Good morning, ladies and gentlemen and welcome to the CSX Corporation’s First Quarter 2014 Earnings Call. As a reminder, today’s call is being recorded. During this call, all participants will be in a listen-only mode. For opening remarks and introduction, I would like to turn the call to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation. You may begin, sir.

Thank you and good morning everyone. And welcome again to CSX Corporation’s first quarter 2014 earnings presentation. Presentation material that we’ll be reviewing this morning along with our quarterly financial report and our safety and service measurements, are available on our website at csx.com under the Investors section. In addition, following the presentation, a webcast and podcast replay will be available on that same 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; Oscar Munoz, Chief Operating Officer; and Fredrik Eliasson, 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 review the company’s disclosure in the accompanying presentation on slide 2. This disclosure identifies forward-looking statements as well as the uncertainties and risks 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. That said, with nearly 30 analysts covering CSX today, I would ask, as a courtesy for everyone, to please limit your inquiries to one primary and one follow-up question. And with that, let me turn the presentation over to CSX Corporation’s Chairman, President, and Chief Executive Officer, Michael Ward. Michael?

Thank you, David and good morning everyone. Last evening, CSX reported first quarter earnings per share of $0.40, down from $0.45 in the same period last year. These results reflect the challenging winter conditions faced by CSX and the broader transportation industry this quarter. In that regard, I would like to offer my sincere thanks to the talented and dedicated men and women of CSX who worked tirelessly to one of the worst winters on record to keep the network running as fluently as possible. I would also like to thank our customers for their patience and support as we work through the service impacts to meet their needs. Looking at the quarterly results, revenue increased 2% to $3 billion on a 3% volume increase. The underlying economy remained strong supports continued gain in CSX’s intermodal and merchandise markets, which more than offset the decline in coal business. At the same time, as Oscar will discuss in more detail later, we took many steps during the quarter to keep service levels as high as possible in a challenging environment. Dealing with these challenges also had the effect of increasing costs. As a result, operating income decreased 16% to $739 million and the operating ratio increased 520 basis points to 75.5%. As we look forward, we have the resources in place to support a gradual service recovery while also capitalizing on the market opportunities created by broad economic strength. We see the first quarter headwinds transitioning to longer-term positive momentum in the back half of the year as the economy drives additional growth in our merchandise and intermodal business coupled with an improving environment for domestic coal this year based on increased electrical demand, higher natural gas prices and reduced stockpiles across much of CSX’s service territory. Given these opportunities, we will more than offset the challenges of this quarter. For that reason, our earnings fit to remain intact with modest growth expected for full year 2014. Now I’ll turn the presentation over to Clarence, who will take us through the topline results in more detail. Clarence?

Thank you, Michael and good morning. This was a challenging quarter with the impact of the severe winter masking the underlying strength of the economy and the strong demand for our service. As you can see on the left side of the chart, total volume grew 3% and surpassed 1.6 million loads in the quarter with growth in merchandise and intermodal more than offsetting the decline in coal. As a result, merchandise and intermodal now combine for 82% of CSX’s total volume. Moving to the right, total revenue increased $49 million to over $3 billion in the quarter, reflecting overall volume growth and increased pricing across most markets. Here merchandise and intermodal now account for over three quarters of CSX’s overall revenue. Next the average, revenue per unit was down slightly, the impact of core pricing gains and liquidated damages was offset by the unfavorable mix impact related to growth in intermodal versus the decline in coal. Finally, coal pricing on a same-store sale basis remains solid across nearly all markets. Recall that same-store sales are defined as shipments with the same customer, commodity, and car type, and the same origin and destination. These shipments represented 75% of CSX’s traffic base for the quarter. On this basis, all-in prices was 0.5% in the quarter, primarily reflecting continued rate pressure in the export coal market. Since we continued to have greater variability in both our export and domestic coal business reflecting global market conditions and our fixed variable contract structure and since our merchandise and intermodal markets are becoming a larger portion of our business, we have again provided you with the same-store sales pricing for these two markets on a combined basis. At the bottom of this panel, you can see pricing for merchandise and intermodal averaged 2.6% for the…

