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Edited Transcript of CSX earnings conference call or presentation 16-Jan-19 9:30pm GMT

Q4 2018 CSX Corp Earnings Call

Jacksonville Apr 2, 2019 (Thomson StreetEvents) -- Edited Transcript of CSX Corp earnings conference call or presentation Wednesday, January 16, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank A. Lonegro

CSX Corporation - Executive VP & CFO

* James M. Foote

CSX Corporation - President, CEO & Director

* Kevin Boone

CSX Corporation - Former VP of Corporate Affairs & Chief IR Officer

* Mark K. Wallace

CSX Corporation - EVP of Sales & Marketing

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Conference Call Participants

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* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Benjamin John Hartford

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity Analyst

* Brian Patrick Ossenbeck

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Cherilyn Radbourne

TD Securities Equity Research - Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* David Scott Vernon

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* Matthew Edward Reustle

Goldman Sachs Group Inc., Research Division - Senior Equity Analyst

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

* Walter Noel Spracklin

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to CSX Corporation's Fourth Quarter 2018 Earnings Call. As a reminder, today's call is being recorded. (Operator Instructions) For opening remarks and introduction, I would now like to turn the call to Mr. Kevin Boone, Chief Investor Relations Officer for CSX Corporation.

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Kevin Boone, CSX Corporation - Former VP of Corporate Affairs & Chief IR Officer [2]

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Thank you, Shirley, and good afternoon, everyone. Joining me on today's call is Jim Foote, President and Chief Executive Officer; Frank Lonegro, Chief Financial Officer; and Mark Wallace, Executive Vice President of Sales and Marketing.

On Slide 2 is our forward-looking disclosure and followed by our non-GAAP disclosure on Slide 3.

With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote.

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James M. Foote, CSX Corporation - President, CEO & Director [3]

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Good afternoon, and thank you, Kevin. And thanks everyone for being on the call today. What an incredible year. I'd like to first recognize the amazing team of CSX railroaders. They have stepped up to the challenge again and again and put this company on a new trajectory. Success breeds success and I am proud of the foundation we have built.

While we wrote an amazing first chapter, the CSX transformation story, it's still early. Across the organization -- operations, sales and marketing, and all other functions -- there are plenty of opportunities for improvement to keep us busy for years to come. Millions of unnecessary events in our business processes can be eliminated, which will improve service to our customers and allow them to be more efficient.

We continue to make progress towards the efficiency goals set a little less than a year ago, whether it's locomotives, cars or yards, we are finding ways to deliver better service with fewer assets. This not only saves CSX money but saves customers money by reducing their rolling stock and other infrastructure needs. Our progress has translated to significantly more free cash flow, which allows us to maintain a safe and reliable railroad, provide the flexibility to invest in high-return projects and return significant cash to shareholders through dividends and buybacks.

Turning to Slide 5. The results are straightforward. EPS grew 58% on an adjusted basis. Our Q4 operating ratio improved 480 basis points to 60.3%, a record fourth quarter performance. And the full year operating ratio, also 60.3%, is a U.S. Class 1 railroad record.

Turning to Slide 6. As you can see, there was broad-based strength across the portfolio. Revenue increased 10% with fuel recovery, volume, price and other revenue all contributing to positive growth. I'm encouraged to see the strong performance from our merchandise business with 10% overall revenue growth. Solid 4% volume growth helped drive positive performance across all markets with the exception of fertilizers.

In fertilizers, we continued to face a headwind from the previously discussed fourth quarter 2017 customer plant closure. We also saw some weakness in the fertilizer export markets, which appears transitory and should normalize in the next couple months.

Intermodal revenue growth was 4% with volumes up 2%. Intermodal grew despite our previously announced rationalizations, which shows very healthy core strength. Significant progress has been made in reengineering this very important part of our business, which better positions the company for long-term profitable growth.

Coal revenues increased 8% with strength in our export met business offsetting domestic utility weakness. Domestic steel and industrial customers also saw good growth. Finally, similar to previous quarters, other revenue gains were primarily driven by increases in supplemental fees.

On Slide 7, I remain focused on safety. On a year-over-year basis, we saw good progress in both FRA personal injuries and train accidents. While it is encouraging to see some progress, the numbers are far from where I expect them to be. As of January 1, our annual bonus targets include specific safety improvement targets. Safety must be a priority for every employee in this company.

On Slide 8, on the efficiency and service side, train velocity saw positive year-over-year and sequential movement with dwell improved year-over-year. Only a couple weeks into 2019, I see positive momentum in both of these metrics with the company currently seeing record performance in both measures.

Cars online continued to trend down, down over 10% year-over-year, while volume increased 3%. As you'll see later, this directly translated to significantly lower car hire expense. In the periodic, we share with you different metrics which we track on a daily basis.

On the bottom right is locomotive miles per day. This reflects the average daily mileage we're able to get out of each locomotive. Locomotives are a significant cost for the company, and by reducing your active fleet, you save on maintenance, fuel and capital requirements. Improvement in this metric means we need fewer locomotives to move the same amount of freight. Our active locomotive count ended the year down over 300 locomotives while we grew volume and revenues.

Now let me hand it off to Frank, who'll take you through the financials.

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Frank A. Lonegro, CSX Corporation - Executive VP & CFO [4]

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Thank you, Jim, and good afternoon, everyone.

Turning to Slide 10. I'll walk you through the summary income statement. As the slide shows, the impacts of tax reform, pension accounting changes and the remnants of our restructuring charges drove a significant difference between our reported and adjusted results for 2017. Big adjustments impacted several line items, and we have provided the full reconciliation of these items in the appendix to these materials as well as in our quarterly financial report. For year-over-year comparability, my comments will be focused on the variance to 2017's adjusted results.

Total revenue was up 10% in the fourth quarter, driven by a 3% increase in freight volumes with particular strength in merchandise, broad-based revenue per unit gains of 7% through higher fuel recoveries, pricing gains and a favorable traffic mix together with increased other revenue. The overall pricing environment remains strong in the quarter, supported by our improved service product, healthy freight demand levels and supported export coal benchmarks.

Consistent with prior quarters, pricing for merchandise and intermodal contracts that renewed in the fourth quarter was particularly strong. Other revenue also increased year-over-year primarily due to increases in carload, demurrage, intermodal storage and other incidental charges. These revenues are intended to offset car hire and car ownership expenses as well as the network impacts of equipment congestion.

Given the STB's recent focus on accessorial and demurrage charges, we thought it was important to note that, in the quarter, only 1/3 of this line item relates to demurrage in the carload business. As we look forward, we expect the run rate for other revenue to decline slightly in 2019, excluding any liquidated damages, which we will disclose if and when they occur.

