Call Transcript

| About: CSX Corporation (CSX)
This article is now exclusive for PRO subscribers.

CSX Corporation (NYSE:CSX) Q1 2016 Earnings Conference Call April 13, 2016 8:30 AM ET

Executives

David Baggs - VP, Treasurer and IR Officer

Michael Ward - Chairman and CEO

Frank Lonegro - CFO

Cindy Sanborn - COO

Fredrik Eliasson - Chief Sales and Marketing Officer

Clarence Gooden - President

Analysts

Ravi Shanker - Morgan Stanley

Brandon Oglenski - Barclays Capital

Brian Ossenbeck - JP Morgan

Chris Wetherbee - Citi Investment Research

Tom Wadewitz - UBS

Allison Landry - Credit Suisse

Rob Salmon - Deutsche Bank

Scott Group - Wolfe Research

Jason Seidl - Cowen and Company

Ben Hartford - Robert W. Baird

Jeff Kauffman - Buckingham Research

Justin Long - Stephens Inc.

Tyler Brown - Raymond James

Donald Broughton - Avondale Partners

John Barnes - RBC Capital

Operator

Good morning, ladies and gentlemen and welcome to the CSX Corporation First Quarter 2016 Earnings Call. As a reminder, today’s call is being recorded. During this call, all participants will be in a listen-only mode.

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

David Baggs

Thank you, Nicole, and good morning, everyone. And welcome again to CSX Corporation’s first quarter 2016 earnings presentation. The presentation material that we’ll be reviewing this morning along with our expanded quarterly financial report and our safety and service measurements, are available on our website at CSX.com under the Investors section. In addition, following the presentation this morning, a webcast replay will be available on that same website.

This morning, our presentation will be led by Michael Ward, the Company’s Chairman and Chief Executive Officer, and Frank Lonegro, our Chief Financial Officer. In addition, Cindy Sanborn, our Chief Operating Officer; and Fredrik Eliasson, our Chief Sales and Marketing Officer along with Clarence Gooden, our President, will be available during the question-and-answer session.

Now, before I turn the presentation over to Michael, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to review the company’s disclosure and the accompanying presentation on slide two. This disclosure identifies forward-looking statements, as well as the uncertainties and risks that could cause actual performance to differ materially from the results anticipated by these statements. In addition, at the end of the presentation, we will conduct a question-and-answer session with the research analysts.

With nearly 30 analysts covering CSX and out of respect for everyone’s time, including our investors, I would ask as a courtesy for you to please limit your inquiries to one question and if necessary, a clarifying question on that same topic.

And with that, let me turn the presentation over to CSX Corporation’s Chairman and Chief Executive Officer, Michael Ward. Michael?

Michael Ward

Well thank you David. Good morning everyone. Yesterday CSX reported first quarter earnings per share of $0.37 compared to $0.45 per share in the same period last year. Revenue declined 14% in the quarter; a strong pricing across nearly all markets reflecting an improving service product was more than offset by the impact of lower fuel recovery, market conditions that drove a 5% volume decline, including a 31% decline in coal, and a $95 million year-over-year decline in liquidated damages.

Turning to operations, CSX remained an industry leader in safety and service measurements continue to advance in the quarter, consistent with our service excellence initiative to meet and exceed customer expectations. Expenses improved 12%, driven by lower fuel prices as well as efficiency gains and lower volume related costs, reflecting CSX’s ongoing drive to aggressively reduce its cost structure, as we continue to reshape the company in face of this challenging market environment.

Including the impact of these cost saving actions finding liquidated damages, operating income decreased $139 million to $704 million for the quarter. At the same time, the operating ratio increased 90 basis points year-over-year to 73.1. Now I’ll turn the presentation over to Frank, who will take us through the results and second quarter outlook in more detail.

Frank Lonegro

Thank you Michael and good morning everyone. Let me begin by providing more detail on our first quarter results. As Michael mentioned revenue was down 14% or $409 million versus the prior year. With coal declining 31%, total volume decreased 5% from last year which impacted revenue by about $140 million. In addition, fuel surcharge recoveries declined $139 million. We continue to see strong coal pricing from an improving service product which for the first quarter was up 3.1% overall and 4.0% excluding coal. However these gains were more than offset by the impact of negative business mix in the quarter.

Other revenue decreased $85 million, driven mainly by cycling higher liquidated damages from last year, which totaled $105 million versus $10 million in this year’s first quarter. Expenses decreased 12% versus the prior year, driven mainly by $133 million in efficiency gains, $78 million in lower fuel prices and $64 million in lower volume related costs. Operating income was $704 million in the first quarter, down 16% versus the prior year.

Looking below the line, interest expense was up slightly from last year with higher debt levels partially offset by lower rates, while other income was relatively flat to the prior year. And finally income taxes were $212 million in the quarter with an effective tax rate of about 37%. Overall, net earnings were $356 million down 19% versus the prior year, and EPS was $0.37 per share down 18% versus last year.

Now let me turn to the market outlook for the second quarter. Looking forward we again expect volumes to decline in the second quarter, the challenging freight environment will continue as headwinds in coal, energy and metals volume are expected to more than offset the markets that will show growth. Automotive is expected to grow, as light vehicle production continues to be a bright spot in the economy. Minerals will benefit from the continued ramp up of the new fly ash remediation project and continued highway construction, driving aggregate movement.

Intermodal is expected to be neutral, as we continue to cycle competitive international losses. This will be offset by secular domestic growth, driven by strategic investments and supporting highway to rail conversion. Chemicals volume is expected to decline, as energy markets continue to be marked by low crude oil prices and reduced drilling activity, which will impact our share related products more significantly in the second quarter. At the same time, the core chemical markets remain healthy.

