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CSX Corp
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Good afternoon, ladies and gentlemen and welcome to CSX Corporation fourth quarter 2018 earnings call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode. Following the presentation, we will be contacting a question-and-answer session. [Operator Instructions].
For opening remarks and introduction, I would now like to turn the call over to Mr. Kevin Boone, Chief Investor Relations Officer for CSX Corporation.
Thank you Shirley and good afternoon everyone. Joining me on today's call is Jim Foote, President and Chief Executive Officer, Frank Lonegro, Chief Financial Officer and Mark Wallace, Executive Vice President for Sales and Marketing.
On slide two is our forward-looking disclosure and followed by non-GAAP disclosure on slide three.
With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote.
Good afternoon and thank you Kevin and thank everyone for being on the call today. What an incredible year. I would like to first recognize the amazing team of CSX railroaders. They have stepped up to the challenge again and again and put this company on a new trajectory. Success breeds success and I am proud of the foundation we have built.
While we wrote an amazing first chapter, the CSX transformation story is still early. Across the organization, operations, sales and marketing and all other functions, there are plenty of opportunities for improvement to keep us busy for years to come. Millions of unnecessary events in our business processes can be eliminated which will improve service to our customers and allow them to be more efficient. We continue to make progress towards the efficiency goals set a little less than a year ago.
Whether it's locomotives, cars or yards, we are finding ways to deliver better service with fewer assets. This not only saves CSX money but saves customer's money by reducing their rolling stock and other infrastructure needs. Our progress has translated to significantly more free cash flow, which allows us to maintain a safe and reliable railroad, provide the flexibility to invest in high return projects and return significant cash to shareholders through dividends and buybacks.
Turning to slide five. Results are straightforward. EPS grew 58% on an adjusted basis. Our Q4 operating ratio improved 480 basis points to 60.3%, a record fourth quarter performance. And the full year operating ratio also 60.3% is a U.S. Class I railroad record.
Turning to slide six. As you can see there was broad-based strength across the portfolio. Revenue increased 10% with fuel recovery, volume, price and other revenue, all contributing to positive growth. I am encouraged to see the strong performance from our merchandise business with 10% overall revenue growth. Solid 4% volume growth helped drive positive performance across all markets with the exception of fertilizers. In fertilizers, we continued to face a headwind from the previously discussed fourth quarter 2017 customer plant closure. We also saw some weakness in the fertilizer export markets which appears transitory and should normalize in the next couple months.
Intermodal revenue growth was 4% with volumes up 2%. The intermodal grew despite our previously announced rationalizations, which shows very healthy core strength. Significant progress has been made in reengineering this very important part of our business which better positions the company for long term profitable growth. Coal revenues increased 8% with strength in our export Met business offsetting domestic utility weakness. Domestic steel and industrial customers also saw good growth. Finally, similar to previous quarters, other revenue gains were primarily driven by increases in supplemental fees.
On slide seven, I remain focused on safety. On a year-over-year basis, we saw good progress in both FRA personal injuries and train accidents. While it is encouraging to see some progress, the numbers are far from where I expect them to be. As of January 1, our annual bonus targets include specific safety improvement targets. Safety must be a priority for every employee in this company.
On slide eight, on the efficiency and service side, train velocity saw positive year-over-year and sequential movement, while dwell improved year-over-year. Only a couple of weeks into 2019, I see positive momentum in both of these metrics with the company currently seeing record performance in both measures. Cars online continued to trend down, down over 10% year-over-year, while volume increased 3%.
As you will see later, this directly translated to significantly lower car hire expense. And we periodically share with you different metrics which we track on a daily basis. On the bottom right is locomotive miles per day. This reflects the average daily mileage we are able to get out of each locomotive. Locomotives are a significant cost for the company and by reducing our active fleet we save on maintenance, fuel and capital requirements. Improvement in this metric means we need fewer locomotives to move the same amount of freight. Our active locomotive count ended the year down over 300 locomotives while we grew volume and revenue.
Now let me hand it off to Frank, who will take you through the financials.
Thank you Jim and good afternoon everyone. Turning to slide 10, I will walk you through the summary income statement. As the slide shows, the impacts of tax reform, pension accounting changes and the remnants of our restructuring charges drove a significant difference between our reported and adjusted results for 2017. These adjustments impacted several line items and we have provided a full reconciliation of these items in the appendix to these materials as well as in our quarterly financial report. For year-over-year comparability, my comments will be focused on the variance to 2017's adjusted results.
Total revenue was up 10% in the fourth quarter driven by a 3% increase in freight volumes with particular strength in merchandise, broad-based revenue per unit gains of 7% from higher fuel recoveries, pricing gains and a favorable traffic mix together with increased other revenue. The overall pricing environment remained strong in the quarter, supported by our improved service product, healthy freight demand levels and supportive export coal benchmarks.
Consistent with prior quarters, pricing for merchandise and intermodal contracts that renewed in the fourth quarter was particularly strong. Other revenue also increased year-over-year, primarily due to increases in carload demurrage, intermodal storage and other incidental charges. These revenues are intended to offset car hire and car ownership expenses as well as the network impacts of equipment congestion.
Given the STB's recent focus on accessorial and demurrage charges, we thought it was important to note that in the quarter, only a third of this line item relates to demurrage in the carload business. As we look forward, we expect the run rate for other revenue to decline slightly in 2019, excluding any liquidated damages, which we will disclose if and when they occur.
Moving to expenses. Total operating expenses were 2% higher in the fourth quarter. Labor and fringe expense was relatively flat year-over-year as average employee headcount was down 6% even with 3% more volume. The company is cycling the previously reported reversal of share-based compensation for our former CEO, which favorably impacted 2017's results. Additionally, in the current quarter, we recognized railroad retirement tax refunds related to share-based compensation awards from prior years, given the industry's recent litigation win on this topic.
On the operating side, year-over-year improvements in velocity, on-time originations and arrivals and trip plan compliance led to significantly fewer active trains and enabled a 10% reduction in road crew starts. Non-productive re-crews, an indicator of network fluidity, improved by 78% and have declined sequentially for five straight quarters. These favorable operating results drove a 12% year-over-year improvement in crew productivity, measured on a GTM per active train and engine employee basis.
