CompanyName:CSXCorpCompanyTicker:CSXSector:Services
Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page1of 25
CSX(CSX)EarningsReport:Q42014ConferenceCallTranscriptThefollowingCSXconferencecalltookplaceonJanuary14,2015,08:30AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
DavidBaggs;CSX;VP-CapitalMarkets,IRMichaelWard;CSX;Chairman,President,CEOFredrikEliasson;CSX;CFOClarenceGooden;CSX;ChiefSalesandMarketingOfficerOscarMunoz;CSX;COO
OtherPart icipants
TomWadewitz;UBS;AnalystAllisonLandry;CreditSuisse;AnalystRobSalmon;DeutscheBank;AnalystKeithMori;Barclays;AnalystThomasKim;GoldmanSachs;AnalystBillGreene;MorganStanley;AnalystKenHoexter;MerrillLynch;AnalystBenHartford;RobertW.Baird;AnalystCherilynRadbourne;TDSecurities;AnalystDavidVernon;Bernstein;AnalystChrisWetherbee;CitiResearch;AnalystJohnLarkin;StifelNicolaus;AnalystBaskinMajors;SusquehannaFinancial;AnalystJeffKauffman;BuckinghamResearch;AnalystScottGroup;WolfeResearch;AnalystJasonSeidl;Cowen&Co;AnalystMattTroy;Nomura;AnalystCleoZagrean;MacquarieCapital;AnalystKeithSchoonmaker;Morningstar;AnalystJustinLong;Stephens;AnalystDonaldBroughton;AvondalePartners;AnalystJohnMims;FBRCapitalMarkets;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator:
Goodmorning,ladiesandgentlemen,andwelcometotheCSXCorporationfourthquarter2014earningscall.Asareminder,today'scallisbeingrecorded.Duringthiscall,allparticipantswillbeinalisten-onlymode.
Foropeningremarksandintroduction,IwouldwithliketoturnthecallovertoMr.DavidBaggs,VicePresidentofCapitalMarketsandInvestorRelationsforCSXCorporation.
DavidBaggs (VP-CapitalMarkets,IR):
CompanyName:CSXCorpCompanyTicker:CSXSector:Services
Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page2of 25
Thankyou,Wendy,andgoodmorning,everyone.Andagain,welcometoCSXCorporation'sfourthquarter2014earningspresentation.Thepresentationmaterialthatwe'llreviewthismorning,alongwithourexpandedfinancialquarterlyreportandoursafetyandservicemeasurements,areavailableonourWebsite,atCSX.com,undertheInvestorsection.Inaddition,followingthepresentationthismorning,awebcastandpodcastreplaywillbeavailableonthesameWebsite.
Thismorning,ourpresentationwillbeledbyMichaelWard,theCompany'sChairman,PresidentandChiefExecutiveOfficer,andFredrikEliasson,ourChiefFinancialOfficer.Inaddition,ClarenceGooden,ourChiefSalesandMarketingOfficer,andOscarMunoz,ourChiefOperatingOfficer,willbeavailableduringthequestion-and-answersession.
LetmeremindeveryonethatthepresentationandotherstatementsmadebytheCompanycontainforward-lookingstatements.YouareencouragedtoreviewtheCompany'sdisclosureontheaccompanyingpresentationonslide2.Thedisclosureidentifiesforward-lookingstatements,aswellastheuncertaintiesandrisksthatcouldcauseactualperformancetodiffermateriallyfromtheresultsanticipatedbythesestatements.
Inaddition,attheendofthepresentation,wewillconductaquestion-and-answersessionwiththeresearchanalysts.Withabout30analystsnowcoveringCSX,Iwouldask,asacourtesyforeveryone,topleaselimityourinquiriestooneprimaryandonefollow-upquestion.
Andwiththat,letmeturnthepresentationovertoCSXCorporation'sChairman,PresidentandChiefExecutiveOfficer,MichaelWard.Michael?
MichaelWard(Chairman,President,CEO):
Well,thankyou,David,andgoodmorning,everyone.Yesterday,CSXreportedfourthquarterearningspershareof$0.49,up17%from$0.42inthesameperiodlastyear.ThisrepresentsanewfourthquarterrecordfortheCompany.Revenuegrew5%inthequarter,to$3.2billion,alsoafourthquarterrecord,withbroadbasedgrowthacrossnearlyallofourmarkets,reflectingcontinuedeconomicmomentum.
Furthermore,thetimelyadditionofoperatingresourcesenhancementsthroughthefallpeakhavesupportedstrongvolumegrowth.Asaresult,operatingincomeincreased11%,toanewfourthquarterrecordof$901million,andtheoperatingratioimproved140basispoints,to71.8%.Thisquarter'sperformanceisfurtherevidenceofCSX'sabilitytocapitalizeoneconomicgrowththatishelpingtodrivestrengthacrosstheCompany'sdiversemarkets.
Turningtothenextslide,I' lldiscussourfull-yearperformance.ThepastfouryearshavebeentransformativeforCSX,andwehaveemergedastrongercompanyforourcustomersandshareholders.Thatstrengthdrovenewfull-yearrecordsin2014forrevenue,at$12.7billion,operatingincome,at$3.6billion,andearningspershareof$1.92,andtheoperatingratioremainedessentiallystableat71.5%.
That'sanextraordinarytestamenttotheworkoftheCSXemployees,becauseitfollowsaperiodduringwhichwelostnearly$900millionofcoalrevenue,asthecountrytransitionedthroughchangesintheenergysector.
Atthesametime,thediversityofCSX'sbusinessmixgeneratedrevenuemorethanoffsettingthosecoallosses.Thatgrowth,combinedwithinflationpluspricing,efficiencygains,andcashdeploymentforsharebuybacks,generatedmodestearningsgrowthfortheshareholdersduringthistransitionperiod.
ThesefinancialresultsarecontinuedevidencethattheCompany'semployees,corestrategy,anddiversebusinessmixcancreatesustainablevalueforshareholders,eveninanevolvingandchallengingbusinessenvironment.Withstrategicinfrastructureinvestments,locomotives,andoperatingemployeescomingonline,weexpectservicelevelstograduallyimprovethroughout2015tosuperiorlevels.
CompanyName:CSXCorpCompanyTicker:CSXSector:Services
Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page3of 25
Withthat,I' llturnthepresentationovertoFredrik,whowilltakeusthroughthetopandbottomlineresultsinmoredetail.Fredrik?
FredrikEliasson(CFO):
Well,thankyou,Michael,andgoodmorning,everyone.Letmebeginbyprovidingasummaryofourfourthquarterresults.AsMichaelmentioned,revenueincreased5%versustheprioryearon6%highervolume,drivenbybroadbasedstrengthacrossmerchandise,intermodalandcoal.Expensesincreased3%versuslastyear,drivenprimarilybyhighervolume,andincludeda$39millionG&Aworkforcereductioncharge.Operatingincomewas$901million,up11%or$88millionversustheprioryear.
Lookingbelowtheline,interestexpenseandotherincomewereslightlyfavorableversustheprioryearperiod.Andincometaxeswere$284millioninthequarter,reflectinghigherpre-taxearningsforaneffectivetaxrateofapproximately37%.Overall,netearningswere$491millionandEPSwas$0.49pershare,up15%and17%,respectively,versustheprioryearperiod.
Nowletmeturntothemarketoutlookforthefirstquarter.Lookingforward,weexpectapositivedemandenvironmentinthefirstquarter,withstabletofavorableconditionsfor96%ofourmarketsandunfavorableconditionsfortheremaining4%.
Lookingatsomeofthekeymarkets,chemicalsisfavorable,aswecontinuedtocaptureopportunitiesinthedomesticoilandgasindustry.Housingstartsareexpectedtoriseconsiderablyin2015,whichshoulddriveafavorableoutlookacrossourconstructionmarkets,forestproducts,minerals,andwasteandequipment.Automotiveisfavorable,drivenbygrowthinNorthAmericanlightvehicleproductionandtherecoveryofvolumelosttotruckinglastyear.
Strongintermodalgrowthwillcontinue,asourstrategicnetworkinvestmentsupporthighwaytorailconversions.Weexpectdomesticcoalvolumegrowthwillbestronginthefirstquarter,attributabletocyclingweakerfirstquarter2014volumeandanewironorefacility.
Exportcoalvolumeisexpectedtobesignificantlylowerinthefirstquarter,throughreflectedcontinuedsoftglobalmarketconditions.Forthefullyear,ourbestestimateatthistimeisaround30milliontons.Overall,weanticipatehighdemandlevelsforourservicewillcontinueinthefirstquarter.
Turningtothenextslide,letmetalkaboutourexpectationsforexpensesinthefirstquarter.Beginningwithlaborandfringe,despiteG&Aworkforcereductions,weexpectfirstquarteraverageheadcounttoincreasesequentiallyby1%,aswecontinuetorampupoperatingemployeestoaccommodatehighervolumes.Thisrepresentsa4%increaseversustheprioryear.