Domestic coal will continue to be unfavorably impacted by low natural gas prices currently around $2 and high levels of coal inventory at the utilities. As a result, we expect second quarter tonnage to be around 18 million tons. In addition, we anticipate a similar quarterly run rate for the second half, recognizing domestic coal volume will be largely dependent on weather.

Export coal remains pressured by the strong US dollar and global oversupply, as a result we believe second quarter tonnage will be around 4 million to 5 million tons and expect a similar run rate for the remainder of the year. For the full year, we now expect around 18 million tons to 20 million tons of export coal in 2016.

Despite a slowly recovering domestic steel production environment, metals is expected to be unfavorable year-over-year as the market works off excess supply from the strong US dollar and imported product. Overall we are still facing significant coal headwinds and a freight environment that continues to experience pronounced challenges associated with historically low crude oil, natural and other commodity prices and a strong US dollar.

As a result, we expect second quarter volume to decline in the mid-to-high single digit range year-over-year. Turning to the next slide, let me talk about our expectations for expenses in the second quarter. We expect second quarter expense to benefit from the low fuel price environment and our ongoing focus on driving efficiency gains and right sizing resources as we continue to reshape the company. Over the course of the last 12 months, we have taken aggressive cost actions with headcount down nearly 4500 versus the prior year.

These actions include our train length initiative, closing facilities in the coal network, consolidating a division headquarters and streamlining mechanical and operations support functions. These actions along with cycling the impact of winter weather last year through high efficiency gains in excess of $130 million seen here in the first quarter. And for the full year, we now expect to deliver efficiency gains of around $250 million.

Looking at labor and fringe, we expect second quarter average headcount to stay relatively flat sequentially. We expect labor inflation to be around $25 million in the second quarter in line with the level seen here in the first quarter. Looking at MS&O expense, we expect inflation and the cycling of an operating property gain from last year to more than offset efficiency gains and volume related savings.

Fuel expense in the second quarter will be driven by lower cost per gallon, reflecting the current price environment; volume related savings and continued focus on fuel efficiency. We expect depreciation in the second quarter to increase around $15 million versus the prior year, reflecting the ongoing investment in the business.

Finally, equipment and other rents in the second quarter is expected to increase moderately from last year, with higher freight car rates and the increase in volume related costs associated with automotive growth, more than offsetting improved car cycle times.

Now let me wrap up on the next slide. CSX first quarter reflect challenging freight conditions with low commodity prices and a strong US dollar continuing to impact most markets, resulting in a 5% volume decline this quarter. However, as we continue to reshape the company, our focus on pricing for the relative value of rail service, driving efficiency gains and aligning resources to the softer demand environment help to offset those volume headwinds.

Looking ahead, we expect macroeconomic and coal headwinds to continue this year. Low commodity prices and the strength of the US dollar are expected to continue impacting many of CSX’s market; in particular we now expect total coal volume to decline around 25% for the full year.

Looking at our expectations for the second quarter and full year, the impact of current market conditions on CSX volume, particularly in coal is expected to outweigh the positive momentum we are seeing in service which drives pricing efficiency and right sizing initiatives. In the second quarter, we expect mid-to-high single digit volume declines with efficiency gain moderating from the level seen here in the first quarter.

For the full year, in addition to liquidated damages we cycled during the first quarter, as we previously discussed we will also be cycling a significant property transaction in the fourth quarter. As a result, we continue to expect second quarter and full year 2016 earnings per share to be down from last year. That’s said, we remain intensely focused on achieving strong pricing that reflects the value of CSX service product, right sizing resources with lower demand and pursing structural cost opportunities across the network.

In particular, the aggressive cost actions we have taken over the last 12 months has helped to mitigate the challenging freight environment and weaker volumes. As a result of these initiatives, we now expect to deliver efficiency savings of around $250 million in 2016. With that let me turn the presentation back to Michael for his closing remarks.

Michael Ward

Thank you Frank. As I think about CSX first quarter performance, it’s clear that the company’s core earning power remained strong, even in an environment in which macroeconomic forces are putting significant pressure on most of our markets. We know 2016 will be a challenging year, and we are focused on delivering the highest level of performance and results possible.

In this environment, CSX continues to reshape its business and network for the economy of tomorrow, maximizing growth opportunities in merchandize and intermodal, while also improving the profitability of these markets to help offset the loss of coal. As we look forward, this team is resolute in its commitment to further transform today’s company.

The CSX of tomorrow is built on the strength of premiere network reaching diverse, merchandise and intermodal markets. It is focused on delivering service excellence for our customers to support pricing that allows us to continue investing for the next generation and drive ever more efficient operations. And we will leverage technology to further improve safety, service and efficiency, as we continue to evolve our business for the realities of tomorrow economy.

As we make decisions today to make that vision of tomorrow a reality, we remain focused on achieving a mid-60s operating ratio longer term and delivering compelling value for you our shareholders. Now I would be glad to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] our first question comes from Ravi Shanker of Morgan Stanley. Sir your line is open.

Ravi Shanker - Morgan Stanley

A question on the productivity savings, clearly your first quarter performance was pretty amazing with the 133 compared to the full year run rate. You did bump up the full year by less than you kind of exceeded your prior guidance for 1Q. Can you just talk about the cadence for the rest of the year and why that appears to step down so much versus the fourth quarter number?

Cindy Sanborn

Sure. This is Cindy. I think we’re off to a great start which reflects a lot of hard work by all of our teams to bring the $130 million of productivity in the first quarter. And as I think about how 2015 progressed, we had a lot of initiatives that we started in the beginning of the second quarter and on in to the third quarter around right sizing of our coal facility as well as our train length initiatives. So we’ll be bumping up against those comps going forward, and I also would say there were some benefit to milder ones for this year than what we had on 2015 in the first quarter.