Shifting to labor. On the mechanical side, the active locomotive count was down 10% year-over-year. We continue to have over 800 locomotives in storage in addition to the hundreds of engines we have sold, scrapped or returned since the beginning of 2017. The smaller fleet, combined with lower cars online and freight car repair efficiencies, helped drive an 8% year-over-year decrease in our mechanical craft workforce. Our G&A headcount also continues to decline as we look for every opportunity to reduce our overhead costs.
With respect to our total workforce, which includes management and union employees as well as contractors and consultants, we exceeded our 2018 goal of 2,000 reductions. Looking forward to 2019, improved service and operating fluidity together with opportunistic streamlining in our support functions will drive a significant year-over-year labor productivity. At a high level, we would expect our total workforce to come down in line with historical attrition rates.
MS&O expense increased 3% versus the prior year. Our operations remained strong in the quarter with year-over-year service improvements driving asset efficiencies which were favorable for MS&O expense. With that said, in the quarter we did have several non-core impacts within this line. Specifically, discontinued projects resulted in asset impairments of $20 million in the quarter, an increase of $10 million year-over-year.
Additionally, there was a year-to-date reclassification in Q4 that shifted certain expense credits from MS&O into other expense lines, primarily fuel. Similar to recent quarters, MS&O benefited from real estate gains which were $19 million higher than the prior year. We are continuing to monetize our surplus assets and are making good progress toward our $300 million target for cumulative real estate sales through 2020 along with the potential for upside from line sale proceeds. We continue to have a strong pipeline of real estate and line sale opportunities, though the impact of these transactions will continue to be uneven from quarter-to-quarter and year-to-year.
Looking at other expense items. Depreciation increased due to the impact of a larger net asset base. Fuel expense was up 4% year-over-year, driven primarily by a 10% increase in the per gallon price, partially offset by improved efficiency. Specifically, we utilized 1.6 million fewer gallons even with slightly higher GTMs, driving favorable fuel efficiency savings. We will drive further fuel efficiency through continued improvement in network fluidity and the increased utilization of fuel optimization processes and technologies.
Equipment rents expense decreased 20% driven by significantly improved car cycle times, particularly in the merchandise and automotive segments as we continued to see strong year-over-year and sequential service improvements. Equity earnings decreased $13 million in the quarter as we are cycling a $16 million non-recurring gain recognized in the prior year by one of the company's equity affiliates.
Looking below the line. Interest expense increased primarily due to the additional debt we issued this year, partially offset by a lower weighted average coupon rate. Tax expense was lower in the quarter even with significantly better pre-tax earnings, reflecting the continued benefit of tax reform. Our effective tax rate was 23.2% in the quarter, slightly lower than prior guidance, mainly due to the settling of certain state tax matters.
Absent unique items, we expect our effective rate to be between 24% and 24.5% for 2019 with Q1 closer to 23.5% due to the timing of stock-based compensation payouts. As discussed at our investor conference, we also expect our cash tax rate to be up slightly, given the roll-off of bonus depreciation over time.
Closing out the P&L, as Jim highlighted in his opening remarks, CSX delivered operating income of nearly $1 billion, fourth quarter record operating ratio of 60.3% and earnings per share of $1.01, representing improvements of 25%, 480 basis points and 58% respectively year-over-year.
Turning to the cash side of the equation on slide 11. Adjusted operating cash flow was nearly $4.7 billion in 2018, an increase of over $1 billion or 29% year-over-year, illustrating the strength of the company's core cash generation capabilities together with the benefits of tax reform. Capital investments were down 14% or nearly $300 million, reflecting the reduced capital intensity of the scheduled railroading model. This reduction in capital intensity combined with the substantial progress this year in CSX's core operating cash flow generation drove an 88% increase in full year adjusted free cash flow.
Importantly, the company converted net income to free cash flow at essentially 100% in 2018. In 2019, we expect the combined impact of revenue growth, expense control and disciplined capital investment to deliver a high free cash flow conversion rate. This significant improvement in free cash flow generation supplemented by a strong balance sheet, help support substantial shareholder returns of over $5.4 billion. We executed nearly $1.9 billion of share repurchases in the fourth quarter and earlier this week, fully completed the prior $5 billion buyback authority.
With that, let me turn it back to Jim for his closing remarks.
Great. Thanks so much Frank. Turning to slide 13 with a few comments about 2019. But before I talk specifically about revenue, I would like to provide some color on what we are seeing from a high level.
Over the past few days, I have spoken to a number of large customers across different industries. General customer feedback has been positive and it's consistent with the demand levels we are seeing today. While it's hard to ignore the volatility in equity markets, I cannot call out any trend in our business today that would point to a significant slowdown in our business.
Talking about this year, driven by merchandise strength, I expect total revenues to be up low single digits in 2019. This reflects muted overall intermodal growth, impacted by the rationalization of intermodal lanes we have talked about. Normalized intermodal growth should return in 2020. As recalled, similar to our view of coming into 2018, we expect some moderation of export coal benchmark prices in the back half of the year, but remaining at very healthy levels. As to the 2019 operating ratio, our goal is to maintain our position as the best in service and efficiency.
If you look at where we finished 2018 at 60.3%, we clearly get better in a number of areas including real estate and line sales. I believe a good 2018 OR baseline to measure our improvement in 2019 is closer to 61% which adjusts for some of the better than expected benefits from real estate that occurred in 2018. I now expect CSX to outperform our previous 2020 target of 60% a full year early. This represents continued efficiency gains across our operations while leveraging the revenue growth from Mark and his team.
At the Investor Day last March we guided for $8.5 billion in cumulative free cash flow over three years, including 2018 through 2020. I am happy to report we are trending ahead of that guidance. As part of our free cash flow outlook, we expect CapEx to be between $1.6 billion and $1.7 billion in 2019.
Finally, as you saw in the press release, we have announced a new $5 billion share repurchase authorization. As Frank said, we completed the existing $5 billion share buyback earlier than was expected. Part of our annual process will be reviewing with the Board our long term outlook for the business and discussing uses of cash and capital structure which will determine the pace at which we complete the newly authorized share buyback program. The Board's review process will take into consideration economic conditions and the company's performance against its targets as well as the current stock price to optimize long-term value for the company's shareholders.