Weexpect2015laborinflationtobearound$35millionperquarterinthefirsthalfandthenmoderatetoaround$25millionperquarterinthesecondhalf.Thisrepresentsanincreasefromthe$20millionperquarterlevelsseenin2014,drivenbyunionwageinflationandpayrolltaxes.
TheunioncomponentisconsistentwithwhatyoushouldexpecttoseeacrosstheindustryasaresultofnationalbargainingandreflectsboththecarryoveroftheJuly1,2014wageincrease,aswellasaJanuary1,2015increase.Inaddition,youwillrecallthatweamendedalocomotivemaintenanceagreementinJuneof2014,whichresultedina$15millionshiftbetweenlaborandtheMS&Oexpenselinesinboththethirdandthefourthquarters.Thistrendwillcontinuein2015andwewillbecyclingtheexpenseshiftduringthefirsthalfoftheyear.
LookingatMS&Oexpense,weexpectthefirstquartertobedrivenbyinflationandvolumegrowthinlinewiththetrendsseenduring2014.Fuelexpenseinthefirstquarterwillbedrivenbylowercostpergallon,reflectingthecurrentpriceenvironment,highervolume,andcontinuedfuelefficiencythroughtechnology
CompanyName:CSXCorpCompanyTicker:CSXSector:Services
Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page4of 25
andprocessinitiatives.
Weexpectdepreciationtoincreasearound$10millionversustheprioryearineachquarterin2015.Thisreflectstheongoinginvestmentinourbusinesspartiallyoffsetbyanassetlifestudyconductedinthefourthquarter.Finally,equipmentandotherrentsinthefirstquarterisexpectedtoincreaseyear-over-year,drivenbyhigherfreightcarratesandincrementalvolume.
Nowletmetalkaboutourcapitalinvestmentplanfor2015.In2015,CSXplanstoinvest$2.5billioninourbusiness.Thisrepresentsamoderateincreasefromthe2014level,andcoreinvestmentisexpectedtobeabout17%ofrevenue.
Inthechartontheleft,youcanseethatabouthalfthecapitalinvestmentwillbeusedtomaintaincoreinfrastructuretohelpensureasafeandfluidnetwork.OurequipmentinvestmentinlocomotivesandfreightcarsensureCSXhasanappropriatelevelofrollingstocktosupportcommercialdemandandimproveon-timeperformancelevels.
Inaddition,wewillcontinuetofocusonstrategicinvestmentsthatsupportlong-termprofitablegrowthandproductivityinitiatives.In2015,weareprioritizinginfrastructureprojectsthatwillincreaselineofroadcapacityonthenortherntiertoimprovefluidityandsystemvelocity.
Finally,lookingatourinvestmentinPositiveTrainControl,wehaveinvested$1.2billionthroughtheendof2014andplantoinvestanadditional$300millionin2015.AstheimplementationofPTCextendsoveralongerperiodoftime,weanticipatespendingatleast$400millionbeyond2015.Asaresult,ourcurrentestimateforthetotalcostofPTCisatleast$1.9billion.
Nowletmewrapuponthenextslide.Overall,CSXdeliveredsolidfinancialperformancein2014,withrobustvolumegrowthoffsettingtheimpactoflastyear'sweather,networkperformance,andaweakcoalpricingenvironment.
Wecontinuedtoseebroadbasedstrengthacrossourdiversebusinessportfolio,andthestrengthistranslatingintomorevisibleandmoremeaningfulearningsimprovement.CSXachieveddoubledigitearningsgrowthinboththethirdandthefourthquarters,andincrementaloperatingmarginsexpandedthroughouttheyear.
Forthefullyear2015,CSXstillexpectstoachievedoubledigitEPSgrowth.Evenaswecyclestrong2014volumegrowth,weexpectmerchandiseandintermodaltoagaingrowatafasterpacethanthebroadereconomy.Wecontinuetotargetpricingaboveinflation,ascapacityremainstightacrossallmodesoftransportation,andweexpecttodeliverproductivitysavingsapproaching$200millionin2015.
Domesticcoalvolumesshouldremainrelativelystablein2015,whiletheexportcoalmarketremainschallenged.Thatsaid,wewillbekeepingaclosewatchonnaturalgaspricesandheatingandcoolingdegreedaysaswemovethroughtheyear.
Finally,weexpectmarginexpansionstoresumein2015,whichreflectimprovingservicelevels,astrongpricingenvironment,andcontinuedeconomicexpansion.Overthelongerterm,wecontinuetotargetanoperatingratiointhemid60's.Withthat,letmeturnthepresentationbacktoMichaelforhisclosingremarks.
MichaelWard(Chairman,President,CEO):
Well,thankyou,Fredrik.Thestrong2014demandreinforcedtheimportanceoffreightrailindustryandCSXinsupportingtheglobalsupplychainandAmericancompetitiveness.Theeconomicandenvironmentalbenefitsoffreightrailnetworkincreasinglyserveacountrywithagrowingpopulationandacriticalneedfortransportationinfrastructure.
CompanyName:CSXCorpCompanyTicker:CSXSector:Services
Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page5of 25
Tocontinuedeliveringthesebenefitsandcreatingvalueforitsshareholders,CSXhastransformeditselfbyforgingnewcapabilitiesalignedwithopportunitiesinenergy,manufacturing,agriculture,andglobalcommerce.We'regeneratingrecordresultsbyleveragingthemostdiversebusinessmixintheCompany'shistorywithnewopportunitiesacrossnearlyallofthemarketsweserve.
Weremainfocusedonexecutingourcorestrategyofdeliveringserviceexcellenceforourcustomers,whichdrivesourabilitytogrowmerchandiseandintermodalbusinessesfasterthantheeconomy,priceaboveinflation,andcontinuetodriveimprovementsinassetutilization.TheCompanyispoisedforabrightfutureofstrongfinancialreturnsandexpansion,andwethankyouforyourownershipofandinterestinCSX.Nowwe'llbegladtotakeyourquestions.
QUESTIONS&ANSWERS
Operator:
Thankyou.
(OperatorInstructions)
ThefirstquestionisfromTomWadewitzwithUBS.
MichaelWard(Chairman,President,CEO):
Goodmorning,Tom.
TomWadewitz (Analyst-UBS):
GoodmorningMichael,Fredrik,David.Wantedtoseeifyoucouldtalkabitaboututilitycoal,andIguessyourvisibilitytostockpilesandalsohowmuchriskyouseeifnaturalgaspricesstayatcurrentlevelsorgobelow,intermsofswitchingfromcoaltogasandhowthatmightaffect.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Goodmorning,Tom.ThisisClarence.
TomWadewitz (Analyst-UBS):
Hello,Clarence.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Weseethestockpiles,bothintheNorthandSouth,areprettymuchwhereweexpectedthemtobe.They'reatnormallevelsinboththeNorthandtheSouth.Wethinkthecompsinthefirstquarterwillbeveryfavorableforuswhenyoulookatwhattheweatherwaslastyearversuswhattheweatheristhisyear.
Ifthesegaspricesstaywheretheyarenow,whicharearound$3.00orsub$3.00,therecouldbesomedownsideriskoutinquarterstwoandthree,fromwhatwehaveplanned.Butfromrightnow,itlookstousliketherestoftheyearshouldbearoundflatgoingforward.
TomWadewitz (Analyst-UBS):
Okay,great.Andthenthefollow-upquestion,thatwe'vehadsuchadramaticmoveinoilprices,Ithinkit'shardtogetyourarmsaroundwhattheimpactcouldbeacrossyourbook.
Andobviously,therecouldbesomeriskaccruedbyrailorfracsandandpipeandsoforth.Butgivenwhatyouseerightnow,ifyoulooktosecondhalfoftheyear,wouldyouexpectthattocomethroughanddrive
CompanyName:CSXCorpCompanyTicker:CSXSector:Services
Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page6of 25
weaknessinthoseareas,orhowwouldyoulookatmaybenotjustfirstquarterbutoutalittlebitmore,intermsofeffectiveloweroilpricesonyourbookofbusiness?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Rightnow,aswelookoutthrough2015,wedon'tseeanysignificantimpactatallinourcrudeoilbyrailintotheEasternmarkets.Andcertainlyinourfracsandmarketswherewegoin--wherewe'removingintotheUticaandtheMarcellusarea--wherethenaturalgasandthenaturalgasliquids,wedon'tthinkitwillimpactthefracsandthatwe'removingintothoseareasatall.
TomWadewitz (Analyst-UBS):
Okay,great.Thanksforthetime.
Operator:
Thankyou.ThenextquestionisfromAllisonLandrywithCreditSuisse.
MichaelWard(Chairman,President,CEO):
Goodmorning,Allison.