That said, we are never done in working on our productivity initiatives and with the pace of change here has intensified, accelerated and we will continue to bring everything to the bottom line that we can, keeping in mind that we have to balance that we’re serving customers and we won’t compromise safety in that effort. And as we go forward and you think about the run rate going forward of $40 million or $50 million in the next three quarters, that is higher than our historical run rate with the exception of 2015 in terms of productivity that we’ll be able to deliver. So if there’s more to get, we will absolutely get it and we’ll be able to update you on that if we see that in the future conversations either on the quarterly or on Frank’s roadshows.

Ravi Shanker - Morgan Stanley

If I can just ask one question on coal, what’s your outlook for the rest of the year? Obviously you’ve given us your guidance, but going in to 70 and 80, just any new thoughts on the outlook coal in the medium term.

Fredrik Eliasson

Sure, this is Fredrik. We guided to about 25% down for the full year. We did on the domestic side here in the first quarter, did about 17 million tons and our view as we think about the next couple of quarters, we like to think that we’re going to be definitely 17-18 million ton range on the domestic side. And then on export side, we did almost 6 million tons in the first quarter.

Traditionally the first quarter is a little bit stronger than the other quarters; at least it’s been like that for the last couple of years. We also enjoyed some spot moves here in the first quarter that we don’t necessarily see in the remaining three quarters, so maybe 4 million to 5 million tons a quarter on the export side. So that gives us 22 million to 23 million range for coal guidance per quarter as we move through the year versus the 23 million tons we did in the first quarter.

Operator

Our next question comes from Ken Hoexter of Merrill Lynch. You may now ask your question.

Ken Hoexter - Merrill Lynch

Just wanted to follow-up on the employees. Great job on the larger than expected reduction down 14%, but maybe if you can walk us through, why was the average cost per employee up? Last few quarters I guess we’ve seen it down 5% to 9%, this quarter it was up. May be you can talk a little bit about what’s in that number in terms of comp or anything else that drives and what should we look forward for that going forward. Thanks.

Frank Lonegro

Ken its Frank. You’re right; headcount was down about 13%-14%, while the labor and fringe line was down about 9% or 10%. So your comp per employee is about 4% or 5% higher. There’s a couple of driver, some of those are industry related and some of those are CSX specific. Clearly you have general wage inflation of 4% a year or so, and then with probably as the biggest driver for us health and welfare inflation. As the industry is reducing resources, you’ve got fewer employees to spread the health and welfare cost over. So both of those are industry in nature.

In terms of maybe some CSX specific dynamics, as you furlough employee, generally those are going to be your less tenured employees with lower all-in wages and then may be as a last point Ken, when you at a year-over-year number of employees in training, there were significantly more employees in training in the year ago quarter than there are currently, just given sort of where we are on the resource side and training pays less than marked-up pays. So you got three or four moving parts in there that hopefully answers your question.

Ken Hoexter - Merrill Lynch

So just on the coal market, Michael can you look forward and tell us. I know you’ve talked in the past about mass gas-fired plant closing that were mandated in ’15 and ’16. Is there something that now is done and we should see that pace decelerate as you look forward. I just wanted to say, there was a great answer by Fredrik on what we’re seeing now. But I just want to understand it, there’s something else that is connected. Can you drive this, is this just market dynamics as far as closings or are there more that’s going to structurally change the market and continue the pace we’ve seen on the decline.

Fredrik Eliasson

Sure Ken, this is Fredrik. Frankly, based on this very low demand levels we’re seeing as we go through plant by plant and look at their closures that we expect at ’16, ’17 and ’18 which really covers all the announced closures that we have on our network. Based on the outlook that we have for the rest of the year now which is consistent with the guidance, there’s only less than 1 million tons that we have in for those plants that have announced to close, which means that the closure side of things is really behind us to a very large degree as we move forward because of the fact that the demand levels are so low.

Operator

Our next question comes from Brandon Oglenski of Barclays. Your line is now open.

Brandon Oglenski - Barclays Capital

Can you guys help us on the top line? I know you’re talking about mid-to-high volume declines for 2Q, but how do we think about the contribution from price within the headwinds from mix. Does that get easier or more challenging as we progress through the year?

Fredrik Eliasson

This is Fredrik again. Yes, the second quarter and probably even third quarter are going to be challenging quarters from the volume perspective. It’s not really until we get to the fourth quarter we will have a little bit easier comparisons year-over-year both on the coal side and on the general merchandize side as well. We’re going to have a negative mix with us as long as our coal business is declining as fast as it is and our intermodal business is growing as fast as it is. Clearly, we are very transparent about what we’re doing from a pricing perspective, and that’s going to continue to be helpful as we move through the year.

Brandon Oglenski - Barclays Capital

I guess what I was getting to as more from the top line perspective, should we be thinking a similar outcome then what makes us - I think you’ve referred this in our prepared remarks that mix might offset the favorable impact on pricing looking forward. So topline could be down a little bit more than volume.

Fredrik Eliasson

Well I think as you try to model out what we’re doing, we’re kind of giving you the individual components. And the one piece we haven’t talked about is of course fuel as well. So you got to put those pieces yourself, we’re very explicit in terms of what we’re seeing in each individual market, we certainly expect continued strong pricing as we move forward and then of course we have the variance of fuel or whatever that is going to do.

Operator

Our next question comes from the line of Brian Ossenbeck of JP Morgan. Your line is now open.

