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Edited Transcript of CSX earnings conference call or presentation 20-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 CSX Corp Earnings Call

Jacksonville Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of CSX Corp earnings conference call or presentation Thursday, April 20, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cynthia M. Sanborn

CSX Corporation - EVP & COO

* David Baggs

CSX Corporation - VP of Capital Markets & IR and Treasurer

* E. Hunter Harrison

CSX Corporation - President & CEO

* Frank A. Lonegro

CSX Corporation - CFO and EVP

* Fredrik J. Eliasson

CSX Corporation - Chief Sales & Marketing Officer

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Conference Call Participants

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* Allison M. Landry

Credit 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. Inc., Research Division - Senior Research Analyst

* Brandon Robert Oglenski

Barclays PLC, Research Division - VP and Senior Equity Analyst

* Brian Adam Konigsberg

Vertical Research Partners, LLC - VP

* 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

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Jeffrey Asher Kauffman

Aegis Capital Corporation, Research Division - Analyst

* Justin Trennon Long

Stephens Inc., Research Division - Research Analyst

* Kenneth Scott Hoexter

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

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* Scott Andrew Schneeberger

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Scott H. Group

Wolfe Research, LLC - MD and Senior Transportation Analyst

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

* Turan Quettawala

Scotiabank Global Banking and Markets, Research Division - 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 morning, ladies and gentlemen. Welcome to the CSX Corporation First Quarter 2017 Earnings Call. (Operator Instructions)

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

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David Baggs, CSX Corporation - VP of Capital Markets & IR and Treasurer [2]

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Thank you, Shirley, and good morning, everyone. On behalf of the management team, I'd like you -- like to welcome you to our first quarter earnings call and also thank you for your interest in CSX Corporation. This morning, we are being represented by our Chief Executive Officer, Hunter Harrison; our Chief Marketing Officer, Fredrik Eliasson; our Chief Financial Officer, Frank Lonegro; and our Chief Operating Officer, Cindy Sanborn.

Now before we begin the formal part of our presentation this morning, let me remind everyone that the presentation materials, our safety and service measures, our quarterly financial report and our press release announcing our new guidance and dividend and share repurchase are all found on our website at csx.com under the Investors section. In addition, following this presentation, later today, our webcast replay and a 10-Q will be filed.

And so now let me turn your attention to Slide 2 of our presentation. Here, our forward-looking disclosure statement outlines the risks and uncertainties of forward-looking statements. There will be a number of them this morning during our presentation. I imagine quite a few during our question-and-answer session. So I would encourage you to take those forward-looking statements in the full context of this disclosure statement.

On Slide 3 is our non-GAAP disclosure statement. While CSX does file all of its financials in accordance with U.S. GAAP, we are providing some non-GAAP financial measures in addition to the GAAP financial measures to help you better understand the business, but these measures are not a substitute for GAAP.

Finally, I would say that we have close to 30 analysts this morning so I would encourage everyone to play nicely in the sandbox, so to speak. (Operator Instructions) And before I turn the presentation over to the team, let me also remind you that the earnings call today is limited to discussions of the earnings and the business of CSX only, and we will not touch upon matters that are currently the subject of the company's annual meeting.

And with that, it is my great pleasure and privilege to introduce our President and Chief Executive Officer, Hunter Harrison.

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E. Hunter Harrison, CSX Corporation - President & CEO [3]

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Thank you, David, and thanks to all of you for joining us this morning. I guess my first comment would be, I'm back. I didn't think that -- I didn't think this was going to happen, but it's come together hopefully -- well, not hopefully. I think it's factually my last leg on this journey that I've taken down this railroad career for now, a little in excess of 50 years, did I ever think that I would finish in Jacksonville with a group of railroaders with the talent that they possess and the franchise that's before us. And I'm very, very excited about the opportunities.

I met yesterday at the first board meeting formally with our board. I think it's safe to say that all of us were pretty excited about the opportunities going forward. As I found here, like I found before and I thought, here's a group of great railroaders. There might be a little shift in direction, but this company is going to achieve things that some of you don't think could be achieved. I'm not going to spend a lot of your time and mine on this -- on the first quarter, because I wasn't here. I was only here for 30 days. And the 3 leaders here that, with their teams, produced those results are going to spend some time going through there with you. I certainly think it was a pretty outstanding quarter as an outsider certainly looking in, and it builds a foundation for us to go forward on with our plans for the future.

I would say this. As I was reflecting this morning on what I might say here today, and I know if you look at the various constituencies that we deal with, certainly the -- our investors are represented, certainly our employees are represented. The one group that's so important to us that's not represented directly that I'm going to become an advocate for is our customers, and I'm extremely excited.

If you look at our service offering as it is today, we do a, I think, there's a lot I've got to learn, but pretty good job in our bulk movements and cycles, do a good job in the intermodal area. I think all of us would say that in our "merchandise category", we can make some significant improvements. Cindy and her team have already started it, down that road. And I think you'll see some -- what I would characterize as some pretty dramatic changes in our cycles. And I think you'll see things, like from Chicago to Florida markets, that we'll take 2 and 3 days out of that as a result of some of the strategies you're going to hear about today. So I think that's pretty exciting for the customer base.

So without me taking up a lot of additional time, let me turn it over to the team here and let Frank give us some observations on the results in the quarter.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [4]

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Thanks, Hunter, and good morning, everyone. Consistent with the transformation that we are undertaking to Precision Scheduled Railroading under Hunter's leadership, and knowing that you're eager to ask questions this morning, we're going to be very efficient in the way that we discuss the numbers. So with that as a backdrop, let's turn to Slide 7.

The safety of our employees and the communities that we serve will continue to be a top priority for CSX and for this leadership team. While the personal injury frequency index was 9% higher year-over-year, the absolute number of injuries was down slightly. And that's part of our continuing drive toward the ultimate goal of 0 injuries. Our train accident frequency index was 25% improved on substantially fewer reportable incidents. In terms of efficiency, we are continuing to drive both train length improvements and fuel efficiency gains, while our service levels remain stable on a year-over-year basis.

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Cynthia M. Sanborn, CSX Corporation - EVP & COO [5]

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Thanks, Frank. Let me just add a little bit. First of all, very excited to be working with Hunter here, and as the operating leader, spend a lot of time with him. And so I'll talk a little bit about the quarter, but I will talk about, going forward, how we're working on some of the items that Hunter has briefly alluded to this morning.

First of all, as you would expect and has always been the case at CSX, safety is our highest priority. And we will continue to focus on that, not only employee performance -- employee injury performance, but train accidents in order to improve or make sure that the communities that we operate through, we operate through safely.

Turning to productivity. In the first quarter, we delivered $123 million worth of savings. Significant resource productivity drove this, continued train length opportunities and reduction in crew starts. And also, we saw some other support costs, particularly in engineering, and mechanical labor costs also affecting us positively in the quarter. But I think what we really want to hit on here is how we think about our business going forward to drive both productivity and service, as Hunter's alluded to. And in the past 6 weeks, we've done a couple of key things I'll just highlight this morning.

One, we've adopted -- adapted our operating plans to incorporate some of our unit train business into a merchandise -- into merchandise service. And this allows us to do a couple things. As you think about our 28-hour train dispatch, or variable train dispatch, we did that in order to improve our train length. And we've done that, been very successful with it. But I think what's helping us continue to move forward with train length and cycle time improvement is adding the batch network into the merchandise service. So now we can have a more balanced network with a more highly likely probability of "7 day a week" service and still keeping the length of the trains where it's productive. This also serves our customers well as we're able to improve dwell time in our terminals as a result of these changes.

The second item that we've been working on is reduce -- or changing or converting our switching operations in some of our traditional hump yards into a flat yard model. We have 12 hump yards across the system. To date, we have converted 4 of those over into flat switching operations. This has allowed us to reduce support resource efficiencies, particularly in managing the infrastructure that's necessary to support in hump yards in the humping process, reduce that as well as, again, our plan has been focusing on improving the cycle time through those terminals. So we've been able to do both of those things.

As we look forward, we expect to continue to reduce several hump yards. We don't have a hard and fast specific number. We'll look at each one individually. We will make sure we're making the right decisions to improve both productivity and service.

And I would also say that as we look at our quarter 1 measurements, and our network performance measurements, we are seeing, as we've implemented some of these changes I'm talking about, improved dwell time, improved velocity across the network. And we think that will compound the effect of some of the changes that we're making to lead us to feel very comfortable moving forward that we'll actually have record productivity in 2017 following our previous record productivity in 2016.

So overall, I think the team is doing very well coming together with some significant changes as we adjusted to the reductions in management headcount as part of our first quarter initiative. We saw a lot of change there, and we're continuing to see change. And we're driving that effectively, I believe, and we'll continue to do so, incorporating that into our business model going forward.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [6]

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Thanks, Cindy. Those are great insights for the analysts and for the investors. Going forward, as we implement Precision Scheduled Railroading, you'll see what we believe is a powerful combination of improved safety, improved service and improved efficiency that exemplifies a great railroad. We believe that that powerful combination will benefit employees, customers and shareholders alike.

Turning to Slide 8. The GAAP view of our income statement highlights the 10% year-over-year top line improvement, which has been achieved through a combination of volume growth, higher fuel surcharge recoveries, favorable mix and value pricing. Volume's up 3%, with pricing on a same-store sales basis increasing 3.9% all in and 2.5% excluding coal, driving revenue per unit up 7%.