You really have to love being in the rail industry right now. So many exciting things happening. I couldn't be more proud of what we were able to achieve in 2018. It means a lot to the employees who work at CSX to be considered winners. It's great to see our mechanical employees are keeping the fleet in great shape, our engineering people that build and maintain the network and the T&E folks that get our customers' products where they need to be having this kind of success. But it does not get any easier from here. The bar is higher and it's our job to deliver. With that said, we have a team that is capable of making CSX the best railroad in North America.
Thank you. Kevin?
Thank you Jim. In interest of time, I would like to ask everyone to limit themselves to one question and one follow-up only if necessary. Shirley, we will now take questions. Thank you.
[Operator Instructions] Our first question comes from Tom Wadewitz with UBS. You may ask your question.
Yes. Good afternoon. I wanted to ask you a little bit about the operating metrics and how you think they would translate to cost side performance in 2019? It seems like you have obviously put up a lot of improvement in the metrics. It sounds, Jim, like from your comments that you would expect that to continue. I am thinking the metrics we see. maybe some we don't, but velocity, dwell and so forth. Do you think that translates to further cost side improvement in 2019? Is that the right way to look at it? And then maybe I have a follow-on on the OR as well?
Sure Tom. Yes. I mean, we are going to continue to grind and make improvement and improve velocity. We are still long ways to go there to become consistently best-in-class. And dwell continues to improve. As we drive those two factors, that will improve our performance for our customers as well with trip plan compliance numbers increasing all the time. So it's the same metrics that we have used in the past and they will definitely continue to get better.
Okay. Great. So it sounds like there should be a translation of the cost side as well. You mentioned kind of an adjustment that you would think of on the base that we look at, like more of a 61% OR for 2018 kind of adjusted. Can you give a little more perspective of what you are adjusting out? Is that primarily land sales? Your land sale gains, are you thinking you won't have those gains? Or how do we think about that? [Indiscernible].
No, Tom. We overachieved in that area and what I am saying is, if you are going to take that over achievement and kind of normalize it and say, okay, in order to move forward and say that we are going to do better than 60%, what's the good starting point? It's kind of foolish to say we are at 60.3% and say we are going to do better than 60%. So if you take out these real estate sales that were higher than what we had originally expected when we set our goal of 60% and remember, again, in 2020, for us to go forward into 2019 and to say we are going to beat that 60% 2020 target in 2019, we are just trying to put it in context for everyone that we believe we are really starting at around 61%.
Okay. So it's primary around how we think about real estate sales. That's primarily what you are saying?
Yes. I think we had a number of $300 million and we had a trend on that. That doesn't mean we are going to do more than $300 million over the three years. It just means that we did better than that in 2019. And so taking that into consideration, as we look at, again, nine months ago, when we said, when we rolled this up, everybody thought we were insane people for thinking that we could hit a 60% operating ratio in three years. We are just trying to put it in context to show that we are going to do better than that and we are going to do better than that in a shorter timeframe.
Right. Okay. Great. Thank you for the time.
Thank you. Our next question comes from Amit Mehrotra with Deutsche Bank. You may ask your question.
Hi. Thanks operator. Thanks for taking the question. So Jim, I was just hoping if you could help us parse out the company's perspective margin improvement between the volume growth that you are expecting and the significant costs opportunity that you talk about? Clearly the outlook for volumes is a bit more uncertain than where it stands today, even outside export coal in the back half, but also the cost opportunity is significant. So if you could just help us think about the net impact of those two in terms of the OR guidance that you put out in 2019. How much of that is really in your control and how much of that is now dependent on the macro environment and the volume environment?
Well, as we have always said, we need to have a topline growth as we move forward and our plan here is not to just merely reduce costs in order to grow the company's financial performance. So it's always been a balance as we have looked at this. That being said, as I talked earlier, on the cost side we believe that we have a lot of opportunity out there for us to continue to improve the efficiency of the network and continue to do that through many of the same practices that we have already put into place, whether it's running trains with distributed power, using other technology to reduce our fuel costs, eliminating more and more and more unnecessary touches, the way we handle our customer's products which improves throughput and improves fluidity. So it's many of those same initiatives that will drive costs further out of the company.
At the same time, we are constantly focused on the topline growth both in terms of volume and price. We have, again, starting 2018, taking just a high level view at the various business segments, we started the year with intermodal which is the "growth engine of the railroad industry". And for a lot of reasons, as I said quite a few times, we had to reengineer that business which meant we took 7% of the volume off the railroad. Well we came out of the year with 2% up. So the 2% plus 7% means recurring about 9%, okay. So I would say, under the circumstances, pretty good.
Okay.
To a large degree, coal has been an issue for CSX for a while and we recognized that the domestic side of the business would be relatively stable in terms of volumes which it was and we had kind of anticipated, along with everybody else in the universe to trying to guess what's going to happen with coal, that these benchmarks for both export, met and steam coal would probably not stay at their high levels for the full 12 months, but they did until basically the very last few weeks of December. So that gave us a little bit of a better, gave us a boost there on the revenue as well, which we are seeing right now. The benchmarks are still high. The optimism right now is still strong for coal. But nobody is saying that these price levels are locked-in for sure. So it's prudent for us to say, they will probably decline somewhat but still be good in the second half of the year.
Right.
And then we get over to the merchandise side of the business. The merchandise side business is the area that most benefits from the change in the operating model from the old way of looking at things and running trains and forgetting where your customers' cars were half the time on the railroad. So as we have implemented scheduled railroading and have improved the quality of our service, we are expecting, first time in a long time here at CSX, we are going to turn around this merchandise business segment which is 66% of the business and start to grow it and we are already seeing some of the business that, for a long time, went away and went to truck because we didn't have a service product that met our customer needs.
So as we have done that, we fully expect to see volume growth across all of the business segments in merchandise which is the key part of this company, the heart of this company. And we are making that service product fantastic and it is something that numerous recent reports have highlighted from the customer base that they are very excited about the new attitude, the new way we do business and the service product that we offer.
Mark, do you want to add anything else?
Again, I guess I talked plenty there. [Indiscernible].
