CSX Corporation (CSX) Q1 2012 Earnings Report, Transcript and Summary

David Baggs - Vice President of Capital Markets and Investor Relations Michael Jon Ward - Chairman, President, Chief Executive Officer of Csx Transportation Inc., President of Csx Transportation Inc and Chairman of Executive Committee Clarence W. Gooden - Chief Commercial Officer, Executive Vice President of Sales and Marketing, Chief Commercial Officer of Csx Transportation Inc and Executive Vice President of Csx Transportation Inc Oscar Munoz - Chief Executive Officer, Chief Operating Officer and Executive Vice President Fredrik J. Eliasson - Chief Financial Officer and Executive Vice President

William J. Greene - Morgan Stanley, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Scott H. Group - Wolfe Trahan & Co. Christian Wetherbee - Citigroup Inc, Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division Robert H. Salmon - Deutsche Bank AG, Research Division Brandon R. Oglenski - Barclays Capital, Research Division Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division Cherilyn Radbourne - TD Securities Equity Research Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division H. Peter Nesvold - Jefferies & Company, Inc., Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division Keith Schoonmaker - Morningstar Inc., Research Division

Good morning, ladies and gentlemen, and welcome to the CSX Corporation First Quarter 2012 Earnings Call. As a reminder, today's call is being recorded. [Operator Instructions] For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation. Sir, you may begin.

Thank you, Lori. And good morning, everyone. And again, welcome to CSX Corporation's First Quarter 2012 Earnings Presentation. The presentation material that we'll review this morning, along with our quarterly financial report, and our safety and service measurements, are available on our website at csx.com under the Investors section. In addition, following the presentation this morning, a webcast and podcast replay will be available on the website. Here, representing CSX this morning, are Michael Ward, the company's Chairman, President and Chief Executive Officer; Clarence Gooden, our Chief Sales and Marketing Officer; Oscar Munoz, Chief Operating Officer; and Fredrik Eliasson, Chief Financial Officer. Now before we begin the formal part of the program, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to review the company's disclosure in the accompanying presentation on Slide 2. This disclosure identifies forward-looking statements and risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements. In addition, let me also remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With nearly 30 analysts covering CSX, I would ask, as a courtesy for everyone, to please limit your inquiries to one primary and one follow-up question. And with that, let me turn the presentation over to CSX Corporation's Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Well, thank you, Dave. And good morning, everyone. Last evening, CSX was pleased to report record financial results for the first quarter. Earnings per share were $0.43, up 23% from the same period last year. Despite significant weakness in utility coal, we continue to see broad-based revenue strength across nearly all of our markets. This led to a revenue growth of 6% to nearly $3 billion in the quarter. Our team supported the revenue gains with excellent results in safety, service and productivity. These are the foundations of our business and our ability to drive value for both customers and shareholders. The strong revenues and operational results produced an 11% increase in first quarter operating income versus the same period last year and 140 basis point improvement in operating ratio. Both were first quarter records and an indication of our commitment to producing strong results for our investors. With that, I'd like to turn the presentation over to Clarence Gooden for his sales and marketing review. Clarence?

Thank you, Michael. And good morning, everyone. Before I discuss the quarterly results in detail, let me take you through our near-term outlook. Most key indicators we look at continued to project year-over-year growth in 2012, which supports our expectation that the second quarter outlook is favorable for 58% of our volume and stable for 32% of our volume. Utility coal, which represents about 10% of CSX's volume, is the only market with an unfavorable outlook. However, with a growing economy, continued truck conversions from the highway and the onboarding of the new Maersk business, Intermodal is expected to continue leading our growth. In addition, the expanding industrial economy supports growth in our Automotive and Metals markets and stability in our chemicals market. Modest improvement in the housing and construction sectors supports growth in our Forest Products business and a stable environment for emerging markets. While the overall agricultural sector is expected to be stable, we see upside in our phosphate and fertilizer market. And finally, we expect stability in our Export & Industrial Coal business. This outlook is generally consistent with what we experienced during the first quarter, which I will begin to review on the next slide. CSX revenue increased 6% to nearly $3 billion in the first quarter. Starting with the left gold bar, you can see that the volume gains of 1% drove year-over-year revenue growth of $26 million. Moving to the right, the combined effect of rate and mix accounted for $64 million of the increase, reflecting yield gains across all 3 major markets as we continue to sell the value of rail transportation and the excellent value of CSX's service product. Overall, pricing in excess of inflation more than offset the mix impact associated with the higher Intermodal growth and declining coal volume. Finally, as you look further to the right, increases in the price of fuel resulted in an additional $66 million of recovery in the quarter, which helped to offset the impact of higher fuel costs. Now, let's take a look at each of the major markets that we serve starting with coal. Coal revenue decreased 5%, driven by weaknesses in utility coal volume that more than offset the strength in Export & Industrial Coal. Domestic utility tons declined 28% as overall electrical generation was down in the eastern United States. In addition, natural gas prices remained at low levels, which led to the continued displacement of coal at some utilities. Partially offsetting this weakness, Industrial Coal tons grew by 11%, driven by increased domestic steel production, while export coal tons grew 17% as demand was strong for U.S. thermal coal shipments. Looking ahead, demand for export coal should remain strong with the increasing demand for thermal coal being offset by weakness in the metallurgical shipments. Overall, we still expect export volumes similar to the 2011 levels. In addition, strength in shipments of industrial coal is expected to continue due to the increased steel production. At the same time, domestic utility volumes are expected to face continued challenges due to the low natural gas prices, above normal inventory levels and environmental regulations. Headwinds should be strongest in the second quarter and then moderate throughout the balance of the year. Now let's turn to our Intermodal results. Intermodal revenue increased 19% to $389 million versus 2011, driven by a 9% increase in volume and a 10% increase in revenue per unit. Domestic volume was up 9%, setting a first quarter record. Strength was driven by highway-to-rail Intermodal conversion, the continued success of our UMAX interline container program and new markets and lines generating organic growth. International volume grew 9%, driven by new business gained as a result of our portfolio of service and network offerings, as well as the successful onboarding of the new Maersk traffic. Turning to the revenue per unit, the 10% improvement versus the prior year was attributable to positive mix, improved pricing and higher fuel recoveries. Looking forward, strategic investments such as the National Gateway initiative and our Northwest Ohio terminal position CSX to compete for an estimated $9 million-truckload opportunity in our service territory. Our modern hub in Northwest Ohio improves transit times, increases capacity and expands our service offering by enabling connections between new and existing markets. For example, the transit time from Chicago to New York has improved by over a day. We expect healthy growth to continue long term as new terminals, such as Louisville, and capacity expansions, including Columbus and Charlotte, drive highway-to-rail conversions. Turning to the next slide, let's look at our merchandise market. Overall, merchandise revenue increased 10%, driven by a 3% volume growth and a 7% increase in revenue per unit, reflecting increases across nearly all markets due to higher yields and higher fuel recovery. Metals and Automotive shipments were key drivers of growth in the industrial sector. North American light vehicle production grew 15% in the quarter. In addition, domestic steel production remained high due to strong demand from the Automotive and the oil and gas industries. In the construction sector, growth in building products was offset by a decline in aggregate shipments due to the completion of several stimulus projects. In the agricultural sector, volume decreased slightly in the quarter primarily due to a decline in phosphate shipments as buyers delayed purchases in expectation of moderating commodity prices. Export grain also declined due to more competitive pricing from other world producers, and ethanol shipments softened as a result of lower gasoline demand. Looking forward, we expect the agricultural sector to be stable with increases in both grain and phosphate shipments being offset by lower ethanol demand. Industrial sector strength is expected to continue led by the Automotive and Metals markets. New oil and gas related growth will also support increased shipments in Metals and chemicals. And finally, in the construction sector, growth should continue led by the strength in multi-family housing. Now, let's wrap up on the next slide. Looking ahead, the economic backdrop remains favorable as most major economic indicators are positive for 2012. As I mentioned earlier, we expect solid growth in 58% of CSX's markets and stable conditions in 32% of our markets. While the utility coal volume will continue to be challenged by lower generation, low gas prices and higher coal inventories, we expect these headwinds to moderate somewhat through the balance of the year. Finally, service levels have improved significantly. In our most recent annual survey results, customers gave us the highest overall rating since the inception of the survey in 2004. And we will remain committed to creating compelling value and providing environmentally friendly solutions for our customers going forward. Thank you. And now, let me turn the presentation over to Oscar to review our operating results.