Thank you, Clarence and good morning everyone. Well, as most of you know or heard by now, this past winter season was one of near historical portions in terms of the duration, the coal, the snow and ice and the corresponding impact on not only rail, but truck and airline transportation systems, their supply chain and frankly the overall economy was pretty significant. We at CSX certainly felt the impact of the severe weather and despite the best efforts of our operating employees, lost and worked around the clock to ensure we were able to deliver freight even in the worst of conditions. CSX’s operating performance this quarter was not at the high levels we’ve all come to expect. We assure you that the team is fully engaged to support both the gradual recovery and the strong demand that Clarence just discussed. Now looking at the operating results in the first quarter and beginning with safety. While CSX still remains a leader amongst the class one railroads, we did experience an increase in both personal injuries and in train accidents. The personal injury rate was up to 0.6 and the train accident rate rose to 2.35, both up from near record low levels in the first quarter of last year. Adverse operating conditions were a factor of these results, but we remained focused on prevention with the specific emphasis on avoiding catastrophic injuries. Let me now turn to the company’s service performance on the next slide. Our operating measures echo the challenges of the North American transportations we faced in the first quarter; originations, arrivals, velocity and dwell are all well off the record levels over the last two years. But as you’ll see later on in the presentation, service measures are stabilizing and beginning to improve. Turning to slide…

Thank you Oscar and good morning everyone. As Clarence mentioned earlier, revenue increased 2% in the first quarter as declines in coal revenue were more than offset by gains in merchandise, intermodal and other revenue. In the quarter, other revenue included $55 million of liquidated damages, an increase of $22 million versus the prior year. Looking at the remainder of 2014, we expect liquidity damages to be about $10 million for each of the remaining quarters. Expenses increased 9% versus last year driven primarily by the adverse impact of winter weather that Oscar mentioned and the cycling of real estate gains, both of which I will discuss in more detail in the coming slides. Operating income was $739 million, down 16% or $141 million versus the prior year. Looking below the line, interest expense was down $7 million versus last year driven by favorable interest rates on debt that was refinanced in 2013 and modestly lower debt levels. Other income was $7 million and income taxes were $208 million in the quarter for an effective tax rate of approximately 34%. This included the stated legislative tax change, which benefited earnings by $0.02 per share. Without this change, the effective tax rate would have been 37.6%. Overall, net earnings were $398 million and EPS was $0.40 per share, down from $462 million and $0.45 respectively from the prior year period. Now before we move on, let me take a moment to summarize the total impact that weather had on our first quarter financial results. We estimate that weather impact on the first quarter expense was around $90 million or $0.06 per share. Revenue impact is more challenging to quantify, but we estimate there was about $0.02 to $0.03 per share in revenue contribution that we were not able to recover in…

Thank you, Fredrik. As you’ve heard this morning this first quarter was certainly more challenging than most. And again I thank our employees and customers for their perseverance and patience over these past few months. As I look ahead, we have the right people and resources in place. And we’re working hard to return our network to the high levels of service and reliability that we have consistently produced for our customers while remaining a leader in one of the nation’s safest industries. With that as a foundation, I’m confident in the company’s ability to deliver modest growth for the full year 2014 and become more effective serving broad markets that will put the company in a position to sustain positive earnings momentum over the long haul. In that regard, we are particularly optimistic about the opportunities and plans to support increases in the intermodal and merchandise markets. Put another way, the underlying strength of our network and team coupled with a more stable domestic coal environment and a growing economy gives us confidence that in 2015 and beyond, CSX should again sustain margin expansion and double-digits earning growth. With that, we’re pleased to take your questions.

We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Bill Greene with Morgan Stanley. Your may ask your questions.

Good morning Bill.

Yes. Hi, good morning. Fredrik, can I ask you for a little bit of clarification on your guidance commentary, particularly as it relates to ‘15, because I think most of us recognize there are some extraordinary events so far this year. And so there is not -- we don’t have the same kind of expectations for this year. But in ‘15, when you think about that double-digit growth rate, what kind of gives you confidence in it? Can you kind of maybe walk us through a little bit of the assumptions behind it maybe, because obviously there are still concerns about how long export coal could be weak and these sorts of things. So I think it would be helpful to know kind of what goes into that comment?

Sure. So, just take a different year, so first of all, we said modest earnings growth for 2014. And while we feel strong and have good confidence in what we see for 2015 as the year by itself, we’re pretty bullish about the macro factors that we’re seeing, we’re pretty bullish about the fact as we get the network running better again, but 2015 by itself will be very strong year. The question is, will it be strong enough to make up for the fact that we’re only making modest gains this year. And that’s left to be seen. Clearly the domestic market on the coal side has gone stronger over the last few months. But at the same time, we continue to see the export coal market deteriorate. So it’s a little hard at this point to be too bullish about that part of the market. And so, instead of getting into individual component, what I have said throughout the quarter has been, so I am overseeing things right now for 2015, we are going to need some help as we think about this thing from a bottoms up perspective. And that help in coming different forms are going to come in terms of export market firming up, a little bit more domestic coal, little bit better pricing, more productivity, we just don’t know. But overall 2015 by itself would be very strong year and it’s just not sure it’s going to be as strong enough to make up for the modest earnings growth we are seeing here in 2014.