AllisonLandry(Analyst-CreditSuisse):
Goodmorning.Thanksfortakingmyquestion.FollowinguponTom'squestion,howareyouthinkingaboutthebroadereconomictailwindsthatresultfromloweroilprices?Andifwethinkaboutascenariowhere,let'sjustsayforargument'ssake,thatcrudeandanythingshellrelatedevaporates,howdowethinkaboutwhereyoucouldseeupsideinintermodalorsomeofyourotherlinesofbusiness?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Allison,wefeelverypositiveaboutit.There'sbeensomestudiesthatcomeoutthatessentiallyonly10stateshaveemploymentthat'sdirectlyimpactedbytheoilboom.It'slessthan2%oftheUSpopulation.
Forus,thecrudebyrailislessthan2%ofourbusiness.FortheaverageUStax,USperson,it'slikegettingataxbreakofalmost$2,000ayear,soitputsalotofdollarsintotheeconomy.Fromanyindicationthatwesee,it'sapositiveexperiencefortheAmericantaxpayer,fortheAmericaneconomy.SoIthinklowercrudeoilpricesisaverypositiveforoureconomyandverypositiveforCSX.
AllisonLandry(Analyst-CreditSuisse):
Okay,great.Andthenasmyfollow-upquestion,the$200millionofproductivitygains,that'squiteabithigherthanwhatyou'vegeneratedinthelastfewyears,whichhasaveraged,Ithink,$130millionto$140million.Isthisinclusiveoftheincrementalorunusualweatherexpensethatyousawlastyear,oristhatontopofthe$200million?
OscarMunoz (COO):
Allison,thisisOscarMunoz.Ithinkaportionofthatnumberisweather,althoughnotassignificantasyoumightthink,probably15%ofthatnumber,roughly.
FredrikEliasson(CFO):
Sojusttoclarifyonthe$200million,sowhatwehaveistheoperationsnormaltargetofabout$130millionto$150million,pluswehaveabout$50millionthatislinkedtotheG&Aworkforcereductionprogramthatweoutlined,theseverancechargeinourfourthquarter.
CompanyName:CSXCorpCompanyTicker:CSXSector:Services
Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
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AllisonLandry(Analyst-CreditSuisse):
Okay.Andthentherestwouldbeweather.
FredrikEliasson(CFO):
Partoftheoperationsproductivitysavingsistocyclewhatwecycledlastyear,asOscaroutlined.
AllisonLandry(Analyst-CreditSuisse):
Okay,great.Thankyousomuch.
Operator:
Thankyou.ThenextquestionisfromRobSalmonwithDeutscheBank.
MichaelWard(Chairman,President,CEO):
Goodmorning,Rob.
RobSalmon(Analyst-DeutscheBank):
Hello.Goodmorning,guys.Asafollow-uptoAllison'squestion,couldyougiveusasenseintermsofwhatsortofnetwork,howquicklyyou'reexpectingthenetworktoreturntonormal,andwhatsortofkeyvelocityanddwellmetricsweshouldbelookingforaswe'rethinkingaboutthat$200million?
OscarMunoz (COO):
Thanks,Rob.Sotheproductivityinitiativesarebroadacrossalotofdifferentaspects,volumeabsorption,specificinitiatives,certainlyweather,wintersortofoverlap.ButIthink,ifyouthinkoftheincrementalresourcesthatarecomingonline,it'sgoingtojustreestablishthedisciplinethatwe'vehadoverthepastthreeorfouryearsaroundtheinternaloperationsofbothscheduledandtheunschedulednetworks.
Andspecifically,whilevelocitywillbeabitofalaggingindicator,aswilldwell,thepublicmeasuresyousee,Ithinkdwellinparticularwillbeakeymetrictowatch.Internally,wehaveintermediateandhometerminaldwellthatwe'remonitoring.ButIthinkthedwell,Ithink,willbeanareathatyoucanfocusonandthat,whenitstopsdwellingthere,itincreasescostinabigway,andthatwillbethefirstfocusandbenefitfromtheincrementalresources.
RobSalmon(Analyst-DeutscheBank):
That'shelpful.Anddidyouguysquantifythesavingsexpectationsfortheemployee--themanagementworkforcereductionprogram,andwasanyrealizedinthefourthquarter?
FredrikEliasson(CFO):
Sotheestimateisabout$50millionfortheoverallprogram,whichlaboristhelargestpartofthat,butthere'salsosomeotherMS&Osavings.Andtothequestionaroundanythingwasrealizedonthefourthquarter,no,nonewasrealizedreallyinthefourthquarter.
RobSalmon(Analyst-DeutscheBank):
Perfect.Thankssomuchforthetime,guys.
Operator:
Thankyou.ThenextquestionisfromThomasKimwithGoldmanSachs.
CompanyName:CSXCorpCompanyTicker:CSXSector:Services
Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page8 of 25
MichaelWard(Chairman,President,CEO):
Goodmorning,Thomas.
ThomasKim(Analyst-GoldmanSachs):
Goodmorning.Ijustwantedtoaskaboutthefuelsurcharges.Andifwegobackthroughhistory,thelasttimeoilpricescollapsedthewaythattheydid,yourrecoverywasquiteeffectiveincapturingthefuelcostsavings.Andaswelookforwardtothisyear,withobviouslytheprecipitousdrop,doyouthinkthatyourfuelsurchargesarewellplacedtoensurethatyou'reabletofullyneutralizetheimpactoflowersurchargeswiththedropinfuel?
FredrikEliasson(CFO):
ThisisFredrik.Yes,wedothinkwehaveafuelsurchargemechanismthatiseffective.It'snotaprofitdriver,butitmakesusneutraltofuelpricevolatility.Thereareperiods,suchaswhenthepricesdecline,thatwegetthelagbenefitwhichwesawhereinthefourthquarter.
Andlikewise,whenfuelrises,ourfuelsurchargemechanismlagsalittlebit,sowehavealittlebitofadetrimentthere.Butoverall,thefuelsurchargeisworkingwell.Andwethinkthatweareneutraltoanysortofpricevolatility,withtheexceptionofthelageffect.
ThomasKim(Analyst-GoldmanSachs):
That'sgreat.That'sveryhelpful.AndIguessjustintermsofthisdecrease,obviouslycertainlybeneficialforcustomers,howdoyouthinkthatthishelpsyouintermsofyourabilitytopushthroughhigherGRIsduringthecourseoftheyear,whereyou'reseeinggeneralpricing?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Well,Thomas,thisisClarence.Ithinkthatit'sapositiveforus.It'slesscost,obviously,overallinthepackagetothecustomer.Soaswepushforourpriceincreases,itmakesitmorepowerfulaswegotothecustomerandtheoverallpackage.
ThomasKim(Analyst-GoldmanSachs):
Great.Thanksverymuch.
Operator:
Thankyou.ThenextquestionisfromBillGreenewithMorganStanley.
MichaelWard(Chairman,President,CEO):
Goodmorning,Bill.
BillGreene (Analyst-MorganStanley):
Hello.Goodmorning.Clarence,canIaskyoutofollow-upalittlebitonthatpricingcomment?SoIwouldguessthatwe'regoingtostartlappingsomeofthebigexportcoalpricedeclines.Sothat'sgoingtomakeourcomps,Iwouldthink,abiteasierinFY15.Andofcourse,theoverallmarketisalotstronger,particularlyonthetruckside,soIthinkthatwouldbehelpfultoyourpricingdynamic.SoisthereanyflawinthelogictothinkthatpricingforCSXinFY15shouldbestrongerthanitwasinFY14?
ClarenceGooden(ChiefSalesandMarketingOfficer):
CompanyName:CSXCorpCompanyTicker:CSXSector:Services
Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
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No,Ithinkyou'reabsolutelycorrect.Ithinkyou'llseemuchstrongerpricinginFY15thanyoudidinFY14,absolutely.
BillGreene (Analyst-MorganStanley):
Okay.AndthenmaybeforFredrikorforOscar.Aswethinkaboutthecoststructureinsofarasvolumesdisappointusthisyear--sothey'reunexpectedlyweak--howmuchofyourcoststructureisvariable?
Howmuchcanyousortoftweakthat$200millionhigher,ifyouhadto,andhowmuchismorefixedsuchthatasyoudedicatetheseresources,locomotives,employees,tomovethecurrentvolume,weruntheriskthatwecreateahighercoststructureinthesecondhalf,let'ssay?
FredrikEliasson(CFO):
Well,andIthinkifyougobackto2008,2009timeframe,youcanseewhatwedidtherewhichwasprettyremarkableintermsofvariablizingthecoststructureandinthescenariothatwedon'tthinkyou'regoingtobecorrectedpredictingorforecastingbutifvolumewouldbesofterthanwearecurrentlyanticipating,wedohavetheopportunitytotakecostoutmorethanwhatwehaveinthecurrentmoneyandwe'veproventhatinthepastourcoststructureismorevariablethanperhapssomepeoplemightthink.