Looking at the expenses at a high level. Total costs were up $243 million with the $173 million restructuring charge accounting for most of that year-over-year increase. Absent the charge, the combined impact of increased fuel prices, inflation and volume were nearly offset by the $123 million of efficiency savings that you heard Cindy reference. The focus on cost control in a rising volume environment produced incremental margins of over 70% excluding the charge. Bottom line, ex charge, CSX delivered a record first quarter operating ratio of 69.2%, operating income of $885 million and a record first quarter EPS of $0.51.

Turning to Slide 9. These financial results drove over $1 billion in operating cash flow, a nearly $300 million year-over-year improvement. This improvement carried through to free cash flow before dividends of $630 million. Earlier this morning, we announced a free cash flow target of around $1.5 billion for the year, which takes into consideration the combined impact of our earnings trajectory and a CapEx reduction of over $100 million.

We continue to remain focused on returning capital to shareholders through a balanced deployment strategy. In the quarter, we distributed $166 million to shareholders in the form of dividends while repurchasing $258 million of CSX shares. Having now completed the 2-year $2 billion program we commenced in April of 2015, we were pleased to announce a new 1-year $1 billion buyback program earlier this morning.

While ROIC was stable on a year-over-year basis, we fully expect that it will inflect more positively going forward as we continue to increase efficiency and reduce the asset intensity of our railroad. Debt-to-EBITDA was also relatively stable as we continue to appropriately utilize our balance sheet and remain committed to a BBB+, Baa1 credit rating.

Turning to Slide 10. The volume outlook for the second quarter is largely positive, with nearly 70% of our markets in the favorable category and over 20% of our markets in the neutral category. Only domestic coal is expected to be unfavorable in the second quarter.

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer [7]

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Yes. So to just to add a little color to that. If you look at the macro environment, there are several indicators that seem to support continued growth. Obviously, the economy continues to grow at a modest pace, IDP, GDP, in the 2, 2.5 range for the full year and probably similar pace in the second quarter itself. The consumer sentiment continues to be at a high level, which helps many of our markets, especially perhaps our intermodal market.

Now at the same time though, the truck market right now is -- continues to see excess capacity. But as we move through the year, we do expect that to gradually improve in the second half and into '18. And then of course, on the favorable side, export coal, that was very strong here in the first quarter, 8.7 million tons that we moved in the first quarter. We do expect that to taper off as we move through the year, but we still think that an upper 20 million range in terms of tons for the full year on the export side is a good estimate at this point.

As we think about some of the headwinds, we think that auto production is clearly flattening out. And we think for the rest of the year relatively flat is probably a good place to think about the auto business. And then while the core chemical market continues to grow at a nice pace, we expect crude-by-rail to continue to decline, both year-over-year and sequentially as we move through the rest of 2017.

And then of course, on the unfavorable side, we see our domestic coal business. We talked about it in the fourth quarter. We lost some short-haul business. And -- but despite that, we did about 15 million tons here in the first quarter on the domestic side, and we expect a similar pace in the second quarter. But as you saw in the first quarter, the quality of the revenue and the impact to the bottom line is still very strong, and we expect it to continue as we move through the year. It's obviously reflected in our RPU.

So I would say overall, we feel good about the top line. We continue to expect our merchandise and intermodal business to grow at or above the economy as a whole. And it's nice to see coal revenue to be growing a little bit here this year as well. And lastly, and echoing Cindy's comments earlier, we are very excited about what this operating model can do for CSX, not just in terms of the bottom line, but really what it can do for our customers. We're already seeing that and -- from a service perspective, both in terms of transit time, reliability and recoverability. So we feel very good about this change.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [8]

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Thanks, Fredrik. A very helpful, again, commentary for the investors and for the analysts. Let's finish up on Slide 11. With our first quarter results, we're off to a very good start in 2017 and expect to accelerate the transformation to Precision Scheduled Railroading in the coming quarters.

Earlier this morning, you saw that we issued full year guidance, excluding the restructuring charges. To that end, in 2017, CSX expects to achieve a mid-60s operating ratio, record efficiency gains that you heard Cindy mention, EPS growth of around 25% off of 2016's reported EPS of $1.81, and free cash flow before dividends of around $1.5 billion. In issuing these expectations, we assume, of course, that the coal markets and the overall economy will remain stable.

This morning, we were also pleased to announce an 11% or $0.02 increase in the quarterly dividend along with a new 1-year $1 billion share buyback program. And finally, we look forward to sharing our longer-term plans with you in the second half of the year.

With that, we'd be delighted to take your questions this morning.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brian Ossenbeck with JPMorgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [2]

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Hunter, I guess the first one for you. I know we'll have a scheduled day later in the year perhaps to hear more about the longer-term plan. But the initial impressions that were laid out in the slides, if you could just give us some context in terms of what you think the significant opportunities are to further streamline the network. You've talked about monetizing real estate, which I know was a target at Canadian Pacific when you were there. And just in general, if you think there's just too much track with too few carloads going over there. Is there just an ability to improve the network density and the design as you move forward over the next couple of years?

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E. Hunter Harrison, CSX Corporation - President & CEO [3]

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How long do you have, Brian, to listen to this response? Let me -- I don't think that this franchise is significantly different than others that we've overlaid this model with. Cindy touched on a lot of these things. And as we've talked internally, we don't have some ironclad numbers on what's the number, what's the headcount number got to be. What's the hump closures got to be. It's going to be what's smart to do. I do think that -- I've spent a great deal of time with Cindy and her team. We are -- I think step one was we're cutting through a lot of bureaucracy. We're shedding through where we had, I think, 9 divisions, and so we'll be going down to maybe a couple. Lines in organizational charts just cost money, and I think we're trying to streamline that. We're trying to get the right leadership in the right spots. We've got 9 dispatching offices. I don't think any railroad has 9 dispatching offices, and we're going to take -- make some efforts there. There's efforts going on now with the locomotive productivity. I would expect that before the summer's out, we'll have 550 or so locomotives stored, we'll probably have 25,000 freight cars put up, and all the associated costs that go with them: labor, material, and locomotives, fuel productivity, velocity and a lot of things. Dwell time in terminals, I would say, will come down dramatically. Are some of our facilities, historically, have they been overbuilt? Yes, like a lot of railroads. But this railroad has had a special challenge. If you look back at the mergers, there was more companies involved with the mergers of what is now the CSX than any other major road. So if you go to a place like Atlanta, and we have 4 or 5 yards, well, it's because everybody had a yard there, or if you go to some of these common points. So we're doing some things, for example, Atlanta's a good example where I think we have 4 yards there. Cindy's helping me here. And I think we'll be down to -- maybe there's one super operation there. But I know we have a tract of land there that's an operating [proxy] that doesn't need to be this [for us]. It's a good deal of money. So there's going to be some monetization of assets. So this is going to be more of the same at maybe a more rapid pace with taking advantage of larger opportunities.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [4]

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Okay, great. So just one quick follow-up just on the coal side. Frank or Fredrik, if you could give us a sense as the export market price in met really spiked in -- pretty much after the quarter ended. So I just wanted to see if you thought that the mix, the favorable benefit that you saw in the first quarter is something that you would also be able to capture in the second and third quarter.

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer [5]

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Well, thank you. Obviously, we don't forecast price, but we have said overall, all the time, that we do have indexes on our contracts on the export side that when things go well, we share in some of the economics. And when things aren't as well, we take some of that pain. Clearly, this quarter, it wasn't just export pricing that helped. We also see -- saw some pretty favorable mix, and a lot of that mix we do expect to continue. But it, of course, depends on where we see the utility business, for example, go in terms of refill, replenishment of inventories through the year. So I think there's a favorable mix story and favorable sort of going forward. But I think it's unclear at this point how favorable it's going to be as we move through the year.

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Operator [6]

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Our next question comes from Chris Wetherbee with Citigroup.

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Christian F. Wetherbee, Citigroup Inc., Research Division - VP [7]

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Wanted to touch on the volume side, Hunter. If you could just sort of give your initial impressions on what you'd give as sort of volume opportunities that are out there for CSX. Obviously, playing in the East, we automatically kind of think of the intermodal markets, and efficiency obviously plays big into being able to gain share, either both from trucks as well as your rail competitors. Can you give us a sense of sort of what your initial impressions are about sort of the franchise there? And how you think about that going forward?

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E. Hunter Harrison, CSX Corporation - President & CEO [8]

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Well, I'm obviously, in 30 days, I'm limited to my knowledge. I will say this. I think one of the exciting things going forward with this organization as well as rail overall is the opportunity that's before us to get business off the highway. And I think that we're set up in almost a perfect storm here to take advantage of that. If you look at -- we have -- we start with a strong base to begin with, with great markets that we serve up and down the East Coast and Chicago and Florida and some really -- some growth areas. Where there's congestion, the highway system's not going to be able to accommodate everything if you look at the advantages of rail with -- from an environmental standpoint, from an energy standpoint. And if you look at an organization that is going to be able to take a combination of, say, dwell times in terminals by eliminating terminals, which lowers cost, but at the same time then takes the dwell times down from an average of effectively a day or 25 or 26 hours of dwell down to 18 or so. And you say, we're going to skip some terminals and you start to look at really -- what we used to talk about was truck competitive. Hell, it's not truck competitive, it's better than truck. Now the issue is the change and the [strategy] to take that to the marketplace and to sell it and convert it and change it. But that's where -- look, the individual markets, I mean, this company has some -- we've got some worthy competitors out there. We'll scratch and bite and win the business there. The real opportunity I see is on the -- is in the highway.