Well, thank you, Mr. Gooden. And good morning, everyone. It's my privilege to represent our operations team today. And I got to tell you, the great part of telling the story is that the fundamental strategy we've been employing since 2003 continues, as does our strong operating performance. So let me begin on Slide 13. At CSX, operational success has, at its core, been driven by our people and the culture we've created. This has resulted in significant improvements in safety, service and productivity over the last few years. This quarter is no different. Safety and service are at or near record levels, and productivity and cost controls are driving margin expansion. At the same time, we are increasingly adding a strategic dimension to what we do. In operations, that means looking around corners and challenging ourselves to think like our customers as their supply chain and businesses evolve. It means being nimble to meet our changing business market conditions like those we're seeing in our coal business, and it means looking ahead as we allocate resources to developing market opportunities like those coming out of the oil and gas industry. By focusing relentlessly on the operational fundamentals and thinking strategically, we will continue to drive excellence in our operations and value for our customers and shareholders. Now let's return to the safety results in the next slide. Those of you who have followed us for any length of time know how important safety is to our business. It transcends every aspect of what we do because it affects the lives of our employees and the communities we serve. At the same time, it reflects the rigor and attention to detail we need to run every aspect of this great railroad. Looking at the FRA personal injury rate on the left, you can see that our employees produced another quarterly record, a testament to their focus and concern for each other. The chart on the right shows our FRA train accident rate, which improved 24% year-over-year, just over 2 occurrences per 1 million train miles. This improvement is driven both by the employees' adherence to operating rules and to their use of new technology to identify issues early. Now let's turn to the next slide and review our on-time performance. On both of these charts, you see our performance in on-time originations and arrivals, which we show you every quarter. This time, however, we've overlaid 6- and 12-month trend lines. When you, as investors, evaluate business performance, you look at the fundamentals of the business as well as the technicals. We view our service measures in much the same way. But the fundamental results for the quarter represented by the bars and the technicals represented by the moving averages, black for 12-month and -- I'm sorry, in black, and 12-month average in red. When our quarterly results in service are below the 6-month trend line, it's an early indication that we need to take corrective action in order to avoid a longer-term negative trend. Likewise, when the quarterly results are above the trend lines, it's a signal that we have strong momentum in our service performance. So when you look at on-time originations for the quarter, they are at an all-time high, and arrivals are near record levels. That's great news and the feedback from customers, as Clarence mentioned, has been very positive. Now if you step back and look at the broader story here, you can see that over the last couple of years, the trend lines for both originations and arrivals have declined. But last year, as you may recall, we made key resource investments to improve our service product. Those investments, along with the great work of our people, are now propelling our quarterly performance and the longer-term trend line. Back with the first quarter results, when the 6-month trends are above the 12-month trend lines, it's a strong signal of our momentum in the coming quarters. Now turning to our system performance on the next slide, terminal dwell is another important measure, not only from a service aspect but also in terms of how efficient we utilize our assets. Here, we have reduced dwell time as favorable, the 6-month trend line is clearly improving. It has crossed the 12-month line, again showing momentum, and represents our best first quarter performance since 2009. Overall velocity on the right side of the chart is also in great shape but is more meaningful when you break it down by market, which we do on the following chart. Here, you can see that the velocity is moving in the right direction across all 3 of our networks: Coal, Intermodal and Merchandise, with both results for the quarter and the 6-month trend line showing positive momentum. In Coal, with overall volumes declining, service and productivity are up with the average train length increasing to 106 cars. At the same time, with the increased fluidity in the coal network, we were able to deliver 12.5 million tons to the export market. In Intermodal, higher velocity means we can make more capacity available to our customers, and therefore, a higher level of service. We did this in the first quarter while handling a 9% increase in volume. Availability, which is measured as the percent of loaded containers or trailers ready for on-time pickup in our most sensitive -- time-sensitive business is up to 98%. And availability across our broader Intermodal business is in the mid-80s. Finally, in the Merchandise business, which grew 3%, higher velocity, combined with significantly improved terminal dwell time is enabling CSX to deliver products to customers with a higher degree of precision. Now looking at cost control and productivity on the next slide. We entered 2012 with high expectations for customer service. But we also knew that we had to regain some lost momentum and productivity and cost control, especially given the need to offset the decline in the coal market. The first quarter was a great start in that regard. In fact, cost controls and operational productivity contributed to our record first quarter operating ratio, as you can see on the chart on the left. From a cost control aspect, as coal demand weakened further, we took steps to adjust our T&E resources in select areas, mainly, as you'd expect, in the coal regions. In addition, we recently began to store locomotives after a smooth and fast start towards spring peak shipping season. On the productivity front, the first quarter was an excellent start toward our goal of delivering savings in excess of $130 million this year. Our train crews have operated with less overtime and fewer re-crews, while engineering overtime has also been reduced. Our improved service has also been reflected in faster cycle times, reducing car rents despite the increased volume in most of our markets. These are just a few examples of the types of productivity drivers we expect to help CSX again exceed its productivity goal for 2012. At the same time, it's important to note that we expect to achieve these goals while maintaining high levels of service. So let me wrap up on the next slide. The story of operational excellence here at CSX has been developed over many years and the commitment of our people is as strong as ever, which is clearly indicated in our first quarter performance. In safety, we are operating at high levels, and as the industry leader, we continue to identify new ways to achieve higher performance. In service, every key measure shows strong momentum. Value is created by people who are engaged, and nothing does that better than knowing that what you do matters to customers. We are seeing that throughout all areas of the operations. And when it comes to productivity, we told you before about our focus on asset management, and these efforts have progressed significantly over the past few months. In fact, we transformed our process improvement teams into asset management teams. They're focused on improved utilization, reliability, unit cost and creating the productivity pipeline for the next several years. These folks have a great track record for getting results, and I'm confident they will continue to succeed. In short, we are committed to safely providing the high levels of service the customers expect while also generating the productivity required to create lasting value for shareholders. Now let me turn the presentation over to Fredrik to review the financials.