Moving to expenses. Total operating expenses were 2% higher in the fourth quarter. Labor and fringe expense was relatively flat year-over-year as average employee headcount was down 6% even with 3% more volume. The company is cycling a previously reported reversal of share-based compensation for our former CEO, which favorably impacted 2017's results. Additionally, in the current quarter, we recognized railroad retirement tax refunds related to share-based compensation awards from prior years given the industry's recent litigation win on this topic.

On the operating side, year-over-year improvements in velocity, on-time originations and arrivals, and trip plan compliance led to significantly fewer active trains and enabled a 10% reduction in road crew starts. Nonproductive recruits, an indicator of network fluidity, improved by 78% and have declined sequentially for 5 straight quarters. These favorable operating results drove a 12% year-over-year improvement in crew productivity, measured on a GTM per active train and engine employee basis.

Shifting to labor on the mechanical side. The active locomotive count was down 10% year-over-year. We continue to have over 800 locomotives in storage in addition to the hundreds of engines we sold, scrapped or returned since the beginning of 2017. The smaller fleet, combined with lower cars online and freight car repair efficiencies, helped drive an 8% year-over-year decrease in our mechanical craft workforce. Our G&A headcount also continues to decline as we look for every opportunity to reduce our overhead costs. With respect to our total workforce, which includes management and union employees as well as contractors and consultants, we exceeded our 2018 goal of 2,000 reductions.

Looking forward to 2019, improved service and operating fluidity, together with opportunistic streamlining in our support functions, will drive a significant year-over-year labor productivity. At a high level, we would expect our total workforce to come down in line with historical attrition rates.

MS&O expense increased 3% versus the prior year. Our operations remained strong in the quarter with year-over-year service improvements driving asset efficiencies, which were favorable for MS&O expense.

That said, in the quarter, we did have several noncore impacts within this line. Specifically, discontinued projects resulted in asset impairments of $20 million in the quarter, an increase of $10 million year-over-year. Additionally, there was a year-to-date reclassification in Q4 that shifted certain expense credits from MS&O into other expense lines, primarily fuel.

Similar to recent quarters, MS&O benefited from real estate gains, which were $19 million higher than the prior year. We're continuing to monetize our surplus assets and are making good progress toward our $300 million target for cumulative real estate sales through 2020 along with a potential for upside from line sale proceeds. We continue to have a strong pipeline of real estate and line sale opportunities, though the impact of these transactions will continue to be uneven from quarter-to-quarter and year-to-year.

Looking at other expense items. Depreciation increased due to the impact of a larger net asset base. Fuel expense was up 4% year-over-year, driven primarily by a 10% increase in the per-gallon price, partially offset by improved efficiency. Specifically, we utilized 1.6 million fewer gallons, even with slightly higher GTMs, driving favorable fuel efficiency savings. We will drive further fuel efficiency through continued improvement in network fluidity and the increased utilization of fuel optimization processes and technologies.

Equipment rents expense decreased 20%, driven by significantly improved car cycle times, particularly in the merchandise and automotive segments as we continued to see strong year-over-year and sequential service improvements. Equity earnings decreased $13 million in the quarter as we are cycling a $16 million nonrecurring gain recognized in the prior year by one of the company's equity affiliates.

Looking below the line. Interest expense increased primarily due to the additional debt we issued this year, partially offset by a lower weighted average coupon rate. Tax expense was lower in the quarter, even with significantly better pretax earnings, reflecting the continued benefit of tax reform. Our effective tax rate was 23.2% in the quarter, slightly lower than prior guidance mainly due to the settling of certain state tax matters.

Absent unique items, we expect our effective rate to be between 24% and 24.5% for 2019 with Q1 closer to 23.5% due to the timing of stock-based compensation payouts. As discussed at our investor conference, we also expect our cash tax rate to be up slightly, given the rolloff of bonus depreciation over time.

Closing out the P&L. As Jim highlighted in his opening remarks, CSX delivered operating income of nearly $1 billion, fourth quarter record operating ratio of 60.3% and earnings per share of $1.01, representing improvements of 25%, 480 basis points and 58%, respectively, year-over-year.

Turning to the cash side of the equation on Slide 11. Adjusted operating cash flow was nearly $4.7 billion in 2018, an increase of over $1 billion or 29% year-over-year, illustrating the strength of the company's core cash-generation capabilities, together with the benefits of tax reform. Capital investments were down 14% or nearly $300 million, reflecting the reduced capital intensity of the scheduled railroading model. This reduction in capital intensity, combined with the substantial progress this year in CSX' core operating cash flow generation, drove an 88% increase in full year adjusted free cash flow.

Importantly, the company converted net income to free cash flow at essentially 100% in 2018. In 2019, we expect the combined impact of revenue growth, expense control and disciplined capital investments to deliver a high free cash flow conversion rate. This significant improvement in free cash flow generation, supplemented by a strong balance sheet help support substantial shareholder returns of over $5.4 billion. We executed nearly $1.9 billion of share repurchases in the fourth quarter and earlier this week, fully completed the prior $5 billion buyback authority.

With that, let me turn it back to Jim for his closing remarks.

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James M. Foote, CSX Corporation - President, CEO & Director [5]

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Great. Thanks so much, Frank. Turning to Slide 13 with a few comments about 2019.

But before I talk specifically about revenue, I'd like to provide some color on what we are seeing from a high level. Over the past few days, I've spoken to a number of large customers across different industries. General customer feedback has been positive and is consistent with the demand levels we are seeing today. While it's hard to ignore the volatility in the equity markets, I cannot call out any trend in our business today that would point to a significant slowdown in our business.

Talking about this year. Driven by merchandise strength, I expect total revenues to be up low single digits in 2019. This reflects muted overall intermodal growth impacted by the rationalization of intermodal lanes we have talked about. Normalized intermodal growth should return in 2020. As for coal, similar to our view coming into 2018, we expect some moderation of export coal benchmark prices in the back half of the year but remaining at very healthy levels. As to the 2019 operating ratio, our goal is to maintain our position as the best in service and efficiency.

If you look at where we finished 2018 at 60.3%, we clearly did better in a number of areas, including real estate and line sales. I believe a good 2018 OR baseline to measure our improvement in 2019 is closer to 61%, which adjusts for some of the better-than-expected benefits from real estate that occurred in 2018.

I now expect CSX to outperform our previous 2020 target of 60% a full year early. This represents continued efficiency gains across our operations while leveraging the revenue growth from Mark and his team.

At the Investor Day last March, we guided for $8.5 billion in cumulative free cash flow over 3 years, including 2018 through 2020. I'm happy to report we're trending ahead of that guidance. As part of our free cash flow outlook, we expect CapEx to be between $1.6 billion and $1.7 billion in 2019.

