David Baggs - Assistant Vice President of Treasury and Investor Relations David Brown - Chief Operating Officer and Executive Vice President Oscar Munoz - Chief Financial Officer, Executive Vice President, Chief Financial Officer of CSX Transportation Inc. and Executive Vice President of CSX Transportation Inc Michael Ward - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chief Executive Officer of CSX Transportation Inc and President of CSX Transportation Inc Clarence Gooden - Chief Commercial Officer, Executive Vice President of Sales and Marketing, Chief Commercial Officer of CSX Transportation Inc and Executive Vice President of CSX Transportation Inc

Walter Spracklin - RBC Capital Markets, LLC William Greene - Morgan Stanley John Mims - BB&T Capital Markets Justin Yagerman - Deutsche Bank AG Garrett Chase - Barclays Capital Ken Hoexter - BofA Merrill Lynch Edward Wolfe - Wolfe Trahan & Co. Thomas Wadewitz - JP Morgan Chase & Co Kanchana Pinnapureddy Scott Malat - Goldman Sachs Group Inc. Chris Wetherbee - Merrill Lynch Jon Langenfeld - Robert W. Baird & Co. Incorporated Christopher Ceraso - Crédit Suisse AG Donald Broughton - Avondale Partners, LLC Matthew Troy - Susquehanna Financial Group, LLLP Jason Seidl - Dahlman Rose & Company, LLC Cherilyn Radbourne - TD Newcrest Capital Inc. Scott Flower - Macquarie Research

Good morning, ladies and gentlemen, and welcome to the CSX Corporation First Quarter 2011 Earnings Call. As a reminder, today's call is being recorded. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Mr. David Baggs, Assistant Vice President, Investor Relations for CSX Corporation. Sir, you may begin.

Thank you, Laurie, and good morning, again, everyone, and welcome to CSX Corporation's First Quarter Earnings Presentation. The presentation material that we'll be reviewing this morning, along with our quarterly financial report and our safety and service measures, are available on our website at CSX.com under the Investor section. In addition, following the presentation, a webcast and podcast replay will be available on the website. Here, representing CSX this morning are Michael Ward, the company's Chairman, President and Chief Executive Officer; Clarence Gooden, Chief Sales and Marketing Officer; David Brown, Chief Operating Officer; and Oscar Munoz, Chief Financial Officer. Now before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to view the company's disclosure in the accompanying presentation on Slide 2. This disclosure identifies forward-looking statements and risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements. In addition, let me also remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With 32 analysts covering CSX now, I would ask as a courtesy to everyone to please limit your inquiries to one primary and one follow-up question. And with that, let me turn the presentation over to CSX Corporation's Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Well, thank you, David, and good morning, everyone. Last evening, CSX was pleased to report another quarter of record financial results. First quarter earnings-per-share, $1.06, up 36% from the same period last year. With a positive economic backdrop, CSX grew volume above both GDP and IDP in the quarter, and this was the primary driver in the strong revenue growth that the company achieved. Revenue also increased from continued core pricing above rail inflation and the effect of higher fuel prices in our fuel recovery program. Our expectations for a continuing expanding economy held true in the first quarter, and we expect the positive trend to continue going forward. At the same time, the industry faced severe challenges as a result of tough winter weather. Here at CSX, operations showed good resiliency with service levels holding up well in most areas of our network. That said, certain areas of the network were affected, and we have been taking steps to address those areas, which David will discuss later. Also, in operations, we're very encouraged that the team delivered an all-time record performance in personal injury safety with strong improvement in FRA train accidents. From a financial perspective, it was also an excellent quarter, with operating income up 22% to $773 million, and with the operating ratio improving 210 basis points to 72.5%. Going forward, we continue to expect to achieve another record year for the shareholders with a high-60s operating ratio. This keeps us on the path to achieve our 65% operating ratio target by no later than 2015. With that, let me turn it over to Clarence to discuss our top line results. Clarence?

Thank you, Michael, and good morning, everyone. With the economy in its second year of expansion, positive trends continue to support profitable growth across all the businesses that we serve. The manufacturing sector continued to expand, as reflected in a reading of 61.2, with the latest Institute For Supply Management index. Recall that a score above 50 indicates expansion. This is the 20th consecutive month of expansion. At the same time, inventories still remain below target levels. The March ISM report on customer inventories registered an index score of 39.5, a score below 50 indicates responders believe that their customers' inventories are too low. As we continue to see increasing demand for rail service, we remain focused on capturing the value of rail transportation, and we continue to be committed to delivering an even safer and more reliable service product for our customers. Now let's turn to the next slide and review the results. CSX revenue increased 13% to a record $2.8 billion. As you can see on the chart, volume increases drove $173 million of year-over-year revenue growth. Also, the combined effect of rate and mix accounted for $86 million of the increase, reflecting yield gains across most markets as we continue to sell the compelling value of rail transportation. Finally, as you look further to the right, the impact of higher fuel costs increased our fuel reimbursement, $60 million in the quarter. Let's turn to the next slide and take a closer look at the volume growth. Looking to the bottom of this chart, you can see the total volume increase 7% versus the same period last year. This overall rate of growth exceeded that of the overall economy, with broad based strength across all major markets. As you can see on the chart, Intermodal is the fastest-growing…