Okay. Let me just ask one very quick follow-up, if I could. Jim, you talk about the best run railroad in North America. I just want to understand what that actually means. Does that translate to the best operating ratio in North America that accompanies the best service levels in North America? And then if you could just tie that into kind of the 2020 target because it doesn't seem like that has changed unless I am reading too much in the language. Does it seem the 2020 target has changed? Is that just too far out for you right now? Or is there something where you are thinking 60% is really kind of the high watermark for the network?
Okay. Well first of all, as I said, what does the best railroad in North America means? First and foremost, the safest. Second, providing the best service possible to the customers and the best service recognized by the customer base as being had at above everybody else in the industry and doing that in the most efficient manner. And the most efficient manner one could look at, one way to measure that in the way that it's commonly measured is by looking at the company's operating ratio. As I have said and as we said in the press release, we had a 60.3% operating ratio this year. That is the best ever in the history of a North American railroad.
We are ahead of the CN and the CP who have been at this for 15 or 20 years and we are ahead of these guys and we plan to stay ahead of those guys. We have an operating ratio that was going to be 60% in two years from now. What we are saying is, we are going to have an operating ratio that is better than 60% this year. So it's not the same, not at all. It is a dramatic and significant improvement in our efficiency and performance. A full year ahead of where we said we were going to be. And as I said, when we said it nine months ago in New York, everybody said we were crazy, it can't be done.
All right. Thanks guys. I appreciate it.
Thank you. The next question comes from Brandon Oglenski with Barclays. You may ask your question.
Hi guys. Well, I guess following along that line of questioning. Jim or Mark, can you talk more about the lane rationalization that you have had on the intermodal business? I think you highlighted it a little bit last quarter that it was about optimizing with some of your interchange partners from the West. But maybe if you could elaborate on that? And how much, again, headwind that could represent in 2019?
Sure. So let me just repeat briefly so everyone understands what we did in 2017. As Jim just mentioned, at the end of the year 2017 when we began this journey of fixing our intermodal business and getting away from what we thought was a broken hub and spoke model, the impacts to those changes that we made then had an impact of about 7% of our intermodal business. As Jim just said, despite that, we grew our intermodal volumes last year 2%. In the middle of last year, as we continued working through a lot of the changes that we made over the course of the year, we decided to do another round of rationalizations, changes that impacted as of October 1, another 3% of the business those took effect and we announced as well as other changes that took effect this year on January 3, impacting roughly another 5%.
And as Jim just said, for 2019, we think we are going to be flattish to hopefully slightly up for the year on volumes. We have been going through this for some time now. You have probably seen some reports from some of our customers who actually agree with what we are trying to achieve. Clearly, we are competing in the lanes where we think we can do a better job of serving them. We are doing really well. We had a great peak season this past fall and into Christmas and we are doing so at lower cost.
We got away from, as I said, the traditional hub-and-spoke. And so the switching and the lifting and all the crazy stuff that we have been doing previously that were driving down the profitability of that business segment is improving substantially and we are not done. We still got a ways to go, but we are pleased with the progress that we have made so far in that area.
Okay. Appreciate that, Mark and if I can just sneak one in here. I think Frank mentioned that you would expect headcount would be down with natural attrition this year. So can you put some context around that for us?
Yes. So a couple of things on that one. Better service obviously requires less folks to run the railroad. Less assets come from better service and less people to maintain those assets. And then certainly on the G&A side, as we have attrition opportunities, we will take those. As you think about our historical attrition levels, we are thinking about going to 6% to 7% from a total workforce perspective.
Thank you.
Thank you. Our next question comes from Chris Wetherbee with Citigroup. You may ask your question.
Yes. Great. Thanks. I wanted to come back to the OR for a second. So I just wanted to get a sense that you are going to exceed the 2020 target in 2019. What do you think the potential of the business is as you look out a little beyond 2019, say 2020 or 2021?
I think that in terms of the specific place where the operating ratio should be, as we move into the future, whether it's a year, whether it's five years from now, wherever it is, we will find the right spot where that operating ratio should be that it allows us to provide the most efficient, highest quality of service but grow the business at optimal levels. So there isn't a magic point where you say, oh, this is necessarily where I am trying to get to. We are trying to put the three elements there of service, efficiency and growth together and find the optimum spot and we will start to search for that in the future.
At the same time, I can tell you that, at least in my opinion, you will always want to be the most efficient in the marketplace. No matter what the line of business you are in, no matter what you are making, no matter what you are selling, normally if you are doing it the best, you are going to be the most successful. So that's my number one reason for wanting to continue to drive on continuous improvement and continue to make all these changes because it continues to make us the best in the marketplace and the best in the industry. And I think that should be a goal of any organization.
Okay. That's fair. That's helpful. And then I also just want to touch on the intermodal outlook. I wanted to make sure I am clear on what you guys think volumes might be in 2019. It sounds like maybe down or flattish a little bit in that segment? And then where are you in that process? You have done some of the rationalization with the repairs. But I am just kind of curious how you think about how much more wood there is to chop on the intermodal segment specifically?
Yes. As I just said a couple of minutes ago, we just announced another round of rationalizations took effect on January 3 this year. Those are obviously working with our customers as they work through all those. I don't foresee and I don't anticipate any other significant announcements in intermodal changes anytime soon. I hope we don't have to do anymore. I think we are getting the network down to a manageable area where we can really focus on the lanes, where we can really compete and deliver superior service.
So we are focused on that. We are driving hard. As I just said, yes, we are going to overcome the loss of the rationalizations as we did in 2018, hopefully in 2019 as well. And so yes, I would be disappointed if our volumes were down and I am looking and I am pushing that we make that up and maybe do a little bit better.
Okay. Thanks for very much. I appreciate it.
Thank you. The next question comes from Allison Landry with Credit Suisse. You may ask your question.
Thanks. So obviously you guys did a really good job on the service metrics overall. But I was a little surprised to see the on-time arrivals kick down sequentially. I think that's a pretty important metric that you focus on. So is there something specific during the quarter that drove that? Or was that where you thought it would be? And what has to happen for that to improve to the point where you can create the slots for intermodal and drive incremental volume growth?
Hi, Allison. Yes. We were clearly disappointed with that metric during this quarter and worked extremely hard on that. Both originations on-time and arrivals were clearly not where they need to be. How do you get them better? You execute. The train is supposed to depart on schedule so that it can arrive at the next terminal. So that the assets and the crew and everything are balanced as we run around our network. It needs to get out of the terminal on time. And then, there can't be an event en route that causes it to experience a delay so that it doest arrive in the destination terminal where it needs to on-time. And so it's just execution.