Finally, as you saw in the press release, we have announced a new $5 billion share repurchase authorization. As Frank said, we completed the existing $5 billion share buyback earlier than was expected. As part of our annual process, we'll be reviewing with the board our long-term outlook for the business and discussing uses of cash and capital structure, which will determine the pace at which we complete the newly authorized share buyback program. The board's review process will take into consideration economic conditions and the company's performance against its targets as well as the current stock price to optimize long-term value for the company's shareholders.

You really have to love being in the rail industry right now, so many exciting things happening. I couldn't be more proud of what we were able to achieve in 2018. It means a lot to the employees who work at CSX to be considered winners. It's great to see our mechanical employees who keep the fleet in great shape, our engineering people that build and maintain the network, and the T&E folks that get our customers' products where they need to be having this kind of success. But it does not get any easier from here. The bar is higher, and it's our job to deliver.

With that said, we have a team that is capable of making CSX the best-run railroad in North America. Thank you. Kevin?

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Kevin Boone, CSX Corporation - Former VP of Corporate Affairs & Chief IR Officer [6]

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Thank you, Jim. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Tom Wadewitz with UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [2]

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I wanted to ask you a little bit about the operating metrics and how you think they would translate to cost side performance in 2019? It seems like you have obviously put up a lot of improvement in the metrics. It sounds, Jim, like from your comments, you would expect that to continue. I'm thinking the metrics we see, maybe some we don't but velocity, dwell and so forth. Do you think that translates to further cost-side improvement in '19? Is that the right way to look at it? And then, maybe I have a follow-on on the OR as well.

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James M. Foote, CSX Corporation - President, CEO & Director [3]

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Sure, Tom. Yes, I mean, we're going to continue to grind and make improvement and improve velocity. We're still a long ways to go there to become consistently best in class. And dwell continues to improve as we drive those 2 factors that will improve our performance for our customers as well with trip plan compliance numbers increasing all the time. So it's the same metrics that we have used in the past, and they will definitely continue to get better.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [4]

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Okay. Great. So it sounds like there should be a translation of the cost side as well. You mentioned kind of an adjustment that you would think of on the base that we look at, like more of a 61% OR for '18 kind of adjusted. Can you give a little more perspective of what you're adjusting out? Is that just -- is that primarily land sales? Are you thinking your land sale gains -- are you thinking you won't have those gains? Or how do we think about...?

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James M. Foote, CSX Corporation - President, CEO & Director [5]

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No, there's no time -- we overachieved in that area. And what I'm saying is if you're going to take that overachievement and kind of normalize it and say, okay, in order to move forward and say that we're going to do better than 60%, what's the good starting point? It's kind of foolish to say we're at 60.3% and say we're going to do better than 60%. So if you take out these real estate sales that were higher than what we had originally expected when we set our goal of 60%, and remember, again, in 2020, for us to go forward into '19 and to say we're going to beat that 60% 2020 target in '19, I'm just trying to put it in context for everyone that we're really -- we believe we're really starting it at around 61%.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [6]

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Okay. So it's primarily around how we think about real estate sales. That's primarily what you're saying?

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James M. Foote, CSX Corporation - President, CEO & Director [7]

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Yes. I think we had a number of $300 million, and we're ahead of trend on that. That doesn't mean we're going to do more than $300 million over the 3 years. It just means that we did better than that in '19. And so taking that into consideration as we look at where -- again, 9 months ago, when we said -- when we rolled this out, everybody felt we were insane people for thinking that we could get a 60% operating ratio in 3 years. We're just trying to put it in context to show that we're going to do better than that, and we're going to do better than that in a shorter time frame.

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Operator [8]

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Our next question comes from Amit Mehrotra with Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [9]

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So Jim, I was just hoping if you could help us parse out the company's, I guess, prospective margin improvement between the volume growth that you're expecting and the significant cost opportunity that you talked about. Clearly, the outlook for volumes is a bit more uncertain than where it stands today, even outside export coal in the back half. So -- but also the cost opportunity is significant. So if you could just help us think about the net impact of those 2 in terms of the OR guidance that you put out in 2019. How much of that is really in your control? And how much of that is now dependent on sort of the macro environment and volume environment?

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James M. Foote, CSX Corporation - President, CEO & Director [10]

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Well, I think, we need to -- as we have always said, we need to have a top line growth as we move forward that our plan here is not to just merely reduce costs in order to grow the company's financial performance. So it's always been a balance as we have looked at this. That being said, as I talked earlier on the cost side, we believe that we have a lot of opportunity out there for us to continue to improve the efficiency of the network. And we continue to do that through many of the same practices that we've already put into place, whether it's running trains with distributed power; using other technology to reduce our fuel costs; eliminating more and more and more unnecessary touches; the way we handle our customers' products, which improves throughput and improves fluidity. So it's many of those same initiatives that will drive costs further out of the company. At the same time, we're constantly focused on the top line growth, both in terms of volume and price. We have, again, starting 2018, let's take a -- just a high-level view of the various business segments, we started the year with intermodal, which is a "growth engine of the railroad industry." And for a lot of reasons, as I said quite a few times, we had to reengineer that business, which meant we took 7% volume off the railroad. Well, we came out of the year, and it was 2% up. So 2% plus 7% means we're currently at about 9%, okay. So I would say, under the circumstances, are pretty good. To a large degree, coal has been an issue for CSX for a while. And we recognize that the domestic side of the business would be relatively stable in terms of volumes, which it was. And we had kind of anticipated, along with everybody else in the universe at trying to guess what's going to happen with coal, that these benchmarks for both export met and steam coal would probably not stay at their high levels for the full 12 months. But they did so, basically, the very last few weeks of December. So that gave us a little bit of a better -- gave us a boost there on the revenue as well, which we are saying right now, the benchmarks are still high. The optimism right now is still strong for coal. And -- but nobody is saying that these price levels are locked in for sure. So it's prudent for us to say it'll probably decline somewhat but still be good in the second half of the year. And then we get over to the merchandise side of the business. The merchandise side of the business is the area that most benefits from the change in the operating model from the old way of looking at things and running trains and forgetting where your customers' cars were half the time on the railroad. So as we have implemented scheduled railroading and have improved the quality of our service, we are expecting to -- first time in a long time here at CSX, we're going to turn around this merchandise business segment, which is 66% of the business, and start to grow it. And we're already seeing some of the business that, for a long time, went away. It went to truck because we didn't have a service product that met our customer needs. So as we have done that, we fully expect to see volume growth across all of the business segments in merchandise, which is the key part of this company, the heart of this company. And we're making it -- service product fantastic. And it is something that numerous recent reports have highlighted from a customer base that they are very excited about the new attitude, the new way we do business and the service product that we offer. Mark, do you want to add anything else?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [11]

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(inaudible) Ditto.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [12]

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Okay. Let me just ask one very quick follow-up, if I could. Jim, you talk about the best-run railroad in North America. I just want to understand what that actually means. Does that translate to the best operating ratio in North America that the company has the best service levels in North America? And then, if you could just tie that into kind of the 2020 target because it doesn't seem that, that has changed unless I'm reading too much into the language. Doesn't seem the 2020 target has changed. Is that just too far out for you right now? Or is there something where you're thinking 60% is really kind of the high watermark for the network?