Thank you, Clarence, and good morning, everyone. CSX employees are mutually accountable for delivering world-class safety, productivity, reliability and customer service results. We once again delivered record safety results and continue to achieve productivity gains. System reliability and service, overall, were resilient in the first quarter. The coal and intermodal networks remain fluid and consistent. However, the merchandise network did not operate at levels we aspired to offer our customers, and we have taken specific actions to address this network which I'll describe shortly. Let's review the results, starting with safety on Slide 16. This slide shows first quarter FRA personal injury and train accident rates over the last 4 years. In the first quarter, the personal injury rate improved 5% versus the prior year to 0.78%. This quarterly personal injury rate is an all-time low and reflects CSX's unwavering focus as a leader in one of the nation's safest industries. As you know, industry results are also outstanding, and the safety success in railroading is remarkable across-the-board. Looking at train accidents, the first quarter frequency rate improved 24% to 2.57%, significantly lower than in previous years, again, reflecting CSX's strong momentum in safety. These excellent results were achieved through a sustained commitment by all employees and keep us on the path towards the ultimate goal of zero injuries and zero train accidents. Now let's look at productivity results on Slide 17. Slide 17 shows the strong improvement in the operating ratio over the last 4 years, ending with this first quarter's record of 72.5%. Despite the challenging operating environment we experienced in the first quarter, CSX continued to achieve solid productivity gains. Examples include the continued automation in terminals and are focused on continuing to increase train length, particularly in the coal network. These gains were partially offset by…

Thank you, David. Okay, let me begin with a quick overview of the quarter's results starting at the top of Slide 25. As Clarence discussed earlier, revenue improved 13% to over $2.8 billion on profitable volume growth, strong core pricing and the impact of higher fuel recovery. And this revenue growth, coupled with continued strong cost management delivered in the face of significantly higher fuel prices, yielded a 22% increase in operating income for a first quarter record of $773 million. If you look below the line, interest expense and other income combined, were both in line with last year. Income taxes were $243 million in the quarter, for an effective tax rate of 38.1%, which is in line with our guidance. All in, CSX finished with a record first quarter EPS of $1.06, an improvement of 36% versus last year. Now if we turn to the next slide, I want to review the drivers of the increase in operating income, and I think this chart provides a simple and a clear picture of these record first quarter results. When I look at it, what I find most compelling is that, that first revenue bar which shows $173 million of volume-related revenue growth, this was supported by the outside expense bar of just $58 million of volume and other related expenses, very nice operating leverage there. Moving inwards, the strong pricing you see on the revenue side was well in excess of the net inflation you see depicted on the expense side, and of course, consistent with our guidance. To round out the chart, the 2 interior bars illustrate the net fuel impact headwind for CSX in the quarter. So all in, CSX delivered $141 million increase in operating income for a record first quarter operating ratio of 72.5%. Also,…

Thank you, Oscar. Over the past 5 years, you, our shareholders, have seen significant gain in the value of your investment. That value has been created by CSX employees who are relentlessly focused on generating competitive advantage in the near and long term. Doing both means that we have to anticipate future transportation needs today, and make the right investments to meet them over time. The key is to make those investments from a position of strength, from a company that's healthy, setting high standards and performing well. That is CSX. As the government strives for solution to the nation's fiscal challenges, CSX is creating real economic stimulus from within. Our efforts ensure that business moves efficiently. Air is cleaner, highways less congested, the need for imported oil is reduced, jobs are produced, and real value is created for American businesses, communities and shareholders. Your company stands to benefit not only because of the major cost and environmental benefits but because of the investments in the quality, flexibility and capacity of America's ever more important transportation infrastructure. With that, we'll turn it over for your questions.

[Operator Instructions] Our first question comes from Tom Wadewitz with JPMorgan. Thomas Wadewitz - JP Morgan Chase & Co: Let's see. The -- A lot of good things going on in the quarter once again. I wanted to ask you a little bit about the price trend. Your same-store price seems to be stepping up versus the pace last year, which I think was kind of in more of a 5.5%, 6.5% range last year. Can you give us a sense of what's driving that? And whether you would expect some further acceleration, or whether the level in the first quarter, that 7% is kind of a run rate we should expect going forward?

Tom, this is Clarence. One, thank you for your comments there. That was kind of you to say. To answer your question directly, our pricing has been broad-based, it's been across all lines of our businesses, both in our Merchandise side, as well as in our Coal, Intermodal side of our business. As we've told you before, we expect that we will exceed rail inflation this year going forward, and that's pretty much where we want to stay. Thomas Wadewitz - JP Morgan Chase & Co: I guess just on export coal, is that -- that would effect in second quarter, that wouldn't yet be in the numbers. Is that fair?

I'm not sure I understand the question. Ask me again. Thomas Wadewitz - JP Morgan Chase & Co: Okay. So your export coal pricing typically goes up in April 1, right? And your coal yields were strong in first quarter. Was there any change that you would have seen a bump up in your coal yields earlier than normal? Or would we expect that impact from higher export prices really to be a second quarter effect?

I think you'll see our export coal prices stay strong throughout the year.

Then you take a tariff increase.

We took a tariff increase, but the tariff covers a relatively small portion of our overall portfolio, and that's why I made that point. Thomas Wadewitz - JP Morgan Chase & Co: Okay. That's clear. And if I can, one follow-up for Oscar. Are there any costs that we should be considering that kind of step up through the year? Or I mean, I guess you talked about headcount and a little bit of training and so forth. I guess in the resource comments that Dave Brown had where you're adding some resource to run the merchandise network a little better, are there costs that kind of come out of that, will -- step up a bit? Or is that kind of not much different from run rate we saw in first quarter?