ClarenceGooden(ChiefSalesandMarketingOfficer):
ButIthinkit'simportanttonotethatvolumeisnotweak.
MichaelWard(Chairman,President,CEO):
We'reansweringahypotheticalquestion,Bill.SpecificallywhenyouthinkoflocomotivesisprobablythemostexpensiveaspectI'vegotroughlyathousandpeopleinthepipelineandroughlyathousandpeoplepotentialattrition,sothatIthinkoffsetsitselfandthenonthelocomotivesidewe'vegotleasereturnswecanworkthroughsoIthinkcitingbacktotheolddaysof08&09wherewedidthemathimprovedvariabilitythathascomeintothisindustry,sowemonitorthatveryclosely.
BillGreene (Analyst-MorganStanley):
Yes,nothingslookstrongobviously.It'smorejustfolksworriedistheoilpriceindicativeofsomeweakeningthat'sboundtocomesojusttryingtothinkthroughwhatyourflexibilityis.Thanksforthetime.
Operator:
Thankyou.ThenextquestionisfromKenHoexterwithMerrillLynch.
DavidBaggs (VP-CapitalMarkets,IR):
GoodmorningKen.
KenHoexter(Analyst-MerrillLynch):
Goodmorning.Justaquickquestiononexportcoal.Clarencecanyoutalkaboutwhatisleftoncontractwithintheexportsideandwhatisstillvariablejustlookingatthemarket-rateseemslikestuffthattheexportcoalsidejustshouldn'tbemovingatthesepricessomaybejustsomethoughtsontheexportside?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Well,wehaveabout40%oftheexportcontractsarecurrentlyexportcoalmovementsarecurrentlyundercontract.Therestofitisupfornegotiation.Doesthatansweryourquestion?
CompanyName:CSXCorpCompanyTicker:CSXSector:Services
Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
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KenHoexter(Analyst-MerrillLynch):
Yes,isthatkindoftypicalatthe40%orareweseeingincreasingamountscomingonto?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Iwouldsaythatit'sfairlytypicalthisearlyinthecycle.Mostofthosemetallurgicalcontractsasyou'reawaretendtogomoreonquarterlybasisbutstilltendtofollowthetraditionallineofthinking,whichprettymuchsettlesinMarch/April.
KenHoexter(Analyst-MerrillLynch):
Okay,andthenjustafollow-upontheservicemetricsissue.Youhitonthedwellandvelocity.Oscarcanyoutalkabouttheontimeperformance?Justseemslikeitcontinuestoremainatthat50%level.Whatneedstohappentogetthatback?Isthatdecreasingcongestion?Isitjustfixingsomethinggettingmorelocomotivesandcrew?Canyouwalkusthrewthatalittlebit?
OscarMunoz (COO):
Yes,wereallyaredowntothatpointKenthatlocomotivesarethebiggestlastsortofaspectofthisandwe'vegot200overthecourseof2014androughly100hereintheFirstQuarter,another150orsointheSecondQuarterandourservicemeasuresandalotofthingswillbealmostprettysignificantlycorrelatedtothearrivalofthoselocomotives.
Crewshavebeentricklinginoverthecourseoftheyearsowe'reinprettydecentshapethere.Itisapowerissueupagainstthisgreatvolumethatwe'regetting.It'simportantthough,weareinessenceopenforbusinessorfluidityhasgottenalittlebitbetteracrossthenetwork.Ourcoststructureisimproving.Thespanaroundourmissesisalittlebitnarrower.We'vegotcrewsandlocomotivescomingonlineandtheinfrastructurethatwe'vebeenbuildinghasimprovedfluidity,sowearefeelinggoodaboutwherewearestartingtheyear.
KenHoexter(Analyst-MerrillLynch):
Wonderful.Appreciatethetime.
Operator:
Thankyou.ThenextquestionisfromBrandonOglenskiandwithBarclays.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Goodmorning,Brandon.
KeithMori(Analyst-Barclays):
Higoodmorning,thisisKeithMorionforBrandon.Couldyougiveusanideaofthecostsassociatedwithimprovingservicelevelsthisquartertiedtotherecoveryandkindofwhenshouldwethinkthesecostsstarttogoaway?Oscar,youmentionedthatservicelevelsarestartingtoimprove,thecoststructureisstartingtoimprove.Shouldwestarttothinkthat'safirsthalfevent?
FredrikEliasson(CFO):
Yes,sothisisFredrik.IthinkifyougobacktotheThirdQuarterweweresomewherearound15-$20millionofwhatwecallservicerelatedcausebecausethenetworkwasn'tperformingatthelevelwewanted,thefluiditywasn'ttheresoextraovertimeandsoforth.
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Industry:Transportat ionEventDescription:Q4 2014 EarningsCall
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HereinthefourthquarterprobablyprettysimilartothatandasOscaroutlinedaswegettheadditionallocomotives,weshouldseethefluidityimproveandthereforseeareductioninovertimeinimprovementinourequipmentrents,etc.andthat'sgoingtocomegradually.
Ithinkit'sunrealistictothinkthatit'sgoingtobemeaningfulhereintheFirstQuarterbecausewhiletheweatherhascooperatedsofar,we'renotthroughityetandgenerallyasyougettotheSecondQuarteryougettothebruntoftheequipmentspecifictothelocomotivesthatweareexpecting.IthinkatthatpointandlateintheSecondQuarterIthinkyoushouldstartseeingsomesignificantimprovements.
KeithMori(Analyst-Barclays):
OkayandthenIguessthefollow-up,whatkindofinspiredtherecentworkforcereductionprogram?Whenyoulookacrosstheoperations,arethereanyotherstrategicinitiativesthatyoucankindofpointtoortalkaboutthathavesimilartypecostimpacts?
FredrikEliasson(CFO):
Well,IthinkintermsoftheG&Aworkforcereductionitsimplywasanopportunityforustostreamlinesomefunctions,stopdoingsomeofthethingswehavebeendoingandjustprocesschangesallowedustobealittlebitmoreaggressivethere.We'vehadaprograminplaceforsix,sevenyearsnowtotrytooffsetinflationandwe'vebeenabletodothatbutthiswasjustawaytobealittlebitmoreaggressiveonthatside.
WethroughthepipelineofproductivityinitiativesthatwehaveasaCompanynotjustfor15,and16,and17,wherewetriedtogetthat130-150ayear,wecontinuetoworkveryhard.It'sabigpartofthevalueequationforCSXandhasbeenoverthelastdecade.It'sgoingtocontinuetobeoverthenextdecade.
KeithMori(Analyst-Barclays):
Thankyouforthetime.
Operator:
Thankyou.ThenextquestionisfromChrisWetherbeewithCitiResearch.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Goodmorning,Chris.
ChrisWetherbee (Analyst-CitiResearch):
Goodmorningguys,thanks.Whenyouthinkaboutthedoubledigitearningsgrowthfor2015,youlookatsortofthevariousbucketsoftheopportunitiesthatarepresented,wheredoyouthinkthepotentialriskcouldcomefrom?
Clarence,youtalkedaboutthedomesticcoalsideupintheFirstQuarterandimplieddowninQ2,Q3andQ4basedonflatforthefullyear.
Doesitcomefromthereifnaturalgaspricesstayattheselevelsordipdown?Iwantaroughsensitivityofthevariabilityofthemodel.Iknowyoutalkaboutcosttoosojustcolorwouldbegreat.
DavidBaggs (VP-CapitalMarkets,IR):
SurewithanymoneythatyouputtogethertherearechallengesandthereareopportunitiesandIwouldsaythatthechallengeswe'reseeingisonthecoalsideandthecrudeside.Rightnowwefeelthatonthedomesticsidethatwhatwethinkflatistherightplacetobethere'sprobablymoredownsidethanupsidetothat.
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Exportweoutlinedthatweexpectexportvolumestodropcloseto25%fortheyearandcrudewhilewe'renothearingfromourcustomersthatthereareanychangeintheshippingpatternsclearlywe'remonitoringthatcloselyaswell,butifyoulookatopportunityside,Ithinkyou'veheardaboutourproductivityinitiativescloseto$200million.
Weexpecttogrowournon-coalbusinessfastintheeconomyasawholeandthepricingenvironmentcontinuestogetstrongerandstrongerfranklysowhenyouaddallthatup,wefeelthatdoubledigitistherightplacetobe.Ithinkthatit'saslamdunkbecauseitwouldn'tbemeaningfulguidanceifitwasbutitissomethingIthinkwecanachievement.