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James M. Foote, CSX Corporation - President, CEO & Director [13]

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Okay. Well, yes, first of all, as I said, what does the best-run railroad in North America mean? First and foremost, the safest; second, providing the best service possible to the customers and the best service recognized by the customer base as being head -- and above everybody else in the industry and doing that in the most efficient manner. In the most efficient manner, one could look at, one way to measure that, and the way that it's commonly measured is by looking at the company's operating ratio. As I said and as we said in our press release, we had a 60.3% operating ratio this year. That is the best ever in the history of a North American railroad. We are ahead of the CN and the CP, who have been at this for 15 or 20 years, and we are ahead of these guys, and we plan to stay ahead of those guys. We had an operating ratio that was going to be 60% in 2 years from now. What we're saying is we're going to have an operating ratio that is better than 60% this year. So it's not the same. Not at all. It is a dramatic and significant improvement in our efficiency and performance a full year ahead of where we said we were going to be. And as I said, when we said it 9 months ago in New York, everybody said we were crazy, can't be done.

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Operator [14]

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Next question comes from Brandon Oglenski with Barclays.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [15]

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I guess, following along that line of questioning, Jim or Mark, can you talk more about the lane rationalization that you've had on the intermodal business? I think you highlighted it a little bit last quarter that it was about optimizing with some of your interchange partners from the West. So maybe if you could elaborate on that and how much, again, headwind that could represent in 2019?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [16]

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Sure. So let me just repeat briefly so everyone understands what we did in 2017. As Jim just mentioned, at the end of the year 2017, when we began this journey of fixing our intermodal business and getting away from what we felt was a broken hub-and-spoke model, the impacts to those changes that we made then had an impact of about 7% of our intermodal business. As Jim just said, we grew -- despite that, we grew our intermodal volumes last year 2%. In July -- or sorry, in middle last year, as we continued working through a lot of the changes that we made over the course of the year, we decided to do another round of rationalizations, changes that impacted as of October 1 another 3% of the business, those took -- and we announced as well other changes that took effect this year on January 3, impacting roughly another 5%. And as Jim just said, for 2019, we think we're going to be flattish to hopefully slightly up for the year, so -- on volumes. We've been going through this for some time now. You've probably seen some reports from some of our customers who actually agree with what we're trying to achieve. Clearly, we're competing in the lanes that we think we can do a better job of serving them. We're doing really well. We had a great peak season this past fall and into Christmas, and we're doing so at lower cost. We got away from, as I said, the traditional hub and spoke. And so the switching and the lifting and all the crazy stuff that we've been doing previously that were driving down the profitability of that business segment is improving substantially. And we're not done. We've still got a ways to go, but we're pleased with the progress that we've made so far in that area.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [17]

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Okay. And if I can just sneak one in here. I think Frank mentioned that you'd expect headcount would be done with natural attrition this year. So can you put some context around that for us?

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Frank A. Lonegro, CSX Corporation - Executive VP & CFO [18]

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Yes. So a couple things on that one. Better service, obviously, requires less folks to run the railroad. Less assets come from better service, less people to maintain those assets. And then, certainly, on the G&A side, as we have attrition opportunities, we'll take those -- as you think about our historical attrition levels, be thinking about kind of 6% to 7% from a total workforce perspective.

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Operator [19]

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Next question comes from Chris Wetherbee with Citigroup.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [20]

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I wanted to come back to the OR for a second. So just wanted to get a sense if you're going to exceed the 2020 target in 2019? What do you think the potential of the business is as you look out a little beyond '19, say, 2020 or 2021?

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James M. Foote, CSX Corporation - President, CEO & Director [21]

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I think that in terms of the specific place where the operating ratio should be as we move into the future, whether it's a year, whether it's 5 years from now, wherever it is, we will find the right spot where that operating ratio should be that allows us to provide the most efficient, highest quality of service but grow the business at the optimal levels. So there isn't a magic -- a point where you say, oh, this is certainly where I'm trying to get to. We're trying to put the 3 elements there of service, efficiency and growth together and find the optimum spot. And we will start to search for that in the beginning -- in the future. At the same time, I can tell you that, at least in my opinion, you always want to be the most efficient in the marketplace. So that has -- no matter what the line of business you're in, no matter what you're making, no matter what you're selling, normally, if you're doing it the best, you're going to be the most successful. So that's my #1 reason for wanting to continue to drive on continuous improvement and continue to make all these changes because it continues to make us the best in the marketplace and the best in the industry. And I think that should be a goal of any organization.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [22]

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Okay. That's fair. That's helpful. And I just want to touch on the intermodal sort of outlook. Wanted to get -- make sure I'm clear on what you guys think volumes might be in 2019. It sounds like maybe down or flattish a little bit in that segment. And then, where are you in that sort of process? You've done some of the rationalization of OD pairs, but I'm just kind of curious how you think about how much more wood there is to chop on the intermodal segment specifically?

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James M. Foote, CSX Corporation - President, CEO & Director [23]

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Yes, I mean, as I just said a couple minutes ago, I think we're -- we just announced another -- another round of rationalizations took effect on January 3 this year. Those are, obviously, our customer -- working with our customers as they work through all those. I don't foresee -- I don't anticipate any other significant announcements in intermodal changes anytime soon. I hope we don't have to do anymore. I think we're getting the network down to a manageable area where we can really focus on the lanes, where we can really compete and deliver superior service. So we're focused on that. We're driving hard. As I just said, yes, we're going to overcome the loss of the rationalizations as we did in 2018, hopefully, in 2019 as well. And so yes, I'd be disappointed if our volumes were down. And I'm looking -- and I'm pushing that we make that up and maybe do a little bit better.

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Operator [24]

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Next question comes from Allison Landry with Credit Suisse.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [25]

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So obviously, you guys did a really good job on the service metrics overall. But I was a little surprised to see the on-time arrivals tick down sequentially. I think that's a pretty important metric that you focus on. So is there something specific during the quarter that drove that? Or is that where you thought it would be? And what has to happen for that to improve to the point where you can create the slots for intermodal and drive incremental volume growth?