Yes. One point of clarification there, another comment you have made in the past I think on ‘15 has been sub-70 OR so a high 60s OR in 2015, are you walking away from that?

I think the same thing holds true there in order to get to that sub 70 offering ratio, we are going to also need some help from where we are seeing things today. It doesn’t mean we can’t get there, we certainly going to -- we certainly target it, we are trying to get there but we are going to need some help from where we are seeing things today.

Does the change to fix variable cost do anything to pricing there, if the domestic coal comes back, does this make pricing sort of weaker and does that effect of you?

It doesn’t really impact the overall trajectory.

Okay, alright. Thank you for the time.

Thank you. Our next question comes from Ken Hoexter with Merrill Lynch. You may ask your question.

Good morning, Ken.

Good morning. Michael, you mentioned a couple of times that you are prepared for a gradual recovery, Oscar mentioned a little bit about maybe not hitting the $130 million recovery this year because some costs are coming in. What if we -- I mean we have seen volumes already up 11% quarter-to-date, what if we get a little bit of a sharper recovery in terms of volumes, what does that do in order to flex the network and stress test, what your infrastructure is?

Ken, so that was a couple of questions, specifically your -- restate your question a little bit if you could?

I am just wondering because you mentioned, Michael mentioned a couple of times and I think as did you in terms of a gradual recovery you are prepared for that. What if we see, I mean you have already seen volumes up 11% starting off second quarter pretty robust, what -- how are you prepared if the recovery is a little bit stronger than that? Does that mean you’re fearful that if we get too much volume, it’s going to stress the network too much and you would be prepared just because you mentioned the word gradual recovery so many times?

Yes. Thank you, Ken. I appreciate that. So, the gradual recovery is based upon exactly the volume that we are seeing, so both backlog as well as the increased demand and again, our balance between productivity and ensuring superior service levels. And so we’re making sure that everyone understands that we -- our balance is geared towards our customer. And the volume that we’re seeing today is if you think of our sort of annual peak periods weeks 9 through week 23 is kind of at the peak of it. So right now we’re probably in the highest point of workload we’re going to have in the course of the year and we’re slightly improving. So we feel pretty confident around that. Now given that fact we’re bringing on some more locomotives, we continue to bring crews out of training and of course doing the hiring if required. But now the volume is a very welcome event for us after a couple of years of being in relatively dry.

Ken, it is Michael. The other thing I’d add to that is obviously with that demand which I think we’re doing a reasonable job of handling, it does slow your ability to recover. And I think the other thing I would point out, the Chicago as you know is a key interchange. And I think all the major carriers have issues around Chicago and those will take time to work through. And it does have a cascading impact on the rest of the network. So, we will continue to improve. I think the reason we used gradual several times, because we don’t think this is going to snap back immediately and that’s [to] try to make people understand that.

But I guess if we see a little bit stronger, is that something that you need to then reengage that, the one plan from years ago, is it evolutionary? I am just trying to understand is that something that could make this look even a worse if you get a little bit faster growth?

Well, we used our reengaging one plan, we still use the one plan to run our railroad, but I’m not overly concerned. I think the demand levels we’re seeing out there we can handle, we will work through. So I don’t see that as a major risk. I think it really adds more like as Oscar said, it’s an opportunity for us to help regain some of that lost earnings in the first quarter.

Wonderful and then just a follow-up on kind of Bill’s question there on the coal RPU. If you exclude the liquidated damages, how should we think about coal yields for the rest of the year? Fred, is that something we’re going to see accelerate on the declines given the change in contract structures or maybe you could just walk us through your thoughts a little bit on that?

Ken this is Clarence. I think you will see the coal RPUs will be very similar to what you saw in the first quarter. Our utility north business was up about 22% in the first quarter and that tends to carry a lower RPU; our southern utility was down about 6% in the first quarter and our rates on our export coal as we mentioned were slightly down. So that mix that particular mix will tend to carry through here in the second quarter, so you will see something very similar on the RPU going forward.

Great, I appreciate the insight and time. Thank you.

Thank you. Our next question comes from Brandon Oglenski with Barclays. You may ask your question.

Good morning Brandon.

Yes, good morning everyone. And it’s still snowing in New Jersey by the way, so it’s a pretty tough spring as well.

Never ending.

I just want to ask a longer term question, Michael. I mean coal revenue used to be 30 plus percent of your mix, it’s down to close to 23%, 22% this quarter. We’ve seen your non-coal volume expand 3% to 4% for the last few years. What are some of the impediments that keeps that non-coal growth from driving better operational margins and I know you’ve been talking about the quarter, but just thinking longer term, how do you get that base of revenue to drive better margins and better earnings growth looking forward?