Thank you, Oscar. And good morning, everyone. In the first quarter, CSX once again demonstrated the ability to leverage strong topline gains with a continuing focus on productivity and service to achieve double-digit earnings growth. Looking at the top of this slide, revenue improved 6% to nearly $3 billion on strong core pricing, modest volume growth and the impact of higher fuel recovery. This, coupled with only a 4% increase in expenses, generated first quarter operating income of $856 million, up 11% versus the prior year. Looking below the line, interest expense was up $4 million, other income was down $1 million and income taxes were up $24 million to $267 million in the quarter for an effective tax rate of 37.3%. Going forward, we continue to expect a normalized tax rate of about 38%. Finally, EPS was $0.43, an improvement of 23%, reflecting the very solid gains in core earnings and the impact of our share repurchase program. Turning to the next slide, let's begin to discuss expenses in more detail. As you can see on this slide, total expense was up 4% with the most significant increase being driven by higher fuel prices that are essentially offset through our fuel recovery program. Despite the resource investments made in the back half of last year, nonfuel costs increased only 2% in the quarter as the high level of service that we are currently delivering for our customers is also improving asset utilization. I will talk about the top 3 expense lines in more detail in the next few slides, but let me briefly speak to the last 2 items on the chart. Depreciation was up 6% to $257 million due to the increase in the net asset base. This is in line with our previous estimates and should continue to increase a few million dollars sequentially each quarter. Equipment rents were flat at $97 million as strong volume increases in Automotive, Intermodal and merchandise were offset entirely by improved cycle times. Turning to Slide 23. Labor and fringe expense was up 1% versus last year or $5 million. Looking at the chart on the left, headcount this quarter was up 6% versus last year and just 1% sequentially, which is in line with our prior guidance. Note that the employees in further retention status will continue to show up in our headcount numbers. Excluding these employees, headcount is roughly flat on a sequential basis. Reflecting the additions we made to the workforce, and looking at the table on the right, hiring and training costs were up $12 million in the quarter, and volume and other related costs were up $9 million. The impact of wage and healthcare inflation in this quarter was a modest $8 million or about 1%. While core wage inflation was between 2.5% to 3%, this is being offset by moderating health and welfare costs, as well as the impact of lower railroad unemployment tax rights. Rounding out the table, incentive compensation was $24 million favorable in the quarter, reflecting the outlook for our incentive programs. Looking forward, headcount should be relatively constant throughout the year. In addition, we expect that labor inflation will remain modest. Finally, the favorable year-over-year variance to incentive compensation will likely moderate in the second quarter and should even out in the second half as year-over-year comparisons ease. Turning to Slide 24. MS&O expense increased 2% or $12 million versus last year. Looking at the table to the right, inflation was $14 million. Next, CSX recognized a $19 million deferred gain. This gain reflects the company's sale of property last year to the State of Florida, and we will continue to recognize a similar gain each quarter throughout the year. CSX recognized a $14 million gain in the fourth quarter of 2011, so the year-over-year favorable comparisons will mainly continue through this year's third quarter. Moving down the table, volume-related expenses increased $12 million in the quarter, reflecting cost related to our growing Intermodal, Export Coal and Automotive businesses. Finally, all other costs increased $5 million in this quarter. Moving to the next slide, let's discuss the impact of fuel. Total fuel costs increased 10% or $42 million versus last year. Looking at the chart on the left, CSX's average cost per gallon for locomotive fuel climbed $3.15, an increase of 10%. This increase in fuel price accounted for $37 million of higher expense, as seen in the table on the right. Next, while the network was significantly more fluid, the addition of locomotives in the back half of last year reduced overall fuel efficiency by $4 million. With gross ton-miles up modestly, volume drove a $2 million increase in fuel expense, and running at the table, non-locomotive fuel decreased by $1 million. Moving to the next slide, let's discuss our progress on incremental margins. The first quarter results, as we discussed, were outstanding, reflecting this company's continued commitment to deliver profitable growth, price above inflation and to serve customers safely and efficiently. As such, we were able to deliver an incremental margin of 53%, which returns us to the levels we saw in 2010 and the first half of 2011. As we look forward at the second quarter, the headwinds in utility coal are expected to be more challenging and we will cycle the repricing of several large contracts in the early part of last year. On the export side, while we expect volume to remain strong, we will continue to feel the impact of higher thermal mix and lower tariff rates in metallurgical coal. However, as we march in the back half of the year and anticipate the moderating headwind from utility coal, as well as the cycling of last year's resource additions, we expect incremental margins will be in line with the levels we saw in the first half of 2011. Now let me turn your attention to CSX's balanced approach to cash deployment on the next slide. The first priority is capital investments. In 2012, we announced earlier, CSX plans to invest $2.25 billion in our business. Over $200 million of this year's capital investment plan is for Positive Train Control. While the amount we plan to spend in 2012 has not changed, we now expect the total PTC investment to be approximately $1.7 billion, up $500 million from our previous estimates. That means that as of this year, we would have a little over $1.1 billion left to spend based on this revised estimate. The largest driver of the increased spending is that, as technology has evolved, we have determined an additional 4,000 miles of track will be compatible with the existing signal systems. In addition, we've also seen increased costs associated with system integration and unit cost of various components. While we continue to target the 2015 deadline for PTC, we recognize that technological challenges are likely to prevent us from achieving this timeline. Outside of PTC, our core investments for infrastructure, rolling stock and strategic projects have remained unchanged. Here, we have been spending 16% to 17% of revenue on capital over the last several years, and we expect that to continue going forward. The second priority in the balanced approach is dividends. CSX remains committed to dividend payout range of 30% to 35% of trailing 12 months earnings, which were $1.75 for the first quarter, and a potential dividend increase will be reviewed by the board next month. The third priority in the cash deployment strategy is share repurchases. During the first quarter, CSX repurchased $300 million of shares and has now collectively repurchased $7.5 billion since 2006. There are approximately 400 million of repurchase remaining under the current program, which we expect to be completed by the end of 2012. Turning to Slide 28. As you can see from these charts, CSX has remained committed to an improving investment-grade credit profile over the last several years. The long-term trend is improving for both funds from operations to debt and debt-to-EBITDA. These are 2 of the key measures used by S&P and Moody's to validate CSX improving credit profile. The market has also recognized our improving profile. We issued 300 million of 30-year debt in February at a 4.4 coupon rate, which is the lowest coupon rate ever secured by a company in the broader BBB space. While CSX will continue to refinance debt as needed and look to take advantage of capital market opportunities, we remain committed to funding future share repurchase primarily through free cash flow while, at the same time, remain committed to an improving credit profile. Now let me wrap up on the next slide. Recapping the first quarter, CSX delivered record financial results despite the significant headwind from utility coal. Merchandise and Intermodal volumes grew above the rate of economy, and we continue to price in excess of inflation. CSX's ongoing commitment to safety, service and productivity helped deliver solid cost side performance that helped drive double-digit earnings growth with strong incremental margins. Looking forward, CSX remains focused on offsetting utility coal declines by relying on 3 key levers of price, productivity and strong volume growth in merchandise and Intermodal. Looking further out, CSX remains on the path to achieve its 65% operating ratio by 2015. While the road has become more challenging, the target remains achievable. Finally, as we deliver outstanding financial results to our investors, CSX remains committed to a balanced approach to cash deployment that includes ongoing capital investments, dividends and share repurchases. With that, let me turn the presentation back to Michael for his closing remarks.