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Christian F. Wetherbee, Citigroup Inc., Research Division - VP [9]

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Okay, okay. That's very helpful. Appreciate that. And then just to follow up, thinking about some of the guidance and maybe how to think about it a little bit beyond 2017. So mid-60s for this year, which I think pulls forward some of the benefits. But clearly, some of the things that you're going to be doing are going to be gaining traction as the year progresses. So presumably, you'll be entering 2018 at a better run rate. So obviously, I'm trying to jump the gun here a little bit and get some of a forward look before you might be ready to give it. But when you think about 2018, am I thinking about it wrong in the respect that it is sort of natural that some of the benefits you're accruing in 2017 will be playing out in 2018? Maybe we're thinking something like the low 60s or [slow] OR in 2018.

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E. Hunter Harrison, CSX Corporation - President & CEO [10]

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Is that bait? Send me your model, Chris, and I'll fill it in. I think you're right on. Look, this is not the first time this movie's played out. We see opportunities. It's not going to happen overnight. Is it going to be exactly linear? No. Will there be a stairstep approach? Yes. Do we have any barriers here, structural issues that we've dealt with before that says we can't do what's been done before and even go beyond that? No reason.

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Operator [11]

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Our next question comes from Tom Wadewitz with UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [12]

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Hunter, I wanted to see if you could offer some thoughts on the opportunity at CSX versus what you saw at CP. I think of your approach being one of the things you do is simplify the flow of traffic and reduce work events. If CSX has a greater complexity in the network to begin with versus CP, that would imply maybe greater opportunity for cost takeout and OR as you take out that complexity, right, and simplify things. So I don't know if that's the right framework or not, but wanted to see if you could comment on that and maybe compare the opportunity you see so far at CSX versus what you had at CP.

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E. Hunter Harrison, CSX Corporation - President & CEO [13]

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Well, I mean, Tom, as you know, they're totally different franchises, the make-up, the markets, as generally speaking, a lot of roads are in North America. So you look at the hand you're dealt and you say, "Look, what is the best way to operate and run this franchise?" And I think that before I arrived, there was a lot of talk about this is not a simple key operation that it's got all the complexities and the density and the spaghetti bowls. Well, the way to handle that, eat the spaghetti and get rid of it. So one of the things we're doing, that Cindy and her team are working diligently on, is being sure that we're not going through terminals and processing cars just because the terminal's there. So it's almost kind of the old term we've used before, the whiteboard approach of let's start over with this franchise. The last -- and I was in error yesterday when I talked to a group, but the last hump yard that was built in North America, the last 2, was one at Waycross, Georgia, which is the heart of the CSX, in my view; and the other one was, I believe, Galesburg, Illinois, which I had something to do with the construction of it at Burlington North in the mid-'80s. Markets have changed since the mid-'80s. The amount of traffic that's bulk, that it's intermodal, that's unit grain, unit coal, crude trains that don't have to be sorted and switched. So you adapt your operating strategies to the markets. And I just think that there's much more of a natural fit to make some of the changes that we need to make here that will present even more opportunities. Because to your point, of the complexity that it's had in the past and the ability to simplify, this franchise, if you apply it to my career to some degree, has more potential than anyone I've dealt with.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [14]

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Okay, great. That's helpful. I appreciate it. Then the second question or the follow-up would be, CSX's approach to intermodal has been a bit different than I think what's typical. If you look at Norfolk, they have the corridor strategy. I think that would be more characteristic maybe of the Canadian roads. But CSX has this Baltimore, Ohio hub strategy and has talked about one in the southeast. Do you think that that's -- do you think that is the right approach to continue? Or do you think on the intermodal network, is there opportunity to maybe simplify and go towards more of a kind of origin to destination as opposed to sending it to the hub that you have in Baltimore, Ohio?

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E. Hunter Harrison, CSX Corporation - President & CEO [15]

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Well, Tom, I don't want to get ahead of myself. I'm sure the people here, they had potentially a different set of strategies given what they had to work with. The operating group's challenge is to present velocity and speed and customer requirements to the marketing sales group. And then given how well that service can apply to the market, then it's Fred's team's job then to design the service to take that to the market. And I think the better product, raw product that Cindy and team can produce, the more successful and more latitude it will give Fred and company. So I think that -- I think the competition, we're going to get bigger in the rearview mirror. And they're going to be looking at the rear, and we're going to be passing them on the left.

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Operator [16]

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Our next question comes from Allison Landry with Credit Suisse.

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Allison M. Landry, Credit Suisse AG, Research Division - Director [17]

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Hunter, Chicago has always been at the forefront of your mind. And historically, you've made comments that CSX used the Chicago belt and perhaps the Indiana belt for switching more than any of the other rails. So now that you're in arguably a much better seat to effect change, do you have any plans to fix Chicago? And if so, could you provide some context surrounding that?

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E. Hunter Harrison, CSX Corporation - President & CEO [18]

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I don't know that I'm equipped to fix Chicago, but Chicago is a special issue. And if you noticed in a lot of our -- what we discussed and talked about, it hadn't included Chicago. Because Chicago, we have effectively carved out and are taking a different special-type look at. Chicago has some real challenges to this whole North American infrastructure. Chicago cannot survive as it's headed today. You've got lawsuits now with eminent domain, taking -- want to take rail infrastructure up to replace it with tollways. You got it right beside O'Hare, okay? Everybody wants to grow. They want to grow in Chicago, and it's not going to work. Now the plus for us is this: We own a lot of assets in Chicago, and we can be a more significant player than in positions I've been in, in the past. And only one move could change things in Chicago, and so people have to be aware of that. And I don't mean -- I'm not going to mention the term, but just the stroke of a pen of a partnership could shift a lot of traffic away from Chicago, and infrastructure and things that people think is needed for Chicago won't be needed. For example, if you look at Kansas City today, Kansas City used to be a Chicago. And we were a little late in the rail business, and we built tons of infrastructure. And now you look at Kansas City, and you don't see much rail business relative to the infrastructure. So Chicago is going to be gravy on top of this plan of what we eventually decide we're able to do with our partners and fellow owners and all the other entities that want to be part of Chicago. So it's real opportunities that we're taking a special look at.

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Allison M. Landry, Credit Suisse AG, Research Division - Director [19]

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Okay, and when you refer to the stroke of a pen of a partnership, is that a single partnership that you have in mind? Or could it be multiple?

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E. Hunter Harrison, CSX Corporation - President & CEO [20]

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Look, I don't have anything in mind. I've got a 4-year contract. I want to go out at CSX with a green -- with a blue and gold jersey running under the goalposts, okay? If anybody wants to do something after that, it's up to them. I'm only pointing out that one of the challenges that's brought to my attention almost every time I deal with a big customer is rail consolidation, and in spite of the fact that what you might hear in public statements. We go to L.A. to a customer and talk about providing service to New York, and I'll talk to you about half of it. They don't want to hear about half of it. They want to hear about all of it. And until one entity can control movement, rail is never going to have the competitive alternative to the highway. But I'm just pointing out that for a lot of these reasons, Chicago is kind of a wildcard.

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Allison M. Landry, Credit Suisse AG, Research Division - Director [21]

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Okay. And then as a follow-up question, how are you thinking about the coal network or other areas of the network that doesn't necessarily have as much density as you would like? And I know there was sort of a question earlier in this realm. But asked a little bit differently, is there any opportunity to short line any of this business? And are there any carriers or holding companies that you think would be a good fit?

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E. Hunter Harrison, CSX Corporation - President & CEO [22]

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Look, I think that -- well, I think if you give thought to and buy into what we say we're going to do, that you don't need to think about short line or alternatives. I do think that we do domestically move coal a little bit different than I'm traditionally used to in a very disciplined, closed-loop unit train operation that can be much more efficient. You can't move unit trains, coal trains for 3 days and then park them 2 days and then run them for 3 days and then park them a while and then move them again and do it very efficiently. Now if you do that, there's a higher cost associated with it. And with higher cost maybe comes a higher price. So what we're trying to do, both with Fred and Cindy's teams both, is to create and encourage our shippers to work with us to create a more disciplined approach. And we can do it with fewer sets and fewer locomotives. And we can be more competitive for them and give them a constant supply of coal, which is what they want. And if we develop the reliability we need, then it'll all come together.

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Operator [23]

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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 [24]

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The first one is just on the operating expectations for this year. It looks like the OR target of the mid-60s implies around $800 million of year-on-year profit improvement. It just seems, by our estimate at least, that only about $300 million of that will come from revenue growth and improved fixed cost absorption, which leaves about, call it, somewhere close to $0.5 billion of absolute reduction in the cost base. So first of all, is that the type of cost takeout that you, Hunter and the team, are targeting to realize this year? And just for our own -- my own edification, how does one achieve sort of $0.5 billion of cost takeout without maybe driving a significant amount of disruption, at least in the near term?

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Frank A. Lonegro, CSX Corporation - CFO and EVP [25]

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Amit, let me -- it's Frank. Let me take that one first and then turn it over to Hunter for additional commentary. In the targets that we gave you, one of the things that we mentioned was record productivity. Embedded within that is, obviously, the prior record of $427 million in 2016. So clearly, you can have your own estimate in terms of how much we will exceed that by. We're off to a very good start in terms of $123 million of efficiency. I think from just a line item perspective, other than fuel, you should expect us to continue to drive cost out across the board in terms of the various items there. When you look at better service, you look at better productivity, you look at the ability to absorb volume with literally no additional cost associated with that, you get huge flow-through from whatever your expectations are on the revenue side. So we're kicking on all cylinders here in terms of the volume side, the pricing side and the efficiency side. So that's what gave us the confidence to put out the targets that we did this morning. Hunter?