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James M. Foote, CSX Corporation - President, CEO & Director [26]

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Allison, yes, we were clearly disappointed with that metric during the quarter and worked extremely hard on that. Full originations, on time and arrivals, were clearly not where they need to be. How do you get them better? You execute. The train is supposed to depart on schedule so that it can arrive in the next terminal so that the assets and the crew and everything are balanced as we run around our network. It needs to get out of the terminal on time. And then, there can't be an event en route that causes it to experience a delay so that it doesn't arrive in the destination terminal where it needs to on time. And so it's just execution. It's constantly looking at all of the root causes of what caused the failure en route. So is it a mechanical issue? Do we need to -- are we focusing on what causes the engines to fail? Are there systemic issues that cause the locomotives to fail, which causes the train not to get across the railroad? Are there mechanical issues? Are there engineering issues that we need to address? Are there crew balancing issues that we need to address? So it is all of those various elements and the way you run the railroad that you need to focus on in order to get those numbers up. I can tell you that the on-time origins and arrivals in our most recent numbers have been -- I certainly hope that we can maintain this and don't get whacked with a bunch of crazy snowstorms, but are significantly better than where they were in the fourth quarter.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [27]

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Okay. And if I think about that improving all the things that you talked about, is that what we should be watching in terms of a metric to sort of think about, okay, this is maybe the point where the intermodal business can start to see incremental volume growth from maybe the guidance that you guys talked about?

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James M. Foote, CSX Corporation - President, CEO & Director [28]

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Well, yes. Let me -- I'll let Mark add on to this but again, incremental volume growth in the intermodal business, when we take 7% of the volume off the railroad intentionally every year because we shouldn't be doing that kind of work in order to fix the company and we grow 2% or we come in and maybe this year flat to slightly up and now -- we're growing the business here at 7%, 8%, 9% a year in intermodal, so that's a good environment for us to be trying to reverse and improve the overall core product of the intermodal business. We are not just driving off bad business for the -- just to get rid of bad business, we are fixing and improving the intermodal franchise and the intermodal network under CSX so that it can grow and grow and grow profitably consistently in the future. Mark?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [29]

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And I think, Allison, one thing under scheduled railroading that we've talked about a lot historically in some of the Northern -- the Canadians talked about a lot, and we're focused on here as well trip plan compliance. Trip plan compliance is what the customer experiences. When the train departs in the terminal and when it arrives is one measure. But what the customer experiences is did we hit the committed-to trip plan for his or her container for intermodal. That's something that we are intensely, intensely focused on at CSX right now, and we will be rolling that out to customers this year. And that's what -- that's our product. That's what we sell to our customers, is meeting their trip plans and the commitments that we make to them on when we're going to deliver their goods.

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Operator [30]

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Next question comes from Brian Ossenbeck with JPMorgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [31]

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So I want to go back to the export coal outlook embedded in the 2019 guidance. What are you thinking in terms of the range of assumptions, specifically for volume and the mix of thermal and met? You had a pretty good year, as did the market, for thermal last year. Do you think that moderates? And I know you said that basically in the back half year, there's going to be some softness on the pricing. But what about the first quarter? I'd imagine that's reasonably well spoken for at this point. Can you give us some color as to how that's shaping up first quarter of '19?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [32]

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Sure. So 2018 was -- I think it was the second-highest export coal year that this company has ever done, somewhere around 43 million tons. We expect similar, low 40s, in 2019. Hopefully, we were able to match our performance in 2018. Look, the mix is 65% met, 35% thermal. That hasn't changed. I should say that of our export coal for 2019, we have about 65% of our contracts that are already locked up. And the team is working hard to get that to 100%. So we see a very good demand environment, and the benchmarks are where the benchmarks are. And there's a forward curve, who knows where that's going to end. Bounced around like crazy in 2018. We're not sure exactly what's going happen, but we've made reasonable assumptions in our plan for 2019, which I think, as I said, are reasonable. And again, as long as we can get the coal out of the ground and get it to the port, and I think we'll have a very good export coal year.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [33]

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And just to follow up on that, the 65% of contracts., can you just put some more context around that? Is that spoken-for volume tied to a benchmark? And is that any different in this cycle versus the last one because clearly we've come off (inaudible).

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [34]

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Yes. So it was 65%, sorry. I don't want to go into the specifics of our contracts, but some of them are tied to the various benchmarks, so pricing goes up and down, collars, et cetera, et cetera. But the 65% is significantly higher than where we were this time last year. So this time last year, we were low in terms of contracts signed up, and we've started the year really good there. So that's just -- it's a reflection of the demand and that our customers want to lock up -- lock these contracts up, too. So we're very happy with that.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [35]

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Okay. And then just to be clear, those are volume commitments where some are actually performed.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [36]

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Right. Correct, yes.

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Operator [37]

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Our next question comes from Justin Long with Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [38]

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So wanted to ask about your expectation for gains on sale this year. I know it's hard to predict but just curious if you have any initial thoughts on what this year looks like versus 2018. And then also on equipment, you referenced the reductions you've seen in cars online and locomotives. Can you share with us what your expectation for the reduction in 2019 is, if you have those numbers?

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Frank A. Lonegro, CSX Corporation - Executive VP & CFO [39]

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Hey, Justin, Frank. In terms of the real estate, as Jim mentioned in his remarks, we did have an extremely good 2018. We still have a good pipeline for 2019, perhaps not as good as 2018, but you should expect some choppiness quarter-by-quarter in 2019 on real estate. On the line sales, in 2018, we did have line sales that had both cash and gain impacts. It's a little unusual to have the gain impacts on line sales. Those were lease conversions that drove some operating income favorability. In terms of 2019, we do have a couple of line sales in the work. They will be cash accretive but not necessarily operating income accretive. In terms of your equipment question, yes, we had a great run in 2018, both in terms of engines and in terms of cars. We will continue -- as service improves and depending on the volume elements of things, we'll continue to see less equipment in service in 2019. We don't have specific targets around that. Obviously, a lot of that's going to be dependent on achievement of service levels and the volumes that come onboard. But you should continue to see us run a better railroad, a more efficient railroad, a safer railroad and continue to drive long-term profitable, sustainable growth.

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Operator [40]

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Our next question comes from Matt Reustle with Goldman Sachs.

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Matthew Edward Reustle, Goldman Sachs Group Inc., Research Division - Senior Equity Analyst [41]

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One on the intermodal business. As you get past the rationalization and you return to those normalized growth rates in 2020, what should we expect those normalized growth rates to look like? Is this a segment that you would expect to be the fastest-growing in the business?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [42]

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We hope so. At better profitability, that would be great. Again, we took off 7%, grew 2% in 2018, so 9%. All depends, state of the economy, demand, you have all the things working in your favor. But certainly, it should be healthy -- it should grow at a healthy clip, a couple points above GDP, hopefully, if not more, at better profitability.

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Matthew Edward Reustle, Goldman Sachs Group Inc., Research Division - Senior Equity Analyst [43]

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Great. That's helpful. And then just one more. In terms of the CapEx budget, it seems like you're trending above the 3-year $4.8 billion target. Are you pulling forward any CapEx? Are you spending more as you generate more? What's driving the trend? And -- or should we expect a major step-down in 2020 to ultimately get to that target?