Tom, yes, there will be a general step-up because of the hiring and the training costs. But in addition to that, I think our continued productivity will more than offset it. So no. No significant increases other than what you'd expect normally. Thomas Wadewitz - JP Morgan Chase & Co: Okay, great. Thanks.

Our next question is from Scott Flower with Macquarie Securities.

Just a couple of questions. One, I guess maybe more for Clarence, is there any sense that the coal stockpiles going forward in terms of what you consider normal, might be changing without naming customer names? There have been some major Southeastern utilities that have sort of said they'll never expect to burn as much coal as they did in '07. And so I guess I'm just wondering with that kind of a statement, whether -- are stockpiles something that might be changing, where a lower level might be more normal, and therefore, the spread to what's normal is actually greater than what we might think?

Well, Scott, this is Clarence. I'm not sure that anybody knows what normal is anymore. I guess there's new normals. But indirectly relation to our stockpiles, our stockpiles in our southern utilities have declined from what they were at the last quarter, but they're still higher than what has been the traditional norm. And in the north, our utilities have stayed pretty much constant with what they were the last quarter. And having said that, our utilities stockpiles in the north have tended to be closer to what has been a traditional norm.

What happened just -- on that specific thing, how many days are we talking about roughly in terms of inventory?

In the north, it's running around -- let me think about that a minute or two. About 56% in the north, and around 81 days in the South.

Okay. And then just one very quick follow-up. How do you see the thermal market into Northern Europe, how strong do you think that will be? Obviously, API 2 has been fairly solid. How do you see the thermal markets both short-term and longer-term perhaps into Europe which has not been a traditional market at least over the last so many years?

Well, as you know, the thermal market into Europe has improved in the last 3 months, the API 2 Index about a week ago, was up to $129 and that's significantly up from where it had been previously. Having said that, we got some -- we've seen some slight pickup in thermal coal going to Europe. Going forward longer-term, I'd be hesitant to venture a guess, given what the German utilities position had been recently on nuclear power, and given the other factors that's influencing that in Northern Europe right now. It's a little too soon to speculate on that.

Great. Thank you, all.

Our next question is from Bill Greene with Morgan Stanley. [Technical Difficulty]

Our next question is from William Greene with Morgan Stanley.

Clarence, I have one question for you, and when you look at your volume commentary, I think the consensus is sort of for the mid-single-digits. So just to clarify, even though we've got a tougher comp on the number of weeks in the year, you still think you can exceed sort of this kind of 5-ish percent number on volume?

Bill, yes, I believe that we can. I think we'll exceed both the GDP and the IDP numbers. And as you're aware, GDP is a -- Global Insights has it at about 2.8%, the Fed has it around, 3% to 3.5% going forward, and IDP is somewhere in the neighborhood of -- Global Insights has it at 5.5%.

Okay, great. Thank you. And then just a follow-up on the export coal question. So if we look at the export coal market, Clarence, can you remind us how big that's been? What was the -- if you think back in all the past, how big was the biggest year ever? Are we exceeding those levels, or we still have room to go on that? And then along those lines, I think you've moved the quarterly pricing in export coal. Will that make your pricing more volatile? Will we see sort of up and down in that range? Or is it just going to be kind of gradual but on a quarterly basis? How do you think about pricing in that market too?

Okay. First is, is that last year, 2010, was our record year in export coal at about 30 million tons. At the end of the fourth quarter, the start of the first quarter, we gave you guidance, if you'll recall, in the 35 million to 40 million-ton category. We're now saying that we're going to be at about 40 million tons in our export market going forward. So that will be our largest single year that we've had in export coal. Going to quarterly volumes, your question is, if I understood it correctly, was does that add volatility in the market? And the short answer would be, yes, it does add volatility by going to quarterly prices. However, the reason that we went to quarterly prices is we expect that volatility to be at an up position for the remainder of this year, very positive in pricing for the rest of the year.

Okay. Thanks for the time.

Our next question is from Ed Wolfe with Wolfe Research. Edward Wolfe - Wolfe Trahan & Co.: Clarence, just a little clarity on -- if I look at the reported yields, they went down from fourth quarter from 7 and change to 5 and change, despite fuel being a bigger piece. And I know there's a lag, but it was still up relative to fourth quarter. You talked about the mix of intermodal, can you talk -- and the contract. But it feels like there's more than just that in the mix. Can you talk about what else drove the big change in mix?

The major part of that was the mix changes. Intermodal has become a larger part of our portfolio. There were some noise around the fringe on some of the mixes in other markets, but it was mainly driven by the intermodal mix. Edward Wolfe - Wolfe Trahan & Co.: Okay. Because, I mean, if I look at intermodal growth relative to carloadings, the gap wasn't as wide in first quarter as it was in fourth quarter year-over-year. It feels like there's something else, but I guess it's starting in that compound? Is that the thought process?

Ed, it's Oscar. I think if you look at the first quarter overall volume growth, half of it was intermodal this quarter. And I think that's probably the larger mix impact that you're seeing versus what it was last quarter. Edward Wolfe - Wolfe Trahan & Co.: Okay. Shifting gears, Dave's slide on Slide 22, where you talked about some of the actions that you're undertaking to improve the merchandise service, the hiring, the locos, can you talk a little bit about when you started that process and where you are in that process? And as we go forward, is it kind of evenly done, or do you do a big move to bring that on, and then you absorb that for a while and you see where you go? Or are you going to constantly be hiring as we go forward? How do you think about as the recovery continues bringing these things back on?