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E. Hunter Harrison, CSX Corporation - President & CEO [26]

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Yes, I mean I'd only add one example that -- which you want look at hard numbers to see how you might achieve that. Prior to my arrival, this group had already taken on some initiatives to take 1,000 positions out of this organization. Now those 1,000 positions were -- a lot of them were voluntary, and there was a severance program. And those were all, I think, if I'm accurate here, those were all management positions. That has not touched any of the people on the ground. We have put in place a hiring freeze. We're going to utilize the people internally we have. We're very sensitive to your comments of disruption and of morale. And we have attrition that is a little higher than normal. And so I think if you had to kind of put a number on it, and I haven't gotten to that kind of level yet, but I think the potential is there that sometime around the first of the year, by then, there'll probably be a similar number taken out also. Now it doesn't take many of those to take some real cost out without impacting the service or safety or anything else. These are just the different ways of doing things. We're bringing some jobs home. We have, I don't know, about 250 or 300 employees in India. Well, we're bringing those jobs back here. So there'll be some loss of some jobs, but I'm really -- to be honest with you, I can't worry about India right now. I'm more worried about CSX and Jacksonville and made in America. So there's a lot of opportunity, and I don't think it's a stretch to say if we do the job that we have the ability to do, that we can achieve all these things that we've talked about.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [27]

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Amit, one other point on the folks in India, they're contractors, not employees. But obviously, we're going to insource that work and really look to absorb that with the existing workforce. I know, Cindy also had some points she wanted to make here.

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Cynthia M. Sanborn, CSX Corporation - EVP & COO [28]

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Yes, I'll just put it in a couple of broad categories as I think about it. Hunter mentioned the reduction in management that took place last month. I think as you think about the hump yard conversions and so forth, those types of actions I would call core operations, and we expect to do more of that.

Volume absorption, we are seeing our outlook with a higher level of volume for us to move, and we think we can absorb that more efficiently than putting resources back one for one. And then I would also say some of the -- looking back at some of the improvements that were made at other railroads, as Hunter's ride of call it network efficiency, cars online, velocity, dwell, those types of things, we think we'll see improvements there. So I'd call that just network efficiencies going forward. And when you put all that together, that's what's given us our confidence to move forward with another record year.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [29]

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Let me just ask one follow-up, if I could. Frank, on your comments about productivity, maybe I'm thinking about it incorrectly, but I feel like productivity is different than absolute reduction in the cost structure. Because productivity is, in my view, the way I understand it, you're optimizing the cost structure to maximize the incrementals, maybe minimize the decrementals. But it doesn't necessarily mean the cost structure is declining. So you guys achieved 72% incremental operating margins in the quarter, which is unbelievably great. Is there a way to understand or help us in terms of what was that with actually fixed cost absorption? What was that, actually, absolute reduction in the cost structure?

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Frank A. Lonegro, CSX Corporation - CFO and EVP [30]

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So when we think about productivity and how we, I'll say, keep score internally, we do look for structural cost reductions. So a big part of that record productivity is structural cost reductions, meaning, each line item in the expenses is going to get lower. Again, I'm excluding fuel just given the price environment that we're in. But we are focused on fuel efficiency as well. I think what we see from an incremental margin perspective, we're off to a very good start with about 72% incrementals for the first quarter. When you understand what we're trying to do on the cost side and you understand what the volume outlook looks like, I would estimate that the incremental margins will actually improve throughout the year, which is going to give you the bottom line flow-through of the revenue that we're bringing on.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [31]

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That's great. Hunter, one last one for me, if I could. Could you just comment on your relationship with the union so far? I mean you have -- the company has over 20,000 union employees. Can you just talk about those initial meetings and conversations and just in the context of all the operational changes to come? That's it for me.

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E. Hunter Harrison, CSX Corporation - President & CEO [32]

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Well, I hope it's pretty good. I've worked most of my career, the first 4 years, alongside of these various roads that now make up CSX. I know some of the leadership. I've had some -- I'm being careful what I say here. I've had some very fascinating conversations, exploring opportunities with those individuals. Now look, it's not real common for a new CEO to come in, and I don't care what your last name is, and the labor leaders to be bringing in a brass band and red carpet welcoming you to town. That's just not their style, and I recognize and understand that. But at the same time, I think, for example, to be approached, unofficially at least, to conversations about potentially doing something like an hourly agreement that's been extended and that is on part of the U.S. system on the -- now the Canadian National that we developed, it's very encouraging to say that we would even enter a dialogue like that. And one of the things -- the beauty of that would be a couple things that people should think about: One, those agreements guarantee people positions. That's important today, people that can have a job and have a job guarantee. That's very important and people -- and at the same time for us, it lowers our -- potentially our T&E, train and engine room cost 30%, 35%. So look, we're going to have some squabbles. They don't like to see their people disrupted, nor do I, but you got to do what you got to do sometimes. And so there'll be some -- I'm sure there'll be some negative comments that all I care about is the bottom line or profit or what. But I hope that's not true. We're very sensitive to the employees and the part they play in this. And so I think we'll do fine with labor.

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Operator [33]

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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 [34]

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Thanks, good morning, everyone. Hunter, just to summarize or tie up everything you've said on the call so far, in terms of playbooks, the precision railroading playbook that you've so effectively deployed several times before at other railroads, do you think that's kind of directly applicable to CSX here? Or do you think the complexity of the network here involves changes to the way it's been done before? And also, CSX has in recent years had a playbook of deemphasizing coal and becoming more of an intermodal rail. Do you agree with that? And do you think that kind of becomes part of your playbook as well?

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E. Hunter Harrison, CSX Corporation - President & CEO [35]

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Well, question one, yes, it applies. Look, I think one of the things that people miss is the more complexity there is to the network, the better models you can apply to it, you could take more advantage of the opportunity. If you've just got a linear, straight-line railroad that goes from A to B, a lot of people can design a model for that. So yes, this has certainly those implications.

Now strategically going down the line as far as -- look, I think the -- if you're looking 3 years out or 5 years out or 10 years out, it's a lot different. Look, we need to understand that the world is going to continue to change on us, and we need to be flexible and to have a plan that allows us to change with those changes, okay? And we have things going on as we speak, okay, from an energy standpoint. What's the future of fossil fuel? What's the future of crude? How much influence are the environmentalists going to have? What's the net going to do with the way freight -- you go out here in Jacksonville, you drive by this huge warehouse of Amazon. And so the supply chain is going to change, and we have to be -- it's not going to be some of the game that I've played before, the traditional intermodal, coal, merchandise. We have to be more flexible and more creative to be able to deal with those changes in the world.

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer [36]

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Yes, to echo on Hunter's point. I mean, we haven't deemphasized coal at CSX. Coal has been deemphasized by the utilities, and so we want as much business as we can, whether it's coal, intermodal, or anything else. But we will deploy our strategies where we can capture the growth and create bottom line value for CSX through excellent service for our customers.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [37]

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Got it. And your vision of intermodal, is this largely -- I know you spoke about service initiatives a little earlier on the call, but is it largely a case of improving the service levels and getting to a point where it becomes super competitive versus truck? Or are you looking for more demand improvements from macro or kind of being able to take price in segments? And between service and demand and price, kind of which do you think is the most important lever for intermodal?

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E. Hunter Harrison, CSX Corporation - President & CEO [38]

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I don't know that you're -- look, the market would have you believe, to begin with, that it's price, okay? We are not going to sit here and let our precious service become a commodity. And so the better we create in service, velocity -- and I would hasten to add this: When just in time and intermodal get real hot, if you look back and do a little history lesson, you'd see that prime then was knocking on 20%. The interest rates aren't there today. [You got] interest rates, and they're going back up. I predict that, okay. I just can't tell you when, but they're going back up. And when they do, people that move merchandise will be rewarded because carrying costs are going to go up. The beauty is this: The quicker we move it, the cheaper it is. And so it grows on itself. And so we turn the equipment quicker, we give better service to the customer, and we got lower cost and then we can be more competitive, and it all fits in this model.

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Operator [39]

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Our next question comes from Ken Hoexter with Merrill Lynch.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [40]

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Hunter, you sound well. I look forward to your tenure at CSX. You noted you're going to be an advocate for customers in your internal remarks. Is that a change in how you're going to attack the plan? I mean, after you've left, obviously, we heard Keith talk about fixing ruffled feathers, and Claude launch a customer focus. So sounds like you may start this with a little bit of a different tact. Maybe you can just talk about that a bit.