Brian Ossenbeck - JP Morgan

A quick question on the impact of the dollar, the trade weighted index was about 5% off from the peak. Are you still calling out some pretty negative headwinds when [you turn] on commodity prices both on the exports and on disruptive imports. Do you think if it stays at this level Fredrik that we’ll start to see some relief towards the end of the year or do you think you need another 5% down move to really get some relief from some of these commodity markets.

Fredrik Eliasson

Well the dollar’s still well above its 10 year average of so forth, but it is clear that it’s been helpful in certain areas the fact that it has taken a step back to last two months or so. One area where we had seen that is in the export coal side on the metallurgical side with a benchmark actually has stepped up a little bit from I think the low [$0.81] in Queensland index trading forward and I think the bench where some of the spot moves are actually even higher than that at this point.

And we’re also seeing, well it’s not directly dollar related, some of the potential tariff and counter (inaudible) that we’re seeing in the metals business, we’re starting to see drive down some of the in-portions of the country which is starting slowly but surely to I think to heal our metals business as well. But it is fair to say that even with that sort of a relief over the last two months on the dollar; you’re looking in to the fourth quarter I think until you’re going to start seeing meaningful improvements in the volume performance.

Brian Ossenbeck - JP Morgan

And then on the productivity side, you mentioned that the train length initiative is basically approaching a one-year anniversary, so comps are going to get a little bit tougher, but maybe if you can just recap the last year, some of the accomplishments and what you think is reasonable for in that context for some of the goals looking out through the rest of this year and in to 2017.

Fredrik Eliasson

Sure Brian. We over the year of 2015 saw 16% gains in our train length and we’re up to about 6400 feet in total. We saw probably smallest incremental change in the fourth quarter as we had really largely put in place all that we felt comfortably we could in maintaining service to our customers, and we are bumping up against challenges in the single track territory where our siding length is a bit of limited for us.

Going forward and in this year we are planning to increase siding length in our core door from Nashville to Cincinnati. That is presently limited to 6500 feet, so we’re making some structural adjustments to help us continue it, and we should see those investments being in place and available to us in the back half of this year.

So I would also say that one of the benefits of the initiative that we’ve seen in the ability to flex as seasonality impacts volumes. So in summer months we feel that with a little bit less volume that’s typically out there that we’ll be able to continue to utilize train length and in terms of reducing our cost gives us the ability to (inaudible) where we haven’t before and certainly if anything changes either up or down we’ll be able to adjust accordingly to maintain train length. So we feel really good about the initiative and our team in the field has done a fantastic job putting it in place.

Operator

Our next question comes from Chris Wetherbee of Citi. Your line is now open.

Chris Wetherbee - Citi Investment Research

Maybe a question for Cindy just following up on the productivity, when you think about the increase from the 200 to the 250, if you could maybe breakdown sort of those specific components a little bit to sort of looking at the puts and takes on some of the expenses. I’m just kind of curious kind of where that comes from, maybe how much weather and maybe how much is headcount, wanted to get a sense there.

Cindy Sanborn

As far as going forward, let me try and understand your question, going forward or --.

Chris Wetherbee - Citi Investment Research

The incremental between 200 million and 250 million for the target for the full year.

Cindy Sanborn

Well I think a lot of it is the initiative that we already have in place. I think the benefit that potentially you’ll hire is to be able to continue to right size and streamline which is also been a big part of our initiative. So we’ve got technology and Michael mentioned in his prepared remarks utilizing that in automation. So it will be some additional benefits to headcount I believe.

Chris Wetherbee - Citi Investment Research

And then Fredrik may be a question for you on the market outlook I guess, putting coal aside for a moment it seems like we’re still sort of maybe a bit weaker than seasonally expected at least as far as the outlook for the second quarter. Just want to get a sense the last couple of weeks we’ve seen some challenges intermodal or sort of slip back again. I just want to get a sense of kind of how you feel about where we stand with volumes, the economy just generally outside of some of the specific pressure points like coal.

Fredrik Eliasson

Sure. If taken to the highest level from what we see the economy, I think we still see the overall economy progressing in that 2%-2.5% range, kind of uninspiring growth. Clearly we’re still dealing with the aftermath that we saw last year both on the energy side and also the strength of the dollar and the low commodity prices. And as I said earlier that’s going to be with us for at least another two quarters and it is also why we guided to volumes to be down a little bit more year-over-year sequentially in the second quarter. Specifically the last couple of weeks to your question, we look at our four key markets merchandize, intermodal, coal and auto.

Our merchandize business has stayed probably some of the two strongest weeks in fact in the last two weeks, but then we have seen some weakness in our coal markets which is consistent with our guidance. We also had some operational issues with some of the terminals we serve in the export side that impacted our volumes.

Our auto business was very strong early on in March. We probably had 65% of our cars under load and that’s kind of cycling through that right now. But we continue to see good strength there for the rest of the year, and yes we have seen a little bit of weakness in the intermodal space over the last few weeks, but I don’t think anything that has structurally changed there. So it’s going to be a tough second quarter, but I don’t think it’s a reflection of where the economy is heading or anything like that.

Operator

Our next question comes from the line of Tom Wadewitz of UBS. You may now ask your question.

Tom Wadewitz - UBS

Wanted to ask either Michael or Fredrik on pricing. You continue to get very good pricing in merchandize and intermodal, and then the totals a bit less. How do you think that changes? Is that something that you kind of sustain through the full year, and is there a point where if you say rail traffic does - I mean you’re saying it’s going to be weak for a couple of quarters, does the same store price are getting decelerate through the year and its somewhat of a timing impact or would you say, hey look we can just keep doing this and we are kind of immune to softness in track, we’re immune excess rail capacity. So just wondered if you could kind of talk about that, because the numbers are pretty good, they are very good in intermodal and merchandize, but it just seems like there’s a lot of excess capacity out there.

