Ladies and gentlemen, greetings and welcome to the Norfolk Southern Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. It is now my pleasure to introduce your host Clay Moore, Director of Investor Relations. Thank you. You may begin.

Thank you, Adam, and good afternoon. Before we begin, please note that during today's call we may make certain forward-looking statements which are subject to risks and uncertainties and may differ materially from actual results. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important. The slides of the presenters are available on our website at norfolksouthern.com in the Investors Section. Additionally, a transcript and downloads will be posted after the call. For comparative purposes the fourth quarter and full year 2017 results have been adjusted to exclude the re-measurement of deferred taxes due to the enactment of tax reform in 2017 and 2018 comparisons are to be adjusted 2017 results. Please refer to our non-GAAP reconciliation, which is also available on our website. Now, it is my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Squires.

Good afternoon everyone and welcome to Norfolk Southern's fourth quarter 2018 earnings call. Joining me today are Alan Shaw, Chief Marketing Officer, Mike Wheeler, Chief Operating Officer, and Cindy Earhart, Chief Financial Officer. In the fourth quarter, we once again delivered strong financial results. Slide 4 highlights the results for the quarter and full year 2018, compared to the prior year. Income from operations was 1.1 billion, an increase of 27% and an all-time quarterly record. Net income was 702 million, up 44% over the prior year and EPS was 257, a 52% increase. The operating ratio for the quarter was 62.8. For the full year, we achieved record income from operations totaling nearly 4 billion, an increase of 17% from 2017. Net income increased 39% to 2.7 billion and earnings per share increased 44% to 951. The full year operating ratio of 65.4 was a record for our company and was our third consecutive year of OR improvement. In addition to lowering the OR and boosting earnings in 2018, we returned more than 3.6 billion to shareholder through share buybacks and dividends and our Board of Directors yesterday increased the quarterly dividend by another 8%. Looking ahead, we are determined to take Norfolk Southern to even greater heights. At our Investor Day, on February 11th, we will go over our new operational and financial targets and discuss in detail all of the initiatives with which we will drive shareholder value. Now to provide further details on our fourth quarter results, Alan will cover trends in revenue, Mike will cover operational performance, and Cindy will go over the financial results. I'll now turn the call over to Alan.

Thank you, Jim, and good afternoon to everyone. As you can see on Slide 6, strength in all three business units drove the fourth quarter revenue increase of 9%. Each business unit posted a revenue per unit gain of 7%, reflecting both improved pricing and higher fuel surcharge revenue, as Norfolk Southern delivered fourth quarter year-over-year pricing increases that were the highest in over six years. Merchandise revenue grew 7%, generating a fourth-quarter revenue record on flat volume. As carload gains in chemicals and agriculture were offset by weakness in automotive and metals and construction. Our success in pursuit of pricing improvement, combined with higher fuel prices, resulted in a record merchandised revenue per unit. Norfolk Southern intermodal franchise once again delivered record-breaking revenue and volume results for the quarter. Our outstanding intermodal franchise, combined with tightness in the trucking sector and high levels of consumer spending, has generated three consecutive quarters of record intermodal volume. Intermodal revenue reached an all-time high in the quarter, reflecting a combination of improved volume, pricing strength and increased fuel surcharge revenue. Moving to coal, revenue increased 7% with a corresponding 7% increase in revenue per unit as a result of pricing gains in fuel surcharge revenue. Volume increased 1% as our utility franchise benefited from increased winter demand in high natural gas prices in the fourth quarter, while export volume was limited by coal availability. Moving to Slide 7. In 2018, Norfolk Southern achieved revenue growth in all three business units, including record revenue in both merchandise and intermodal, while handling record volumes. NS delivered 9% revenue growth in 2018, on top of 7% revenue growth in 2017, while improving the margins on our business through a combination of volume growth, pricing initiatives and efficiency improvements. Our year-over-year pricing was the highest in seven years, with strength in all business units. Throughout the year, the trucking industry experienced capacity constraints, and high truck rates, which supported strong growth in intermodal. In addition, consumer spending and industrial production both increased close to 4% in 2018, providing conditions that Norfolk Southern leveraged to drive merchandise growth. In the energy sector, increased demand for U.S. coals and favorable fuel price differentials led to revenue gains in export coal and crude oil, respectively. Overall, Norfolk Southern delivered strong top line results and improved margins in 2018, and we look forward to building on that momentum in 2019. I'm excited about our upcoming Investor Day, and sharing with you our outlook and plans for growth. I'll now turn it over to Mike for an update on operations.