Well, thank you, Fredrik. Well, 2012 represents another challenging year, yet one in which our team expects to deliver excellent results. As we outlined in this morning's presentation, utility coal is our biggest headwind and it will be even a greater factor in the second quarter. In response, we will continue to maximize opportunities in all other markets that are solid to growing, as Clarence outlined, while keeping our focus on safety, service and productivity. This team remains vigilant and confident. We are aware of the obstacles, we know what we need to do to progress forward and we again expect to achieve year-over-year earnings growth in 2012. Our confidence is reinforced by the resiliency that this team has demonstrated while delivering record financial results in 5 of the past 6 years. We accomplished this through the housing collapse, the biggest global recession in the last half-century and a significant decline in our utility coal business. CSX is a healthy growing company that responds well to challenges. We enter the future with a robust industry outlook, a diverse mix of product markets, a well-positioned transportation network and a track record for success. Our first quarter performance was the fast start we were looking for, and our employees will remain highly focused in the months and years ahead. We thank them for being key to our success. And at this time, we look forward to answering your questions.

[Operator Instructions] Our first question comes from Bill Greene with Morgan Stanley.

I'm wondering, Clarence, if I can ask you just a couple of questions on pricing. First, in your presentation, I didn't hear any comments on same-store sales pricing. Maybe you can offer some views there. And along those lines, how do we think about how the potential for take or pay would affect how pricing will be perceived? Does that just show up as price without -- or revenue without any carloads? And are your comments on coal suggestive that maybe we're not actually going to get there if things are troughing in the second quarter?

Okay. First question is on the same-store sales pricing. They were in the range between 5% and 6%. The second question there, which was on -- was it on take or pay?

Yes. Just how does it show up? And do your comments suggest we're not going to see that effect on coal?

When you say take or pay, are you referring to liquidated damages?

Yes, I'm sorry.

Oh. Right now, there was no impact in this quarter on the liquidated damages. Usually, the way that process works is liquidated damages, if they are in fact applicable, apply in the following year for the year which the shortfalls were not met.

So if you have liquidated damages, you would get essentially just the loss of that revenue and the carloads this year with a kick next year?

Well, actually, what you would get is the liquidated damages next year.

But, Bill, this is Michael, you're referring to it as take or pay. Most of our contracts, it's not officially take or pay. You have to pay the full price if you don't move it. There's usually a liquidated damages amount that's less than what the rate would be.

I'm just trying to figure if we will -- because the yields on coal, I think, surprised a bit to the upside. And I think what I'm trying to understand is when we think about modeling this going forward, we've seen some Export Coal pricing come down. We're getting questions about, is there room to move this. But there's a few moving parts here such as maybe you'll get paid for volumes you don't move. But I'm not sure how to think about modeling that.

Well, I think -- this is Fredrik. I think first of all, in the first quarter, there was really no impact of that. And if there would be liquidated damages going forward, and I think that's on a customer-by-customer basis, that we will sit down and talk to that customer, it would really not show up in the line also. It would be show up in other revenue. And at this point, as we look out for the next few quarters, we don't see a material impact of that.

Our next question is from Ken Hoexter with Merrill Lynch.

Just on that last statement, you said the second quarter was the worst headwinds on coal. Just wondering what are you basing that on? Are you just guessing that inventory is as high as it's going to get, the switching is all done in region? And therefore, with the switching done, you have a better outlook?

No. Ken, we're basing it on several factors. Number one is what our customers have told us that they expect to ship and receive. Number two is electrical demand, as we mentioned earlier, still down in the East from where it has historically been. Third reason is, is that our comps on a year-over-year basis are just more difficult in the second quarter than they are in the third and the fourth quarter.

Okay. And then if I can just switch, Fredrik, on the incentive comp, I think you threw out that it moderates in the back half of the year. I just want to understand, should we then expect kind of on a cost-per-employee basis to see a kind of catch up as you had adjusted, you reversed some accruals in last year's third quarter. Does it get a lot tougher in the second half? Or does it just -- I just want to understand the impact on that reversal.

Well, as we said, obviously, there's a big number here in the first quarter. We expect it to moderate in the second and then kind of level out in the fourth on incentive comp, specifically. Now cost per employee has some other factors in it as well, which we talked about as well, which is that the health and welfare cost is a little bit lower this year than it was last year and that's helping. The unemployment tax rate is lower this year than last year as well.

Our next question is from Tom Wadewitz with JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wanted to ask, I guess, for a little bit more, Clarence, if you're willing to give a little more granularity on second quarter. So how big of a step down are you talking about in the utility coal, if you're -- I think you said you were down 27 -- or was it 27% of volumes in first quarter? Is it kind of a modest step down? Or what just kind of magnitude for what you're looking at in utility coal in second quarter?

Yes. It's close to that. We should be down somewhere around -- it'll be close to what it was in the first quarter. Just a little, not a lot. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. And is there an ability for the utilities to say, look, we just can't, our stockpiles are full and we can't, literally, can't take any more coal without having an operational problem of stockpile management problem and so we need to take a further step down? Or is that essentially what you're kind of saying that, that moderate reduction is maybe stockpile related?

No. Tom, obviously, if you can't physically take the coal, you can't physically take the coal. I mean, that is what it is. But what we're seeing in our stockpiles now is 2 things. One is the burn itself. The coal burn is being displaced by natural gas, the days of burn de facto go up. And then the stockpiles of the sales from a tonnage standpoint are somewhat higher than they normally are at this time of the year in any event. That makes sense to you? Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Yes, sure. Sure, that does make sense. And then I guess the second topic, just on Intermodal train lengths. How did the Maersk business affect -- did you actually -- you had good volume growth in Maersk and in other areas, did you see train lengths improve? Or did you see kind of train starts go up with the added addition in volume?

We saw both. The train lengths did, in fact, improve, and then into a couple of OD pairs, specific OD pairs, we had additional train starts. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. Can you give a sense of overall, how much train length was up?