Fredrik Eliasson

We’re certainly not immune to what’s going on in the market place and I think you’ve seen a reflection of that here in the quarter versus the fourth quarter as you’ve seen a sequential downtick in our pricing. There obviously are specific drivers of that, we work with our customers on a deal-by-deal basis to understand their needs and what opportunity to drive price is. A critical component of supporting our price right now is of course the fact that our service product has improved significantly. And I think our customers value a long term access to our network and the markets that we provide.

Clearly the market is softer now, than it was a year ago, but yet our pricing is frankly up year-over-year as well. So we’re going to work with our customers, our prices are going to reflect what the market allows us to do. At the same time, it’s critical for us to be able to price, so we can reinvest in our business. And there’s been a strategic imperative of ours for a long time, but underlying all that pricing is a service excellent for our customers.

Tom Wadewitz - UBS

So that having being said, do you think it’s more likely that you see stability through the year in your same store price or do you think there’s some risk that you see deceleration in that as we look forward.

Fredrik Eliasson

We really don’t forecast price. You’ll have an opportunity to see price as we disclose our earnings each and every quarter. But strong pricing is important to what we’re trying to do strategically, and we’re going to work with our customers to make sure that they get service that they need to be successful in their market place and at the same time we need to be able to continue to invest in our business.

Tom Wadewitz - UBS

Do you just have a quick thought on where domestic coal inventories are?

Fredrik Eliasson

Our domestic inventories are at very high levels, if you look at annuals its well above 100-112 days. I think it’s the latest data that we have and in the south it’s even higher than that about 170 days or so versus kind of the normal range of 55 to 70 days of burn. And so we got plenty of inventory at our customers which will take a fairly significant time I think to get down to more normalized levels. It’s going to depend both and of course where the natural gas prices are, but also dependent on where we see the summer here in terms of how much burn we get as we move towards kind of a peaker and kind of that incremental demand levels. We are more weather dependent than we’ve been in the past to try to work some of these stockpiles down.

Operator

Our next question comes from Allison Landry of Credit Suisse. Your line is now open.

Allison Landry - Credit Suisse

Following up on Ken’s question earlier, lot of puts and takes on the labor line. But as I think about total labor and fringe expense in the second quarter, typically we see a decline on a sequential basis. Not sure we think about it being roughly flat versus the first quarter or would you expect it to be a little bit higher.

Frank Lonegro

Allison if you look at where we are on an absolute headcount basis what we’ve guided to is sequentially flat which his down about the same percentage on a year-over-year basis that you saw in the first quarter. Clearly the inflation will continue to impact as will the health and welfare peace there. So I’d say flat to up slightly would probably be the right thing to look at.

Allison Landry - Credit Suisse

And then thinking about the service metrics and in particular train speed, it seems that CSX is lagging the other rails in terms of returning to level seen in 2013. So anything specific driving this, and then when would you expect to get back to peak productivity levels.

Fredrik Eliasson

Well Allison, when it comes to services we’re constantly working with Fredrik and his team and making sure we’re providing that service product that our customers need, and we’re really never satisfied with where we are. So the balancing act here is how to trade that off with productivity and inefficiency and make sure they are back to - what Fredrik’s talking about we are earning the ability to reinvest in our business.

So I think when I look at it as to where we are? I alluded to you a little bit earlier, we have some opportunities, we’re seeing great performance in our double track territories, it is a little bit more challenging in the single track territory and we are making some investments to improve that and one of the core lots that we have between Nashville and Cincinnati, and we will continue to work on making adjustments as necessary to serve our customers well.

Frank Lonegro

And the train length initiative has some impact as well, right. That’s what’s driving the single track challenge.

Operator

Our next question comes from Rob Salmon of Deutsche Bank. Your line is now open.

Rob Salmon - Deutsche Bank

Following up with Tom’s question, we’re certainly seeing some really strong pricing across the overall network. If I look last quarter, the delta between the same store sales pricing which obviously includes coal and merchandize and intermodal which kind of strips it out, it expanded last quarter. Can you help us better understand what drove that? Was this kind of unique to the quarter or was there adjustments that were made across the network that are going to impact the duration of the year as well.

Fredrik Eliasson

Make sure I understand your question a little bit better Rob.

Rob Salmon - Deutsche Bank

If I’m looking at kind of the delta between same store sales at 3.1 and the core merchandize intermodal pricing at 4.0, it’s about 90 basis points. If I look back to the fourth quarter, the split was about 40 basis points. Should I think about, what drove that kind of step up in that split last quarter? Was it something you need because of some closures or just how the volumes were coming on within your coal network or are there underlying adjustments that we should be thinking about having an impact for the duration of the year as well?

Fredrik Eliasson

The delta there is pretty much exclusively driven by the fact that we have taken some pretty significant action in our export coal business. That is a reflection of what the market place allows us to do or enforces us to do right now to optimize our bottom line. So that’s really driven export coal more than anything else the fact that that spread has increased.

Rob Salmon - Deutsche Bank

Got it. And so inherent in the guidance is export coal volumes coming down. So we should see less of a headwind as I look forward.

Fredrik Eliasson

Yes, that’s one way of looking at it. That’s probably one way of looking at it.

Rob Salmon - Deutsche Bank

That helps. And also to get a little bit more color in terms of the intermodal RPU, the sequential decline obviously fuel had an impact there. But I would imagine the bigger impact in terms of the first quarter was just the declines, the mix of the business with international being under so much pressure and the uptick in domestic.

Was there any impact in terms of [loose] or truck load market impacting intermodal RPU as well or were those two factors the entire explanation of the sequential decline here.