Yes. Thanks for the question, Ed. And what we've done is we have progressively brought in the resources, so it's not really big chunks. It's like over time, we bring back our locomotives, we brought 180 back into our active locomotive fleet. At the same time, we're calling back our furloughed employees as needed, and have done that over the period of the last couple of months, especially the last several weeks. And then the hiring is based on an annual plan that basically keeps it flat throughout the year. So we're hiring at a strong level, sufficient level and doing on a consistent basis across the year. Edward Wolfe - Wolfe Trahan & Co.: So it sounds like second quarter, there's a little bit more than it levels out in third and fourth in terms of hiring and bringing locos in, is that a fair way to think about it?

Some, in the remaining -- throughout the second quarter, we will be continuing to bring on more of our locomotive resources, and that will level out. Hiring is consistent across the entire year week by week. Edward Wolfe - Wolfe Trahan & Co.: Okay. Thanks for the time. I appreciate it.

Our next question is from Ken Hoexter with Merrill Lynch.

Just following up on Dave. Kind of surprised that kind of fall here in the on-time performance in the velocity, and it looks like it's the worst in years. Going back to almost the launching of the One Plan, just when does congestion impact your ability to charge for it? I guess is there a point of taking on too much volume, or calling too much costs to great service? I just -- I want to know if we should be getting concern on that level of cost creeping up because performance is slipping a bit.

Well, Ken, we have seen some decline in our measurements as you saw. And I mentioned the 3 networks, and we have sustained a consistent level of performance in our intermodal network. I showed you how our coal network has remained very fluid, and it really is a merchandise network issue. We found ourselves doing quite well through January and most of February, and as we had winter impacts in late February, storms rolled in across our system in succession in early March. We did see a drag on our merchandise operation, both increases in dwell time and some drag on our velocity. So the recovery initiatives that I talked about are the things that we're doing and are ongoing, and we're very confident in our ability to recover back to our high-level of service in all 3 networks. And at the same time, we know that takes time, and we expect to be working on that across the second quarter. We have -- when we look at the overall sort of definition of significant loss of fluidity, in our assessment of that, the measurements would be 240,000 cars online consistently there or above, which we are significantly below that. If we see sustained dwell above 30 hours, that's where we believe that we really -- really see congestion that is at a rate that would be less fluid and our velocity at 18 miles an hour, consistently below 18 would be a severe issue as far as our measurements are concerned. So we're certainly in the range of fluid operations in all 3 of those measures, and you'll see those improve through the second quarter.

Yes. And, Ken, this is Michael. You had mentioned that the cost elements of it. Quite frankly, with some of those challenges we had in the merchandise network toward the second half of the quarter, we still had a very good cost profile as Oscar pointed out. With 7% more carloads, we were only up 4% in costs excluding the impact of fuel. So I think we still did it in a very cost-effective manner.

And if I could just punctuate that, Ken, with one last statement. As you know, we, both, Michael and I, re-committed to the high-60s guidance for 2011. And I think that commitment is obviously, includes the service improvements we expect in the ongoing business volumes that Clarence discussed, so we're confident.

It's actually very helpful, Dave. I think putting those numbers down puts it into great perspective into how much room there still is to go. So Oscar, let me follow up with that. Because looking at those targets, and I just want to -- I would imagine that the more you get closer to that 7% pricing, it just raises a lot of issues, especially with the STB's planned hearings coming up in June. But when you think about your returns are still only about 11.5%, what level do you, or even Michael, do you believe you need to get to, to earn your proper returns on replacement costs? Just as you get to even that 65 target, do you -- does that get you to those levels where you think you're closer to replacement, or do you still have to go beyond that to earn the levels you believe are needed to keep that reinvestment going?

You raised the obvious and important point is that we still aren't at that level of return. I won't suggest in specific number on this call, but certainly, we're below it, and our charge has been to sort of meet and exceed that cost of capital, as we make those investments. And the investments to support the great business growth and the great support we give to the American economy, I think it's important that we continue to make those, and so let me just stop there.

All right, thank you. I appreciate the time.

Our next question is from Chris Wetherbee with Citigroup.

Maybe a little bit on pricing here. When you talk about intermodal, now that we're lapping the negative comps as we move forward into 2Q and beyond, how do you think about the pricing environment in this segment and particularly, how do you think about the shrink we've seen in the TL market, as it implies to your taking some of that business off the road?

Chris, this is Clarence. We feel very positive about it. If you think about what our true number was in core pricing on our intermodal product, it was up on a year-over-year basis, in line pretty much with what you've seen throughout the industry. We think that's going to stay in place going forward when you look at what is happening in both the truckload capacity, for example, as measured by the Morgan Stanley Index, what we're seeing happening in fuel costs and the efficiency of our intermodal product being 3x to 4x that of truck. It looks to us every indicator we see, that the pricing environment for our intermodal products going forward is going to be positive and continue to be positive.

And then maybe just to backstop that, Oscar, from your perspective, do you think about the growth in this business? And even in the Export Coal business, how do you think about CapEx? You're staying at $2 billion for the year. Is there any incremental areas where there may be some puts or takes on CapEx, as you move through the year, assuming contingencies this could grow out of these 2 business segments?