It's constantly looking at all of the root causes of what caused the failure en route. So, is it a mechanical issue, do we need to, are we focusing on, what causes the engines to fail? Are there systemic issues that caused the locomotives to fail, which causes the train not to get across the river? Are there mechanical issues? Are there engineering issues that we need to address? Are there crew balancing issues that we need to address?
So it is all of those various elements in the way you run the railroad that you need to focus on in order to get those numbers up. I can tell you that the on-time origins and arrivals in our most recent numbers have been, I certainly hope that we can maintain this and don't get whacked with a bunch of crazy snowstorms, but are significantly better than where they were in the fourth quarter.
Okay. And if I think about that improving all that the things that you talked about, is that what we should be watching in terms of a metric to sort of think about, okay, this is maybe the point where the intermodal business can start to see incremental volume growth from maybe the guidance that you guys talked about?
Well, yes, I will let Mark add onto this. But again, incremental volume growth in the intermodal business, when we take 7% of the volume off the railroad intentionally every year because we shouldn't be doing that kind of work in order to fix the company and we grow 2% or we come in maybe this year flat to slightly up and our goal in the business here, 7%, 8%, 9% a year in intermodal. So that's a good environment for us to be trying to reverse and improve the overall core product of the intermodal business. We are not just driving off just to get rid of bad business. We are fixing and improving the intermodal franchise and the intermodal network of the CSX so that it can grow and grow and grow and grow profitably consistently in the future.
Mark?
And I think Allison, one thing under scheduled railroading that we have talked about a lot historically and the Canadians talked about a lot, we are focused on here as well, trip plan compliance. Trip plan compliance is what the customer experiences. When the train departs in the terminal and when it arrives is one measure, but what the customer experiences is, did we hit the committed to trip plan for his or her container or intermodal. That's something that we are intensely focused on CSX right now and we will be rolling that out to customers this year and that's our product. That's what we sell to our customers is meeting their trip plans and the commitments that we make to them on when we are going to deliver their goods.
Got it. Thank you for the time.
Thank you. Your next question comes from Brian Ossenbeck with JPMorgan. You may ask your question.
Hi. Good afternoon. Thanks for taking the question. So I want to go back to the export coal outlook embedded in the 2019 guidance. What are you thinking in terms of the range of assumptions specifically for volume and the mix of thermal and met? You had a pretty good year as did the market for thermal last year. Do you think that moderates? And I know you have said that basically the back half of the year is going to see some softness on the pricing, but what about the first quarter? I would imagine that's reasonably well spoken for at this point. Can you give us some color as to how that's shaping up, first quarter of 2019?
Sure. So 2018, I think it was the second highest export coal year that this company has ever done. Somewhere around 43 million tons. We expect similar low-40s in 2019. Hopefully we are able to match our performance in 2018. But the mix is 65% met, 35% thermal. That hasn't changed. I should say that of our export coal for 2019, we have about 65% of our contracts are already locked up and the team is working hard to get that to a 100%. So we see a very good demand environment and the benchmarks are where the benchmarks are and there is a forward curve. Who knows where that's going to go. It bounced around like crazy in 2018. We are not sure exactly what's going to happen but we have made reasonable assumptions in our plan for 2019 which I think, as I said, are reasonable. And again, as long as we can get the coal out of the ground and get it to the port, I think we will have a very good export coal year.
Thanks Mark. A follow-up on that. The 65% of contracts, can you just put some more context around that? Is that spoken for volume tied to a benchmark? And is that any different in this cycle versus the last one, as clearly [indiscernible].
Yes. So it was 65%, sorry. I don't want to go into the specifics of our contracts, but some of them are tied to the various benchmarks. So pricing goes up and down, collars, et cetera, et cetera. But the 65% is significantly higher than where we were at this time last year. So this time last year, we were low in terms of contracts signed up and we have started the year really good there. So that's just a reflection of the demand and that our customers want to lock these contracts up soon. So we are very happy with that.
Okay. And then just be clear, those are volume commitments or some are actually performing?
Correct. Yes.
Okay. All right. Great. Thanks a lot.
Thank you. Your next question comes from Justin Long with Stephens. So you may ask your question.
Thanks and good afternoon. So, wanted to ask about your expectation for gains on the sale this year. I know it's hard to predict. But just curious if you have any initial thoughts on what this year looks like versus 2018? And then also on equipment, you referenced the reductions you have seen in cars online and locomotives. Can you share with us what your expectation for the reduction in 2019 is, if you have those numbers?
Hi Justin, it's Frank. In terms of the real estate, as Jim mentioned in his remarks, we did have an extremely good 2018. We still have a good pipeline for 2019, perhaps not as good as 2018. But you should expect some choppiness quarter-by-quarter in 2019 on real estate. On the line sales, in 2018 we did have line sales that had both cash and gain impact. It's a little unusual to have the gain impacts on line sales. Those were lease conversions that drove some operating income favorability. In terms of 2019, we do have a couple of lines sales in the work. They will be cash accretive but not necessarily operating income accretive.
In terms of your equipment question, yes, we had a great run in 2018 both in terms of engines and in terms of cars. We will continue as service improves and depending on the volume elements of things, we will continue to see less equipment in service in 2019. We don't have specific targets around that. Obviously a lot of that's going to be dependent on our achievement of service levels and the volumes that come onboard. But you should continue to see us run a better railroad, a more efficient railroad, a safer railroad and continue to drive long term profitable and sustainable growth.
Okay. Great. I will leave it at that. Thanks for the time.
Thank you. Our next question comes from Matt Reustle with Goldman Sachs. You may ask your question.
Yes. Thanks for taking my question. One on the intermodal business. As you get past the rationalization and you return to those normalized growth rates in 2020, what should we expect those normalized growth rates to look like? Is this a segment that you would expect to be the fastest growing in the business?
We hope so. At better profitability that would be very, again, we took off 7%, it grew too in 2018, so 9%. It all depends on state of the economy, the demand. You have all the things working in your favor. But certainly, it should be healthy, it should grow at a healthy clip. A couple of points above GDP hopefully, if not more, at better profitability.