Thank you, Alan. Today, I will update you on the state of railroad. 2018 was a year in which we handled record volume, record gross ton miles, and achieved a record operating ratio. Moving to our network metrics on Slide 9, we are pleased that the velocity of our railroad accelerated at the end of the fourth quarter and we drove further improvements in the first quarter of 2019. This has been achieved by the healthier T&E crude base, Clean Sheeting gaining further traction, the full implementation of our network operations center, and intense energy and execution by the field. We are operating from a position of strength as we go into the year and are laying a good foundation for our operating plan changes that you will hear more about in our investor day next month. Turning to some of our productivity initiatives on Slide 10, we are continuing to drive improvement in all areas. Record GTMs combined with our ongoing locomotive strategy resulted in record locomotive productivity for 2018. Beating the prior record set in 2017. We stored over 300 locomotives throughout the quarter and turned in 100 of our 180 leased locomotives. Fuel efficiency for 2018 tied our record performance from the previous year. Both of these measures have been driven by our improvements in train length, which was a quarterly record and for the full year. This is the third consecutive year we have either matched or exceeded record annual results for these key metrics. In closing, our full attention is looking forward. We are excited about the momentum we are delivering in operations and we expect our performance to continue to improve in 2018 and beyond. I will now turn it over to Cindy who will cover our financial achievements.

Thank you, Mike. Good afternoon everybody. We delivered another strong quarter and finished the year with record financial results. I'll start with fourth quarter summarize operating results on Slide 12, which as Clay mentioned earlier are compared to the adjusted 2017 results. As a reminder, 2017 results have also been recast to reflect the required reporting reclassification of certain pension and postretirement costs. As Alan discussed, our strong revenue growth has continued into the fourth quarter. The 9% increase in revenues when combined with the slight decrease in railway operating expenses resulted in all time quarterly record for income from railway operations of $1.1 billion, 27% higher than last year. We also achieved an operating ratio of 62.8 improving our last year's by 550 basis points. Let’s take a look at the component changes in operating expenses in more detail on Slide 13. In total operating expenses were $4 million lower than last year’s expenses. Gains in the sale of operating properties more than offset entire inflationary and volume-related increases. The material in another category decreased a 111 million or 66%. This quarter included a $145 million in gains on the sale of operating properties, as compared to approximately 25 million in the fourth quarter of 2017. Property sales do fluctuate from quarter to quarter. The large sales in this quarter highlight our ongoing strategy to monetize assets that are no longer needed in our operations. The berries of this line item also included 20 million of rental income associated with operating property, which you will recall is now included in this expense category. This favorability was partially offset by higher casualty expenses, which were 9 million higher than fourth quarter 2017. We also incurred expenses associated with dispatched in our relocation which was completed in December. Compensation and benefits…

Thank you, Cindy. Three years ago, we announced a strategic plan aimed at delivering value to our shareholders through growth, productivity and bottom line improvement. Thanks to the hard work and dedication of our employees, we did just that. We lowered our operating ratio over 700 basis points, improved operating income by 39% and increased EPS 86% compared to three years ago. Building on these successes, we have been overhauling our operations from top to bottom in the quest for shareholder value. In short, we have been reimagining Norfolk Southern. At our Investor Day next month, we will discuss our new financial targets, the initiatives that will propel us into the future, and the metrics you will use to assess our progress. Today, our focus will be our fourth quarter and 2018 results. Thank you for your attention, and we will now open the line for Q&A.

Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session. [Operator Instructions] Our first question comes from the line of Allison Landry from Credit Suisse. Your line is now live.

I realized that you plan to share a lot more detail in a couple of weeks, but wondering if you could speak broadly to when you think network fluidity will start to improve in the material way such that you can begin to eliminate the need for re-crews and additional locomotives and other added costs?

Good afternoon. Allison. We will go into a lot more details at investor day, not only about our new financial targets, but about the operating initiatives that will drive the financial results. And as I mentioned, we will also be introducing some new metrics with which to gauge your progress. Today, we are going to try to keep the focus on 2018. I do want to emphasize a couple of things that Mike pointed out in his portion of prepared remarks. We posted annual records and key productivity measures in 2018, locomotives efficiency and trend size for example. We stored more than 300 locomotives in the fourth quarter, and we returned 100 leased locomotives and that was while over the course of 2018, we handled a record volume and record gross ton miles. In the latter part of the fourth quarter, we achieved our highest monthly network velocity for 2018 and that was in December with service and velocity continuing to improve in first quarter. So the point is, we have a lot of momentum early in 2019 as we head into our new plan period. We've gained traction through Clean Sheeting and full implementation of our network operations center, and we're operating from a position of strength as we implement the new operating platform.