Fredrik Eliasson

Most of the impact were because of fuel. We also did see some mix impact in the quarter in both international and in our domestic shorter length of [hall] that impacted as well. But most of our business intermodal space is under long term contract. So while the spot market does effect a portion of the business, most of it is really impacted by longer term trends not these shorter term issues that we’re facing. So while there were some challenges in the quarter, our pricing in intermodal space is still positive.

Operator

Our next question comes from Scott Group of Wolfe Research. Your line is now open.

Scott Group - Wolfe Research

I’m not sure if you can help us kind of frame the earnings guidance a little bit better. I don’t if year-over-year is the right way to look at it, but supported earnings were down 18% in the first quarter, are you expecting kind of similar declines in second quarter maybe that’s negative, more negative, and I know that you have some comps on your liquidated (inaudible) so maybe potentially it’s the right way to think about it. I don’t know but if you could help kind of frame that guidance a little bit closer.

Frank Lonegro

Scott its Frank. You’re right, we did guide that the second quarter would be down on a year-over-year basis. You’re also right that when you look at the second quarter of last year, it was an all-time record for us in terms of operating income, EPS and operating ratio. So we have a significant comp that we have to work through in the second quarter. We tried to give you as much granular guidance as we could, as we look out over the next three months, certainly we gave you some very specific tonnage guidance around coal and then overall volumes in the mid-to-high single digit range just given the softness in the economy and certainly the coal headwinds play in to that.

And we’re going to continue to focus on the things that we have the most impact on certainly safety and service, productivity Cindy mentioned, a run rate of 40 million to 50 million in the second quarter and improving service product as well as continued strong value pricing. So you add all of that up and we come to the conclusion that earnings are going to be down, and if you want to talk sequentially, generally speaking second quarter earnings are better than first quarter earnings, if you look historically at that.

Scott Group - Wolfe Research

That’s much tricky if you look at the past couple of years you’ve seen kind of significant increases in earnings first quarter to second quarter. You go back further it’s more smaller increases in earnings and I’m just struggling with the right way to think about the seasonality.

Frank Lonegro

Like I said, I think you’ll see a sequential improvement. We had not sized that, but I think you will see a typically seasonal pattern unless of course coal disappoints even further.

Scott Group - Wolfe Research

Just one quick follow-up, I think in one of the earlier questions you said that total labor cost should be kind of flattish 1Q to 2Q. So that implies like a 10% increase in comp per employee in the second quarter year-over-year. I just want to make sure that that’s right.

Frank Lonegro

I think what I was trying to do is to help Allison see that on a flat headcount number with the inflation that’s fairly typically and a moderating productivity environment that it would be essentially flat to up a little bit.

Scott Group - Wolfe Research

In terms of total labor and fringe?

Frank Lonegro

Total labor and fringe, that’s right, comp per employee.

Operator

Our next question comes from Jason Seidl from Cowen and Company. You may now ask your question.

Jason Seidl - Cowen and Company

I want to think a little bit longer term here. Could you talk about right sizing the network beyond just furlough and repurposing may be some locomotives. Where are you at in that stage and what really can be done in some of the network that might be just loosing too much traffic for you.

Cindy Sanborn

If you’ll indulge me here Jason, I think the changes that we’re making in our company are not short term reactions to temporary economic conditions. So everything is on the table in terms of how we look at our network. I think what you’ve seen us do is rightsizing the coal fields with some specific facility reductions that we’ve made starting in the third quarter last year, which would be Erwin, Tennessee, Corbin, we announced a consolidation of a division from Huntington’s other divisions and also reducing our yard operation and car operation in Russell, Kentucky.

On the rest of our network, and we’ll continue to work on the coal network and in the coal fields on making the right decisions, while still serving the customers that we have there. When you look at the rest of the network, we’re focusing very hard on density which is part of our train length initiatives really kind of the underlying component of train length initiative. So as we look at our main arteries, how can we continue to drive density there, which then also allows us to streamline some facilities around that, so you’ve seen us do that with some of the mechanical reductions that we announced that we were going to make in some of our car facility?

And then going forward too beyond just simply network type of actions, our technology implementation that allows us to do automate. So we are looking at this as the ability from my perspective to create the plan and execute a plan that helps CSX strive in a rail industry that is fundamentally changing. And so we will continue to drive all of these initiatives and look for ways to tweak them to get even better efficiency while still and I have to say, it’s very important to us that we serve our customers and have a service product that needs or exceeds our expectations.

Jason Seidl - Cowen and Company

So what you can do in the coal network down right now or is there more to come in terms of rightsizing that particular PC or network.

Cindy Sanborn

I would say we’re never done in any of this, and we’ve taken some really large steps, will continue to look as the demand for our services changes and it will change. We will take the appropriate steps to take out the cost that need to come out. You have also seen us publicly put in to the STB some discontinuance of service on routes where the mines are shut down and we will continue to do those types, take those types of actions that will be aggressive with it. But keeping in mind that it’s a very profitable business for us and we want to serve the customers that need our service.

Michael Ward

You may want to mention the change in some of our pricing on the origin side.

Fredrik Eliasson

Sure. I mean obviously we work hand-on-hand with Cindy and his team here to help her drive productivity. Not just in the coal fields but elsewhere in terms of train length initiative and so forth. But specifically to Michaels point, we have changed the way we price our coal in the coal field to drive efficiency.

So we’ve gone away from pricing zone so to speak rate district towards specific point-to-point pricing that better reflects the reality of operating in to certain brands lines and so forth and the maintenance that has to occur there and we will price more efficient loading points differently going forward which is tough discussions to have with our customers, but at the same time I think this is our understanding that this sort of a transformational change, you need to do something different.