This is Oscar. Not on Intermodal, but we still have plenty of capacity there. I mean, I think the merge in the Intermodal world, we have 10% to 15% capacity on these areas. So we'll continue to put a lot of the volume that we're getting on to that network. The extra starts was due to new markets for our new customer.

Our next question is from Scott Group with Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: Clarence, I'm wondering, can you give us the breakdown of the met versus the thermal exports in the quarter? And then, can you talk about -- how do you think about the balance between volume and pricing in your different coal segments? I understand that the export met tariffs are down starting in April, but how do we think about contractual export met and thermal rates this year? And then I guess maybe longer term or this year, how do we think about the pricing strategy in the utility business? Can you continue to get rate increases? Or do you think you have to think about slowing or even cutting the utility coal rates going forward?

Okay. On the first question, the split between the thermal and the metallurgical for us in the first quarter was almost 50-50. And the how do you view pricing in the midterm here, obviously, the metallurgical prices will start to mitigate some over the next few months, as you saw the fact that we took our tariff rates already down as we're trying to price to the market. The thermal rates have historically carried a lower transportation cost, as well as a lower coal price, in the marketplace. So you'll see that mix change impact our same-store sales pricing in the coal business as we move forward. Then on your third question there, which is how do we look at utility coal prices going forward, we're going to price to the marketplace in those utility markets going forward. And as that market develops over time, we'll be able to give you a clearer picture.

And a lot of those context have built-in escalators, don't they?

They do. Scott H. Group - Wolfe Trahan & Co.: The 50-50 split on met versus thermal, how is that on a year-over-year standpoint for the 2?

Well, last year, the mix on a hit -- or for a year basis, was about 65, 35 in favor of met. Scott H. Group - Wolfe Trahan & Co.: Okay, great. And then just second thing if I can, just in terms of some of the alternative energy things, how big at this point is the crude oil and the frac business? And what kind of growth are you thinking about in those markets that can help offset some of the pressure in coal?

The frac sand market is very robust now, and it's becoming even, in the near term, better for CSX in our franchise because a lot of the drilling is moving to Western Pennsylvania and the Eastern Ohio. That's a positive move for us. In fact, we added fracs and cars to our fleet last year and again this year. We've moved some crude by rail. We have some contracts in place to move some more crude by rail. I wish it was as big on us as it is the western carriers, but it's not. And we think it's a future market, though, that will develop nicely for us.

Our next question is from Chris Wetherbee with Citi Investment Research.

On coal yield, I just want to try to understand, sequentially, as you move from the first quarter to the second quarter, outside of some of the metallurgical tariffs on Export Coal changing on April 1, how much of the business kind of gets repriced in that interim? Or how should we think about the change sequentially in the rest of the business? Or is there a piece of that business that gets repriced? Or does it roughly stay the same kind of quarter to quarter?

Well, you'll see a couple of things with the pricing. One is that the metallurgical coal will not have the same pricing characteristics this year that it had last year. And you can read that real simple. It will be cheaper rates for the metallurgical coal. The thermal coal is mostly all under contract, under an annual contract, and has already been priced and it's in place.

And then just on the rest of your coal business, the domestic business, the utility and the domestic met, is there any reason to think that there will be meaningful amounts of business repricing between first quarter and second quarter?

No, there is none.

Okay, there's none there. Okay, that's helpful. And then switching gears just to headcount for a second. When you think about kind of the level of employees you have furloughed at this point, when you look at the weakness that you're expecting for the quarter in the domestic side of the business on coal, do you feel like you're at the right point there? Do you need to take any further steps or is headcount, based on what Fred has said, kind of should be flattish going forward overall for the business?

Yes, I think that's the right place to be thinking about it, as flat. Obviously, we will adjust up and down depending on the demand levels. But right now, our crystal ball is saying that we're in a pretty good place.

Our next question is from Chris Ceraso with Credit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Just a couple of quick ones. I know you mentioned that longer-term in the domestic utility coal market, you would so-called price to the market. But maybe you can give us a little more detail on how to think about this in terms of things like, what proportion of your utility customers are regulated versus competitive and maybe what proportion of your customers have capacity to switch to gas versus those that don't?

Chris, I don't have that number off the top of my head. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. Do you have a ballpark? Is it 60% or 70% of your customers are regulated? Anything close?

I don't want to guess on a data point that I just don't have the facts on. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. Maybe one for Oscar then. You mentioned that you're on track for the 130 million. Can you give us a number? And then maybe, more importantly, do you have a rough estimate of how much benefit you're deriving from the improvements in your velocity and dwell and performance? Is it 50 basis points worth of OR? Is it 100? How do you -- you're kind of in a unique position as the finance guy/CFO that became an operations guy, so maybe you've got some insight on that front.

Chris, I've forgotten how to do all that math. It's amazing how quickly it changes, Chris. We are well on path and feel very comfortable about 130-plus number. We're not yet prepared to give a full number with regards to that, but we'll probably do that here in the next couple of quarters. And with regards to the operating ratio performance, I mean, it's always been a big factor in that incremental margin. And I don't want to take any particular number on that one, but it's -- the important part is over the course of the year, our productivity efforts are well -- started very well and will continue for the rest of the year.

Our next question is from Justin Yagerman with Deutsche Bank.

It's Rob Salmon on for Justin. I guess as a follow-up to the last question, regarding kind of the productivity tailwinds, if I think about this on a CapEx basis, if you guys can maintain these productivity levels looking forward, does that change the percentage of revenue that you think you should be deploying for CapEx looking forward?

No, I don't think that changes cause. I think we've been consistent, around 16% to 17%. Then for the next few years, that looks like the right place to be.

All right, that's helpful. And then going back to the utility coal, domestically. If we think about this business longer-term and if we got a secular shift from the baseload capacity to more of the surge or supplemental capacity when electric generating demand is much higher, does that change your philosophy about your ability to price? And if you do get a switch at one of your utilities, is there a corresponding contract clause, which has a step up in terms of underlying price because the business becomes less visible and much more volatile? If you're in that section, any color would be really helpful.

Okay. I'll answer the second question first. I can't discuss publicly any of our provisions in our contracts with our customers as to how the rates change and move up or down. I can tell you that if this is, in fact, a secular change in the natural gas, that the railroads and the utilities will have to sit down because what we can't do is build a church for Easter Sunday, if you'll pardon the cliché. And we've got to be able to resource -- Oscar has to be able to resource his operations here to some practical level in order to handle this. So I think that will end up being a common ground reach between the carriers, the coal suppliers and the utilities as we move forward.

When you think about that in light of kind of the much higher CapEx that's required for some of those utilities because the tracks were built explicitly for that customer, what sort of step up should we expect in pricing over time, if it is a secular trend, to justify reinvestment in those track?

I'm not sure I have an opinion on that. Most of those track structures that the utilities have essentially are loop tracks designed to unload the coal with belts. So I'm not sure where you're heading.