And maybe a question for the quarter, could you parse out the growth in domestic versus international intermodal? And maybe on the domestic side, I know you talked about tight capacity, but relative to Q3 or even if you went back a little further, has there been any change or sequential loosing in truck capacity because of lower spot rates?

Good afternoon, Allison. Our international volumes were up 9%, and the fourth quarter and domestic volume was up 4%. And yes, we've seen some loosing and the truck market. I know the market still tight and we’re encouraged by what we’re seeing so far in bid season, and we are also encouraged by what we're hearing from our channel partners with respect to their outlook from both price and volumes as we move through 2019.

Our next question comes from the line of Chris Wetherbee from Citi. You are now live.

Wanted to just sort of make sure I understood how you guys are viewing the 2018 performance to the 65.4% operating ratio obviously includes some gains and there is going to be gains and hopefully lost to a degree when you make transactions in the portfolio. So I get that, I just want to get a sense. Do you think sort of 65.4 is a good rate off of which sort of the future builds? Or maybe do we think about something that’s adjusted extra of those gains? I just want to get a sense maybe how you guys think about the process?

Let me comment generally for us on how we view our 65.4 annual operating ratio for 2018 and then let Cindy address how we might want to think about that going forward. We started out three years ago with the goal of the sub 65 operating ratio by 2020, and here we are with the 65.4 operating ratio in 2018. So that represents excellent progress under our prior strategic plan and we made many other financial improvements along the way. So, we are pleased with our performance up to this point. We recognize that we have much more to do and that we are intent on continuing to drive financial results and shareholder value in the future and we have a lot, lot more to say about that at Investor Day.

Yes, Chris, I mentioned this in my comments we did have $145 million worth of gains of operating property this quarter which is high, I mean, compared to 25 million in the fourth quarter of 2017. We are going to continue to look at these assets and try to monetize them. It's very, very difficult as you know we're to be able to predict what quarter sales may come in. I certainly think that we got a very large gain in the fourth quarter around the property in Atlanta that’s pretty unusual, but we are going to continue to sale property as we can. And it's going to continue to help from the operating ratio. Although, I'll say that going forward that we will continue to do that. The benefits in the operating ratio are really going to come from improved revenue and continue to push on productivity and that’s what's going to drive our operating ratio long-term.

And then just maybe, Alan, if I could switch gears onto the coal side just to get a sense, I know again trying to keep it relatively focused on the current period, but just sort of in context of what you are seeing in the market today. Maybe a comment on the utility side what you see from an inventory perspective in early '19 and then maybe some thoughts on the export side will be helpful?

Yes, absolutely. On the utility front, stock piles have declined in the north and in the south by 17 days over the past year. And bulk of the some of our coproducing customers it's pretty clear that utilities are screaming for coal at this point and that’s kind of the factor that we are seeing right now is limiting both volumes and the utility franchise and on the export side is coal availability, particularly thermal coal availability.

Our next question comes from the line of Justin Long from Stephens. You are now live.

I wanted to ask about incremental margin, if we look at the gains on sale impact this quarter and what it was last quarter and back that out. I think you get to low 40s incremental margins, which I think is below what we have come to expect from a lot of the rails especially with some of the productivity initiatives in place. Could you give us some sense of the incremental margin you expect going forward? And what you view as a more normalized number?

Sure, again, let me address that generally and then I'll invite Cindy to add to my comments. I think, you think about incremental margin as being a reflection of the lower marginal cost of additional volume in part. Price -- the impact of pricing on the bottom line and productivity, those three key components, incremental margin will be a significant objective and output of the initiatives we undertaken all three areas in our new strategic plans. So recognizing the important the critical important of incremental margin that will certainly be a big part of the plan.

Justin, I would just say that, I think we said in the past the 50% incremental margin is kind of we talked about in the past it's going to vary from quarter-to-quarter. We did have in this quarter increased cost particularly in comp and benefits around incentive comp based on the business results that we have. So I mean I think that’s a sort of way we think about it.