Well, as Fred alluded to one, obviously the coal is a high margin business and our portfolio has changed. But we’re very optimistic, if we look at our intermodal and merchandise growth, it is good margin business. And we think as we go forward, if you look at our value creation we drove in the decade prior to this, it was about two-thirds price and one-third productivity. As we look at the company going forward, we still see strong value creation opportunities that are being more balanced, not exactly a third; a third; a third, but it’s going to be continued productivity, continued pricing above rail inflation and adding the element of growth. The intermodal margins are very nice now that we have basically double stack economics and the density of lanes and the other business we’re growing the crude by rail, the growth in our other merchandise businesses are all good margin businesses that will help drive us to that mid 60s operating ratio long-term.

Okay. I mean at what point though, do you need still coal revenue stabilization in order to just overall expand margins for the business; is that what we’re hearing today?

Well, we do need the coal to stabilize and we think we’re getting fairly close to that point now. This cold winter, the early blessing of this cold winter is a big drawdown to the stockpiles. Actually as Clarence alluded to, the demand in the north is very strong and actually the stockpiles are below where they ideally would like to have them. And the overhang we’ve been living within the south for the last couple of years, about three quarters of that was eliminated here. So, we really do see that domestic is very strong…

Yes. Just to add to that that Brandon also, in terms of the underlying core earnings power of our company over the last two years, it’s been pretty strong. I mean we’re still thinking of double-digit earnings range. The issue has been $800 million of coal revenue that has gone away. And in this year we are still seeing some headwinds in coal, which is why we only feel that we are going to have modest earnings growth. But we are pretty confident as I said once we get through this transition that we are going to return to the more normalized earnings growth going forward.

Okay, appreciate it guys. Thank you.

Thank you. Our next question comes from Chris Wetherbee with Citi. You may ask your question.

Good morning, Chris.

Hey, good morning, guys. Clarence, could I just ask for a little bit of clarification on your comments around the export coal market? I think you included it in the neutral category in the outlook. And I just want to get a rough sense of how you think about that relative to the sort of full year target. I think you still said in the mid 30 million ton range. Should we expect a bit of an absolute tonnage step up in the second quarter which I guess would be a little bit more neutral or is that still going to be a little bit under pressure on a year-over-year basis?

Well, it’s a little too soon Chris to sort of see what this export coal business going to do. Frankly it’s a lot stronger this first quarter than I anticipated that it would be. So, we are sticking with sort of mid 30s throughout the year. We have got in the second quarter right now about 80% of what we project for the quarter is tied up under contracts. And that’s obviously subject to market conditions. We think we have hit pretty much the bottom of where the global price of coal is going to be. The thermal is very low right now in Europe; the metallurgical prices are very low over in Queensland right now. So, as we move towards the middle of the year, we expect to see a more firming in the rate structure, and we can tell you a little bit more towards the middle of the year what it looks like. But right now, we are sticking pretty much to the mid 30 ton, mid 30s in the export market.

Okay, that’s helpful. I appreciate that. And then Fred, I think three months ago, you sort of mentioned that the first half of the year when we thought about 2014 was going to be the where you were lapping some of the real-estate gains and other stuff yet in 2013. When you look at the second quarter with the volumes bouncing back with still some cost lingering, is that still the right way to think about the first half is going to sort of be a bit, sort of flat to downish on a year-over-year basis and then maybe you get a little bit of upside, is that sort of how your plan is building as you think about 2014 showing modest growth?

Yes. I would say that probably flattish is a good way to think about the second quarter. I think we feel very good about the top-line. I think that you have still those things to cycle that you talked about real estate gains based on that what I said earlier liquidated damage probably down a little bit in the second quarter as well. And then we will have some lingering cost there for a period of time because of the fact that our network is not running as well, but offsetting that is a more vibrant top-line especially in the coal side and we expect it. So I think flattish is probably good place in the second quarter and then from there, we have to produce earnings growth for the rest of the year to get into that modest earnings growth for the year.

Do you think you mostly cut up on volume by the end of the second quarter, is that how the plan would sort of trend?

I would think that based on what you’ve seen here in the last few weeks where volumes are up double-digit that that would be a good assumption.

Okay. Thanks very much for the time. I appreciate it.

Thank you. Your next question comes from Allison Landry with Credit Suisse. You may ask your question.

Good morning Allison.

Good morning. Thank you for taking my question. So, I wanted to ask the question about core operating margins. And if I am adjusting both this quarter and the prior year for all the unusual items including weather or liquidated damages, real estate gains, the fuel lag et cetera, it doesn’t appear that there was very much operating leverage on the 3% volume growth during the quarter. So, I wanted to ask how we should think about contribution margins for the balance of the year, considering both the rate cuts on the export coal side and the fact that you plan to bring on additional locomotive and people.