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E. Hunter Harrison, CSX Corporation - President & CEO [41]

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Well, I'm going to talk to Claude and Keith later on today, okay? We'll mentor them a little bit, okay? But look, I've -- my whole career, in fact, one of the reasons why I'm sitting here was I happened to be an operating guy that thought we ought to provide good service to the customer, okay? Now I got a little bad reputation in Canada because I asked people to pay their bills, and that wasn't the thing to do in the crown court. But look, there's no one more sensitive than I am and more appreciative than I am of the business that our customers give us, okay? I am the greatest advocate in the world, and I wish you could sit in some of our meetings when we talk about service and when we talk about car delays. Because that's not just about car delay, it's about creating pain and suffering for our customer, which I don't want to see created, okay? And I can't get anybody to give me one example of a customer, except during a turnover period just -- where we're going through a transition, that's had any problem or issues from a systemic standpoint that says, "We've got service problems," okay? It doesn't exist, okay? So I'm going to do a little coaching to a couple of my former sidekicks and see what their comments are. And I can anticipate right now the response: misquoted.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [42]

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Let me just revisit something you talked about on the unions. Because the U.S., it seems like historically, have been a little bit different, right, in terms of all the rails kind of negotiating in one team against kind of the -- all the unions in one group. You've always had things maybe a bit differently in Canada. Can you -- is that something you think you need to shift how you address that as you move forward?

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E. Hunter Harrison, CSX Corporation - President & CEO [43]

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Well, I think it's something we're going to look at. If you look back at parts of when I was at Canadian National, the parts of the U.S. operation that we had when we had Illinois Central, we were not part of "national handling". So we negotiated our labor agreements on our own. And that's not to say that we're going to do that now. It's -- we're going to have some dialogue. It appears to me, and I haven't had a chance to visit with some of my colleagues about this, but it appears to me that some of the big 6, if you will, or 7 Class Is see the world a little differently. And if they start to see the world differently and they're not all on one page, I'm not so sure that makes a lot of sense to have this one big carriers' conference negotiating for us. I would much prefer, I think, us to sit down with our employees and do what's the best for the CSX organization and CSX employees. So I think that all those things that deal with policies and coalitions and all, we'll take a look at it and see how others see the world and how we see it going forward and what's the most appropriate action for us to take.

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Operator [44]

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Our next question comes from Brandon Oglenski with Barclays.

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Brandon Robert Oglenski, Barclays PLC, Research Division - VP and Senior Equity Analyst [45]

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And Hunter, definitely welcome back. I know there's a lot of investors excited to see you back in the seat, too.

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E. Hunter Harrison, CSX Corporation - President & CEO [46]

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Thanks, buddy.

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Brandon Robert Oglenski, Barclays PLC, Research Division - VP and Senior Equity Analyst [47]

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So surprisingly, though, it just keeps coming back, we hear it a lot, that length of haul and the shorter length of haul in the East Coast just means that the return on invested capital or the margin potential is not as high as some of your predecessor railroads or some of the stuff going out out west in the U.S. Can you just talk to that dynamic and whether or not you think length of haul plays a lot of determination in the ultimate profitability of the network?

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E. Hunter Harrison, CSX Corporation - President & CEO [48]

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Well, longer length of haul is better than short. But if you only have short, you got to deal with short. The markets are the markets. We don't get a chance to make the market. I know this: The more productive we are, the better we are at, "controlling costs," not cutting and slashing -- the operative word is controlling costs -- will put us in a position that says -- people used to say if you weren't hauling intermodal 800 miles plus, you couldn't make $1. Well, that's not true. If your operating ratio is 90, it's true. If you're operating ratio is 58, it's wrong. So it's -- I don't really focus necessarily on the long and the short. It's the bottom line margin that we can make on all the business and what -- I don't think we set the price out there. The market sets the price. We decide whether we want to play or not. And if we keep ourselves competitive with the market, we'll do fine, both with long and short haul.

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Brandon Robert Oglenski, Barclays PLC, Research Division - VP and Senior Equity Analyst [49]

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And if I could follow up kind of off of that question, maybe what Ken was asking as well, just there's some fear that as you go through these operational changes and focus more on service that maybe some of your customers are disrupted from the way business was done in the past. Is there potential here that you see some share shift as you go through this transition period? Or do you think as service improves, you could actually improve top line at the same time?

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E. Hunter Harrison, CSX Corporation - President & CEO [50]

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Yes, that's the story. That's why you provide good service, selfishly, okay. It starts with your product. If you don't have a product, you don't have anything. So we start with a product. And the better we make that product, the more we can extract the value out of it, both in market share and what I refer to as quality revenue. So this is not a "one side of the ledger" game. This is revenue up and costs down and investors get rewarded. And it's fun, okay.

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Operator [51]

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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 and Senior Transportation Analyst [52]

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So maybe, Fredrik, can you isolate the strength in export pricing from the mix benefit of losing the short-haul business? I'm just trying to understand which had a bigger impact on coal yields in the quarter. And then can you just kind of confirm if the guidance for the year assumes kind of export pricing stays where it is or that it does come down in the back half of the year? And then bigger picture on coal, maybe for you, Hunter, I mean, we can see this quarter how profitable the coal franchise is. If we kind of assume that coal resumes its secular decline the next couple of years, do you think that maybe could impact the ability to get to a sub-60% OR in a couple of years?

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer [53]

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So let me take the first part of your question first. I would say that the majority of the coal RPU change was favorable mix. We had favorable mix, on one hand, that some of that short-haul traffic obviously went away, which was short-haul and marginal. But also we saw more replenishment of utilities in the south versus last year where, if you recall, natural gas prices were tremendously low for a period of time. And then also on the export side, we saw additional traffic going into Virginia, which is generally a little bit of (inaudible) there but is a little bit longer length of haul. So we had a couple of things that was favorable from a mix perspective that certainly helped. So that was the majority of the driver that we saw. And then I'll turn the question about the coal franchise to Hunter.

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E. Hunter Harrison, CSX Corporation - President & CEO [54]

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Look, my numbers, my analysis as a short-timer, it doesn't include some big rebound on coal. If coal comes back stronger than anticipated, it's gravy. Will it change any of these numbers? I don't think so. If you looked at the last story, we had the same thing, except it was crude oil. And you still get to the numbers. I think that group has done an excellent job and they continue to do it. I think they bounded through 60%, and I don't know what their last quarter was, but it started with a 5, it was 58%. So no, I don't think that -- I've said longer term, it almost ran me out of Western Canada, that fossil fuels are dead in my view. I've said it and I can't retract it. I just think longer term, coal is not something that rails should depend on. Now it's going to take a while to transition out. It's not going to happen overnight. And we might see another 10, 15 years. But longer term, I don't think that fuel -- I mean, coal is going to be the energy source of the future.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [55]

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Okay. And just that part about coal pricing assumed in the guidance in the back half?

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer [56]

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Well, overall, we feel on the export side that we follow the indexes that are out there, a variety of them. And as you can see in the forward curve currently, that is coming down as we move through the second half of the year, and then certainly, then our expectations as well. But we'll ultimately see where the market ends up.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [57]

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Okay. And then just, Hunter, since this is your first call, there's a couple of things that I want to address. There's some people that presume that ultimately M&A is part of the strategy, and maybe you can talk about that. And then also in some of your past rails, you've brought some people on in terms of the team. Should we be expecting something similar here?

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E. Hunter Harrison, CSX Corporation - President & CEO [58]

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Well, look, I don't know what I can say, but I would emphasize and emphasize this, okay? M&A has nothing to do with the strategy of me being here at all, okay? And one thing I take great pride in is my integrity, okay? I'm telling you, there's no such plan. I don't have time. Look, I've got 4 years. It's not going to happen in my tenure to have anything to do with me. Number two, my MO is I like to play with the hand I'm dealt, okay? And we've got a good hand here. Now do we have a couple of missing cards in a fixed 2-card deck? Maybe. But we're looking internally. In fact, I was here late last night talking about some people, and going through, and I'm not sure that we've taken advantage of all of the internal talent that we have here. But if we hit a void, that we have a void here that we need, then we always have the ability to go externally. Is there anybody who wants to get into the workforce? The list is long, okay? And we don't have any restrictions about who can leave and you can't go here, you can't go there. We're free agents. So if people don't want to work here, they can leave, okay? In fact, if they want to go to some other railroad, let them go, okay? But we've got -- we will not have a short of talent or resources to be able to operate this railroad like we've described.

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Operator [59]

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Our next question comes from Jeff Kauffman with Aegis Capital.

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Jeffrey Asher Kauffman, Aegis Capital Corporation, Research Division - Analyst [60]

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Welcome back, Hunter. Good to have you back, Hunter. My question has been asked 6 ways to Sunday how CSX differs from some other rails you've been at. But what I'd like to know is at CP, there needed to be a capital investment in sidings and some other portions of the rail to achieve the things you wanted to achieve. At CN, it was a different investment. Can you talk a little bit, not so much about multiple yards because we've been built for acquisition, but talk about the capital plan at CSX? And is there investment that needs to occur for what you need to do and kind of how we think about that strategically?