And maybe for my second question, I know that you are going to get more details about the specific financial targets here at the Investor Day. But just bigger picture, as it relates to the OR performance, we heard from a variety of other class I rails that they want to lead the industry or be near the top of the fact. I know like I said, we’re going to get the details today but just from a high level. Is there any reason why Norfolk can’t progress from what is now the worst OR in the industry to something that's at least in the middle of the pack? Just curious how you're thinking about the OR performance relative to the rest of the industry?

We will do what we need to create shareholder value adjustment and so, we understand the importance of operating ratio, and that is certainly front and center as we think about the future. So, we’re going to continue to push on operating ratio. We will get there, as well as operating income and other key financial metrics. We will get through a combination of growth and efficiency.

Our next question comes from the line of Amit Mehrotra from Deutsche Bank. You are now live.

If we take out the 145 million non-cash gain in the quarter, the core operating ratio is more like 67.8%, unless I calculated something incorrectly, that’s an improvement year-over-year but not nearly that impressive in the context of best pricing environment in seven years, which I think was a comment that was earlier made. So, and also obviously still far away from your peers, so what are the issues, I guess, either from a cost or volume side that maybe is not allowing you to make that type of progress of the profitability side in the context of pricing? And I guess maybe you can address in this answer the fact that you have CSX out there that is in a much better proper position and has taken out significant cost and may be in a position to drive a little bit of market share shift.

I think if you step back, we have produced over 700 basis points operating improvement, operating ratio improvement under our all strategic plan. We've made significant progress on operating ratio and that’s been accompanied by very strong earnings growth and shareholder returns as well. We've taken that the cash that we have generated. We have reinvested it in our company and we have returned to shareholders in the form of dividends and share repurchase. So, it’s been a strong performance for the last three years. Now, we've recognized that we have more room to increase shareholder value and that's obviously our objective in the new plan. So, we’re going to continue to push operating ratio is front and center as I mentioned, and we will pull out all the staffs to generate shareholder value in the coming years.

Just one follow-up if I could on the balance sheet, really on the cash flow side. You know every rail now I mean, UMP just brought their number down to 13.5% of sales in terms of their CapEx. CSX has been there, I think you guys are still up in that kind of much higher level is CapEx and leverage levels really CapEx. Is their ability to bring down CapEx towards where the rest of the industry is part of this evaluation? Just any update or thought there as you guys look at that.

The level of CapEx going forward will obviously be depended on the return that the capital spend it can generate. In our view, 16% to 18% of revenue has been a solid range, that’s what we have been doing for the last several years, and likely we will continue to. Again depending on the returns, we believe that that level of capital spending we can generate excellent shareholder returns.

So, 16% to 17% for the next several years is that going to be updated in February?

Look, we will talk more about that at Investor Day for sure, but we previously said that we believe 16% to 18% is an appropriate zone for capital spending because it can drive the shareholder returns that we are trying to drive.

Our next question comes from the line of Tom Wadewitz from UBS. You are now live.

I wanted to get thoughts on the -- you talked about Clean Sheeting. You've identified some of the metrics that saw some benefits from that and in terms of some of the productivity metrics. Just wondering, if you could give us a sense of where you're at in that process, I know that focused on I guess the local yards. So that I'm sure there is a lot more to go to that you will talk about in February, but maybe just some thoughts on where you are at in the work on the local yards in the Clean Sheeting process?

Okay and we will talk a lot more about that in a few weeks, but let me turn it over to Mike for some thoughts on what we're doing right now.

Yes, so the initial phase of the Clean Sheeting process is going to be completed essentially crossed the railroad, early summer, and it is going very well. We are really pleased with that's why we are really focusing a lot on it. But the idea of using good industrial engineering practices to look the way we do business in our local serving yards and really any of our yards is going to turn the way we are going to do business the NS way in the future. But once we get the Clean Sheeting initially done, we will be rolling out the new operating plan on top of that in midsummer as well. But I'll tell you, we are taking the opportunities we see now when we see an operating plan change that that works now we are going to hit and implementing it. But Clean Sheeting will be done by midsummer and then we will be implementing the new operating plan then.

And then, a question for you on the export coal side or maybe on the broader coal side, Alan, you mentioned that supply issues are constraint. Is that a temporary constraint? Is that just kind of near-term issues at existing mines? Or is that something where you said that’s just kind of tapped out where they are running and you would have to bring new mines online in order to produce more coal?