Well, I think as we talked about our balanced deployment of capital, certainly, our first priority is the reinvestment for business and particularly for business growth. So in the instance that we saw the right requirements in the out years or out quarters, we would certainly let you know ahead of time.

Okay. And then one final follow up maybe for you, Oscar, on the buyback, looks like you did about $300 million in the buyback in the first quarter. I think that about closes you out. Just curious if there's any update on extensions or reauthorizations going forward.

Not at this time.

We did finish it, it did finish the program, Chris, the $3 billion program.

Okay, that's helpful. Thank you, guys. Appreciate it.

Our next question is from Chris Ceraso with Credit Suisse. Christopher Ceraso - Crédit Suisse AG: Another question on intermodal yields. I understand the year-over-year impact from the change in the interline agreement. But if I look at the yields on a sequential basis, I would have thought that with rising fuel and where truck prices are that you might have seen more yield growth sequentially. Was there some mix impact within the intermodal category, or something else that restrains the yields growth there?

The largest mix impact within that segment itself was the large growth that we saw in our international traffic. That was up 24%, which, as you know, Chris, carries a slightly lower revenue per unit, because it's in private equipment. Christopher Ceraso - Crédit Suisse AG: Okay. That makes sense. And then on the comp and benefit growth, if I look at it on a per head basis, it was a lot slower than normal, i.e. better. Is this a function of more junior workers coming back in from furlough, or is there something else going on there? And then what's the expected growth rate from here?

Chris, it's Oscar. Yes, in the quarter, we did have a slight bit of that with junior employees, and we had some slightly lower comp. 2010 was a recovery year from the 2009 recession, so we had pretty high comp numbers. So I think as you look forward, I think it's a story of 2 halves. The first half you'll see sort of the inflationary rate that you saw this quarter. The second half will probably increase by $10 million a quarter or so, and that's just the normal midyear accrual for the future labor contracts that we normally do. Christopher Ceraso - Crédit Suisse AG: Okay. And then just lastly, Oscar, on the high-60s target, as well as your expected surcharge lag affecting Q2, what does that assume, either in terms of a diesel price, or a crude price?

At a forward curve. That's the best information that we have as you know.

Thank you. Appreciate it.

Our next question is from Justin Yagerman with Deutsche Bank.

I wanted to ask a question on the met coal side and get a sense, is it possible to breakdown the volumes by month? And then within that question, talk to -- you did 11 million in the quarter, annualized, that would be 44 million of capacity. Were you bumping up against capacity when you were moving that this quarter? Or could we potentially expect a higher number next quarter, as the waiting is probably likely first half waited for a lot of these met coal shipments?

Justin, this is Clarence. I can't give you a met coal number by month. I can tell you that in general, or market for met coal is between -- is in the 69% to 70% of our export coal is metallurgical coal. The other 30% to 31% is in the thermal coal. I can tell you that our Coal business on the export was very good from a fluidity standpoint. In the first quarter, the 11 million tons that you've alluded to. We think that we have additional capacity in our port facilities, as well as our rail infrastructure to handle more. Having said that, I want to stay in guidance with you, that we're going to ship about 40 million tons as best we can tell right now for the year going forward. And as the year progresses, we'll know more.

Clarence, do you have a sense of distribution across the year for that? I mean, is it going to be a first half waited 40 million, or should we expect, I mean, been kind of 9 million to 11 million next quarter and kind of evenly throughout?

Our best guess for this year, 2011, is just pretty a straight line across.

Okay. That's helpful. And I guess with this discussion of costs coming on and thinking about incremental margins as we move through the year, is it fair to assume that with fuel still high, that incremental margins likely dip as we move through the middle of the year, but recover as you get some of that efficiency gain from the labor and the equipment costs that are coming on in the fourth quarter here? So when I look at my model, at least, the progression seems to be kind of a degradation for the next 2 quarters and then a recovery in the fourth quarter. I mean, is that a fair way to think about how you guys are modeling costs for this year?

I think, Justin, yes, if you don't adjust for fuel. But I think it's important as you measure an operating efficiency of a company, although that's a very real expense. When you adjust for that, incremental margins stay very strong. But as you outline on an out year, out quarter basis, as fuel moves up and down, it will have that effect on margin.

Okay. And conceptually, when you guys are doing that planning, what kind of network capacity are you planning around in terms of the ability to handle surges in volumes, or what have you?

Well, we still have roughly a good amount of capacity left in the system across all the networks. If you think of our peak volumes, probably as recently as '06 and back to '04, we're still well below them on an overall volume basis. So we're not putting a lot of constraints on our capacity.

Yes, David, it's constantly adjusting that train plan to make sure we can meet those demands. But right now, we guess we have 10% to 15% capacity in our merchandise network, maybe 15% to 20% in the intermodal, and it's constantly changing that as we see it moving. So we think we can meet the demand that we expect to come. So thank you, Justin.

Thanks a lot, guys.

Our next question is from Scott Malat with Goldman Sachs.

Just wanted to -- you talked a little bit about the longer trains, the new intermodal terminal, can you talk a bit more on where we are overall in the $130 million to $140 million of productivity enhancements you're targeting in 2011? Where we are today, the different initiatives that are incorporated in that?