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E. Hunter Harrison, CSX Corporation - President & CEO [61]

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Well, overall, just to look at it without starting to break it down, I think it's clear to me that the capital investment will come down over time. There's been a good deal spent the last few years, if I looked at kind of the graph. If you take a look at just what's been spent the last few years on locomotives, you would say, "We're not going to have to do that for a while." If we've got 550, 600 locomotives stored, and I can know one of our previous experiences there, that we went through similar numbers. And we said, "Well, maybe we can take a couple-year holiday for locomotives," and we did. And I think they're on their fifth year holiday. So do you say, "Well, we don't have to spend anything on locomotives generally for 4 or 5 years"? Clearly, a lot of the replacements that were an issue with the hump yards are not there. Clearly, if we have sidings that are too short with the longer trains, we're certainly not going to leave those sitting in the ground and not being utilized. So we'll pick up 1 6,500-foot siding and put it 15 miles down the railroad and put it with another 6,500. And then we've got a 13,000-foot siding and the only thing we've capitalized is effectively the labor. We don't have to capitalize the rail but once. And so there's some ways to save capital. And another issue that people overlook is this: The better productivity you have with capital, the more you can put in. The higher productive your yard, you take $100 and you can put in more ties with the $100 being productive. So there's a productivity factor to the capital. So I think, Jeff, overall, I'm not -- well, I'm a little embarrassed that the numbers don't jump. But I think my numbers were that over the 3- or 4-year period, we can see $500 million or $600 million reductions in the capital spend. And then there will be a point where it will potentially trend back up. And if we don't have something else like PTC come along with all the brains in Washington to help us with our capital spend -- and I'm not a big advocate of 7% of revenue. I wish it worked that way, it doesn't. When ties were out, ties were out, whatever the revenue is. But I think, overall, to answer your question, there will be some positive for free cash flow out of the reduction in capital.

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Operator [62]

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Our next question comes from David Vernon with Bernstein.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [63]

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Hunter, maybe just a quick question for you on the presence of the shared asset areas, the old legacy, the Conrail acquisition. Does that sort of joint operations in some of those bigger eastern metros create any challenges or opportunities for you when you think about implementing that precision railroading model into CSX?

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E. Hunter Harrison, CSX Corporation - President & CEO [64]

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You know what, I'm going to have to defer to Cindy there. I don't -- I have not spent in my first 30 days a lot of time in that area. And I'm limited on my knowledge there. And I don't want to try to baffle you with a story that I don't know a lot of about. So Cindy, if you've got any comments there...

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Cynthia M. Sanborn, CSX Corporation - EVP & COO [65]

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Yes, David, I think we're always looking for efficiencies where we hand off cars, whether it's for the jointly owned facility known as Conrail or IHB in Chicago. And there's nothing that really jumps off the page. But as we've said many, many times, everything is on the table. If we can find opportunities, we will certainly take advantage of them.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [66]

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But would you think there are any sort of constraints because you're tied to a schedule that maybe the Conrail is serving for -- that meets both your and Norfolk's needs and it's harder to change? Or is that just something that's probably not an issue?

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Cynthia M. Sanborn, CSX Corporation - EVP & COO [67]

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That's really not an issue. It's in all of our best interest to serve our customer better. And they just simply supply the last-mile service and do a very good job of it. And we work very closely together on making sure that's efficient and effective for our customers.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [68]

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Okay. And Fredrik, maybe just as a quick follow-up, when we look at that same-store sales pricing, I heard your comments on mix in coal. And I think what I've heard is we should expect that to continue to happen. But I think in the intermodal merchandise, the deceleration in the core price, is that something that we should also expect to kind of happen here? Or are we starting to see some signs of improvement in that domestic intermodal market that would help kind of shore up that number?

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer [69]

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Well, yes, listen, just to clarify also, and I'm not sure that's where you were going with the question, the mix is obviously out of the same-store sale number, which is why we're doing it. Second, once again, we don't forecast price. But I think it's clear that we've been in a place over the last few years where there's been a fair amount of excess capacity in the marketplace. And all our customers, as Hunter alluded to before, have alternatives, so we've got to price to market. The key thing is as I look forward now between what I think you guys write a lot about, which is there's a structural change coming in the truckload market with some of the ELD implementations and the shortage of drivers and hopefully getting to a better place from a capacity perspective, and couple that with what we were doing with this operating model, where I already see a significantly improved service, I think there's an opportunity as we move into '18 to really capitalize on that. So we feel good about where we are. We price to market each and every day. And as we move forward, we will do the same.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [70]

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But as we think about rail right now, are we starting to see things kind of improve sequentially? Or are we still kind of in a soft patch on the domestic market?

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer [71]

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I see some opportunities on the spot market side that I follow closely, where things to be seem to be moving in the right direction. I do think that obviously if you see some of the -- and you follow this more than I do, on the trucking side that there's some challenges out there. But I see that the light is coming closer at the end of the tunnel. And supply and demand should be getting to a better place as we move through the second half of the year and into '18.

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Operator [72]

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Our next question comes from Bascome Majors with Susquehanna Financial Group.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [73]

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Just real quickly on the attrition rate, can you guys help quantify that for us, whether in percentage terms or the number of people per year?

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E. Hunter Harrison, CSX Corporation - President & CEO [74]

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I think they were working on some numbers for me. And let me clarify something that I'm trying to -- we all have kind of semantically different types of explanations for -- I'm talking about contractors, consultants, employees, all of the above, everybody that gets a check, okay? I think, and I'll correct this if I'm wrong, that the attrition is going to come in at about a 9% level range, 8.5% to 9%. So if you look at those numbers as opposed to where we are, gives you some kind of order of magnitude of what we could absorb without adversely affecting people.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [75]

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Yes. And Hunter, as we take a step back, if you look recently at least, management incentives have been based in the short term on operating income and the longer term on the mix of ROA. And as you and the reconstituted board look at the outcomes you want to drive over the next 4 years, is there a change to that comment? How do you want to incentivize the senior management team to accomplish what you want to accomplish?

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E. Hunter Harrison, CSX Corporation - President & CEO [76]

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Well, yes, I think that clearly -- look, we -- I am not obsessed, for example, with operating ratio, okay? The more I try to get away from it, the more people push me back in the middle of it. I mean, clearly there's some -- there are issues that are return on -- you name it, capital, equity, debt, whatever, there are more material ways over a longer time frame to -- look, the problem gets to be is to incorporate it into your yearly, daily operations and make the conversion, because there's a lag period that you go through. I think a lot of businesses, and I think we are -- a little bit that we have to address is this: We've got our compensation system so complex that employees don't understand it, then you've gone too far. But I think that that's something that the board talked about this week, the compensation committee discussed it. And I think it's something that we want to be sure that we're motivating the right behavior with employees of return effectively on capital. One of the rules of this model is this: Don't spend $1 in precious capital until you've looked and explored every operating alternative. And so I think there's going to be a push that way more and more for return numbers rather than just raw margins or operating ratios.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [77]

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One second. You had talked about the long term being ROA. ROA is half of it and operating ratio is the other half of it. I just want to make sure you knew both of those.

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

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Appreciate it. Is there a possibility for a free cash flow component? Is that something that you guys are considering?

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E. Hunter Harrison, CSX Corporation - President & CEO [79]

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Yes, free cash flow works. I mean, in all of the above, it's how you weigh those factors and if you do those things in a mature manner. Every one of them has got some downside to them. You focus this year on free cash flow and you make some immature decisions to make some artificial goal, which kills you next year. So it really takes a mature approach from management, and sometimes that's hard to put together.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [80]

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And certainly, a focus on cash is important. As you saw in the quarterly financial report we put out last night and the guidance we put out, I mean, we're certainly being transparent in terms of free cash flow and how we're calculating it and what the goals are for the year. So that's a new thing for us.

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Operator [81]

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Our next question comes from Jason Seidl with Cowen and Company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [82]

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Hunter, welcome back. A couple of quick things, Hunter, when looking at intermodal, clearly it's an opportunity in the east. In your eyes, what's the most important piece of intermodal and how to get it more profitable for the railroad?

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E. Hunter Harrison, CSX Corporation - President & CEO [83]

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Well, I mean, clearly it's a pretty simple formula. Cindy talked about it this morning. The longer the trains, the fewer the train starts, the lower the cost, the better we can be in the terminals. And the service factor, that's all you've got to do, get the trailer, get the conveyor, get it on a train, get it to its destination and get it on the ground and have it available for the customer. And it's not so much -- you do the job right and that's -- and this organization is doing a pretty good job there. I mean, I look at some of our numbers that I'm learning, and with our domestic business, we're like up in the mid-, higher 90s, which is pretty admirable, with pretty demanding customers as they should be demanding, like UPS. I mean, UPS, just all they want you to do is write what we say in the model. Just do what you say you're going to do. If you say you're going to be here third morning by x, be here. And if you do that, okay. It's not -- sometimes we may see things too complex. It's just simply get it, move it and do what you say you're going to do and be efficient with it. And are we looking at some fine-tuning that we can do, a little bit here, a little bit there? Continually, but I think we're going to do fine there. And we're going to get even better there. And then we'll, at the same time, take advantage of this merchandise network.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [84]

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And Hunter, is the offering as big as it needs to be? Does any investment beyond the typical investment that goes in need to be made at intermodal?

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E. Hunter Harrison, CSX Corporation - President & CEO [85]

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Well, I mean, Frank can -- I mean, Fred can probably and Frank can speak to that better than I can. I know that -- look, I know this company is going to be in a much better position from a cash standpoint. If we see the opportunities, we're ready to make whatever investments we need to take advantages of opportunities in the market out there.

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer [86]

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Yes. And we've talked about before that over time, in terms of the network itself, we're at 95% double-stacked clear, which is a critical component to driving efficiency. We are opening one new terminal in a white space that we felt was needed, which is in Pittsburgh here in July. And we are looking at longer-term terminals that we've announced out at -- in Carolina, the CCX terminal we talked about. And we're also, to Hunter's point earlier, trying to see where there are opportunities to leverage existing facilities and perhaps combine things to create value that way. So Hunter has been a great supporter of our intermodal franchise and what we're trying to do. And the essence of precision railroading is about running a scheduled network at a high-level reliability. And that is what we have been doing and we're going to do even more so going forward.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [87]

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I'm going to get my follow-up. Hunter, I'd love to hear your opinions on CSX and the rest of the rail industry pushing towards one-man crews. And when do you see that as a viable option?