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Frank A. Lonegro, CSX Corporation - Executive VP & CFO [44]

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Yes, a good question. In 2018, we did pull some stuff forward. We did have an acceleration of PTC. Jim wanted to get that done as quickly as possible. From a safety perspective, it makes all the sense in the world. We had some hurricane damage, obviously, in 2018 that we had to take care of. And then we had a couple of high-return projects as Ed got involved and wanted to look at certain things that can help improve on the maintenance side, especially on locomotives. 2019, we gave you a range there to give ourself some flexibility on projects that may or may not come to fruition as we look across both the commercial side and the operating side of the business. We're going to hopefully finish up Positive Train Control and most of the spending in 2019. We ought to see at least that element of step-down as we get into 2020. But then again, every year is going to be a little bit different. We're going to look at the free cash flow. We're going to look at the opportunities to generate returns on those projects. So we'll give you 2020 guidance as we get out much further into 2019.

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Operator [45]

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Our next question comes from Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [46]

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So Frank, I just wanted ask you a couple of smaller guidance things. One, can you give us some color on equity earnings line for 2019? And then I think you said other revenue maybe a little bit lower but maybe what's a good quarterly run rate for that line?

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Frank A. Lonegro, CSX Corporation - Executive VP & CFO [47]

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Yes. So let's do your equity earnings one first. I think if you plug in somewhere in the $20 million to $25 million benefit a quarter in your 2019, you're probably in good shape. This year was $96 million total. I think you're going to see roughly that same amount as you think about 2019. In terms of other revenue, yes, I did say it's going to be a tad lower from a run rate perspective. This year, the number was $582 million. We had $28 million of liquidated damages. So back that one out and then get a little bit lower on your run rate there. I'm not going to give you a quarterly run rate number, but if you take the $28 million off and then back out a little bit more, you'll be in the right neighborhood.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [48]

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Okay, helpful. And then, Jim, I understand your point about you've got to figure out exactly where -- what the optimal operating ratio is where you can still grow, so you're not ready to give a number. But is there a reason why that optimal OR couldn't be in the mid-50s? I mean, there's still obviously more to go headcount. the intermodal network changes. We haven't seen the full impact there yet. Could we be talking about a mid-50s OR as the optimal OR at some point in the future?

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James M. Foote, CSX Corporation - President, CEO & Director [49]

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Oh, sure, Scott. There's no reason in the world that we -- we look at where we -- like where we are today as far as we comb and where we are positioned in the railroad industry today and can't -- you can't make this stuff up, what we find, that we need to fix every single day opportunity after opportunity after opportunity. So yes, we are -- and I know that sounds crazy when you guide - we don't think we're anywhere near where we can get. So it's not inconceivable that mid-50s is something that someday might happen, but it's not like that is the quest. The quest is to get as efficient as and as best placed as we possibly can be so we can grow the business.

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Operator [50]

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Our next question comes from Ken Hoexter with Bank of America Merrill Lynch.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [51]

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Just, Jim, you noted you're not seeing economic weakness, so I just wanted to dig into that for a second. Intermodal pricing slipped to about 2.5% from 9% growth. Is that from just the looser truck environment? Is that a shift in mix? Any thoughts on pricing at intermodal?

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James M. Foote, CSX Corporation - President, CEO & Director [52]

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Well, pricing in intermodal, that was clearly the markets going into the peak season were tight. I mean -- and they've been tight for a long time due to the driver situation and the electronic reporting. So it took a while for that to work out. And so I think that the truck market, clearly, in terms of the spot pricing, has declined. Now in our case, as I've said before, we don't chase that spot market. Our contracts, our arrangements with our customers, our channel partners is much more longer-term. We guarantee we provide a longer-term service, a partnership arrangement with the intermodal people. And they make commitments. They make investments. They buy containers. They do a lot of things in order to be able to grow their intermodal franchise with us. So it's not like, oh, my god. Look at this. It's not that sort of thing. So that is the more recent view of the marketplace in terms of pricing. In terms of the overall economy and are we seeing kind of changes in the economy that would prohibit or limit the intermodal growth, I could say, as I said earlier in my remarks, we look at every economic indicator possible to try and understand what the economy is. And we talk to our customers, which touch every segment of the U.S. economy and especially in intermodal, where they go for -- they move from auto parts to tennis shoes. And so we are -- we believe that we have a very good feel and sense for what's going on in the economy. However, over the last couple of months, everybody, not only us, but when we talk to our customers, we're talking about headline news about trade, tariffs, interest rate, what's going on with Brexit, government turbulence, all of these things that everybody is swirling around that must have -- they had a solid impact on the way you're running the business. So we all go back, and we look in the crystal ball really deeper and we try to determine what's going on. And we go back to the same place we were a few months ago. Everybody, us and our customers, are still very optimistic about the business in 2019 and not necessarily on the intermodal side of the business but on the merchandise side of the business. We have customers who are making long-term capital investments where they're going to be building and expanding their facilities over the -- into '19 and '20, and none of those projects are being pulled back. So we feel very good about where we are right now, especially given the fact that we're dramatically improving the quality of our service and not -- and are just not sitting here with a transportation product that's viewed as a commodity that we just sell into the marketplace based on price, and the customer decides, “Well, I'll go with truck or I'll go with railroad, whoever gives me the lowest price.” Well, we're providing them with a valuable service and changing the dynamics. And we're starting to get business from truck that historically moved on rail. It's now coming back because of the changes that we've made. So it's a good time. And as I said, it's a great time to be in the railroad business.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [53]

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Yes, I appreciate that. It just seemed odd to see the deceleration of pricing in intermodal. But let me just ask a quick follow-up. You mentioned the work of -- or I guess, we've seen a lot of the peers adopting precision railroading or, I guess, the final 2 big ones on the Class 1 side. Any impacts in -- that you've seen on service interchange? You always talk about if the industry gets better, it's better for everybody. Have you seen impacts to service as the other carriers start launching into that?

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James M. Foote, CSX Corporation - President, CEO & Director [54]

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Well, first, yes, I would reiterate, yes, I mean, to the extent that all the railroads run tethered to a network, so if everybody's running better, it's better for the individual companies. I have not -- I am unaware of any kind of interchange issues that we are experiencing that would be, let's say, attributed to somebody changing their business model. Clearly, day of the week, a couple of days here and there due to snow in Chicago or something like that, yes, everybody gets slowed down, yes, but nothing unusual.