ChrisWetherbee (Analyst-CitiResearch):
Justafollow-upthinkingabilitythepricingdynamicyoumentionedseemslikeit'sfirmingupinto15.Whenyouthinkaboutintermodalandrelationship,withdecliningfuelsurchargesitwouldstillseemit'stheabilitytopricethatbusinessupatareasonablepacegivenwhat'sgoingoninthetruckmarketbutjustwantedroughsense.Doyoufeelacaptosomeextentifweseepricescontinuingtofallfromwheretheyarecurrently?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Chris,thisisClarence.Ithinkthere'saverypositivetrendintheintermodalpricing.Weseethatthetruckissuesstillremainthereevenwiththe34hourrulethat'sbeenturnedback.There'scapacityissues,driverissues,evenwithClass8truckordersbeingupthere'sstilltheissuesofbeingabletogetthedriverstomovethebusiness,sowethinkthatthere'salotofpricingopportunitiesinintermodalitself.
ChrisWetherbee (Analyst-CitiResearch):
Okay,perfect,thanksforthetimeguysIappreciateit.
Operator:
Thankyou.ThenextquestionisfromBenHartfordwithRobertW.Baird.
FredrikEliasson(CFO):
Goodmorning,Ben.
BenHart ford(Analyst-RobertW.Baird):
Goodmorningguys.Justturningtheattentiontolongertermmarginoutlookandthereiterationthereandalotoffocuson15butifwecanput15aside,whatiscontemplatedintermsofwhat'srequiredtogettothemid60stargetlongtermifyoucouldspeakinkindofbroadstrokesasitrelatestocoalandcrudeandbasepricingandproductivitygainsandservicenormalizinginthosetypesofitems?Howareyouthinkingaboutthecalculustogettothatmid60starget?
FredrikEliasson(CFO):
ThisisFredrik.Clearlyweexpecttostartmovingtowardsthemid60sherein2015afterhavingabsorbedthatcloseto$900millionfromcoallossoverthelastcoupleyears--goingtomakesomemeaningfulimprovements.
Aswethinkaboutthethreecomponents,it'sultimatelyprice,volumeandproductivity,thelastdecadeitwasmorepriceandproductivityandaswethinkaboutthenextdecadeit'smoreevenlysplitbetweenthethreeaswecontinuetoseegoodvolumeopportunitiesforus,wecontinuetohaveastronghealthypipelineofproductiveitinitiativesnotjustfor2015butintheyearsbeyondthat,aswellandthenpricingenvironment
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afterhavingbeenalittlebitsloweroverthelastcoupleyearsIthinkisbecomingmorevibrantaswellsothreeofthosecomponentstogetherwithcontinuedgoodcashdeploymentoftheFreeCashFlowisthewaywegetthere.
Itcontinuestodoblockingandtacklingwe'vedonethelastcoupledecadesthatgotusfromthehigh80sdowntothelow70swe'llcontinuetopushgoingforward.
BenHart ford(Analyst-RobertW.Baird):
Acouplespecificquestions,doesitrequireastrengtheningofthepricingenvironmentfromcurrentlevelsandfromacoalstandpoint,doesitrequireanyimprovementinthecoalMarketsrelativetowhateverthebaselineisfor15?Iguessthosearethetwokeyconcernsintermsofthesensitivitythatwehave.
FredrikEliasson(CFO):
Yes,Ithinkwe'regoingtotrytostayawayfromtoomuchofthedetailaroundspecificpiecesbecausegenerallyasIsaidbefore,wheneveryouputaplantogether,Ithinkitwillbeobsoleteassoonasyouputtheplantogetherbutintermsofpricingspecificallyinflationpluspricingiscriticaltoeverythingthatwedo.Wearenotnecessarilybankingoncoalonthedomesticsidecomingbackspecificallyfromwhereitistoday.
Itwouldbenicetoseebutnotnecessarilyanythingwe'rebankingon.Exportcoal,we'reinadowncycleatthemomentandtwoyearsfromnowwhoknowswhatit'sgoingtobebutwethinkthere'senoughotherfactorswithinourbusinesstodrivethatearningsgrowthwithoutjustfocusingtoomuchonthecoalbusinessitself.
BenHart ford(Analyst-RobertW.Baird):
Okaythat'shelpfulandrealquickifIcouldgetjustaclarificationonthetaxsidewhatareyouassumingforataxratefor2015?
FredrikEliasson(CFO):
Generallyweseeataxraterightaround37.5.Itwasalittlebitlowerthisquarterbecauseofsometaxcreditsthatwegotbutgenerallyabout37.5.
BenHart ford(Analyst-RobertW.Baird):
Okay,thankyou.
Operator:
Thankyou.OurnextquestionisfromCherilynRadbournewithTDSecurities.
DavidBaggs (VP-CapitalMarkets,IR):
Goodmorning,Cherilyn.
CherilynRadbourne (Analyst-TDSecurities):
Thanksverymuchandgoodmorning.ItwascertainlynicetoseeyourpricingimprovesequentiallyandIjustwondergiventhenatureofthecontractyouhaveinplace,howlongshouldweexpectittotakebeforethetightnessintransportationcapacitywhichreallyemergedinQ214ismorefullyreflectedinyoursame-storepricing?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Well,ourpricingis--thankyoufornoticingbythewaythatitimprovedsequentially.It'slikesometimes
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watchingpaintdrytowatchthosenumbersgoup.Ithinkyou'regoingtoseeitameverimprovesequentiallyeachquartergoingforward.Wehavemomentuminit.
Weareconstantlywatchingwhathappensinthatpricing.About20%ofourcontractswillrenewintheFirstQuarter.WeexpecttogetverystrongpricingintheFirstQuarter,astheyearprogresses,Ithinkyou'llseeitimprovesequentiallyineachofthosequartersparticularlyinournon-coalbusiness.
CherilynRadbourne (Analyst-TDSecurities):
Okay,that'shelpfulandjustaquickfollow-up.YourquarterlymaterialsmentionedthatResourceconstrainsimpactedyouragshipmentsinQ4.Justcuriouswhethertherewereotherareaswhereyoumissedoutonthefullvolumeopportunitybecauseofresources?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Mainlyinouragbusinessandinaggregates,ourstonebusiness,wewereconstrainedinboththoseareasinthefourthquarter.ThathasimprovedsignificantlyhereintheFirstQuarter.OuraggregatebusinessintheFirstQuarter,exceptinsomeofournorthernareaswhereitsbeenweatherimpactedhassignificantlyimprovedaswellasinouragbusiness.
CherilynRadbourne (Analyst-TDSecurities):
Great,thankyou.That'sitforme.
Operator:
Thankyou.ThenextquestionisfromDavidVernonwithBernstein.
DavidBaggs (VP-CapitalMarkets,IR):
Goodmorning,David.
DavidVernon(Analyst-Bernstein):
Goodmorningandthanksfortakingthequestions.Fredrik,givenwhatweknowrightnowaboutfuelpricesandobviouslygiventheoutlookforkindofflatdomesticanddownexportcoal,wouldyouexpectfullyearrevenuetobeupordownrelativeto14?
FredrikEliasson(CFO):
Iwouldexpectittobeupbutclearlythatdependsonultimatelywhatyouthinkaboutthefuelitself,butwedoexpectasIsaidouroverallmerchandiseandintermodalbusinesstogrowfasterintheeconomyasawholeandthedomestictobeflatandtheexportcomingdown,butIstillthinkwehaveanopportunitytogrowtherevenue.
Thekeyparthereisthefuelsurchargeisreallyapassthroughforussoeveniftheoverallrevenuenumbercomesdownbecauseofthefuelsurchargereallyitdoesn'timpactthebottomlineexceptforthelagasIsaidearlier.
DavidVernon(Analyst-Bernstein):
Okay,andthenmaybejustasaquickfollow-up,howdoestheservicemetricsandstufflikethatplayintothepricingenvironment?ObviouslyClarenceyou'vemadethepointherethatyou'reexpectingpricingtoacceleratenextyear.Isthatinlinewiththeservicerecoveryorareyouexpectingtobeabletotakethatrateupindependentoftrucksmaybegettingalittlemorecompetitiveandtheservicelevelstillbeingweak?
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ClarenceGooden(ChiefSalesandMarketingOfficer):
Ithinktheanswerisyestobothquestions.Ithinkjusttheoverallcapacityissuesinallofthemodesoftransportationwherethere'sbarge,truck,orrailhasgivenusapositivepricingenvironmentandcertainlyasourservicesimproveandI'dliketopointoutthatwehadapointofinflationlastsummer.
Ourservicehasbeencontinuallyimprovingsincelastsummer.InfactthisFall,inourFallpeakwithUPSforexample,beingoneofourprimepremiumservicepartners.Ourservicehasbeencontinuallyimprovingandthatmakesitmucheasierforoursalesforcetogooutandgettheratesup.
DavidVernon(Analyst-Bernstein):
Allright,thankyou.
Operator:
Thankyou.ThenextquestionisfromJohnLarkinwithStifelNicolaus.
DavidBaggs (VP-CapitalMarkets,IR):
Goodmorning,John.