I guess the track, you'd have incremental track, which would need maintenance to kind of serve the utilities. And it's on -- my understanding is that the routes that you run are more exclusive for the coal franchise. And if you're seeing less domestic coal, to me, that would imply you would probably need to see higher pricing on the business to justify the continued reinvestment. Is that a fair conclusion to be drawing? Or are we missing something there?

This is Michael. I think what I'd say, Rob, is a lot of the line haul movement from the mining areas to the utility itself uses lines that we use for Intermodal, merchandise that are common lines. The only place we've had the issue you're alluding to is perhaps in the coal field themselves. And as Clarence said, at the utilities, it's just a little loop track there. That's not a big deal. So it'll be mainly in the coal mining areas. We do see good vibrancy in the export market longer-term, which I think will help support that infrastructure. So but to Clarence's earlier comment, it's probably too early in this evolution to really get specific. There will be dialogues between us and the utility companies of how we ensure that they have the capacity they need, but that we also have the predictability that we need. And that's yet to be worked out.

Our next question is from Brandon Oglenski with Barclays.

Can you just remind us, how much contract repricing did you have on the domestic side last year?

We had one contract last -- of significance, one significant contract last year.

And we should assume that, that helped the same-store comps last year, right?

That's right, yes.

Okay. And maybe just switching back to this $130 million out of cost offset, Oscar. How much of that is really associated with idling some of your coal assets right now? Or should we be thinking this is incremental to what you're doing in the business today? And how much of that run rate did we see in the first quarter, how much more is coming throughout the year?

Yes. So the coal asset reduction is an incremental piece. The 130 productivity is an ongoing initiative that we have in the company. And as business conditions allow, we'll take more of that cost management aspect. So it will be incremental to our 130. And I think your question was asked before in a couple of different manners to try to ascertain what the actual number was in the first quarter. It was significant as that we've made great progress to the number we have for the year. I'm not quite ready to share the full year number just yet.

Our next question is from Jason Seidl with Dahlman Rose. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Two quick questions. I'll start with the non-coal one first for you. Oscar, sticking sort of with that productivity number, how much of the productivity gains in 1Q were just sort of weather-related? I have to imagine there were some benefit from not having winter for you guys?

Yes. That's, gosh, it's been a great quarter for the industry with regards to that, and we'll take it. Trying to quantify that is a little bit more difficult. We tend to be better at quantifying the impact when we hit adverse conditions. But let me tell you how I've kind of looked at it to, in essence, assure myself that we've actually run better. If you take the sequential view from the fourth quarter of last year to this quarter, it was roughly the same kind of quarter, roughly same level of workload, roughly same number of resources and roughly, to some degree, the same kind of weather pattern. And the quarter-over-quarter sequential improvement in those are, as our charge talked about, on those trend lines actually improved. So there was definite improvement, sequentially. The mild weather helped both quarters, so, but it's hard to quantify specifically. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: But you're confident that you guys are heading in the right direction x weather.

Definitely. That's how I look at it. If you look at the sequential numbers, again, roughly the same kind of quarter, that's where I get. That's where I've been able to make that statement. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Okay. So my second one is going to be on coal, I apologize. When looking at the -- you guys, obviously, are more positive on the thermal side. When you're looking on the thermal, is the ARB spread for our U.S. coal still in the money or are you just moving coal that's been booked in the past on backlog?

Yes, we're still in the money. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: You're still in the money.

Barely, but we're there.

The next question is from John Larkin with Stifel, Nicolaus. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: First question relates to your comment that you continue to expect that this year will be a record year for EPS. Does that comment apply to each individual quarter as well?

I think we are forecasting on a full-year basis. We're trying to stay out of forecasting on quarter-by-quarter basis. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: I'm just trying to get a handle on the second quarter in particular because you've been so careful in pointing out that it's going be the toughest quarter with respect to the coal comps on the utility side.

Yes. It is going to the toughest quarter. And we're going to be seeing a little bit more favorability in the second half as we lap some of those resource additions and most of the work. The coal headwind will moderate, but the comment is really about the full year. John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: Got it. And then just maybe as a follow-on, we talked about the weather in the first quarter. Is it safe to say that there were fewer or less severe fuel headwinds in the first quarter relative to the first quarter of 2011? In other words, did fuel rise at a slower pace? And was that somehow reflected in the results?

In terms of just the lag piece first, we did have a little bit of a negative lag in the first quarter. We had even a greater lag last year in the first quarter. In terms of fuel efficiency, as you saw, we had a little deterioration there, but that's predominantly due to the fact that we have more locomotives on our property here in the first quarter. And the same thing was true in the fourth quarter. So that's really the reason for the degradation in the efficiency numbers.

It was the headwind in both quarters, a little bit less than this year, right? John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division: But you don't care to quantify that?

The end quarter lag was $15 million here in the first quarter in terms of the lag.

So it was what? 35 last year?

Yes. It was about 35 last year. That's correct.

John, this is Clarence. Just to elaborate on the question you asked Fredrik. Our business this year -- this quarter, although the volume was only up 1% in total, if you take coal out of that mix, our business was up 6%. And if you look at that first slide that we had in my presentation, 90% of all of our business is either stable or growing. So the way I look at the second quarter other than coal is, I'd look at it very positively.

The next question is from Cherilyn Radbourne with TD Securities.

I wanted to ask you something a little bit broader. You've indicated that you are still on track to achieve a 65% OR by 2015. And I think the market wanted to hear that. If I recall at your analyst day last year, you did describe that as growing to 65%. So I wonder if you could just elaborate on the relative importance of pulling harder on the cost lever versus a renewed focus on business development to stay on track?

This is Mike, Cherilyn. I guess when we look at it, we do, when we were going to grow to 65%, there was really 3 components: The pricing above inflation, which we're still very confident about, growing our business and the productivity of $130 million to $140 million per year. So as we look at it now, we're still going to be getting that $130 million, $140 million. We'll strive for more because, obviously, the coal dragging down some probably implies or impels us to think a little bit more on the productivity side, but the growth element is still pretty critical. And we're very excited about what we're seeing in our Intermodal business especially. We've been growing that domestic Intermodal 6% to 7% for the last 6 or 7 years. And we think the conditions in the highway trucking is going to continue to fuel that. So I'd say the basic thematics we laid out in our earnings release are still there, as Fredrik alluded to earlier, it's just a little bit more challenging with some of the loss of that utility coal business. So it's still going to be about the great service Oscar and his team are going to provide for us. And as he alluded to, and I think is very true, better service is cheaper. So we think the discipline around that will help us grow the business, as well as produce the cost efficiencies we need.

Okay. And my second question, quickly, it did catch my notice that if you annualize the 12.5 million tons of Export Coal in the quarter, you effectively were operating at the high end of what you've indicated is the annual capacity of that Export Coal network as currently configured. Did that change your view of current capacity assuming that the demand is there?