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [55]

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Ken, just to alleviate maybe some of your concerns with respect to the intermodal issue in Q4, don't be concerned. You're always going have a little bit of noise in there. We did see some impact with respect to the lane rationalizations. We are seeing and experiencing some really good pricing renewals from channel partners on the private asset side. And the spot market rates don't really have too much of an effect. 90% of our intermodal business is not impacted by the spot market. Most of our contracts are long or multiyear. We have seen recently -- I mean all kinds of talk in the industry about what's going to happen to the spot market, nobody really knows. There has been a little bit of softness, but I don't think we're too concerned about it at this point in time.

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Operator [56]

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Our next question comes from Ben Hartford with Robert W. Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [57]

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Frank, just to clarify on the OR target for '19 now, the previous '20 target was 60%, so that does assume some sort of normal. You talked about choppiness and gains here in 2019. That does include gains to some degree, right? That's not a complete ex gains number, that 60% that you're talking about?

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Frank A. Lonegro, CSX Corporation - Executive VP & CFO [58]

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Yes. So sub-60 for '19 is obviously the message that Jim's sending, and it's a reported number. So yes, it would include some level of real estate gains.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [59]

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Okay, that's good. And then the share repurchase authorization, when does it -- when is it scheduled to expire?

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Frank A. Lonegro, CSX Corporation - Executive VP & CFO [60]

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It doesn't have an expiration. But certainly, we'll -- we wanted to make sure we have the authority and the capability to be in the market when the window opens. We exhausted the prior program early, which is why we're announcing it on this call. Normally, it would have been a little bit later in the year in connection with the capital structure conversation that Jim mentioned in his remarks.

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Operator [61]

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Our next question comes from Walter Spracklin with RBC.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [62]

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I got one question on OR, one question on volumes. On the OR, I guess, Jim, when PSR was first contemplated at CSX, it was a significant opportunity. And I think you executed on that in 2017 and with upwards of 400 basis points of improvement; 2018, almost 600 basis points. I'm just getting now -- I'm hearing you say there's still tons of room for early innings, a lot more to go. But I'm getting the indication that that's going to slow significantly. And I'm reading that right? Is the trajectory now of a 55 OR now far, far down in the future that it's something that will come, and really we're going to block and tackle from this point going forward 100 basis point per year here, 100 basis point per year there? Am I hearing you right on that?

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James M. Foote, CSX Corporation - President, CEO & Director [63]

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Well, I think that as I said, Walter, you've been following us longer than anybody probably because you've started with me -- with us at CSX. And yes, as you get further down the road, it becomes harder. CN and CP have been doing this a long time and have been recognized to be the greatest of all time and are still considered by some to be phenomenal because they can take a point out a year after doing this for 15 years. We're beating them, and we're saying we're going to get better next year, below 60% off of a 61%. So I'm pretty confident and pretty comfortable that we are clearly not just sitting back and taking it easy. It just gets harder. And so I don't think anybody at this level is going to look you square in the eye and say, yes, I'm going to take another 600 basis points out of the company this year, so (inaudible) it is grinding up.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [64]

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And Jim, you mentioned CN and CP. And PSR has been used as a cost driver, and you've used it very much successfully there. But in prior incidents or prior iterations, it then turned into a revenue driver where PSR could then be used to gain share, to gain traction, be it from truck, from your rail competitor. You're guiding at kind of flat to slightly up volume growth this year. When do you really see an inflection where you can turn around and take PSR and use it the way the other PSR players have done and really drive revenue growth?

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James M. Foote, CSX Corporation - President, CEO & Director [65]

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Well, the reason it -- the reason, in my opinion, and I've said this many times for years and years and years, the reason, in my opinion, is it becomes a point in time when all of a sudden you start to see above-average growth for a railroad company that's adopted this because the quality of the service becomes so much better than it historically was. Again, it's not like some people say, oh, all of a sudden, you get to some point in time, June 22, 2020, and you go, oh, we're going to pivot from cost reduction to growth. It is an evolutionary process that, as you continue to focus on getting new trains to run on time as efficiently as possible, it improves the quality of the service, and the customers can put more. Because we become more reliable, they'll put more business on it. So it's an evolutionary process. And yes, that's why we, Mark and I and everyone here now who has seen the benefits of this transformation, recognize that the customers are actually starting to like us for the first time in a long time. And so we're going to continue to grow. That doesn't mean we are all of a sudden going to say, okay, 60.3%, is it --we're not going to get any lower. No, we're going to continue to believe that each and every year, we can continue to improve the efficiency of the network because, again, it improves the profitability of the company but improves the quality of the service to the customer. So it's an ongoing continuous improvement initiative that hopefully will go on as long here as it has at CN and now CP.

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Operator [66]

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Our next question comes from David Vernon with Sanford Bernstein.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [67]

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Jim, I wanted to ask you a question on the regulatory and then just a quick follow-up on CapEx. First, the STB poking around accessorial fees, can you give us a sense for how that is expected to play out? Is there any timetable for that review? And do you see any risk to the industry from seeing some of those fees maybe clawed back?

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James M. Foote, CSX Corporation - President, CEO & Director [68]

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Oh, I don't know that there's any good -- I mean, I don't know that there's any kind of process -- formal process with timestamp. I just think that the Chairman reached out to the railroads and wants to know more about it. And we have responded and given -- provided a great amount of detail. And none of these issues, whether it's demurrage or any of these things, is new. These things have been on the books for years and years and years. They're kind of industry practices in transportation. So I don't think there's any issue. And you also have to remember that these are public tariff situations. The vast, vast majority of our contracts or services are privately negotiated and have been since 1980 when we were deregulated. And when we sign a contract with a customer, it says you'll be governed by our tariffs. So it's a very, very small percentage of the business that the customers already have not agreed to as being fair and just.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [69]

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So there's no formal case that's been opened or a docket that's been opened for them. Do you think this is one of these things?

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James M. Foote, CSX Corporation - President, CEO & Director [70]

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Again, I think this is just the Chairman doing her job. She heard like in the media or whatever, maybe at one of the -- one of those public trains magazine or something like that, she read an article that something was -- nefarious was going on, and they’re reporting on. And she said, well, I better check it out. She sent a letter out said tell me what's going on.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [71]

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Maybe that interview with Matt Rose the other day.

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James M. Foote, CSX Corporation - President, CEO & Director [72]

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I didn't say that.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [73]

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Not sure if you want to comment on that one, but that one would obviously be welcome to your comment. But as a follow-up, I had a question on the CapEx and the Baltimore tunnel project. I read some stuff in the industry rags about that maybe coming back to life. Could you talk a little bit about kind of what that looks like from a capital commitment standpoint and whether or not that thing has been -- come back to life from a planning perspective for you guys?