Yes. So obviously it was a noisy quarter in terms of the ins and outs. But I think you are right, if you do adjust for the real estate gains in both the years, you adjust for the fact that you did have weather impact here, and you will see that you had modest earnings growth year-over-year. And now that’s an even factor in also the fact that we had taken our export rate down quite significantly. So once you adjust for all these things, we as I said in my previous answers, the core earnings growth of our company and margin expansion is still very healthy, we’re just dealing with a lot of factors right now that we have to cycle through. And as we get through this, real estate gains will be behind us here as we get through the second quarter where the tail end I think of what we reasonably can do on the export side; and the rest of the business is doing good; coal on the domestic side is coming back. We feel we’re going to return back to normal incremental margins going forward. But it’s just a lot of noise right now that prevents us from coming down to the bottom line.

Okay. And a follow-up question on the tax rate benefit during the quarter. I did notice that there was a comment in the earnings review that the future corporate tax rate would be reduced. I mean should we expect sort of a similar tax rate as we saw in 1Q or is there any sort of prior period catch up?

No, we had a -- this is a state legislative tax change that impacted our earnings by $0.02 here in this quarter that made effective tax rate 34%. If you just ask for that, we were right at 37.6%. So, our guidance has always been somewhere around 38%, that’s very conservative place to be and then we think that we should be the place going forward as well.

Okay. So, I guess in terms of the comment that said that this will reduce the future corporate income tax rate, is that…

I don’t know about that comment.

Okay.

So maybe David will talk about it later, but there is -- nothing has changed in terms of our overall tax and we would like to of course have a lower tax rate. But nothing is imminent around that.

Perfect. Okay. Thank you so much.

Thank you. Your next question comes from Rob Salmon with Deutsche Bank. You may ask your question.

Good morning Rob.

Hey, good morning guys. Thanks for taking my question. Fred you had called out about 7 million incremental utility coal counts you guys are going to be taking on that you have got now line of sight into the back half of the year. How should we think about this as we look out to 2015 as well? Does this give you guys conviction that we’re going to see utility coal point that we stabilize to growth as we look out even in spite of some of the, I think the 4 million tons that you’re expecting to go in ‘14 and ‘15 from some plant closures?

Well, a couple of things there in your question just to clarify. So first of all, we do see several million tons of incremental demand here this year, because of the cold winter. Then I think your question was around 2015 and beyond the impact of map. And what we have said is that as we look at the movement of coal for 2013 into plants that we expect to be close, because of map, we have identified 7 million tons that we think is going to come out between ‘14 through ‘18 essentially. 4 million of those tons we think is going to come out in ‘14 and ‘15 and the remaining 3 million in the years beyond that between ‘16, ‘17 and ’18. Does that answer your question?

That answers that question with regard to the several million tons that are coming out in the back half of the year. Will we have continued -- are you expecting that, do you have line of sight in terms of that traffic looking out ‘15 as well where you have got a lot of conviction that utility coal volumes, how that be stabilized and are growing as we look out over the next several years?

Well Rob, this is Clarence. We expect that our growth in coal continues in through 2015. In fact the growth for the rest of this year in utility coal will be in the mid to the high single digits as a lot of those plants that Fredrik has talked about is that will be closed in those years in terms of tons, the other plants that will remain open will simply run harder to absorb those tonnage.

Thanks, appreciate the color.

Thank you. Our next question comes from Bascome Majors with Susquehanna. You may ask your question.

Good morning.

Good morning, guys. One for Clarence here, we’ve talked pretty extensively about export coal pricing pressure over the last couple of years. And you said again today that you kind of [have been] to what you can do to help incentivize your customer’s competitiveness in that market. If my math is right, it looks like that yields have come down a bit on domestic side of business over the last few quarters as well. I know you called out mix earlier but can you directionally kind of walk us through what’s driving that drop in domestic yields between mix and any pricing or fuel that’s in there as well?

Well as I said earlier on the mix side, the [plus point] preponderantly in the mix, the utility coal which carries a much lower rate than those, the northern utility coal which carries a much lower rate than the southern utility coal is up about 22% this year. The southern utility coal which carries a considerably higher rate due to the much longer length of haul was down about 6% then when you put it in the export coal which we said has been slightly down in terms of rates. Those three combinations that put down have led to the lower RPU, very little of that has been driven at all by the fixed variable charges in our coal rates. So, that’s the principle preponderant drive.

Okay. And a bit more broadly on the similar theme, you talked about competitive gains helping your domestic coal volumes this quarter. What’s the competitive dynamic like in that business today and has the volatility we’ve seen over the last couple of years given you more opportunities to go after your competitors’ business and vice versa than after yours?