Cherilyn, this is Clarence Gooden, it's interesting you'd ask that question because we discussed that this morning and had some prep. And that is that the number that we used last year was 45 million to 50 million tons in capacity. And what has happened is, is our people who've been handling this coal have gotten more experienced, as the dumpers and stuff now have been replaced and the maintenance and all has been caught up with that, a lot of that capacity was idle. We feel very comfortable in that range.

Our next question is from Ben Hartford with Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Question, I guess, on the CapEx side into lower-than-expected utility coal volumes. Are we seeing a shift in some of that CapEx allocation to some of the other growth-oriented commodities? Can you talk a little bit about maintaining that CapEx bucket for 2012 despite the fact that we're seeing coal volumes as weak as we are?

Yes. So on the utility coal side, most of our capital -- there's very little capital that actually goes into the car side for utility coal. So on -- and then if you look at our overall spend and coupling that with Clarence's comment that 90% of the business is doing well, there is some shifting occurring, on the maintenance side perhaps, but it really isn't that much of a difference. And Export Coal still remains very strong. So there isn't a lot of changing going on. Yes, almost all of that utility coal moves in privately owned equipment.

Ben, it's Oscar. Clearly, while there are very specific needs for a specific utility customer that we don't see a large forecast for, we are clearly moderating. But I think to Fred's point, it's not as significant you think given the fungibility of our track network that we use and the fact that we are growing our business in all the other aspects besides that. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay, good. And then I guess just to provide a little bit more context to the OR target in light of coal volumes being as weak. Can you talk about what that contemplates in terms of your expectations for the utility coal market over the next 3 years as we near 2015? And kind of what the underlying maybe industrial production growth assumptions might be and continued productivity gains? Or can you provide a little bit of context in terms of how that trajectory might shape up in light of what we've seen in 2012 from a demand environment?

Yes. If you look at the overall target of getting 65, as Michael indicated and I indicated in my comments, it's obviously more difficult now than it was a year ago. There are certain pillars that needs to be achieved in order to get there. And clearly, utility coal has to stabilize at some point. We don't know when that is, if that is sometime later this year or early 2013, but it has to stabilize. We can't have this headwind along the way. That obviously doesn't work. Where that specifically is, I think, I don't think we're in a position to say, but it has to stabilize. And then you look at the other components on the top line side, we do need a robust economic recovery that continues in line of what we've seen here. We need our continued inflation plus pricing, and you probably need Export Coal to stay as robust as we're seeing it here right now. And then on the productivity side, as Mike alluded to before, we need to continue to see that 130 plus in order to get there. So we need to hit on all cylinders in order to still achieve that number.

Our next question is from Peter Nesvold with Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: I actually want to follow up on the comments that Fredrik just made because Central App has been in secular decline for years and certainly, that's not new. What we've probably seen here in the last 3 to 6 months is that the declines have been more accelerated. And Fredrik, you just said that utility coal headwinds have to bottom out at some point. I think there's a segment of the investment community right now that doesn't think it's going to stabilize, at least out of the Central App. In the scenario in which you don't really get stabilization over the next 1 to 2 years in Central App, what do you do? I mean, what operationally can you do in order to take cost out? And can you get back to a 50% incremental margin as Central App continues to be a bit of a runoff business over time?

Peter, this is Michael, and you're tied into Central App. I think we think more of our total coal portfolio. The Illinois Basin and the Pittsburgh Seam Coal's are growing in prominence because of their cost characteristics. So we think we will see some shifting, have been seeing shifting from cap to Central App over to Illinois Basin and to the Pittsburgh 8 Seam over the last several years. We expect that to continue. As to the end use by the utility companies, I think that's more of what Fredrik was referring to. We think that will stabilize at some point because there will be the need for the generating capacity to meet the electrical demands. So a lot of the fall we're seeing right now has been largely these plants that were built in the '50s and '60s that were going to go out, in our view, by 2014 or '15 anyway. It's just been accelerated by the weak demand due to the weather and the natural gas prices. So I think you're right, it was envisioned, it's happened a little quicker, but I think there's going to be a strong base of regular business out there just to meet the electrical demands in the Eastern half of the United States. And Clarence, I don't know if you have anything you'd like to add to that.

No, I agree with you, Michael. And plus, I'm not so sure that natural gas is going to stay at $1.95, where it is now, because I don't think the gas companies can afford to allow that to happen and justify the drilling. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Yes. I don't necessarily disagree on that sub $2 gas, it remains long-term. But I think that, that fear is out there in part of the investment community. And on Slide 26, when you show effectively a U-shaped recovery in incremental margins, though, is this just like a transitional quarter in which you need to reposition equipment in order to move it over to the Illinois Basin and other parts? Or is this based on -- is this kind of predicated on the areas where we're seeing the greatest weakness right now actually start to stabilize, looking out 90 to 120 days?

Well, I think, there's a -- as we said, the second quarter because of the 2 factors that we mentioned in the presentation, first of all, the fact that utility coal continues to be very weak and you couple that with where the export tariff changes that we made and the pricing impact on that, and we haven't lapped the resource additions that we made in the second half of last year, that is what makes that quarter as challenging as it is.

Peter, I'd like to address your comment about the markets and the jitteriness. I mean, if we just step back as we look at our company here, so if we go back to 2006, then our domestic utility, about 1/3 of that business has went away over that 5- to 6-year period. And during that period, we basically, through the diversity and the strength of our overall markets we serve, we've been able to produce record years 5 out of 6 years with that dramatic decline in the utility coal. And right now, as I think Clarence said earlier, it's earning about 10% of our portfolio. So I think somewhat there may be an overconcern about that because we have been experiencing this for half a decade and still been able to produce records year after year.

The next question is from Matt Troy with Susquehanna.

Quick question, I just want to clarify. Before, earlier, I think Clarence said that you guys had not seen any impact from liquidated damages. I assume you mean financial impact, i.e. there's usually a one year look back, and we don't hit that until next year, but I assume some of your utility customers are wanting to and asking to operate at the minimums in their contracts? Is that fair?

Yes, that's correct. They are asking to operate at the minimums.

Some might not be able to make the minimums, and you're quite right, Matt, it would be a next year issue should they not make the minimums.

I'm just trying to take weather out of the equation because only an idiot would try and call that. But I'm trying to understand from a volume perspective, what percentage of your coal business domestically is operating currently at those minimums? Is it a minority, is it about half, is it the majority? Just directly trying to understand if weather doesn't help out, how much more downside might there be until everyone is operating at those minimums?

Well, Matt, that's difficult for me to give you a finite number on. I would tell you that, as we said, we expect the second quarter is going to be -- look a lot like the first, maybe a little worse in the headwinds there, that's number one. Number two, that we're working with all of the utilities where they have minimums in there. The utilities, themselves, are trying to take the minimums they can. They don't want to pay liquidated damages any more than anyone else, so are the coal companies. So I don't know if that helps you.