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James M. Foote, CSX Corporation - President, CEO & Director [74]

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Well, about a year ago, maybe you'll remember, I went out -- just about a year ago, I went out there and met with the Maryland delegation because Hunter had said we would not participate in the project. And I went out there a year ago, and I said, well, give me some time to look at this and figure out what it is, what's going on with this tunnel. Why do we -- why are we spending all these hundreds of millions of dollars for a tunnel under the city of Baltimore? And so we studied it. We looked at it for a long time. And we went back and said to the Maryland delegation, I did again just before Christmas, and said we've looked at it, the economics are such that there would be justification for us to participate but at a lower level than had been previously committed to, the lower level being we believe that there's sufficient turnaround investment to CSX of around -- if we put in around $91 million. I think that's like $50 million-or-so less than what we had previously said we would participate at. The Maryland delegation, I think -- it's my opinion, was pleased that we did what we said we were going to do. And they're trying to figure out if they could find other funding mechanisms to make up the difference. And if they can find other funding mechanisms, then they -- maybe this project goes forward. It is viewed as a tremendous opportunity for the city of Baltimore and the state of Maryland. And we're trying to participate and work with them as best we can.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [75]

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No hard date or anything like that, right.

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Frank A. Lonegro, CSX Corporation - Executive VP & CFO [76]

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Yes, there's nothing in the 2019 capital number that Jim and I talked about relating to the Howard Street Tunnel.

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Operator [77]

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Your next question comes from Bascome Majors with Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [78]

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This summer, you changed the operating structure of the railroad to a more regional one with more responsibility under the people in those region. And it sounds like there may have been some turnover in that senior team since then. I was just curious, are you happy with the new structure and the results it's producing? And maybe longer-term, either Ed or Jim, could you discuss your thoughts on the bench strength and when you might name a permanent Chief Operating Officer?

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James M. Foote, CSX Corporation - President, CEO & Director [79]

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Yes. We're very happy, I think, with the structure. It's a structure that we're comfortable with, I'm comfortable with, Ed is comfortable with because that's the way we structured the railroad at CN, driving accountability and responsibility down to the line supervisors and the front-line supervisors to make the day-to-day decisions. And our experience is that the railroad runs better that way. So far, that's exactly what we're seeing. And so -- but we'll continue to refine it. We'll continue to improve it. At least the employees tell me they like it because they get to make decisions, and they don't have to pick up the phone and call somebody in Jacksonville and ask if it's okay to take a switch engine off. They can -- they make decisions on the fly in order to make the railroad run better each and every day. In terms of naming someone to, I guess, become head of the operating department, let's call it that, we don't have a specific time frame. Ed and I are working on that along with our human resource people to come up with a plan, and the board because it's important to the board, too, to get -- I would say, to get somebody in there as quick as possible. But we're not going to rush forward and do something rash. We're assessing all of our talent internally. And if appropriately inappropriate, we'll look at -- we'll look elsewhere. But our first -- we got a lot of great people here that can probably step up into that role. And one of Ed's responsibilities when I asked him to come and help me was to help me choose that -- find that person, work with that person and train that person so that they can be the best. And there's nothing that's changed there. Maybe we'll get it done this year, I don't know.

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Operator [80]

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Our next question comes from Ravi Shanker with Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [81]

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Just one follow-up on the guidance. Did you say flat to slightly up volume growth on the intermodal side or just overall volume growth or both?

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Mark K. Wallace, CSX Corporation - EVP of Sales & Marketing [82]

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What I said was that we are -- with the lane rationalizations that we announced in October and then those ones that we implemented January 3 of this year, it's about another 8%, we looked -- we would look to make that up. And if we're flat, that's great. It we're up slightly on volume, that's even better.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [83]

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Great. It sounded that like that's an intermodal comment. Can you just help unpack your full year revenue guidance in terms of volume mix and maybe some of the components? Because if I look at low single-digit revenue growth, I'm assuming you guys get at least 3% price, which doesn't leave much room for volume or mix growth there even if you adjust for the fuel surcharge headwind. So can you just tell us kind of what you're expecting in terms of overall volume growth in '19?

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James M. Foote, CSX Corporation - President, CEO & Director [84]

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I don't think we gave any volume growth for 2019 other than, as Mark anecdotally said in his comments here related to volume growth on the intermodal side that we hope that we will see flat -- again, because we took 8% of the volume off again -- flat. And if Mark, being the marketing czar that he is, is able to achieve success, he'll grow it again like he did this year. And so the low single-digit number is in relation to revenue growth in 2019.

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Frank A. Lonegro, CSX Corporation - Executive VP & CFO [85]

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And remember, Ravi, you got fuel price moderating, so you're not going get the fuel surcharge uptick that you saw this year. And then as you heard me answer I think Scott's question around the supplemental line that's coming down, so you've got more help on the volume and the pricing side than what that low single digit might imply.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [86]

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Okay, got it. And just a follow-up, as it was alluded to earlier, there are a couple of U.S. rails left that are potentially going down the PSR path, one of which is your regional competitor. If they do something significant and they do see service disruption as a result of that and there's volume that comes your way, are you willing and able to take that kind of just given your focus on -- the right focus that you have on price and margin over volumes?

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James M. Foote, CSX Corporation - President, CEO & Director [87]

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No, we don't any -- listen, we're trying to grow the business. That's what we keep saying over and over and over here. And we can grow the business with price and improving margins, and we're open for business.

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Frank A. Lonegro, CSX Corporation - Executive VP & CFO [88]

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And we have ample capacity: line of road, equipment, people. We're good to go. When they want to bring it over, we're ready.

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Operator [89]

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Our last question comes from Cherilyn Radbourne with TD Securities.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [90]

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Just wanted to ask, in terms of your safety goals, wondering if you could give us a high-level idea of some of the areas where you'd like to see improvement in 2019 and how that ties back into the cost equation.

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James M. Foote, CSX Corporation - President, CEO & Director [91]

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Well, the goals are pretty clear: FRA personal injuries and FRA reportable accidents. So there's complete transparency and no ambiguity in terms of what we're trying to do. From a cost savings perspective, they have put a dollar amount on personal injury. I don't -- my goal -- and I've told everybody here since I walked in the door here, is I don't want anybody to ever get hurt here. And so you see that our numbers, at least from a personal injury standpoint, have improved and come down dramatically. On the FRA reportable accidents/derailments, wow, there's a huge amount of money we could save if we can get that number down, huge. But again, that's not necessarily the sole motivation. Every one of those -- in my opinion, every one of those accidents where we derail that we call it a car or we kick the car down the long track and it derails or something like that, in my opinion, every one of those incidents means somebody could have gotten hurt. And so we got to stop doing that, and we got to stop wrecking things. And so -- but on that accident side, to directly answer your question, there would be a big pot of money there if we can improve that number. Great. Thanks so much. Kevin?

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Kevin Boone, CSX Corporation - Former VP of Corporate Affairs & Chief IR Officer [92]

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Yes, I think we're done. Thank you, everybody, for joining the call. If you have any questions, please reach out.

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Operator [93]

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