Not really, it was a single account in the north that the customers put up more competitive bid and involved the one-time issue. So, we really haven’t had many opportunities in that area at all.

Is there any way to quantify how much of that is driving your domestic gain which you talked about in the previous question?

Very little is driving our domestic gain in that area, most of it has been a result of a burn in the northern utilities and their stockpile depletion.

All right. Thanks for the time this morning.

Thanks. Your next question comes from Jeff Kauffman with Buckingham. You may ask your question.

Good morning, Jeff

Hey, good morning everybody. Thank you very much. I think the point on the weather has been well made. But I have a question concerning some of the noise we’ve been hearing on the regulatory side. And I don’t know if you’re prepared to comment, but there recently were hearings on the competitive switching, they’ve put out some requests for recommendations on the revenue adequacy questions. How do you view the regulatory environment right now? And what are your thoughts out there on some of the discussions?

Yes Jeff, this is Michael. So, on the export of 7/11 which is the [met leave] proposal as you’re well aware, we did testify at the March 26th hearing opposing that proposal, because it basically provides no public benefit at all. The early possible beneficiaries -- and you may recall there is a study commissioned by the STB a number of years ago by the Christensen Group is that very few shippers would benefit to the detriment of everyone else and we think that’s still true. It would degrade service, it would introduce uncertainty in the marketplace, disrupt our plans for growth and capital investments, strain prior investments. And if you think about it, our witness Cressey Brown that day at the hearing did say that you could introduce a perpetual winter like we’ve just seen because you’ve been putting unnatural moves in there. So, we’re hopeful that the STB in its wisdom will not do anything to disrupt what is working quite well today for our customers. On the side of the revenue adequacy piece, we actually welcome that examination. As you know, that’s an issue that’s I think right for examination in that, no time of the past [leveraging] but anywhere close to revenue adequacy. Some of us are approaching that, but those issues around what is sustained revenue adequacy, how many years do you have to be doing it through a business cycle, what is the appropriate criteria. And we really welcomed that examination to try to bring better clarity to what will happen as the railroads continue to grow in their financial health. And you’d like to bring a question of replacement cost into that equation, because we do have to replace old assets with new dower. So, we think that’s really right one and we’re glad that they call for it.

Okay. Well, thank you very much and congratulations.

Thank you.

Thank you. Our next question comes from Scott Group with Wolfe Research. Your may ask your question.

Good morning Scott.

Hey, thanks. Good morning guys. Just want to clarify one think Clarence, did you guys have to take the export rates down further in 2Q as the new benchmark kicked in?

Scott we did in a couple of lines with a couple of customers to make them competitive, yes.

Okay. On the intermodal side so nice volume growth, but still some pressure on the yields and wondering if that's a pricing thing, is that mix. I wouldn’t think it's mix just with domestic growing faster than international, but maybe it's mix. And then with the truckload pricing that's really starting to get better, should we start to think about your intermodal pricing getting better going forward?

Two answers, it was definitely and specifically weather related, it was definitely a mix, it was in our door-to-door product, it had almost 2.5% impact, it was in the spot market where we couldn't price because of the weather-related issues this quarter. The other pricing, the other areas was positive. Yes, we are seeing a firming in the spot market with truck capacity tightening up in the U.S. in just about every regional area that we serve. So, you are seeing a more firming in the truck pricing.

Okay, great. And then just last thing maybe for Oscar or Michael, you guys have done such a great job taking resources out of the network following ‘08, ‘09 after a winter like this and maybe with volumes getting better. Are there longer term implications or do you need to spend more capital or bring back on a more sustainable basis more people or equipment?

Yes. Hi Scott, it's Oscar. Seeing the operations no longer the financial guy can always use a little more capital here and there. But generally we had adequate level of resources; it’s just that the winter conditions were harsher than in a long, long period of time, which created a little bit of a log jam. I think there is a high level of learnings we’ve had operationally that we’ll obviously include, but we went into the year, into the start of the year with low locomotives, we’ve done a lot of the work on the plan of road over the course of time. And so from a long-term perspective, there are places that we will strategically sort of review with the coming thing, but nothing immediately evident that would have been that helpful. Chicago land terminal, which as you know is the interchange between all of the different railroads that’s where the [create] project is really making a lot of that investment. And I think continuing that is probably the biggest investment the industry can make to make that fluidity in that location better.

So, any implications on capital, it sounds like not really?

Not now.

From CSX’s perspective. Okay. All right, thanks for the time guys.

Thank you. Our next question comes from Jason Seidl with Cowen & Company. You may ask your question.

Good morning, Jason. Jason Seidl - Cowen & Company: Good morning, guys. Two quick questions here. One for Oscar, I’m sorry one for Clarence. Clarence you mentioned you guys had to bring down some of the export rates due to the benchmark weakening a bit. If the benchmark starts recovering, how quickly can you bring those rates back up?