So there are a lot of things that we’re doing cooperatively with Cindy to try to help drive out cost, but still protect our service going forward.

Jason Seidl - Cowen and Company

My follow-up is on the intermodal side, clearly there is slight capacity in the truckload market place and in fact you could argue it probably got a little more slack here in 1Q. When you talk to your intermodal customers, how are they viewing that? Are they viewing that slack capacity in the trucking market as just a temporary blip where they’re maybe taking manage of it or are they viewing this as longer term they want to play the stock market maybe a little bit more than they have in the past.

Fredrik Eliasson

As I said before that we have - a significant portion of our domestic business is under long term contracts. And I think those customers that participate there in those products do value the long term access to our network and the capabilities that we provide. There is certainly right now excess capacity which is reflected in the spot pricing.

I would say though that as we look at some of the underlying drivers there especially new orders for trucks which is coming down pretty rapidly, you still have the challenges in terms of driver retention and escalating cost there, and we have the biggest impact that I think all of you followed and we certainly follow as well is the ELDs next year and the impact that that will have definitely as we get in to the second half of 2017. So while this is a soft environment right now that will be with us for a couple of quarters, I think the fundamentals that we talked about for a long time is very much intact.

And we’re seeing that in the partnership with the truckers that we continue to build on to allow us to do the long haul and then do the pickup and the delivery which solves some of their strategic challenges. So it is softer, but we do think that’s a temporary issue and that the basic thesis of our intermodal investments and our bullishness of intermodal long term to 9 million loads etcetera is very much intact and frankly the fact that we’re getting still very much positive pricing in intermodal space even in this environment right now, I think bodes well for the long term prospect for an intermodal business.

Operator

Our next question comes from Ben Hartford of Baird. Your line is now open.

Ben Hartford - Robert W. Baird

Fredrik may be just taking the other side of the intermodal equation. On the international side obviously there’s a lot of discussion with the implementation of SOLAS in a container weight rules. But any thoughts about how that’s going to look on the other side of 2016 and longer term if and when those rules are implemented.

Fredrik Eliasson

We are trying to understand that ourselves frankly, and I think we are learning from our customers. It could be opportunities for people to ship earlier potentially. But at this point, I think it’s a little unclear exactly what the impact will be.

Operator

Our next question comes from Jeff Kauffman of Buckingham Research. Your line is now open.

Jeff Kauffman - Buckingham Research

My question on efficiency’s been asked, but let me Cindy come back to you in a different way. Gross ton miles are down about 9% to 10%, where are you right now in terms of locomotive capacity, say locomotives online, locomotive on storage. And I’m surprised I’m not seeing more of a reduction in cars online, kind of flat to down 1% over the last year. Can you help explain to me some of these dynamics and what you can and can’t do there?

Cindy Sanborn

Sure. I’ll talk about locomotives first. If you compare first quarter ’15 to this quarter, we actually have about 400 less locomotives active, which is about 10% in line with the volume reductions that you’ve talked about. Within that, embedded in that is the fact that we’ve got 275 store but there’s also another 96 that are lease returns that will be returned in the second and third quarter of this year that we’ve already pulled out.

So we feel like we’re fairly, decently in line with the GTM reduction and our workload reduction in our resource take-down as a result of that, and it also allows us if we can surprise on the upside we have the ability to pull more locomotives out. And I would also add that we are receiving locomotives. In our long term purchase plan we have received 26 locomotives of that 100 total in the first quarter. So that’s kind of a puts and takes around locomotives and we are very obviously focused on right-sizing our resources around both locomotives, employees and cars, and I’ll talk about cars here as well.

In terms of what you’re seeing with cars online, we have about 1300 cars stores right now, versus - our 13,000 stored right now versus 5500 this time last year. When you look at cars online, the cars that are actually stored don’t come out of the count for a fairly long period of time, about 36 months, it’s a standard that we all have. So if you include those additional cars that were pulled out in the first quarter, we’re down about 4% in terms of cars online. If you take those out with cars online number; so again, we feel like we’re fairly well resourced appropriately for the demand that we have.

Operator

Our next question comes from Justin Long of Stephens Inc. Your line is now open.

Justin Long - Stephens Inc.

I know you aren’t giving specific EPS guidance beyond expectations for a year-over-year decline. But there have been several puts and takes since the January call, and I just wanted to get a sense if your expectation on the magnitude of that EPS decline has changed. When you put it altogether has your overall earnings outlook for this year gotten better, worse or is it about the same as it was three months ago.

Frank Lonegro

Hey it’s Frank. I think when you look at the full year, clearly we knew this was going to be a down year, I think in terms of the puts and takes coal has gotten worse on a relative basis versus what we had walked into the year with. We knew we were going to have soft volumes in the merchandize side especially with the dollar and the commodity prices, intermodal is hanging in there especially on the domestic side, and then we’re over delivering on productivity versus how we set out the year, and so if you add all of those up and I’d say we’re pretty much in line with what we had originally thought.

Justin Long - Stephens Inc.

Okay, great. That’s helpful. And then just one quick modeling question, I wanted to ask what you’re expecting on the change and incentive comp this year just based on your current plan for 2016. Do you expect a major year-over-year change in incentive comp in the next quarter too?

Frank Lonegro

Well obviously that depends on how we do against our internal plans and clearly those are designed to align with the interest of the shareholders. We reset it every year as of January 01, if you remember in 2015 we began to roll-off incentive comp in the third and the fourth quarter. So I wouldn’t suggest any meaningful change in the first and the second quarter and then we’ll update depending on how we’re doing as they year goes on in terms of incentive comp year-over-year as we get out in to the back half of the year.