Tom, good question and thank you for allowing me to clarify that, that is -- our perception is a temporary constraint from speaking with our partners on the production side, something that we feel like is going to cycle off by the end of the first quarter. There is very strong demand out there both overseas and domestically.

So, you could see tonnage growth given the market but just probably not in first quarter given the mine constraints.

Yes, the production is going to be a limiting factor here in the near term.

Our next question comes from the line of Ravi Shanker from Morgan Stanley. You are now live.

Just to clarify on the Clean Sheeting, did you say that you're working on the plan just now and will be implemented over the summer? I just want to check if you have already started implementing certain actions and if there are any cost drags in the fourth quarter as result of that?

We have been implementing Clean Sheeting for some time now, in fact, for much of 2018, we were Clean Sheeting the railroad, and we are making some changes in the operating plan even as we speak with more of that to come in 2019.

Are there any pretty growth cost items you would like to point out as being the drag to railroad?

No not as a result of Clean Sheeting or implementation of the high velocity plan.

And just as follow-up, I mean, just given the pricing environment that you mentioned. Just going ahead in 2019 and the potential loosening of truck markets and maybe a broader macro slowdown, can you just clarify your broader strategies and pricing going forward? Are you happy to push for more pricing gain even if that means a loss of volumes and shippers switching from rail to truck?

Ravi, our strategy to when it drives shareholder return and this is a great environment to push our price. We’re going through bid season right now in the air model network, and we’re seeing continued strength there. So, I’m very confident in our ability to continue to price through 2019. We've talked about that basically for the past year that 2019 was lining up to be a strong pricing year, and we still see that and we're expecting the momentum that we created and 2018 to carry over into 2019.

Our next question comes from the line of Matt Reustle from Goldman Sachs. You are now live.

Back to the intermodal business, you did see deceleration in volume and pricing in the fourth quarter. It sounds like the environment is still strong. Is that purely a case of lapping tough comps? Is there anything else there in terms of competition picking up, loosing truck market that’s driving that deceleration?

We actually saw an acceleration of pricing in the fourth quarter, Matt. And I will point you back to the fact to your point that fourth quarter 2017 at the time was a record volume and a record revenue quarter for us in inner model. We go a great intermodal franchise, we got the best intermodal franchise in the east and then there is great opportunity for highway to real convergence going forward.

Yes, I’m looking at RPU on ex fuel basis and it looks like 3Q to 4Q that came down a bit, but understood.

We've talked about a shift, international intermodal grew 9%. Domestic intermodal grew 4% in the quarter. So, that's a negative mix was in intermodal. We had a great pricing quarter and fourth quarter and intermodal and expect that to continue and based on what we’re seeing so far with bid season, we’re very confident it will.

And just more philosophical question looking back at 2018, you've mentioned a couple of times. You're coming off a year where operating income is up in the high-teens. It's at the high end of the peer group. You've shown all our improvement. So, when you look at 2018 results, what drives the need to shift to a new operating plan? What is it that stands out that was disappointing, which requires a whole new operating strategy versus progress that you've been making over the past couple of years?

Financial results were good. Network performance and customer service were not what they should have been in 2018. And so, it’s a push to achieve higher levels of network performance customer service and greater efficiency as well. Of course that has us taking another look at the operating plan.

Our next question comes from the line of Brandon Oglenski from Barclays. You are now live.

Jim, I get it that you guys had the rental gains and we include those for other carriers too, but it was pretty chunky. I guess just want to circle back because the OR is trailing your peers now. I mean, is there a sense of urgency inside the organization that says, clearly, there is an operating model that can drive well cosmic system better service. How are guys incentivizing I guess the organization to go and achieve these goals?

Sure, absolutely, there is a lot of urgency around here and a lot of enthusiasm, energy and excitement about this new mode of operations we are adopting based on precision schedule railroad. So, we talked about that on the third quarter call about the people that we have brought into the organization to help us drive PSR preferences and it's working. You see it in the surface metrics thus far in the first quarter in the latter part of the fourth quarter as well. So, it's clearly taking hold. We feel like there's a lot of momentum, and yes, there is a great deal of urgency here about the new plan. We will talk a lot more about that at Investor Day.