Certainly. This is David. Thank you, Scott. We are very confident in our achieving that level of productivity that we already stated we would achieve. We of, course, started that early in the first quarter. We're working through various initiatives. We were challenged somewhat in the first quarter but have our initiatives underway to accomplish, and I've talked about yard automation, train length, and there's just a long pipeline of multi-year initiatives really that we've implemented, or continue to implement through our cost processes, through our service processes and therefore, are very confident in achieving that result.

Okay. Thanks. The other follow up I just had on margins was just, the last time you reported, intermodal operating margins broken out in 2009, you were at 86.5% operating ratio. I'm not expecting you to give us some hard numbers here. But I just -- if you can help us think about where the incremental margins for this business has been versus the rest of the business, help us think through that, that would be great. Thanks.

Again, the normal practice of making and running a much more efficient network, the double stack clearances, a lot of the network investments we've made in terminals and fluidity, I think those are all part and parcel to improving the margins on that great growing business.

So from a qualitative standpoint, can we think the incremental margins are in-line or above the rest of the business, or is that kind of never appropriate in the intermodal business?

We have talked about this in times past about the incremental margin being on par with our average margins in our core business. So yes, when you have 15% to 20% capacity, those extra cars going in back of a train, create quite a nice bit of margin improvement. So incrementally, they're very, very healthy.

Okay. Thanks. That's helpful.

Our next question is from Garrett Chase with Barclays Capital.

Want to see if you could maybe shed a little bit more light on what you think the root cause of some of the difficulty that you experienced in the merchandise was. Was it more volume than you anticipated? Was it volume in the wrong pockets of the network? I know you mentioned storm impact which is pretty clear, but were there any other aspects of this that caught you by surprise, and have led to the planned additional resources?

Sure, Gary. This is David, and yes, just to give a little more detail on that. It really is -- it began with the weather. And again, we weathered the storms very well in January and February. We did see a succession of storms across our network, particularly in early March. And essentially, we're not able to recover between those. So we found ourselves somewhat constrained because of the lower velocity and the increase in dwell. And it's not network wide in merchandise. It really impacts regionally towards in the deep South area, and somewhat in the Midwest. And all of our routes that are tributary to the Western gateways. So there is impact around gateway fluidity. That has collateral impacts into our network. We've obviously encountered this before. We know how to deal with it. We know that it takes resources and time, and a lot of focus to bring the operation back to the high-level that it's expected to be at. And that's what we're doing right now, and we see those improvements on a daily basis, and we continue to make that our focus. It's solely really, a function of a catalyst of weather, and then the impact of just going through the recovery process.

So is it safe to say then, that the weather impact made you realize you didn't have the search capacity you needed there? Or that later, for the volume levels you're anticipating later in the year, that you weren't appropriately resourced?

No. I don't think that at all. I think we have the search capacity that Michael talked about. We always are looking at our One Plan and building into that through incremental train start additions. We've done that in intermodal, we've done it in automotive, we've done it even in merchandise. So we add trains into our network that make it more efficient and maintain that level of search capacity. The bottom line is, it takes more resources to run a slower railroad with higher dwell time then it takes to run it at the higher level of velocity and improve dwell, and we know that. So we know we have to concentrate resources into it to return to those levels, and they will maintain our efficiency at the resource levels required to sustain higher velocity, lowered dwell, with a better service product and maintaining the search capacity that Michael talked about.

Okay. Thanks, guys.

Our next question is from Cherilyn Radbourne with TD Newcrest.

A question on intermodal. I've seen some fairly optimistic forecast from a volume perspective as it relates to the peak season. So I'm wondering if you could just comment on what you're expecting there. And also, to what extent do you see container supply and the withdrawal of ocean carriers from the Chassis Supply business as potential constraints on the peak this year?

What was the last part of your question there, ocean container?

Container supply.

The chassis supply.

Chassis supply. Okay. Number one, on domestic box capacity, we don't foresee any of the repeat issues of 2010 as we move into the fall peak of 2011. In regard to the ocean chassis situation, if you follow that to some degree of detail, the ocean carrier fleets themselves are moving away from privately held chassis fleets into OCEMA managed chassis fleets. That is a process that is still in a lot of flux. It remains to be seen how that's going to end up, but we don't anticipate that on CSX, of having any adverse impact to our intermodal operations. Third, what are we planning for, for the fall peak, assuming all of the economic assumptions that we have in place, and that the country has in place, in fact materialize. Assuming that there's no disasters or things beyond our control, we expect to have an absolutely robust fall peak and look forward to handling.

Thank you. That's it for me this morning.

Our next question is from John Langenfeld with Robert Baird. Jon Langenfeld - Robert W. Baird & Co. Incorporated: On the intermodal side, can you talk about your specific container capacity, what it looks like going into the peak season 2011 versus 2010?

This is Clarence again, Jon. What I could tell you without giving you specific numbers is, is that we expect and will have a significantly larger container fleet available in our UMAX broke, along with our partner, Union Pacific as we proceed throughout the year. The reason I don't want to give you a specific number is we consider that confidential market information. But the numbers will be up significantly. Jon Langenfeld - Robert W. Baird & Co. Incorporated: And then you're a little bit different than the others on the intermodal side, you have some more transactional capacity that's available throughout the year. Whereas, I think many others have more contractual capacity tied in. So as you think about your availability to capacity, how much of that, or how do you think about that trending relative to previous years in terms of the boxes available for spot market pricing opportunities?