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E. Hunter Harrison, CSX Corporation - President & CEO [88]

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I'm not a one-man crew advocate. There are special circumstances due to different issues. I mean, clearly if you're switching a rip track or you're switching a mine track that's one track or something, there's applications that we have today for 1 person. But today, to take a 20,000-ton train on a line of road with 1 person, I don't think it's good business. Number one, I don't think that -- and shame on us that we don't have, in my view, the quality control to do that. So if you've got one person on the train and you have an air hose failure or a drawbar or whatever, how's the one person going to deal with it, the delay to the customers, the domino effect and all that? And then some of my cohorts tell me, "Well, we're going to have people in trucks along the right-of-way with all these materials with them and they'll be dispatched to the train to help the engineer or the one-man crew." And I said, "Well, it's not one man then, it's one-point-whatever case." Particularly today with where rail is relative to safety issues and the whole issue of common carrier obligation, I just don't think that it's something that we're focusing on. If you look at the payload, and people will shudder when I say this, some of my peers who are labor leaders, if you look at the cost of the other person on that train that you've got a revenue and the payload of x, it's relatively a drop in the bucket to the values that person can bring. It's an additional eyes and ears. I mean, you can't watch both sides of the train. We've got a lot of things in ABCs that we needed to get better at before we start talking about one-man crews. And I guess, before it's over with, we will have -- we will be running an electric train with nobody up there, with somebody with a rheostat somewhere running it. I don't know how we're going to get to minus, but somebody would figure it out before it's over.

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Operator [89]

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Our next question comes from Ben Hartford with Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Inc., Research Division - Senior Research Analyst [90]

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Hunter, I'm just curious about -- you talked a lot about intermodal on the call but curious about your go-to-market perspective on that. The focus has been on the operational side and improving service and efficiency for the customers. But as you think about being innovative and creative and flexible, as you see CSX's IMC partnerships, do you see opportunities to expand into new partnerships with new IMCs or even kind of go more direct to market on the intermodal side as you think about a marketing strategy? Do you have any perspective on that?

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E. Hunter Harrison, CSX Corporation - President & CEO [91]

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Under certain circumstances, I think they all work. I think there's a lot of things that we can do intermodally that, for whatever reason, some have tried before and it kind of gotten away from them. But I'm a big advocate of day-of-the-week pricing. One of the things that you have to do in our model that you'll hear a lot about is balance. Because when you look at that graph of intermodal trains and it's kind of at the bottom on Monday and it peaks on Thursday night, and then it sinks down on Sunday, it's just money that's being wasted. And I tried one experiment. When you hear and you listen to the market and you listen and you hear, "Service, service, service." And so we said, "Well, we're having to run 3 trains on Friday night, so maybe we can discount on Saturday and Sunday to move some of that business from Friday to Saturday and Sunday." And so we discounted 15% and 20%. Guess how many people came on Friday? Nobody. Everybody went Saturday and Sunday. So you start to find out what the real market is out there. So there's a lot of creative things I can see today that we're going to have dispatchers sitting there 2:00 in the afternoon selling the slot, saying, "I've got 8 slots left that are going to be open unless -- and they're going to discount." I see that -- my personal view is we'll see a day where there won't be "contracts" as such that we think about. There will be tariffs, but they will be shorter even in length. And so I think there's a lot of things to do, the way we compensate salespeople, for example. And a lot of things that rail can do that we've kind of been a little stuck in the mud with, that we can be much more creative to supplement the standard intermodal product.

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Operator [92]

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Our next question comes from Cherilyn Radbourne with TD Securities.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [93]

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Fredrik, wondered if you could talk about, at the margin, how you feel about the volume outlook for 2017 versus how you felt at the time of the Q4 call and just what influence that had on the team's confidence in providing 2017 guidance this morning.

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Fredrik J. Eliasson, CSX Corporation - Chief Sales & Marketing Officer [94]

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Sure. I would say that coming out of the, I guess, election -- I'm not sure it has anything to do with it. But at the end of the year, we did see a little bit of an uptick in our volume and our projections for the year. I'm not sure that it's translated into the macro numbers at this point. But we did see a little bit more volume than perhaps we would've anticipated at the beginning of the year. We obviously also saw a coal market on the export side that improved beyond what we had anticipated originally, even though we still expect it to taper off as we move through the year. So I would say that there's probably a slight increase in the top line projection, but it really isn't the foundation for what we did here in terms of the guidance, that incremental change. It is (inaudible) we've done here over the last quarter or so to put ourselves in a position, coupled with Hunter's arrival there and his operating model, that has allowed us to do this.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [95]

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Okay. So it's more the operational side then.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [96]

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Which, Cherilyn, gives the flow-through obviously through the bottom line.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [97]

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Right. And then just a quick one on CapEx. You've adjusted down by about 5% for 2017. Can you just talk about where you've already found room to trim there?

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Frank A. Lonegro, CSX Corporation - CFO and EVP [98]

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Sure. So you're right. We started out the year with about $1.97 billion in core capital, meaning before you get to Positive Train Control. We've trimmed a little over $100 million from that number as we gave you the free cash flow numbers for the year. What we really did was we looked at all of the network investments and decided to pause some of those, given the fact that we're making terminal changes, operating plan changes. We have higher expectations for service product. And so we've really got to give that some time to sink in before we decide exactly where we want to deploy some of that network capital. And then on some of the return-seeking projects, to the point Hunter made earlier, we really looked at ways that we could get there through better process, better execution of that process, better accountability, et cetera. So we found some opportunities in both of those categories.

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Operator [99]

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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 [100]

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Welcome back, Hunter. My question is on the free cash flow and how that's going to go into your buyback program leverage. I know you announced $1 billion new program here. But I know, Hunter, you've always liked your buyback. Leverage doesn't seem to be an issue at all. And I don't know if you've huddled with Frank here a little bit and talked about longer term, where you want to see your leverage ratio go to. And as a result and with the free cash flow you're going to generate from your initiatives, could we see a much more expanded buyback than the $1 billion announcement here this morning?

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E. Hunter Harrison, CSX Corporation - President & CEO [101]

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Well, Frank spent a lot of time this week with the board and the finance committee. And I have, believe it or not, decided to back up from that discussion and be a little more operating focused. So let me let Frank help you there.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [102]

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Yes, we had a great discussion this week. And obviously, you heard us reiterate the BBB+, Baa1 today. You saw the size of the program for the next 12 months. Obviously, as we get more and more months and quarters under our belt and we get an understanding of the free cash flow numbers both for coming quarters and coming years, we'll take a hard look at whether or not we're deploying capital in the correct way to shareholders and in the correct amounts. And we always look at the balance sheet and try to determine what the appropriate place is, given really the cyclicality of the business on the merchandise and intermodal side as well as the capital intensity of the business and making sure we preserve the access to the marketplace that we need in tougher times. So we want to stress test the numbers that we have internally to make sure if there is, in fact, a coal decline or an economic decline, that we can stomach that. So we think we're in pretty good shape. We put good numbers out for you in the quarter and the forward guidance as well as the buyback and the dividends. So right now, we feel like we're in pretty good shape.

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E. Hunter Harrison, CSX Corporation - President & CEO [103]

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Yes, Walter, I don't think our policy is going to be any different than what you've been familiar with us in the past. If you look at allocation of capital, the first call is going to be always reinvestment in this railroad. And hopefully, we've got opportunities to make the appropriate returns there. If those don't present themselves, then we're going to look at other ways, the most efficient ways, as Frank described, to return that cash to the owners. Whether it's through buyback, dividends and combinations thereof, we'll always be a little debated about what your structure is and what kind of funds you're managing and which customers want which and -- but I think the board yesterday has -- both -- for 2 days, that's committee meetings and board meetings, had a thorough discussion of our policies there. And there was a great deal of common understanding directionally which way we need to go.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [104]

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Okay. So the second question here is on the competitive response to your initiatives, both from a service standpoint but also from an operating standpoint as you get lower cost, your ability to more efficiently and at higher profitability service your customers. And I'm just interested in what the competitive response might be that might cause problems for you, Hunter, in terms of what you're trying to achieve. I know you've always had a great view on pricing. The pricing is what the market dictates. But often, we hear when market share shifts, they won it on price. So is there a risk that a competitive response might come in and make -- put problems on how you can effect change or make them a little -- lot longer to achieve at the end of the day? Do you have any views on that?

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E. Hunter Harrison, CSX Corporation - President & CEO [105]

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Well, yes. They ought to be careful with that, the response. Look, I think this is a pretty simple response. As long as we provide the service we've talked about today and we become, and we're going to get there, the low-cost carrier, okay, we've got the world by the tail. I don't know what they're going to do in the way of response that is smart that they could do to hurt us. Now if the competitors do anything stupid, that's good. Sometimes it's short-term pain, but I don't think that I see anything out there that says they're going to have some different response than they've had 6 months ago than what they're going to have in the future that's going to set this organization back. We've got an agenda. We've got a wonderful customer base. We're going to see some organic growth. I'm convinced we're going to see some market share growth. I've got to be a little patient there, but this is going to come together. And I don't think a lot of what takes place is going to be negatively impacted by the competition.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [106]

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There's a view out there that it can be emulated, that some of your initiatives can just be copied and the efficiency you achieved can be followed by your competitors. Anything you'd respond to that with regards to what you're doing and the unique way you're doing it that will make it more difficult for the competition to copy you?