And I get that, you want to save a lot of discussion for Atlanta, but the headcount line, we saw headcount move up a little bit in the fourth quarter and I think the key tenant when we have seen these PSR implementations work is very rapid reduction in employee counts because productivity gets that much better. So, how do we think about just in the context of heading into '19, the movement between volume and the network and headcount and the ability to drive incremental labor productivity?

Significant improvement in operating ratio, which is our goal will be premised on a combination of growth and productivity. Productivity in turn is a function of better efficiency with respect to labor, locomotives, fuel and our other resources in the business. So, that's the foundational, all of that is the foundation of our new strategic plan, and we will get into a lot more detail on those things in February.

Our next question comes from the line of Walter Spracklin from RBC Capital Markets. You are now live.

Just going back on your characterization, I'm little surprised by Jim you characterization of your operating ratio given how significant the gains were. I'm just curious whether there -- how much gain was predicated in the sub 65 OR that you had anticipated compared to what actually came to play? And should we bank on continued gains to this level over the next few years? Or maybe some guidance around what gains, what level of gains you expect?

Walter, I can't give you good guidance on real estate gains, except to say that they will occur from time to time and in some quarters they will be significant as they were in the fourth quarter. Monetizing real estate and all underutilized property is part of our strategy. And that results in better results for shareholders. That will not be the driver of our success as a company going forward. What will make a difference for shareholders and will drive shareholder value will be railroad operations, pricing, and growth and so that will be the focus from time to time, there will be significant gains and I'm sure enough they were in the fourth quarter.

So, you did compare your quarter 2 to sub 65, so you did obviously have an assumption for gains for that sub 65 level. How do they compared to what you're realizing the share?

We no longer want the real estate gains would occur from time to time. It's very difficult to predict when you will book the more significant gains, but certainly that’s part of the strategy part of the plan and we saw lot of them.

Just on call, you've done a good job just to kind of characterizing a quarter-to-quarter expectation for how your domestic volumes would come in. Any -- I know, it's uncertain, obviously, but any move toward giving contextualizing the sequential quarter going forward with of course domestic utility call.

We will talk more about the 11 demand is strong, stockpiles have declined, and customers are searching for coals. So depended upon availability of thermal coal could be a pretty strong quarter.

Thank you. Our next question comes from the line of Jason Seidl from Cowen and Company. You are now live.

This is Adam for Jason. I guess just a couple quick questions on precision schedule railroading and Clean Sheeting. First in terms of Clean Sheeting, how many relocations were you guys able to attack in the fourth quarter and go after with the Clean Sheeting process?

Well, we ramped it up in the fourth quarter as we plan to do because we are excited about what work results were getting out of it and we even ramped it up a little bit more going into this year to get it done early into the summer. So we’re moving ahead of pace on what we wanted to get done and Clean Sheeting, but I will tell you in addition to putting teams out there that were doing Clean Sheeting from location to location, we've embedded people into the field to just make this the part of the way of life at NS. So while we’re while Clean Sheeting across the railroad, we’re also building it just the daily operating practices at the railroad. So early summer when this things all done, we will be ready to go with our new operating plan.

And I guess quick follow-up as well. You guys cited the customer service was kind of one of the drivers here for improvements what you're looking to do. I guess maybe little bit on your conversations with shippers and with your customers concerning PSR. What have those been like? What are the back and forth spin? What have shippers been telling you guys about PSR? And the data effects that you had on them either positive or negative?

Ours has been and we will continue to be a consultative approach. We’re working with our customers as we overhaul our network. Let me turn over to Alan to talk a little bit about the dialog with customers as we go through Clean Sheeting.

Absolutely, our approach with our customers has been highly collaborative. They want us to succeed and they want a supply chain partners that can support their growth and so their goals are aligned with ours, we’re focused on improving service and also putting a product out there that lets them compete and we’re seeing that, we got 9% growth in 2018 on top of 7% growth in 2017 and we’re very excited about the growth opportunities that we see in 2019

Our next question comes from the line of Brian Ossenbeck from JP Morgan. You are now live.

So, Mike, just going back to some of the performance in the quarter, and I'll get few more metrics in the next couple of weeks. But last call, you mentioned that network velocity measured at the car level. That was near the highest for the year and crew productivity was also strong. So I was hoping you could give us an update as to where those metrics were in the fourth quarter? And did they also improve through the middle of January?

The answer is yes. They continued to improve. We saw our terminal really get fluid into the third quarter going into the fourth quarter and that's where I was referring to that was getting the cars through the terminals. And then at the end of the fourth quarter our main lines really became fluid. So yes, and it's continued on even into the first quarter so both of those are doing well going forward so pretty excited.