Well, by having just in general a larger fleet, it makes more containers available on that spot market. Obviously, we'd like to tie up as many as we can under longer-term commitments. But the fact is, is that the spot market is just bad. It's where we have available capacity. We try to utilize it to the maximum efficiency we can. Then when we don't have available capacity in those markets, obviously, we just simply don't play it. Jon Langenfeld - Robert W. Baird & Co. Incorporated: Great. And then the last question, just on the volume in the intermodal. Now as you anniversary this comparison, and as you shifted off the UP legacy contract, does that volume number -- we're seeing double-digit volume growth year-over-year. Does that change because now we're changing that comparable to apples to apples?

No. The comparable impacts the revenue per unit as opposed to either the profitability, or the sheer volume that's in that business. So we expect our volumes in intermodal to stay very strong throughout this year. Jon Langenfeld - Robert W. Baird & Co. Incorporated: Thank you.

Our next question is from Jason Seidl with Dahlman Rose. Jason Seidl - Dahlman Rose & Company, LLC: I'll start on export coal here. Clarence, you said about 40 million for the year. Can you give us a sense of the breakdown between met and thermal?

Yes, Jason. The met coal runs around 69% to 70%, and the thermal coal runs at obviously, the remainder 30% to 31%. Jason Seidl - Dahlman Rose & Company, LLC: All right. Perfect. Also, if we continue to see increased tightness in the truck market, I would assume that you guys pick up even some more share on intermodal side. At what point should we expect you guys -- some of the increase, some CapEx beyond the $2 billion to accommodate that business?

Well, I think that would be premature for me to say that other than to tell you that we have, at CSX in our intermodal network expansion plans both the announced projects that you've seen in 2011, and we obviously have a comprehensive plan over the next 2, 3 years to expand and invest in our intermodal network. But having said that, as Michael pointed out and David earlier, we have about 15% or plus capacity within that intermodal network as it exists today. So we can handle a lot of surge and a lot of growth in the foreseeable future. Jason Seidl - Dahlman Rose & Company, LLC: Okay, that's great. And one more for Oscar. Oscar, end of the quarter, shares outstanding, what was the count?

370-ish. I'm sorry, I don't have the exact number. Jason Seidl - Dahlman Rose & Company, LLC: You can give it to me off-line, that's fine, Oscar.

That's 371.6.

Did you hear that? 371.6. Jason Seidl - Dahlman Rose & Company, LLC: That was the average, or that was on the quarter?

That was -- it looks like the quarter average. Jason Seidl - Dahlman Rose & Company, LLC: All right. If you could give me the end of quarter off-line, that would be great. Guys, I appreciate the time as always.

Our next question is from Walter Spracklin with RBC Capital Markets.

Just 2 quick ones here for you. First one on the op resourcing that you talked about in your merchandise side, you noted that, that your competitor had a nice rebound in volumes this quarter. Was there any -- did you have any discussions with your customers? Were any of them disappointed with some of the service levels, and you might have seen some of that share move over to your competitor, or is this, was your competitor also hurt by the same weather factors, and that not an impact there?

Walter, this is Clarence. We thought it rained and snowed on the entire eastern United States, so we thought everybody had issues in regard to that including our customers, including our competition whether it was rail, whether it was highway-based, or whether it was water-based, barge base. So most of our customers were, I don't know if sympathetic is the right word or empathetic is the right word, but clearly understood the issues that we had. And I think what they expect going forward is, as we do as David has outlined, that we rebound, we get back to the service levels that they are accustomed to, and I think it's a very positive story for us.

Okay. Now that makes sense. Second question here, Oscar, you gave us some good sensitivities to every $10 move in WTI, I think you said 50 basis points on OR just by not doing anything. Now your low-70 or I guess your high-60s and 65 ratio hasn't changed, but we've seen a pretty big move in oil prices since then. Given that sensitivity, are you implying then that you're going to be able to get more opportunities than you had originally thought? Or do you expect oil prices to come down, because it sounds like you're using a forward curve, those are indicating higher. So I just want to understand why we haven't seen a change in your targets when we've seen such a big increase in WTI?

I think, well, there's two assumptions, right? There are business outlook and the forward curve. And I think our business outlook, as you've heard today, remains very robust and that allows us to restate that guidance as we have.

So better-than-expected operating results based on the improved top line?

Business outlook, yes.

Got it. Okay, that's all my questions. Thanks very much, guys.

Our next question is from Jeff Kaufman with Sterne Agee.

It's actually Kanchana Pinnapureddy for Jeff Kaufman. I just have one quick question for you guys. Could you talk a little bit about what's going on with the Central Appalachian production? Are these more shorter-term issues, or are these more longer-term structural issues?

Well, I think Central Appalachian production has got all the long-term issues that you and I and others have talked about, read about, and speculated over the last few years. Having said that, in the near term here for this year, our Central Appalachian production is very strong. Our producers are producing quite well. I'm not aware of any mining issues that we have other than the normal one-sy, two-sy stuff that crops up from day to day. So we expect our central app coal origins to be big, strong and robust both in our domestic and our international markets.

That was it. Thank you.

Our next question is from Matt Troy with Susquehanna.