JohnLarkin(Analyst-StifelNicolaus):
Goodmorning,gentlemen.Thanksfortakingthequestion.Justwiththeservicelevelshavingremainedstablebutmaybenotwhereyou'dliketoseethemoryourcustomerswouldliketoseethem,whatwasthedecisionthinkingbehindkeepingyourCapExjustalittlebitgreaterthanlastyear,therewasonerailroadintheWestthatdramaticallyincreasedtheirCapEx.Whydidn'tyoudecidetodothattotryandacceleratetheservicerecovery?
MichaelWard(Chairman,President,CEO):
Well,Ithinkwetookitupslightlyandthat'sreallyareflectionofthefactthatwedoneedtogetthepowerandthat'swherethebiggestareaisforopportunitytomakeanimpactontheservicerecoverysomaybewecouldhavegottenmorelocomotivesbuttherealityiswecan'tgetmorelocomotivesrightnow.
Butevenwiththelocomotiveswe'regettingandourinternalrepairopportunitybecausewedohaveafairamountoflocomotivesinternallythatwe'rebringingbackintherevenueservicethatperhapsotherrailroadsmightnothavethatopportunityandthat'sacheaperformofcapacitythanbuyingnewones.
JohnLarkin(Analyst-StifelNicolaus):
Gotit,thanksandthenasafollowontotheservicerelatedissues,someoftheserviceproblemsIguessarecausedbyissuesbeyondyourcontrol,alltheconnectingtrafficoverChicago.CanyoutalkalittlebitabouthowChicagoisoperatingnowandhowtherailroadshaveworkedtogethertotryandincreasethefluidityoverthatcriticalhub?
OscarMunoz (COO):
John,it'sOscar.Youknow,alot.We'vehadknockonwoodagoodalmost11plusweekswhereChicagohasbeenonwhatwecallanormalalertlevelandsothat'sthegoodnews.Thecommunicationandcoordinationyoureferredtowe'vealwaysknownit'sbeencritical.
ItsbeenrampedupbothatthemostseniorlevelsoftheindustrybutalsoatthelocallevelwiththatChicagoterminalcoordinatingofficeandtheeffortsaroundthatandsoeverybodyisworkingcloselyaroundthat.We'vehadacouplesystemstarts.Chicagowasincrediblycoldlastweek.Wemusteredthroughthat.
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Wealltakeourturnsinthebarrelstrugglingthroughvariousinterchangepoints.Butbyandlarge,theentireindustry,isworkingverycloselyandverywellsofarwiththat.Now,thenextfewweekswe'lltestagainandofcoursewhenvolumereturnsintheSpringpeak,Week9orsowe'llfocusonthatbutsofarsogood,John.
JohnLarkin(Analyst-StifelNicolaus):
Appreciateit,thankyou.
Operator:
Thankyou.ThenextquestionisfromBaskinMajorswithSusquehannaFinancial.
BaskinMajors (Analyst-SusquehannaFinancial):
Goodmorning.You'vetalkedbeforeabouttheintermodalmarginsandportfoliorisingtofairlylevelinlinewiththerestofyourbusinesswiththeexceptionofcoalandchemicals.Canyoujustgiveusanupdatewhereintermodalmarginsaretrackingdirectionallyversusyourotherbusinessestodayandwhetherornotthebigdropindieselpriceswillimpacttheprofitabilityofintermodalgoingforward?
FredrikEliasson(CFO):
ThisisFredrik.Yes,soifyoulookatthemarginswhenyouexcludechemicalsandcoalit'sprettymuchinlinewiththerestofourmerchandisebusiness.Becauseofthefuelsurchargethatwehaveinplaceinintermodalbusinessitessentiallymirrorsthetruckingindustry.
Whenyouseepricevolatility,whenpricescomesdownastheyhavedonehereonthefuelside,whathappensisnotsomuchthatthisisavolumeplayfortheindustry.It'sreallythefactthatourmarginsandintermodalbusinessgetsalittlesqueezedbecausewearemorefuelefficientsomoreofthedollarsfromfuelsurchargeinintermodalgoestothebottomline.
Net-netforCSX,that'snotthecasebutjustonintermodalbusinessitself,sothereissomemarginsqueezewhenfuelcomesdownbutit'snotsignificantandthestatementthatit'sinlinewiththerestofourbusinessisstillatruestatement.
BaskinMajors (Analyst-SusquehannaFinancial):
Okay,thankyouforthatcolorandjustonequestiononexportcoalandotherpricingcompsgetmucheasieryear-over-yearaswegoforward.WhatdoyouexpectsequentiallyinQ1aswethinkaboutthatbusiness?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Whatdoweexpectsequentiallyin...
BaskinMajors (Analyst-SusquehannaFinancial):
Inexportcoalpricing?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Asfarasthepricinggoeswethinkit'sgoingtobeflat.
BaskinMajors (Analyst-SusquehannaFinancial):
Thanksforthetimeguys.
Operator:
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Thankyou.ThenextquestionisfromJeffKauffmanwithBuckinghamResearch.
DavidBaggs (VP-CapitalMarkets,IR):
Goodmorning,Jeff.
Jef f Kauf fman(Analyst-BuckinghamResearch):
Goodmorning,everybody.Thankyoufortakingmyquestion.Mike,IhaveaquestionaboutacommentyoumadeonyourCNBCinterviewyesterdaywhereyouhadmentionedthatthesuppliersthatyouwereworkingwithoutofBakkentoshipthecrudebyrailtotheEastCoast,youhadthoughtthatat$35oiltheycouldbecompetitive.Youobviouslyunderstandalittlemoreaboutthisthanwedo.
Couldyouhelpusunderstandbecauseyoumentionedthefracsandvolumeswerejustfine.Thecrudebyrailismovingfine.Whatgivesyouconfidencethatyouwouldcontinuetoseethesetypesofvolumesat$35crude?
MichaelWard(Chairman,President,CEO):
Welloneit'snotat35butwethinktheycouldcontinuewiththeexistingfacilitiestobecompetitive.Asyouknowonceyoumadethatinvestmentyoucouldgetbackinthereandrefracthoseandgetadditionalwiththatadditionalhugecapitaloutlayssowethinkthatit'sshortandintermediatetermwhichcertainlyincludesallof15.
Wethinktheshipmentswe'vebeenseeingroughly3.5trainsperdaycontinuesandmaybeevengrowsalittlebit.Longertermifthepricesstayatthoselevels,there'squestionswhetherthecapitalwillgobackinfornewfacilities,Jeff.
Jef f Kauf fman(Analyst-BuckinghamResearch):
Okay,noIjustwantedsomeclarityonthat.Mike,thankssomuchandcongratulations.
MichaelWard(Chairman,President,CEO):
Thankyou.
Operator:
Thankyou.ThenextquestionisfromScottGroupwithWolfeResearch.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Goodmorning,Scott.
Scot t Group(Analyst-WolfeResearch):
Higoodmorningguys,wantedtojustclarifyacouplethingsoncoal.Howmuchistheironore,thenewironorebusinessandisthatinclusiveinyourcommentaryonflatdomestic?
Andthenwhenyouthinkaboutthosemovingpartsofironore,lessexportcoal,fixedvariableonthedomesticsidehowshouldwethinkaboutyieldsin2015incoal?Positiveornegative.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Well,theironoreisalargemove.It'sbothapriorandsubsequentmovemeaningthattherawmaterialcomesin,it'sprocessedandthenitgoesoutasafinishedproductofironoreandtheyields,youshouldconsidergoingforwardtobeverypositive.
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MichaelWard(Chairman,President,CEO):
Asincludedinyourdomestic.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Butitisincludedinthedomesticcoal,yes.
Scot t Group(Analyst-WolfeResearch):
Okay,that'shelpfulandthenjustoneforyou,Fredrik.Thepastfewquartersyou'vegivenuskindofsomeroughparametersorguidelinesforhowyouthinkaboutearningsinthecurrentquarterandthisisFirstQuarterisatougheronejustbecauseofthecompsandweatherlastyear.
AnycolororcommentsyouwanttogiveusonFirstQuarterearnings?I'mguessinggiventhecompsit'sgoingtobebetterthanjustdoubledigitearningsgrowthbutanyadditionalcoloryouhavewouldbehelpful.
FredrikEliasson(CFO):
Yes,Ithinkthat'swhatwetriedtolayoutthekeyassumptionsbyexpenseiteminthepresentationitselfsoyouknowhowwe'rethinkingaboutit.Igaveyousomeofthecomponentsthere.Clearlyyou'rerightthattheFirstQuarterIthinkwillbeastrongquarterandsupportiveofourdoubledigitearningsgrowthfortheyear.
Scot t Group(Analyst-WolfeResearch):
Okay,thankyouguys.
Operator:
Thankyou.ThenextquestionisfromJasonSeidlwithCowen&Co.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Goodmorning,Jason.
JasonSeidl(Analyst-Cowen&Co):
Higoodmorning,howareyoutoday?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Great.