Within a quarter. Jason Seidl - Cowen & Company: Within a quarter. Okay. And the last question is for Michael. Michael I have done this a while and Chicago has always been a major interchange issue for the rail industry. It should have improved I guess over the last 10 years with (inaudible) [EJ and E&N] and taking some pressure off of sort of that downtown area? What’s the need in going forward in terms of capital investments by the railroads maybe as jointly or with some help from the government because it’s pretty much still sort of playing after all these years?

Two things; one, you’re certainly correct that we need to put some better infrastructure and that is the create project which we’re in the process of working and there is money from the railroads, from the state of Illinois and federal money to improve the fluidity in Chicago. But I will remind you though, friendly we looked at the statistics in Chicago going back to I think it was 1871, they kept records from then. Normally you can have a cold winter or you can a snowy winter, you’d rarely have both. This was the third snowiest winter in Chicago, the third coldest winter in Chicago. I think they had 32 snow days, they closed schools in Chicago, which is really rare. So, this is an extraordinarily tough winter that exacerbated some of the natural challenges in Chicago. So yes, as an industry we are putting more capital in there, but I think we do need to put the context of how severe this winter was when we think of what happened this year. Jason Seidl - Cowen & Company: And what happened this year, maybe accelerate some of the industry’s plans to pick Chicago?

Well, quite frankly the railroad piece, the money for the railroad elements of it because create not only helps the rail freight infrastructure; it also helps the commuters, it also helps the interface at [gray] crossings and those sorts of things. The money related to the rail freight infrastructure is being provided by the rails today. The federal and state money for the other aspects, the commuter and the interface, crossings et cetera is coming a little bit slower just because of some of the budget challenges in those states comparatively. So, that’s moving at a slower pace, but the freight piece is moving forward faster. Jason Seidl - Cowen & Company: Okay. Gentlemen thank you for the time.

Thank you. Our next question comes from Ben Hartford with Robert W. Baird. You may ask your question.

Good morning Ben.

Hey, good morning guys. Just want to circle back Fredrik, we addressed this earlier in the Q&A but in terms of abandoning that sub-70 OR target for 2015. I want to understand the reasons I believe it’s on the export coal side, specifically on the pricing side, but Clarence I think you as well have made a comment about volumes frankly in the first quarter being slightly stronger than you guys had anticipated and we know that the settlement prices are lower here on the margin in the second quarter. So Fredrik maybe if you could provide just some context into really what is driving the lack of confidence there for 2015, in terms of that line of sight to the sub-70 OR and when you say that you will need some help, is it simply on the export coal pricing front or are there other opportunities even at current pricing levels in the export market that would allow you that would provide for that help to get back into that sub-70 OR for 2015?

Sure. And I won’t say we have abandoned it, what we said is that we need some help from where we see things today. As we do a bottoms up view of thing, we are going to need some help and that help can come from different places, it doesn’t have to be from export coal, but particular to that while Clarence up, you are right, our export coal market has done better than we’ve thought from a volume perspective, as you also heard, we will continue to make adjustments on the right side to make sure we optimize our bottom line and of course try to do what we can to keep the U.S. producers in the business. At these low levels in terms of underlying commodity prices, it is unknown to us or it’s difficult for us to predict, how long this would be able to sustain, how long will the producers be able to be competitive in marketplace. So until we see some sort of an uptick there, it’s hard to be too bullish on 2015 in terms of what our overall volumes will do. But it's not defined to that, if we can as I said earlier get help from other places as well in terms of more price, more productivity, the economy is doing well. And so we continue to target, we continue to think that that's where we want to be. At the same time, one of the things that we try to do as a company is to be very transparent about how we see things and that's really I think pretty consistent with the two public appearance I had in the quarter in terms of saying what we need in order to be able to get there. We certainly haven't given up volume, we certainly haven't abandoned it.

Of course, okay. And then if I can ask a follow-on in terms of the mid 60s OR target longer term. Do you have comfort that at current global segment prices on the export coal market that you can -- that this mid 30 million tons run rate is an appropriate run rate going forward. And that with the component of productivity gains and volume growth and coal price growth, you have visibility overtime to be able to get to that mid 60s OR that how we should look at that longer term target?

Yes, we think about pulling the three levers that we have, price, volume, productivity, so we do a long-term modeling. We still feel comfortable that we will be able to get that mid 60s level, obviously it’s taken longer than we expected for that, because of the fact that we have lost $800 million from coal revenue in two years alone here and we still have some headwinds, we're facing this year. But even at the current levels as we model things out, we will get there overtime, it’s just look at longer than we had anticipated originally.