Great. That's helpful. And then just one more. In terms of the CapEx budget, it seems like you are trending above the three year $4.8 billion target. Are you pulling forward any CapEx? Are you spending more as you generate more? What's driving the trend? Or should we expect a major step down in 2020 to ultimately get to that target?
Yes, a good question. In 2018 we did pull some stuff forward. We did have an acceleration of PTC. Jim wanted to get that done as quickly as possible. From a safety perspective, it makes all the sense in the world. We had some hurricane damage obviously in 2018 that we had to take care off.
And then we had a couple of high return projects that got involved and wanted to look at certain things that could help improve on the maintenance side, especially on locomotives. 2019, we gave you a range there to give ourselves some flexibility on projects that may or may not come to fruition, as we look across both the commercial side and the operating side of the business.
We are going to hopefully finish up positive train control and most of the spending in 2019. So we ought to see at least that element of step down as we get into 2020. But then again, every year is going to be a little bit different. We are going to look at the free cash flow. We are going to look at the opportunities to generate returns on those projects. So we will give you 2020 guidance as we get out much further into 2019.
Okay. Great. Thanks for the questions.
Thank you. Our next question comes from Scott Group with Wolfe Research. You may ask your question.
Hi. Thanks. Good afternoon guys. So Frank, I just wanted to ask you a couple of small little guidance things. One, can you give us some color on equity earnings line for 2019? And then I think you said other revenue maybe a little bit lower, but maybe what's a good quarterly run rate for that line?
Yes. So let's do your equity earnings one first. I think if you plug in somewhere in the $20 million to $25 million benefit a quarter in your 2019, you will probably end in good shape. This year was $96 million in total. I think you are going to see roughly that same amount, as you think about 2019.
In terms of other revenue, yes, I did say it's going to be a tad lower from a run rate perspective. This year the number was $582 million. We have $28 million of liquidated damages. So back that one out and then get a little bit lower on your run rate there. I am not going to give you a quarterly run rate number, but if you take the $28 million off and then back out a little bit more you will be in the right neighborhood.
Okay. Helpful. And then Jim I understand your point about, you have got to figure out exactly what the optimal operating ratio is where you can still grow. So you are not ready to give a number, but is there a reason why that optimal OR couldn't be in the mid-50s? I mean there's still obviously more to go, headcount, the intermodal network changes, we haven't seen the full impact there yet. Could we be talking about a mid-50s OR as the optimal OR at some point in the future?
Well, sure, Scott. There's no reason in the world that we look at where we are today as far as we come and where we are positioned in the railroad industry today. And you can't make this stuff up when we find that we need to fix it every single day, opportunity after opportunity after opportunity. And I know that it sounds crazy when we said, we don't think we are anywhere near where we can get. So it's not inconceivable that mid-50s is something that someday might happen. But it's not like that is the quest. The quest is to get as efficient in best places as we possibly can be so we can grow the business.
Makes sense. Okay. Thank you for the time guys.
Thank you. Our next question comes from Ken Hoexter with Bank of America Merrill Lynch. You may ask your question.
Hi Jim, Mark, Frank and team, congrats on the OR. Just, Jim, you noted you are not seeing economic weakness. So I just want to dig inside for a second. Intermodal pricing slipped to about 2.5% from 9% growth. Is that from just the loser truck environment? Is that a shift in mix? Any thoughts on pricing at intermodal?
Well, pricing at intermodal was clearly the markets going into the peak season were tight. And they have been tight for a long time due to the driver situation and the electronic reporting. So it took a while for that to work out. So I think that the truck market clearly, in terms of the spot pricing, has declined.
Now, in our case, as I have said before, we don't chase that spot market. Our contracts, our arrangements with our customers, our channel partners is much more of a longer term. We guarantee we provide a longer term service, a partnership arrangement with the intermodal people and they make commitments, they make investments, they buy containers, they do a lot of things in order to be able to grow their intermodal franchise with us.
So it's not like, oh my God, look at this is up, that is up, that sort of thing. So that is the more recent view of the marketplace in terms of pricing. In terms of the overall economy and are we seeing changes in the economy that would prohibit or limit intermodal growth, I could say, as I said earlier in my remarks, we look at every economic indicator possible to try and understand what the economy is. And we talk to our customers, which touch every segment of the U.S. economy and especially in intermodal where they move from auto parts to technicians. And so we believe that we have a very good feel and sense for what's going on in the economy.
However over the last couple of months, everybody, not only us, but when we talk to our customers, we are talking about headline news about trade, tariffs, interest rate, what's going on with Brexit, government turbulence, al of these things that everybody swirling around that must have a solid impact on the way you run the business. So we all go back and we look in the crystal ball really deeper and we try to determine what's going on and we go back to the same place we were a few months ago. Everybody, us and our customers, are still very optimistic about the business in 2019 and not necessarily on the intermodal side business, but on the merchandise side of the business, we have customers who are making the long term capital investments where they are going to be building and expanding their facilities over into 2019 and 2020. And none of those projects are being pulled back.
So we feel very good about where we are right now especially given the fact that we are dramatically improving the quality of our service and are just not sitting here with a transportation product that's viewed as a commodity, that we just sell into the marketplace based on price. And the customer decides, I will go with truck or I will go with railroad, whoever gives me the lowest price. We are providing them with a valuable service and changing the dynamics and we are starting to get business from truck that historically moved on rail that's now coming back because of the changes that we have made.
It's helpful.
So it's a good time. And as I said, it's a great time to be in the railroad business.
Yes. I appreciate it. It just seemed odd to see the deceleration of pricing in intermodal. But let me just ask a quick follow-up. You mentioned the work of or I guess, we have seen a lot of the peers adopting precision railroading or I guess the final two big ones on the Class I side. Any impacts that you have seen on service interchange? You always talk about if the industry gets better, it's better for everybody. Have you seen impacts to service as the other carriers start launching into that?
Well, first, yes, I would reiterate, yes. I mean to the extent that all the railroads run better, we are a network. So if everybody's running better, it's better for the individual companies. I am unaware of any kind of interchange issues that we are experiencing that would be, let's say, attributed to somebody changing their business model. Clearly, day of the week, couple of days here and there due to snow in Chicago or something like that, yes, everybody gets slowed down, yes. But nothing unusual.