JasonSeidl(Analyst-Cowen&Co):
Justwanttofocusalittlebitonsomeofthenon-coalexportside.Obviouslywe'veseensortofRussiainandoutofthewheatmarketandthenthismorning,IthinkShellreceivedsomefavorableproductclassificationrulingsforcondensateexport.Couldyoutalkaboutthingsthatcouldprovideupsidetothenumbersontheexportsideforyouguys?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Youtalkingaboutexportintermsofcondensateorexportintermsofcoal?
JasonSeidl(Analyst-Cowen&Co):
Exportintermsofanything.
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MichaelWard(Chairman,President,CEO):
Non-coal.
JasonSeidl(Analyst-Cowen&Co):
Non-coal.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Mostofthecondensatethat'sgoingtothatI'mawareofthat'sbeingexportedoutofthiscountryismostlybeingexportedovertheGulfsoforexample,,MexicoandtheUnitedStates,acoupleofdaysagohaveamajorexchangeofcondensatesandheavypetroleumproductsthatarebeingexportedinexchangemainlythroughtheTexasrefinerysothat'swhereyou'llseemostofit.
TheEastCoasthassomecondensatesthatwillbeexportedthroughworkdown,buttheyareverysmallnumbersthatimpactussowearen'tseeingalotofthatactivityyoudescribeinthecondensates.
JasonSeidl(Analyst-Cowen&Co):
Okayandanythingontheexportagside?
ClarenceGooden(ChiefSalesandMarketingOfficer):
ThesoybeanmarketisprettyheavymainlyoutofNorfolkandMobileandweareseeingquiteabitofactivityinthoseareas.
JasonSeidl(Analyst-Cowen&Co):
Andasafollow-upguys,gettingbacktopricing,wesawitinoursurveythatwedototheshippingcommunitythatwepublishedyesterday,whenyou'retalkingaboutanaccelerationthroughouttheyear,I'massumingthisisobviouslygoingtobeex-coalbutwhereareyougoingtogetthemostbangforyourbuck?Isthisprimarilyinyourtruckcompetitivebusiness?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Onthepricingside?
JasonSeidl(Analyst-Cowen&Co):
Yes.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Ithinkwe'regettingitacrossallsegmentsofourmarketplace.Ifyoulook,bargesaretightrightnow,sowe'reabletogetpricinginthoseareasandourbulkcommodities.We'reabletogetpricingparticularlyinthetrucksideofthebusinessiscomingup,sopricingrightnowisverymuchinfavorofthecarriers.
JasonSeidl(Analyst-Cowen&Co):
Okay,gentlemen,thankyouforyourtimeasalways.
Operator:
Thankyou.OurnextquestionisfromMattTroywithNomura.
ClarenceGooden(ChiefSalesandMarketingOfficer):
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Goodmorning,Matt.
Matt Troy(Analyst-Nomura):
Goodmorningguys.Question,alotofpeopleouttheretalkingaboutthedeclineinfuelprices,loweringtheabsolutepermilecostpertrucking.Obviouslyintermodalratesaregoingtogodownaswellasthesurchargesdeclinetherebutjustcuriousacademicallyorinpracticeareyouhearingfromanyofyourcustomersaboutadesiretoswitchfromintermodalbacktotrucking?
Somefolksarespeculating.Iwouldthinkjustcan'tswitchawholebunchofbusinessintoanindustrythatdoesn'thavecapacitybutgiventhatpriceshavecomeinIfiguredI'daskthequestion.Doyouseeitasarisktointermodalin2015?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Weabsolutelydonot.Thebigissuethathasbeenintruckingremainsthebigissueintruckingandthatisdriveravailability.MostpeoplethatI'mawareofdon'twanttheirsonstogrowuptobetruckdriverssotruckdriversbecomeanissue.
Peopledon'twanttobeawayfromhomefive,six,sevendays.There'sissuesinpassingthedrugtesttogetacommercialCDL,therearebarrierstoentrynowinbecomingatruckdriverandgettingnewClass8truckspurchasedandthecostofgettingintothebusinessismuchhigher,soit'smorethanjusthavingthecapacityitself.
It'salltheissuesthatsurrounditsoweseeintermodalinfactgrowing.OurintermodalbusinessgrewfasterlastyearthantheGDP.Thecountrydid.IfyoulookattheAARdataintermodalingeneralgrewfasterthantheeconomydidlastyear,soIthinkwhatyou'rereadingintheperiodicalsispeoplewritingthatdon'thaveanythingtowriteabout.
Matt Troy(Analyst-Nomura):
Rightthatisthegreatestacademicobservation.Lowerfuelsurchargesdon'tcreatedrivers.Iguessmysecondfollow-upquestionwouldbenaturalgasifyoulookatthefuturescurveit'simplyingprettymuch$3fortherestoftheyearorwellintotheyear.Justwondering,IknowtheAppalachiancoalandfromaswitchingperspectivehasbeenoutofthemoneyforsometime.
ShouldwejustthinkaboutthevulnerabilityinyourdomesticcoalbusinessbeingIllinoisbaseatcurrentlevelsat$3andhaveyoutriangulatedinyourguidanceaNatgaspriceassumptioninyourearliercommentsaboutQ1flatfortheyear,justwonderingwhatmightbeatriskbecauselasttimewesawgasdownherestockpileswereNorthof200milliontonsandwe'reatasixyearlowat130milliontonssothatobviouslywon'thurt.Justtryingtotriangulatewhatmightbevulnerableifwestayatthree?Thanks.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Well,about47-48%ofourcoalbusinesstodaycomesoutofnorthernAportheIllinoisBasin,sowetrytolookaround$3or$3.50naturalgasasanumberthatifyougetmuchunderthat,westarttohurtalittlebitinourburnsothosearethenumbersthatwetriangulateagainst.
Matt Troy(Analyst-Nomura):
AndIllinoisBasin,youaren'thearinganythingaboutswitchingfromthosecustomersyet?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Well,I'mnotsureexactlywhatyou'reaskingbutwhatwe'reseeingisalotofourcustomersaremovingtothe
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IllinoisBasinincoalwhichisgoodforusbecauseitgivesusalongerlengthofhaul,itishigherRPU,anditisagoodthingforus.
Matt Troy(Analyst-Nomura):
IwasjustmoretalkingabouttheswitchingsensitivitiesofthevarioussourcingBasinsbutI'vegotit.Okay,thankyou.
Operator:
Thankyou.OurnextquestionisfromCleoZagreanwithMacquarieCapital.
DavidBaggs (VP-CapitalMarkets,IR):
Goodmorning,Cleo.
CleoZagrean(Analyst-MacquarieCapital):
Goodmorningandthankyou.HappyNewYear.Myfirstquestionisalsowithregardstothedomesticcoalbusiness.CanyouhelpusthinkjustmorespecificallyaroundthesensitivityofEPSfor15toplusorminus5%orwhicheverwayyouthinkisgoodfordomesticcoalvolumearoundthatbasecaseofflatforthisyear,whatwouldplusorminus5%domesticcoaltoEPSfor15giventheprofitabilityinthenewprofitsetup,thenewmix,andalsogiventhefixedvariablestructurethatwe'veseenaffectearningssofar,thankyou.
FredrikEliasson(CFO):
ThisisFredrik.Ithinkintermsoffixedvariablethere'slessofanissue.Intermsofsensitivityclearlythereissensitiveitifcoalcomesdownandisnotflatit'sgoingtobesensitivitiestoourEPSguidancebutatthesametimeaswesaidthereareopportunitiestooffsetthatsothere'salotofdifferentpiecesthatgoesintoourguidancesoIthinkthere'salittlebitisolatingspecificpieces.
Whenweaddallofthethingsupaswedidearlierandthinkaboutthebusinessasawholeandsomeofthevacancywe'reseeingincertainmarketsandsomeoftheproductivityopportunities,thepricing,wefeelwecanabsorbsomeofthosesensitivitiesonthecoalsidebutwe'llhavetowaitandseeandgetacouplequartersunderthebeltuntilwegetfullvisibilityintowhatisdoableandwhat'snotdoablefortheyear.
CleoZagrean(Analyst-MacquarieCapital):
Thankyou.Andmysecondquestioniswithregardstooperatingratioexcludingfuel.You'vehighlightedthatyouliveapassthroughsoIwouldappreciateanyhelpyoucangiveustothinkabouttheperformanceofthebusinessexthenoiseintherevenueandexpenseline.AreyoulookingatapathForEx-fuel,anykindofprogressionthatyouhaveinmindthatyoucansharewithussowecantrackperformanceonthatbasis?Thankyou.