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E. Hunter Harrison, CSX Corporation - President & CEO [107]

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Tell them to buy the book. It's on eBay for $1,000, I think, and it's a bargain, okay? It's not -- we can't get it recopied. Some of the competition that I used to work for won't let us get the copyrights to it and they're sensitive about it. It's no secret, okay? It's one thing to write a playbook, okay? A lot of companies can sit down and give you Xs and Os, okay? The key is they've got to have players that can execute, okay? If you don't have the players that can execute, you can steal every playbook you want, okay? So I hope they do copy us because if they copy us, I think they might be more efficient. And I look at other rails, generally speaking, much more as our partners as I do our competitors because we have so much interline business together. So we don't -- if there's any secrets to this, I missed them.

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Operator [108]

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Our next question comes from Scott Schneeberger with Oppenheimer.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [109]

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Hunter, I was curious, just your comment in taking 2 to 3 days out of the Chicago-Jacksonville route, curious what type of time it would take to do such a thing. And is that unique because it's Chicago? Or should we expect that more broadly?

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E. Hunter Harrison, CSX Corporation - President & CEO [110]

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Well, I think you'll expect it broadly if you look at the overall velocity. I mean, I just used Chicago for an example. And how quick you can see it? You can see it overnight. I mean, we're starting to reschedule the railroad. I know that Cindy and company have gotten, I think, effectively Florida pretty well reworked and done. And I think that I've been doing some looking westward towards New Orleans. And so we're going to kind of go up the line. We'll have what you have been used to before with every car is going to have its own trip plan. One plan, you don't plan on getting retripped and retripped and retripped, you've got one plan. We're going to tell the customers it's going to be 83 hours door-to-door and we're going to do it. And one of the ways to do it is this. Look, we've got a lot of good things going. We've got some things we've got to fix. Our train speed is not where it ought to be. Our merchandise train speed between terminals is like 18 miles an hour. We've got the potential to be at 27, 28. And you start taking numbers like that, and then you avoid terminals, and rather than drive into a terminal and dwell for 26 hours, you can drive by that one and skip that 26 and pick up a little here. And you do the math, it doesn't take long, you get to Florida 2 or 3 days quicker, depending on where in Florida you're going. That's just an order of magnitude that impacts both service and cost and asset turns, and all that stuff is good.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [111]

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Great. And then just separately, with regard to this year's operating ratio guidance, what is the one big bucket item that you think could -- where you could outperform, and then maybe a bucket item where you're most nervous where you may underperform?

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E. Hunter Harrison, CSX Corporation - President & CEO [112]

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There's nothing I lay awake late at night worried about in that regard, if something happens that I'm not aware of and there's some geopolitical or if something happens in Washington or something like that. But I mean, this is a pretty simple formula of doing something that most of us have done our whole life and we know how to do and that's railroad. And that's all we have to do to get these things accomplished. Now I mean, obviously -- look, when you take 1,000 people out of an organization, that's a big hit. That's big savings right here. So that's a lot of it. But the other thing that you look at, the railcars, the train starts, the yard start with the closures of the hump, all those things, those are natural that come about. Working capital will be down because we weren't going to be able to buy parts for some of these retarders in these old hump yards. They don't make them anymore. So we avoided a lot of problems there, but this is going to happen.

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Operator [113]

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Our next question comes from Turan Quettawala with Scotiabank.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Analyst [114]

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Hunter, I guess just one question from me on the revenue side. I'm wondering, is there any sort of revenue that you see here in the book of business that maybe doesn't meet the return thresholds and maybe needs to be demarketed? I know some of that did happen with CP sort of early on in the process there.

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E. Hunter Harrison, CSX Corporation - President & CEO [115]

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No. Look, there's some odds and ends that just pops up every once in a while with an individual move or something. Everybody goes through a little bit of that. But generally speaking, I mean, Fred didn't need me to get here to point those kind of things out. And obviously, if they were there and I was coming, he might have been motivated to get them out of there, but he didn't have to. And so no, we're not looking at demarketing, we're looking at marketing.

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Operator [116]

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Our next question comes from Justin Long with Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - Research Analyst [117]

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I know it's still early, but I was wondering if you could talk about any structural changes to the network that we could see this year as it relates to divestitures of noncore assets. And when thinking about that mid-60s OR guidance for 2017, does that include the impact of any real estate gains?

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E. Hunter Harrison, CSX Corporation - President & CEO [118]

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The second part, no, it doesn't include any real estate gains. The real estate gains, to the degree there are, and that's being discussed internally, are all gravy. But I can tell you that experience in the past, there's lots of opportunities out there, even out in Chicago. And it's a big number in my book and it's something that we will be sensitive to and focus on. It's not going to drive the business, but it's certainly going to be in the bucket and the blender when we make certain operating decisions about where we operate from and locate. And let me be sure I understood the first part of the question.

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Justin Trennon Long, Stephens Inc., Research Division - Research Analyst [119]

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Just asking about the potential for divestitures at some point this year, maybe some short-line assets that you would view as being noncore to the franchise.

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E. Hunter Harrison, CSX Corporation - President & CEO [120]

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There's not anything -- look, there's a lot of initiatives going on here that I'm sure that I'm not even aware of yet. But to my knowledge, there's nothing of any large nature that we're looking at. What we've been focusing on is just getting better at what we do with the franchise that we have.

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Justin Trennon Long, Stephens Inc., Research Division - Research Analyst [121]

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Okay. And secondly, Hunter, you made the comment earlier that this franchise has more potential than any other you've dealt with. With that in mind, do you think there's a path for this business to have industry-leading margins? Or do you think there are structural limitations getting to an OR level that we've recently seen from the Canadian rails?

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E. Hunter Harrison, CSX Corporation - President & CEO [122]

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I think we can have industry-leading margins. I think we will have. The only issue there in my world is if I can get all that done before I have to go. I'd like to be here to cut the ribbon. (inaudible), it's just a little personal goal. But there's no reason that -- structurally, certain. I know of no reason that this railroad team cannot become the greatest railroad in North America and be the greatest in North America and probably the greatest in the world. And let me just end and say this thing, how people look at this. I went to Canada the first time as an American and that's not fun to begin with. But I got there and CN has just gone through a great restructuring, coming out of an IPO. They had some impressive numbers. But the one thing they said to the public, "Do not expect the Canadian railroad to ever achieve numbers like the U.S. rail. It's just not structurally possible, okay?" Until our operating ratio went to the leading operating ratio in North America. And then guess what the U.S. road said? The U.S. road said, "Look, we're going to improve but don't think we're ever going to reach the level of the Canadian roads. It's just not structurally possible." So it's got something to do with what your passport says and where you reside, but it's just the same thing. That little border up there doesn't mean that much.

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Operator [123]

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And our next question comes from Brian Konigsberg with Vertical Research Partners.

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Brian Adam Konigsberg, Vertical Research Partners, LLC - VP [124]

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Welcome, Hunter. And just almost all my questions have been answered. I think an award is deserved for many of the analysts still coming up with stuff this late into the call. But I guess just the one thing, just for the model's sake, obviously, Hunter, you've got an employment contract that has been stamped. We're still waiting for the result of the shareholder meeting, but we expect that to go through, most likely. So how should we be baking in just kind of the share grants and additional payments that have been agreed upon so far throughout this year in cash flows and into the share baseline?

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E. Hunter Harrison, CSX Corporation - President & CEO [125]

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Yes, I'm not sure that it's appropriate for me to address that. Let me let Frank address that.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [126]

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So in terms of the share-based compensation, obviously we book expense on that one under the Black-Scholes model. And we've done that in terms of the guidance that we've given you. In terms of the shareholder vote, obviously you heard David's opening remarks, so we're not going to touch on that one. But the free cash flow number that we gave you for the year is excluding the existing restructuring charges and any subsequent restructuring charges that might happen in the second quarter.

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Brian Adam Konigsberg, Vertical Research Partners, LLC - VP [127]

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Yes. And so just presumably though, the share count does not reflect any grant at this point, but that can certainly change after the shareholder meeting. Is that the message?

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Frank A. Lonegro, CSX Corporation - CFO and EVP [128]

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I'm sorry. Could you repeat your question?

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Brian Adam Konigsberg, Vertical Research Partners, LLC - VP [129]

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I'm just saying the share grants, I presume it's not in the numbers now and likely not in the guidance that was provided, but that could change after the shareholder meeting. That could be baked in, in our next discussion, if it's approved.

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Frank A. Lonegro, CSX Corporation - CFO and EVP [130]

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The numbers we gave you, around $1.5 billion in adjusted free cash flow excludes the cash impact of the things that we're discussing both from the first quarter and perhaps things that could happen subsequently in the second quarter. Does that clear it up?

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Brian Adam Konigsberg, Vertical Research Partners, LLC - VP [131]

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Yes, I could follow it up offline, but that helps.

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Operator [132]

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And this does conclude the question-and-answer session. At this time, I'll turn the call over to Hunter Harrison for closing remarks.

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E. Hunter Harrison, CSX Corporation - President & CEO [133]

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Well, thanks very much for joining. It's been a very stimulating call. Hopefully, we have answered a lot of your questions. And I've got to run and call Keith, so if you'll excuse me. Thanks.

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Operator [134]

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This concludes today's teleconference. Thank you for your participation in today's call. You may disconnect your lines at this time.