Jim, obviously, there is some more tariffs and credits going into effect in the network next month and these have obviously been used to incentivize compliance with service design changes at the aspects of PSR at different networks. But with the STB is trying to look at these demurrage and accessorial fees, do you think that approach has to change this time around? Appreciate some context in terms of interaction with the regulators some of the shipper response to these items and how you might plan utilizing in the future?

I'll ask Alan to talk about the specifics of our demurrage changes, but let me say that we are in regular dialogue with our regulators, including the STB. As you know, Chairman, [indiscernible] send a letter to all the Class 1 about changes in demurrage programs to which we responded we will continue to keep up that dialogue that open relationship with our regulators. Alan, some more specifics on our changes in assessorial.

Brian, our assessorial program is designed to align our interests and our customers' interest with our mutual benefit, and really complements the efforts of our operating department to improve our service and efficiency. And we are delivering that. As Mike has said and you can see in the public metrics, our train speed is improving our dwell is declining and customers are seeing improvements in our service. That’s ultimately what they're looking for.

Our next question comes from the line of Bascome Majors from Susquehanna. You are now live.

As we look into the first part of next year and I realized the meet of the guidance is going to come in couple of weeks here, but other than the gain and maybe some elevated incentive comp expense. Is there anything abnormal about the fourth quarter results when we think about what they mean in a run rate or seasonal basis going forward?

Cindy went through the particulars in the expense lines and flagged the things that stood out in the fourth quarter. Cindy, other things that…

No, I would just say that and you'll notice in my comments. I did talk about we still have some additional cost associated with re-crews in overtime and some equipment rails associated with the some of our network velocity. So they were some of those, but nothing else.

And with the headquarters move, from economic perspective, should we expect anything lumpy over the next couple years, be it in labor with packages for people who don't decide to relocate or rent additions for new facilities or capital cost? Just anything financially from that course may that can move the needle on enterprise basis?

We will begin relocating employees in 2019 in the middle of the year and we will relocate the majority of the employees in 2021. Tallying up all the costs associated with those moves we would not expect them to be material over that period of time. So the purpose of the headquarters relocation I might add is closer alignment and we’re excited about that we think that having all of our folks in one head quarters building will be a very good thing.

Thank you. Our next question comes from the line of Ken Hoexter from Merrill Lynch. You are now live.

Cindy, you've noted the incentive comp boosted salaries and benefits. Do you include the gains in that to get to your -- or to you OR target, are the gain included to get to that incentive comp? And then, were there any other real estate gains throughout this year or only in the fourth quarter?

In terms of the gain on the sales of operating property, as you know, Ken as to operating income and operating ratio, those are two key components of our incentive comp. So, it did add to incentive comp. We obviously have had property sales this year throughout the year and not to the extent of the fourth quarter and we had obviously improved the issues as well. So it does add, it does add to the incentive comp.

Ken, as Cindy mentioned, incentive compensation for the full year 2018 was roughly comparable to 2017.

No, I asked it because if I look at the largest for year gains for CP was 95 million CFX with 140 million. So your one quarter here was bigger than full year that both those companies included. So, is there -- you've mentioned there were others earlier in the year, but I don’t think they got called out. Can you give us the total for what they were for the quarters?

Yes, so Ken, in total, they were probably 10 million to 15 million for the three quarters.

And then I guess Mike, if we can just on your KPIs that you talked about. Jim noted you take out locomotives and I presume that accelerating as your performance improves. So you plan to improve that, but your gross tons miles for locomotive chart that you had there was flat year-over-year. Just wondering as you step back and think about that given the Clean Sheeting, is that something we should have see improvements that we should going forward see improvement? I guess is that something you focus on with whether it's train length growing our or improve sidings how you think about that that metric?

Yes, it is absolutely one of our KPIs now and going forward. But if you look at the fourth quarter, you'll see that in December it really changed there was a big step function up in the quarter. So, we took the locomotives out near the end of the quarter, we’ve continue to take locomotives out even into this year. So absolutely train links, train weight are all part of the operating plan changes were put in place and again were not waiting when we see opportunities were take advantage of it . But the more holistic operating plan will be the next quarter or two.

Our next question comes from the line of Scott Group from Wolfe Research. You are now live.