FredrikEliasson(CFO):
Wellthepositivelaginthequarteritselfhereforthefourthquarterwasabout$23millionandIthink$16millionyear-over-year,sothatwasafavorablecomingfromfuel.WealsoyousawalittlebitoffavorabilitybecausewholesalepricesIthinkcamedownfasterthantheretailpricesandit'stheretailpricethatourfuelsurchargeistiedtosowhenwepaytothepump,probablydeclinedfasterthanthefuelsurchargerevenueitself.
sothat'sanotherbenefitthatwesawherethisquarterbutoverall,franklyifyoulookatamarginexpansionandouroperatingratio,itisnotaprofitelement,iffuelpricescomedown,it'sactuallygenerallyslightlypositivetoourpathfor65%operatingratiolongerterm,butasIsaidoverall,notaprofitelement.Thereis
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somelageffectsandherewesawanadditionallagperhapsinthefourthquarterorthefactthatwholesalepriceswentdownfasterthanretailpricesand--
CleoZagrean(Analyst-MacquarieCapital):
SoI'msorry,soinalowerfuelpriceshouldweexpectthatyouarefindingiteasiertoreachthatmid60'stargetsooner?
FredrikEliasson(CFO):
Yes,it'simmaterialintheschemeofthingsbutifyoujustthinkaboutthefactyou'readdingforexample,$100milliontotherevenuelineandadding$100milliontotheexpenselinethisisnotaprofitdriver,theoperatingratioforthatis100%becauseyou'renotgettingamarginonthatsoasfuelpricecomesdownandyourfuelexpensegoesdown,ofcoursevolumeyouactuallygetalittlebenefitfromit.
CleoZagrean(Analyst-MacquarieCapital):
Thankyouverymuch.
Operator:
Thankyou.ThenextquestionisfromKeithSchoonmakerwithMorningstar.
ClarenceGooden(ChiefSalesandMarketingOfficer):
GoodmorningKeith.
KeithSchoonmaker(Analyst-Morningstar):
Goodmorning.I'dliketoaskaboutthe2%declineinchemicalsrevenueperunit.Isitsimplyamixissuewheregrowthincrudewheretheshipperprovidesatankcar[SalvatoreVitaleing]amixeffectonthisoristheresomethingelseatwork?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Absolutely.Youarecorrect.
KeithSchoonmaker(Analyst-Morningstar):
Thusthere'snoreadthroughtolowermarginsonthisbusinessthatIcouldtrackjustfromthat?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Right,that'scorrect.
KeithSchoonmaker(Analyst-Morningstar):
Andthenafollow-upquestionon[Moddal]shift.IthinkthecommentaryintheQuarterlyReportindicatedautomotivegrowthwasconstrainedbycustomertransportationmodeallchanges.Couldyouelaborateonthatplease?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Intheearlypartoflastyearintheheavyfreezesthatwereoccurring,someoftheautomakerspulledbusinessoffoftherailandwenttotheHollawaycarriers.TheHollawaycarrierswouldnottakethebusinesswithoutcontractdurationofaroundsixmonthsforobviousreasonsandthat'swhatyou'reseeingthere.
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KeithSchoonmaker(Analyst-Morningstar):
Thankyou.
Operator:
Thankyou.ThenextquestionisfromJustinLongwithStephens.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Goodmorning,Justin.
Just inLong(Analyst-Stephens):
Goodmorningandthanks.FirstquestionIhadwasonservice.WiththelocomotivescomingoninthenextcoupleofquartersandtheserviceimprovementsbeingcorrelatedtothisadditionalpowerasyoumentionedOscar,istheexpectationthatyoucangetbacktonormalservicelevelsthatwesawin2013bytheendoftheSecondQuarter,absentanymajorweatherevent?
DavidBaggs (VP-CapitalMarkets,IR):
Yeah,Ithinknormalservicelevels,thosewererecordservicelevelsbackthen.Ithinkwewillgraduallysteamuptothatareaasthelocomotivesarriveanditwillbegradualoverthecourseoftheyear.Notquitereadytocommittothosehigherlevelsthatquickly.
Again,wehaveaSpringpeakthatgoesfromWeek9throughWeek23throughtheendofJunesoIthinktherewillbesomelageffectbutagainIthinkyou'regoingtoseetheefficiency,theproductivityandofcoursethegrowththatwe'veseenaltogetherstarttocometogethercertainlybythesecondhalfoftheyear.
Just inLong(Analyst-Stephens):
Okay,greatandsecondquestionIhadwasonpricing.Ijustwanttogetabettersenseofhowthepricingenvironmenthasimprovedandwaswonderingifyoucouldprovideanymorecoloronhowrecentrenewalshavebeentrending.Generallyspeaking,areyouseeingsomethingclosertothemidsingledigitsonrenewalsversusthe2.5-3%overallcorepricingthatyoupostedrecently?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Justin,myfriendDavidBaggstellsmenumbersarenotmyfriendsoIcan'tgiveyouaspecificnumber,butIwouldtellyouthatIamverypleasedwiththepricingthatwe'regetting.IthasbeenverypositiveandyouwillbeverypleasedwhenwereportournumbersfortheFirstQuarterthisyear.
Just inLong(Analyst-Stephens):
Fairenough.Iappreciatethetime.Iknowit'sbeenalongcall,thanks.
Operator:
Thankyou.OurnextquestionisfromDonaldBroughtonwithAvondalePartners.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Goodmorning,Donald.
DonaldBroughton(Analyst-AvondalePartners):
Goodmorning,Clarence.Itturnsoutmommasaren'tsupposedtolettheirbabiesgrowuptobetruckdrivers,I
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alwaysthoughtitwascowboysbutI'mgladtolearnthatthismorning.Thatsaid,ayearago,onhighwaydieselandobviouslythat'snotthepriceyouallpaybutaveraged3.96agallon.
Lookslikewe'reoncourseforittoaverage3.10agallonorlessintheFirstQuarterthisyear.Iknowyou'regettingbaseyieldandyouaredoingagreatjobtherebutjustthefuelsurchargeoverall,canyoukindofgiveussomeparameters?
Istheabsenceofthefuelsurchargeandadropfromwhatisessentially$4agallonto$3agallonoralmost,isit1%yieldheadwind,2%yieldheadwind,5%yieldheadwind?Whatdoesitrepresentforyouroverallbookofbusiness?
FredrikEliasson(CFO):
Idon'tthinkwehadthemathinfrontofustodothat.YoudohavethistotalfuelsurchargerevenuethatwereportedSTBthatIalsothinkisactuallyinourquarter.Youcanlookatthetotalrevenuefromfuelandthenyoucanmodelthatout,Ithinktogetasensedependingondifferenthighwaydieselpriceswhattheimpactwouldbe.
DonaldBroughton(Analyst-AvondalePartners):
AllrightI' lljustbackintoitthatwaythen,thankyou,gentlemen.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Thankyou.
Operator:
Thankyou.OurfinalquestiontodayisfromJohnMimswithFBRCapitalMarkets.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Goodmorning,John.
JohnMims (Analyst-FBRCapitalMarkets):
Goodmorning.Thanksforslippingmeinhere.Soaquestiononthechemicalbook,ifyouexcludecrudeoilandoilandgascommentsforaminuteandjustlookatmoretraditionalvolumes,canyouprovidesomecolororjustoutlookOnDemandandpricingandcontractingforyouractivitiesdownintheGulfandjustyournon-oilrelatedvolumes?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Yes.Theotherlinesofchemicalbusinessisgrownabout2-3%.That'sprettymuchinlinewithwhatthechemicalindustryhasbeengrowing.Actually,it'salittlehighontheplasticsendgrowingatabout2-3%overwhatitsbeenforthelastsixorsevenyears.
Pricinghasbeenverygoodinthechemicalsideofthebusiness,particularlyintherenewalsthathaveoccurredintheFourthQuarterandareinfactincurringintheFirstQuarter,sowe'reverypleasedwithwhatwearegettinginthepricinginthoseareas.Doesthatansweryourquestion?
JohnMims (Analyst-FBRCapitalMarkets):
Yes,itdoes.It'shelpfulandwhat'sthesplitbetweenyourtraditionalchemicalsversusyouroilandgasrightnowwithinthatsegment?
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ClarenceGooden(ChiefSalesandMarketingOfficer):
Oilandgasisamajorpartgrowingofthatportfoliobutit'stheplasticspartofthebusinessisstillthelargestbyfar.
JohnMims (Analyst-FBRCapitalMarkets):
Isthereapercentageyoucangive?Iknowyou'veputoutnumbersasfaraswhatgasisforthetotalbookbutjustwithinchemicals?
ClarenceGooden(ChiefSalesandMarketingOfficer):
Idon'thaveitoffthetopofmyhead.
JohnMims (Analyst-FBRCapitalMarkets):
Icanjustbackintosomethingthanksalot.Otherquestionshavebeenanswered.
MichaelWard(Chairman,President,CEO):
Thankyou.
ClarenceGooden(ChiefSalesandMarketingOfficer):
Thankyou,everyoneforyourattentionandweappreciateit.We'llseeyounextquarter.
Operator:
Thankyou.Thisconcludestoday'steleconference.
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