Well, it's directionally just trying to figure out the scenario by which we call out. I guess, Clarence, last question for you. You've been at this for a while. The take or pay is the liquidated damages. They're in place for a reason, they have been historically, and we've tested them before. Are you getting anymore or incremental pushback from utilities saying, Listen, this is not sustainable, we'd like to revisit this, or any signaling that the current contract structure for you and the industry may not work if coal ultimately does become more of a marginal supply or surge supply? I'm just wondering if that posturing from the customers has changed and what those minimum levels might be.

We have had very little negative feedback or pushback from any of the utilities that we work with. Now having said that, we've had a couple of utilities that's called that understand that with the way things are going in their particular situation, that they may be looking at some potential liquidated damages. And what they've said is, Hey, let's stand out here and try to work together and solve our problems. And it's been all very positive. Now how's that going to impact the 3, 4, 5 years from now? To your point, I've been doing this a long time and I don't -- my crystal ball gets cloudy when I get out there 3, 4 years.

But there will be some changes in those relationships. We just -- it's too early to know what they are, Matt, as we discussed earlier.

But the conversations are rational and controlled. Is that fair to assume?

Yes.

Our next question is from Walter Spracklin with RBC Capital.

I just have a few clarification questions. First on the guidance that you're providing for 2011, you mentioned, of course, record levels. Just to understand, that's on an EBIT basis, not an EPS basis, and it includes the roughly $19 million per quarter, call it $75 million in the deferred income or the deferred gains that you're booking. Is that correct?

Yes. We're looking at record levels, operating income, EBITDA, earnings per share, and, yes, that would include that $19 million as it will continue in the second and third quarter, and then moderate out in the fourth quarter.

Perfect. Okay. Next question is, I think, sort of a follow-on to Matt's last question there is, if -- do you get a sense that any of your utility customers today are taking the minimum volumes because contractually, to do otherwise would be negative that upon the end of that contract, do you see risk in provoking that coal to nat gas switch that might not be there as long as that contract is in place? In other words, how much of your business do you believe that is running at minimum volumes is at risk of completely going away at the end of the contract?

Well, if I were speculating on that, I would say that to the point Michael made earlier, which is most of the plants that got throttled back here in the near-term were already plants that would -- that the CSAPR rules would've effectively taken out between now and 2015. To the second point that Michael also made earlier is you've got to have a certain amount of baseload coal just to beat the demand. If we have a hot summer here, and I think one of our other analysts just mentioned to predict the summer weather is crazy, and I have to agree with him, but if we have a hot summer here the -- it changes some of the dispatch that you will see the utilities have.

Okay. So that's very, very helpful. The other quick question here, you've been always targeting pricing plus inflation. Big step down in your tariff rates, down 12%. Can you just give us, simply put, why is it down so much when you're typically looking at pricing plus inflation?

You're talking about the tariff in coal?

Correct.

That was a metallurgical tariff, and if you'll recall, we had taken that tariff up 2 or 3 times in the last few years when the boom happened in the metallurgical coal. And I don't have the number right here in front of me, but I know with discussions with our coal folks last week that the amount that we've taken down, the tariff is still greater, is still greater than what the tariff rate was when we started taking it up.

Okay. Is there -- given that differential, is there still room next year for it to come down but still be above that differential?

On the met side, yes.

The next question is from Jeff Kauffman with Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Real quick, let me ask a non-coal question and then a coal question. The ILA, we're talking about discussions on the East Coast ports. Typically in years where this happens, some of the shippers may be talking to you about moving goods at a different time of year than normal in case you get some brinksmanship in the discussions. What is it your customers on the international shipping lines indicated in terms of their concerns for later this year?

Well, as you probably are aware, the ILA had a very significant policy speech out at the Pacific Maritime Conference about 2 or 3 weeks ago, in which they had at least alluded to possible work stoppages on the East Coast. What our customers have told us that they're doing is evaluating any of the East Coast ports of call that they have to build contingency plans to divert some of that business to the West Coast. And in either event, CSX will still haul our share of that business. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Okay. And let me ask kind of a more positive question on coal. We focused a lot on the utility needs, but let's talk about where these utilities are going to source their coal when they do need it. A lot of production shutdowns announced more in Central App. Are you seeing any change in the length of haul that your customers are having to get their new coal? And I'm under the assumption as your length of haul increases, you're not actually paid by the carload, you're paid by the ton mile. So can you kind of talk about some of these mix effects?

Well, we had already seen over the last several years, as Michael spoke to earlier, the Illinois Basin coal starting to grow. We had several utilities that had already switched over to the Illinois Basin coal. It's got lower cost mining characteristics. It's got higher BTU content. And given the fact that the power plants now are all essentially scrubbed, the sulfur content is of little consequence there. And so and in those rate structures, the longer length to haul out the Illinois Basin versus some of the Central App locations is more favorable to us in our rate and pricing.

But it's not a huge model, just difference of Central App versus Illinois Basin, it's not huge. If you get up into the Pittsburgh 8 Seam coming into the Southwest -- or Southeast, it's a big difference, not a big difference on the Illinois Basin, Jeff. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Okay. But the point is some of these factors are beneficial on a met basis to your coal franchise despite what's going on with utilities.

Our next question is from Anthony Gallo with Wells Fargo.

I just wanted to be clear on the incentive comp discussion. I thought I heard Fredrik say that the incentive comp benefit moderates as the year progresses. Is that correct? In other words, it was a big help in the first quarter, and it's less of a help as the year progresses. Is that correct?

Yes. That is correct. If you look back at last year, we were in a different trajectory that point. So we had significant amount of incentive comp in the first half. And then as the economy slowed down and we did some of the resource additions in the second half, we reversed some of the incentive comp last year in the second half. And so the comparisons will be easier as you get to the second half of this year. So we expect it to moderate in the second quarter and then once you get to the second half, probably flat year-over-year.

Okay. And then, if I could just briefly, you mentioned that you're moving crude on rail. There's no shale oil produced on your network, correct? This is a handoff from shale oil production in the West, is that correct?

So far, that is a correct statement.

Okay. And then along those lines, with the frac sand that you're moving, I know David and I have talked about this in the past, but can you put any numbers around that right now in terms of carloads?

No, I would rather not.

Our final question will come from Keith Schoonmaker with MorningStar.

Knowing the $275 million of cash pension contribution in the period, do you expect no more such contributions for next couple of years?

That's correct. We took advantage of what we saw was very attractive rates to the marketplace and prefunded what otherwise would've been funded the next several years. So at this point, we don't see any additional funding required.

Great. And another quick cost question. Can you maybe elaborate on a couple of the details in the decline in rail inflation that you mentioned? And more broadly, how closely do CSX estimates generally agree with the global insight values?

On the inflation, a couple of things there that we talked about. First of all, we have some new contracts with our union members, and we have a little bit better cost share in the health and welfare side that is helping us. Then, we also have lower contribution year-over-year into the unemployment fund, the railroad unemployment fund, which is also helping. In terms of how we compare to the global insight, our forecast, over time, we should be pretty close. There could be some variations quarter by quarter but over time, it should be very, very close.

Thank you, and thanks, everybody, for joining us, and we'll see you next quarter.

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