So, a couple of things for you Cindy, can you give us any guidance on other income going forward? Can you give us some thoughts on how much of an increase we should expect in accessorial revenue? And I guess since you don't report other revenue, will that be just put in revenue per car? So, two questions, and then I guess maybe just a comment Cindy like in the future if we ever not some made really big gains just in the 8-K like let us know about in advance would be helpful?

Scott, in terms of other than that I think the run rate perspective, we would say that probably about 80 million annually is the good run rate for that. In terms of the accessorial, you are right. I don’t know that we are expecting there to be big changes in that and it just becomes part of the normal revenue car. So, does that answer your question?

Yes, I guess why wouldn’t there be big changes like we saw pretty meaningful increase in that other revenue for CFX series, they made changes? Are your changes different than what they did?

Not with our.

Scott, our changes are designed to improve our efficiency and our network velocity. So, we are not counting on additional revenue with these. What we're doing is we are collaborating with our customers on our service changers they are being brought in on the front end of this because we want to make this smooth for them and smooth for us. They can help us, we can help them and we can both grow together that’s the overall intent.

And are you seeing compliance with it right away?

Yes, you can see improvements as Mike talked about we are in storing locomotives at the end of December while volumes were accelerating and our change people is improving.

Scott, the customers are really engaged in this and they want, as Alan noted, they want to see it see us and this process succeed.

And we've gotten off Scott to a very strong start to start January in terms of both volume and service product. Now, the storms in the Northeast have had an impact on our volumes and our velocity so far this week, but we are very confident in the product that we are delivering and the demand out there for our product.

I know we are going to get long-term sort of labor productivity headcount guidance in the interim, can you just give us some guidance on 1Q for headcount?

I think if you can hold for just a couple of more weeks, Scott, we will give you as much forward-looking guidance as possible. I know that’s obviously going to be a big focus of investor day to give you the longer term and shorter term in some cases shorter term financial goals and the resource components thereof.

I know I'm going over but just to help us get ready for next kind of month. Should we be thinking five year targets, three year targets, I just want to get prepared?

We will get into the plan period, duration of the new plan period in February along with everything else.

Our next question comes from the line of David Vernon from Bernstein. You are now live.

Alan, when you look at the intermodal per unit for the revenue bringing for intermodal, up 7 with fuel up 4 without fuel coming off sort of mid teens increase in truck rates. Should we be expecting that numbers to creep up a little bit is a lag effect sort of kind comes into the business? Or is that a good kind of 15, get to your 7 kind of ratio thinking about for the pricing leverage you guys can take out of the truck rate, inflationary that’s happening in the market?

David, we as I said our pricing improved throughout the year, which was very good about where we’re headed as we move into 2019. Bid season has started for us pretty well and the feedback that we're getting from our channel partners is there is continued strength and intermodal pricing. We’re seeing strength there as you know our RPU was up 7% in every single one of our business units. It has to go back seven years to find that. So, we're very confident in our pricing strategy and our approach, it will continue into 2019.

Is it reasonable to think that it could approach those sort of levels that you saw in truckers? Or is that going to be -- is that just kind happening too much?

We’re going to push it as hard as we can and you saw that this year. We delivered 18% revenue growth in our intermodal franchise and 2018 on top of 11% growth in 2017, while improving margins, that is exactly what we need to do.

Thank you that’s helpful. And then Cindy, just to clarify before, I think you said other net should be about 80. Is that inclusive of the reclassification of the some of the rental income of above the line or because I’m just trying to reconcile the zero and 4Q this year to a expecting like an 80 for the full year of 19 on that other net line?

Yes, the 80 is we would expect for an annual run rate. I have mentioned in my comments in the fourth quarter, we had about $25 million decrease year-over-year in returns on a company or life insurance. So, that’s what you’re seeing in the fourth quarter. That was pretty unusual. It was tied very much just market performance in the fourth quarter.

Okay and then just in that other offset to the other line that moved above the line. I’m assuming the coal royalty to be included in that. Can you give us any sense for how much of an increase you got into fourth quarter this year on that number?

Yes, it's not significant

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the call back over to Jim Squires for closing comments.

Thank you. We are proud of what we've accomplished and are excited about our prospects for future success. In a few weeks, we will discuss the strategic initiatives we have underway which will further strengthen our company deliver even more value to our shareholders, and we look forward to discussing them with you at our investor day on February 11th. Thank you.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.