Operator

Our next question comes from Tyler Brown of Raymond James. Your line is now open.

Tyler Brown - Raymond James

Frank, I believe in your 10-K you guys mentioned that on 2016 you guys are expecting to have a 53 week this year. Can you just talk a little bit about what the expected impact in Q4 would be? I mean is it basically adding that extra week of operations and extra week of earnings and then in a similar vein, how would it impact the optics of Q4 traffic?

Frank Lonegro

So let us get a little deeper into the year and that’s a good Q3-Q4 question for us. We hit this about six or seven years and its really normalize the number of days in every quarter, the number of weekend days in every quarter, the number of holidays in every quarter and it gives us a better comparable. But one of the things we have historically done and you can expect us to do going forward, we will give you the very specific revenue and expense and operating income and operating ratio of numbers for the 53 week on the fourth quarter call.

Tyler Brown - Raymond James

And then Fredrik, I am curious about this new flash move that you’ve noted in minerals. Is this a result of the Coal Ash regulations from last year and do you think this is kind of the tip of the iceberg or do you think this is more of a one-off project. It just seems to me that minerals has been one of the few areas of strength.

Frank Lonegro

Now fly ash is a byproduct of burning coal which must be remediated by the utility plants, and obviously it can also be used in the production of concrete. And we do have a significant uptick in interest in looking at opportunities to move this to a variety of land fields business. The first move that we’ve been able to secure and that we do think there are more opportunities as we move forward to capitalize on that input products to get it for our customers to make sense.

Operator

Our next question comes from Donald Broughton of Avondale Partners. Your line is now open.

Donald Broughton - Avondale Partners

Just real quick, you at least objectively appear to become more and more aggressive in share repurchase in the recent quarters. Refresh on how you think about that? Is it a fixed dollar mark you’re putting towards your purchase and so as stock price falls are you going to buy more or is it some of the metric that’s returning the level through which you’re being aggressive to share re-pricing.

Frank Lonegro

No, we’re being very ratable about it as a matter of fact. I mean we have guided previously that it would be about $250 million to $260 million a quarter, so I think all you are seeing is us being the beneficiary of deploying that in a lower stock price environment and so that ratable approach will value more share obviously in a lower price environment and less shares in a higher price environment. So we’re not trying to pick the stock, we are trying to run a good rail road, and so as the price goes down we’ll buy more as the price goes up we’ll buy fewer.

Operator

Our last question comes from John Barnes of RBC Capital. Your line is now open.

John Barnes - RBC Capital

Going back on Donald’s question, from a share repurchase perspective and it were like due to maybe CapEx that 1Q is a little bit lower. You talked about some of the rationalization of infrastructure and that kind of thing, could you talk about may be the CapEx outlook not just for this year, but going forward should we see it continue to turn lower as whatever the metric is, I guess percentage of revenue is probably not the right measure anymore. But should we expect it to trend lower and if so how do you reallocate may be that free cash flow.

Frank Lonegro

Sure. As you know we entered this year and put a plan together on the capital investment side that took out over a $100 million on a year-over-year basis, and that was just reflective of the environment that we’re in. As you’ll look forward I think we have some significant things that will be rolling off, positive trend control would clearly be one of those. And as we look at the asset intensity of our business, there may be some opportunities on the infrastructure on the equipment side.

At the same time, as you heard Cindy mention making sure that we can keep pace with the train length opportunities that we have and investing in sidings going forward is going to be important for us, technology investments will also be important for us and making sure we have a good safe and reliable rail road is going to be important for us. So I do you’ll see some moderation overtime as we continue to target 16% to 17% of revenue as our long term goal, and I think we have line of sight to that over the next few years.

So, I do think you will continue to see us deploy capital in a balanced view with capital investment being the first priority, second priority being dividends and then the third priority being buyback. So I think you will continue to see us take that balanced approach.

John Barnes - RBC Capital

And then Fredrik on the coal outlook, and longer term you got a huge shift in the portfolio makeup of eastern utilities. I guess Southern company just announced another plant site for a nuclear reactor in South Georgia to go along with the two to build a plant (inaudible). I mean you’ve got this incredible amount electricity production coming on line from nuclear. I know you’ve talked a little bit about the plants that are targeted to shut down from ’16 to ’18, but is there any concern that as you go out further on that curve that you start to see additional coal facility shut down as a result of maybe some of this nuclear beginning to come online.

Fredrik Eliasson

I think we have seen a lot of change over the last couple of years. Who would have thought that in four years we would lose $1.4 billion of coal revenue and we’re pretty much on target here in 2016 to lose at least $500 million of coal revenue. And so clearly based on what natural gas prices are right now, there’s an economic interest in diverting a lot of the utility plants away from coal towards natural gas and in some instance like you pointed out to also to nuclear.

We do think though that where we are at these very depressed levels both because of natural gas prices being so low and most likely an unsustainable low place, and the fact that stockpiles are also very, very high that there are opportunities to see some pickup at some point. But there is no doubt that the trend on the utility side is downward going forward. But I don’t think its anywhere close to the pace that we’ve seen here over the last four to five years.

So we’re monitoring that very closely, we’re of course also looking at the direct impact of the regulation that is going to kick in here potentially, as we get in to 20-20 and beyond. But I think as we look at the next couple of years, we have seen a significant portion of the pain behind us and right now it’s about seeing where natural gas prices will stabilize and when do we get through this overhang in the stockpiles to get back to more normalized level. When that happens, we’ll see where it is. But the general term is obviously, it’s a downward path.

Michael Ward

Bye everyone. Thank you for joining us and we will see you again next quarter.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!