Hi Ken. Just to alleviate maybe some of your concerns with respect to the intermodal issue in Q4. Don't be concerned. You are always going to have a little bit of noise in there. We did see some impact with respect to the lane rationalizations. We are seeing and experiencing some really good pricing renewals from channel partners on the private asset side. And the spot market rates don't really have too much of an effect, 90% of our intermodal business is not impacted by the spot market. Most of our contracts are multi-year. We have seen recently there are all kinds of talk in the industry about what's going to happen to the spot market. Nobody really knows. There has been a little bit of softening, but I don't think we are too concerned about it at this point in time.
Thanks for the follow-up. Thanks, guys. I appreciate the time.
Thank you. Our next question comes from Ben Hartford with Robert W. Baird. You may ask your question.
Yes. Thanks. Frank, just to clarify on the OR target for 2019 now. The previous 2020 target was 60%. So that does assume some sort of normalized. You talked about choppiness and gains here in 2019. That does include gains to some degree, right? That's not a complete ex-gains number, that 60% that you are talking about?
Yes. So sub-60% for 2019 is obviously the message that Jim is sending and it's a reported number. So yes, it would include some level of real estate gains.
Okay. That's good. And then the share repurchase authorization, when does the schedule expire?
It doesn't have an expiration. But certainly, we wanted to make sure we had the authority and the capability to be in the market when the window opens. We exhausted the prior program early, which is why we are announcing it on this call. Normally, it would have been a little bit later in the year in connection with the capital structure conversation that Jim mentioned in his remarks.
Okay. Perfect. Thanks for the time.
Thank you. Our next question comes from Walter Spracklin with RBC. You may ask your question.
Yes. Thanks very much. I got one question on the OR and one question on volumes. On the OR, I guess Jim, when PI service first contemplated at CSX, it was a significant opportunity and I think you executed on that in 2017 with upwards of 400 basis points of improvement. 2018, almost 600 basis points. I am just getting now, I am hearing you say there's still tons of room for early innings, lot more to go, but I am getting the indication that that's going to slow significantly. Am I reading that right? Is the trajectory now of the 55% OR now far, far down in the future that it's something that will come and really we are going to block and tackle from this point going forward, a 100 basis point per year here, a 100 basis point per year there? Am I hearing you right on that?
Well, I think that as I said, Walter, you have been following this longer than anybody, probably because you started with me, with us. And yes, as you get further down the road, it becomes harder. CN and CP have been doing it for a long time and have been recognized to be the greatest of all time and are still considered by some to be phenomenal, because they can take a point out a year after doing this for 15 years.
We are beating them and we are saying we are going to get better next year, below 60% off of a 61%. So I am pretty confident and pretty comfortable that we are clearly not just sitting back and taking it easy. It just gets harder. And so I don't think anybody at this level can look you square in the eye and say, yes, let's take another 600 basis points out of the current this year.
Right. So when do you --
It is growing it up
And Jim, you mentioned CN and CP. And PSR has been used as a cost driver and you have used it very much successfully there. But in prior incident or prior iterations, it then turned into a revenue driver, where PSR could then be used to gain share, to gain traction, be it from truck, from your rail competitor. You are guiding it kind of flat to slightly up volume growth this year. When do you really see an inflection, where you can turn around and take PSR and use it the way the other PSR players have done and really drive revenue growth?
Well, in my opinion and I have said this many times for years and years and years, the reason that my opinion as it becomes a point in time when all of a sudden you start to see above average growth for a railroad company that's adopted this, is because of the quality of the service becomes so much better than it historically was. Again, it's not like some people say, oh, all of a sudden you get to some point in time, June 22, 2020 and you go, oh, we are going to pivot from cost reduction to growth. It is an evolutionary process that as you continue to focus on getting your trains to run on time as efficiently as possible, it improves the quality of the service and that customers can put more, because we become more reliable, they will put more business on it. So it's an evolutionary process.
And yes, that's what we, Mark and I and everyone here now who have seen the benefits of this transformation recognize that the customers are actually starting to like us for the first time in a long time. And so we are going to continue to grow. That doesn't mean we are all of sudden going to say, okay, 60.3% is it. We are not going to get any lower. No, we are going to continue to believe that each and every year, we can continue to improve the efficiency of the network that again, it improves the profitability of the company, but it improves the quality of the service to the customer. So it's an ongoing continuous improvement initiative that hopefully will go on as long here as it has at CN and now CP.
Excellent. Thanks for the insight, Jim.
Thank you. Your next question comes from David Vernon with Sanford Bernstein. You may ask your question.
Hi. Good afternoon guys. Thanks for taking the time. Jim, I want to ask a question on the regulatory and then just a quick follow-up on CapEx. First, the STB poking around accessorial fees, can you give us a sense for how that is expected to play out? Is there any timetable for that review? And do you see any risk to the industry from seeing some of those fees maybe called back?
I don't know that there's any kind of formal process with time stamp. I just think that the Chairman reached out to the railroads and wants to know more about it. And we have responded and provided a great amount of detail. And none of these issues, whether it's demurrage or any of these things, is new. These things have been on the books for years and years and years. They are kind of industry practices in transportation. So I don't think there's any issue.
And you also have to remember that these are public tariff situations. The vast, vast majority of our contracts or services are privately negotiated and have been since 1980 when we were deregulated and when we sign a contract with a customer and it says, you will be governed by our tariffs. So it's a very, very small percentage of the business that the customers already have not agreed to as being fair and just.
So there is no formal case that's been opened or docket that's been open for them to [indiscernible]?
No. Again, I think this is just the Chairman doing her job. She heard like you know in the media or wherever, maybe that one of those public trains magazine or something like that, she read an article that something nefarious was going on and they were reporting at. And she said, well, I am going to check it out. She said, tell me what's going on.
Maybe that interview with Matt Rose the other day. Second is --?
I didn't say that.
Not sure if you want to comment on that one, but that one would obviously be welcome to your comment. But as a follow-up, I have question on the CapEx and the Baltimore tunnel project. I read some stuff and the industry ragged about that maybe coming back to life. Could you talk a little bit about kind of what that looks like from a capital commitment standpoint and whether or not that thing come back to life from a planning perspective for you guys?