Thanks for taking the questions. I'll keep it to 2 exactly. First question would be, you've certainly have trounced you competitor in the east with respect to export coal volumes. I think when all is said and done, you'll be 3 to 4x the times they did and we know why. I think the structural ground load out issue. But I was curious on the bigger piece, the domestic side, everyone's impacted by stockpiles and natural gas. But if you look at the AR reported numbers, Norfolk Southern is running up about 11% in total coal volumes. You guys are up in the low single digits. Given the very strong performance for you at export coal, just wondering was there something else on the domestic side that was hampering you near term, so those volumes don't look closer to your eastern competitor?

Matt, this is Clarence. We had really 3 issues that sort of impacted us, in my view, more than perhaps, our competitors. One, is our Florida utility base was down, both due to our burn and dispatch in the Florida area, generation in the Southeast in particular, electrical generation, was down 1.1%. And the main driver behind that, as we understand it is, is that on a year-over-year basis, we had a milder winter versus 2010. And as you know, most of the heat here in the south is done with electric heat pumps, and a second factor influencing that was lower natural gas prices, which impacted the sources of dispatch of what electricity was used. The second factor involved the bridge outage up in West Virginia at a fairly large coal producing mine for us, and we're working on getting that problem solved as we speak. And then there was a shift in dispatch by some of -- one particular major utility of ours in the Southeast from a CSX source plant to an NS source plant which was simply a balancing of what the utility stockpiles were. Going forward, we think that our utility coal will continue to grow and do quite well in 2011.

All right, I very much appreciate that color. My second question would be for Oscar. I know you guys performed your accruals in the second and fourth quarter, and certainly, in the last 2 years, you've received some very nice reversals given your very noticeable improvement both operationally and from a safety perspective. Can you give us a sense of run rate? I mean, should we expect something like that again to occur in the second quarter at a higher or lower level than what we've seen? I think it was $80 million in the fourth quarter, net $40 million year-over-year. Just a sense directionally, should we expect something and is it going to be higher or lower?

I mean, I think as you know, the more important part is the fact that personal injuries do continue to be at record low levels, which is, I think the biggest accomplishment that we like to talk about. Now given that, I think we'd expect more modest reductions to these reserves as we look forward into this year.

Okay. Those are my 2 questions. Thank you.

Our next question is from Donald Broughton with Avondale Partners.

I am worried though about your operating metrics. When I look at them, terminal dwell, train speeds, they got worse throughout the quarter. You've highlighted manifest trains as a problem but, I mean, I look at the intermodal train speeds and they fell from, like what, 29.6 the beginning of the quarter to 27.4 in the week just reported. Multilevel goes from, what? 24.6 at the beginning of the quarter to 20.4 in the week just reported. Coal is down from 18.1 to 15.6. Trains -- unit trains are down from 19.3 to 16.8. It looks and feels from the outside, looking in like a system-wide problem. Why shouldn't I be more angst about a steep ramp up in hiring and training cost to address this?

This is David, Donald. So when we look at where we have seen, I mentioned the regional sort of impact areas, and certainly, because we use the same routes for all that traffic, it has impacted our intermodal velocity. I mean, marginally, those are still not bad velocity numbers, they're just not at the high levels we've been at, where we know we could be in. We always focus on velocity as a key part of our productivity and just efficiency overall, and we're working hard to restore that. We showed you things like our premium service, maintained at a high level, we are certainly meeting our demands for as far as moving coal, moving export coal, and there's some velocity impacts around just moving that coal to the export terminals and handling it there. So it's not all related to the merchandise network issues. But it is one overall system, and the influences in the merchandise area have some marginal impact on the rest of our traffic flows. Again, not at levels that we have identified or defined for you as what we would consider not fluid. And we're doing what it takes to solve it on a consistent basis, and you'll see those measurements will improve as we go through the second quarter back to where you've seen them in the past.

So I should expect in coming weeks for train speeds to improve and dwell times to come back down.

I think you should, absolutely.

Our final question will come from John Mims with BB&T Capital Markets. John Mims - BB&T Capital Markets: It's been a long call, most of my questions have been answered. So just one quick little housekeeping thing. When you talked about bringing locomotives out of storage and bringing back some furloughed employees, did you give or can you give the counts for those? I mean, how many locomotives are still in storage? How many employees you still have on furlough?

Sure. In terms of our locomotive fleet, we have about 60 locomotives that are readily available in storage with sort of a very short time period preparing them for service. We've got about 30 more, they may take a little longer if we need to bring those out, we can, and just, again, taking a little longer to bring them back up to a high level of maintenance. And then we've got about 200 more locomotives that are, what we consider stored and not serviceable, which means they would have to go through some major work in order to bring those out. So a pretty good number when you look at our overall fleet, a pretty good number of locomotives still in reserve. And as far as our furlough employee situation goes, it's fairly minimal. There's about 200 employees in our conductor ranks that are in furlough right now, about 400 of all crafts. So there's a base to draw from. We have both the, we call them employees as needed, and we also offer some relocation or temporary transfer opportunities. A lot of our employees take advantage of when they're furloughed in order to get work. So again, we have a pretty good amount of those resources still out there, and as we hire through the year, covering our attrition and hiring for additional business, it's all a part of our plan and it's going on a very consistent basis. John Mims - BB&T Capital Markets: Was the 200 conductors included in that 400 all crafts or is it 600 total?

That is included. So that's 400 in total, and 200 of those are conductors. John Mims - BB&T Capital Markets: Okay. That's all I need. Thanks a lot. Great quarter. Thank you.

Thank you. Thanks to everyone for joining the call today. We'll talk to you next quarter.

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