Well, about a year ago, maybe you will remember I went out just about a year ago, I went out and met with the Maryland delegation because Hunter had said, we would not participate in the project. And I went out there a year ago and I just said well, give me some time to look at this and figure out what it is, what's going on with this tunnel, why are we spending all these hundreds of millions of dollars for a tunnel under the city of Baltimore.
And so we studied it. We looked at it for a long time. And we went back and said to the Maryland delegation, I did, again just before Christmas and said, we have looked at it. The economics are such that there would be justification for us to participate, but at a lower level than had been previously committed to.
The lower level being, we believe that there's a sufficient return on investment to CSX, if we put in around $91 million. I think that's like $50 million or so less than what we had previously said we would participate at. The Maryland delegation, I think, it's in my opinion, was pleased that we did what we said that we were going to do and they are trying to figure out if they could find other funding mechanisms to make up the difference.
And if they can find other funding mechanisms, then maybe this project goes forward. It is viewed as a tremendous opportunity to the city of Baltimore and the state of Maryland and we are trying to participate and work with them as best we can.
But no hard data or anything like that, right?
There's nothing in the 2019 capital number that Jim and I talked about relating to the Howard Street Tunnel.
All right. Thanks very much guys.
Your next question comes from Bascome Majors with Susquehanna. You may ask your question.
Yes. Thanks for taking my question here. This summer you changed the operating structure of the railroad to a more regional one with more responsibility under the people in those regions. And it sounds like there may have been some turnover in that senior team since then. I was just curious, are you happy with the new structure and the results it's producing? And may be longer term, either Ed or Jim, could you discuss your thoughts on the bench strength and when you might name a permanent Chief Operating Officer? Thanks.
Yes. We are very happy, I think, with the structure. It's a structure that we are comfortable with, I am comfortable with, Ed is comfortable with because that's the way we structured the railroad at CN, driving the accountability and responsibility down to the line supervisors and the front line supervisors to make the day-to-day decisions and our experience is that the railroad runs better that way. So far, that's exactly what we are seeing. But we will continue to refine it. We will continue to improve it. At least as the employees tell me, they like it, because they get to make decisions and they don't have to pick up the phone and call somebody in Jacksonville and ask if it's okay to take a switch engine off. They get to make decisions on the fly in order to make the railroad run better each and every day.
In terms of naming someone to, I guess become head of the operating department, let's call it that, we don't have a specific timeframe. Ed and I are working on that along with our human resource people to come up with a plan and the Board, because it's important for the Board too, I would say to get somebody in there as quick as possible. But we are not going to rush forward and do something rash. We are assessing all of our talent internally and if appropriate, we will look elsewhere.
But, we got a lot of great people here that can probably step up into that role. And then one of Ed's responsibilities when I asked him to come and help me was to help me choose that, find that person, work with that person and train that person so that they can be the best. And there's nothing that's changed there. You know maybe we will get it done this year, I don't know.
Thank you.
Thank you. Our next question comes from Ravi Shanker with Morgan Stanley. You may ask your question.
Thanks. Good evening everyone. Just one follow-up on the guidance. Did you say a flat to slightly up volume growth on the intermodal side? Or just overall volume growth? Or both?
What I said was that with the lane rationalizations that we announced in October and then ones that we implemented January 3 of this year is about another 8%. We would look to make that up. And if we are flat, that's great. If we are up slightly on volume, that's even better.
Great. It sounds like that's an intermodal comment. Can you just help unpack your full year revenue guidance in terms of volume mix and maybe some other components, because if I look at low single digit revenue growth, I am assuming you guys get at least 3% price which doesn't leave much room for volume or mix growth there, even if you adjust for the fuel surcharge headwind. So can you just tell us what you are expecting in terms of overall volume growth for 2019?
I don't think we gave any volume growth for 2019 other than, as Mark anecdotally said in his comments here related to volume growth on the intermodal side that we hope that we will see flat, again because we took 8% of the volume off again, flat. And if Mark being the marketing czar that he is, is able to achieve success, he will grow it, again like he did this year. And so the low single digit number is in relation to revenue growth in 2019.
And remember, Ravi, you got fuel price moderating. So you are not going to get the fuel surcharge uptick that you saw this year. And then as you heard me answer, I think Scott's question around the supplemental line, that's coming down. So, you have got more help from the volume and the pricing side than what that low single digit might imply.
Okay. Got it. And just as a follow-up, I think as it was alluded to earlier, there are a couple of U.S. rails left that are potentially going down the PSR path, one of which is your regional competitor. If they do something significant and they do see service disruption as a result of that and there's volume that comes your way, are you willing and able to take that just given the right focus that you have on price and margin over volumes?
Listen, we are trying to grow the business. That's what we keep saying over and over here. And you know we can grow the business with price and improving margins. And we are open for business.
We have ample capacity, line of road, equipment, people, we are good to go. When they want to bring it over, we are ready.
Great. Thank you.
Thank you. And our last question comes from Cherilyn Radbourne with TD Securities. You may ask your question.
Thanks very much. Good afternoon. I just wanted to ask, in terms of your safety goals, I am wondering if you could give us a high level idea of some of the areas where you would like to see improvement in 2019 and how that ties back into the cost equation?
Well, the goals are pretty clear. FRA personal injuries and FRA reportable accident. So there's complete transparency and no ambiguity in terms of what we are trying to do. From a cost savings perspective, they have put a dollar amount on personal injury. My goal and I have told everybody here since I walked in the door here is, I don't want anybody to ever get hurt here. And so you will see that our numbers, at least from a personal injury standpoint, have improved and come down dramatically.
On the FRA reportable accident/derailments, wow, there's a huge amount of money we could save if we can get that number down, huge. But again, that's not necessarily the sole motivation. Every one of those, in my opinion, every one of those accidents where we derail, where we corner the car or we kick the car down the wrong track and it derails or something like that. In my opinion, every one of those incidents means somebody could have got hurt. And so we have got to stop doing that and we have got to stop wrecking things. But on that accident side, it could directly answer your question, there would be a big pot of money there if we can improve that number.
Thank you. That's all from me.
Great. Thanks so much. Kevin?
Yes. I think we are done. Thank you everybody for joining the call. If you have any question, please reach out.
This does conclude today's teleconference. Thank you for your participation in today's call. You may disconnect your line.