Perfect. Thank you.

Thanks. Our next question comes from Cherilyn Radbourne with TD Securities. Your may ask your questions.

Good morning Cherilyn.

Thanks very much and good morning. In your testimony before the STB last week I think I heard Cressey Brown indicate that you had recently acquired a new route through Chicago. And just given all of the focus on Chicago currently, I just wondered if you could give a bit of color on that and how it might be strategic to you going forward?

Yes Cherilyn, this is Michael. We acquired the Elliston sub of this Canadian National in our swap ratio. When they acquired the EJ&E, they didn’t need that route any more. So, we acquired that from them and we are currently once this weather is broken we are making improvements to that route to allow additional fluidity in the Chicago area.

And how long would you expect those investments to take before you start seeing some benefits?

Those are -- Cherilyn, this is Oscar. By mid-year, let’s say July we should be fully operational.

Okay. And then just one last quick question; in terms of the double-digit volume growth that we’ve seen over the last couple weeks in your carloads, do you have any feel for how much of that is pent-up demand versus real organic traffic growth?

I think a lot of that is pent-up demand, but at the same time though we still feel that the economy, as I said in prepared remarks, continues to be very vibrant and we are also seeing our coal business now finally is picking up. So the underlying volume trend is also very positive, but there is no doubt that there is a fair amount of that double-digit volume growth that is related to just catching up of things we didn’t move in the first quarter.

But I would add to that, the economy is forecast to grow let’s call roughly 3%. We think our merchandise and intermodal business we can grow faster than that rate as we did last year, we will do this year as well. So we will be some amount above what that economy is doing with the great service product we’ve been providing. So, we do need to temper down a little bit, because it is pent-up demand, but it’s also a strong demand in the base business.

Great, thank you. That’s all from me.

Thank you. Our next question comes from David Vernon with Bernstein. You may ask your question.

Hi David.

It’s David Vernon with Bernstein.

Hi David.

Hey good morning. Just maybe a higher level of question, if you think about the slower rate of operating margin development and keeping CapEx is higher, is there a point where you need to start thinking about the capital budget a little bit differently just to ensure overall returns are kind of getting to an upward trajectory?

David, this is Michael. One, I think what I think is the slower operating margin growth; I don’t know that I’d necessary agree to that base premise. I mean if we look at our business and strip out the effect of the loss of that coal business over the last couple of years, we are in the high single to low double-digits growth on the other businesses, and once we get through this transition, we will produce that kind of growth. Now to do that we have to make the investments necessary to support it, so that 16% to 17% of revenues that we’ve held with the last few years, we still think that is the appropriate level. We do need to make strategic investments in our intermodal as we’re going to capture that growth opportunity, we think there are 9 million truckloads out there that we can go after and we have to make the investments necessary to do so. So we still think the 16 to 17 is the appropriate level and it will produce value for our shareholders as we grow the business and the margins.

You don’t get concerned at all about the asset turns created by the mix headwind towards lower revenue intermodal?

No, because of lots of lower revenue doesn’t mean it’s a lower margin. So if we look at the margins on the intermodal business it’s as good as our other margins for our merchandise businesses. So, as good margin business it’s lower RPU, but what we get paid for doing is producing margin not necessarily revenue per unit. So we think it’s good business and we’ll lower the overall RPU, but we’ll increase our profitability, which is what we really need to do.

All right, I appreciate the time.

Thank you. Our next question comes from Walter Spracklin with RBC. You may ask your question.

Good morning Walter

Good morning. Thanks for taking my call here. I just have two follow-up questions really, one is for Clarence on the export coal side and the guidance that you provided with regards to the neutral on the second quarter, I know Chris kind of asked this. But just to clarify, if we reflect in -- you did 11.5 million tons last year, you did 10.5 last quarter even though we do say 10.5 this quarter it would imply a step down of over 20% in the back half of the year to get to about 36 million tons. So I just -- is that what you are guiding or are we just giving a little bit more room for upside in the case that’s the back half turns out to be better than we are expecting?

Walter I guess someone was to hint me up (inaudible) what are you really guiding? I’m guiding that this market is very volatile that has a $120 a ton in Queensland, you will get there, your guess is as good as mine, it is extremely volatile. With thermal coal sale in Europe between $75 and $79 a ton, some of the things we’ve seen in the first quarter really defy what has been historical norm. It’s highly speculative, we’ve worked with our producers to try to stay in the marketplace right now and it’s just too soon for us to bid on. So we’ve got a fairly clear line of sight of what the next two, three months look like, but to tell you what the third and fourth quarter looks like is just going way out in the [lamp].

Okay, all right. That makes a lot of sense. Okay. I appreciate that color. Staying with you Clarence here on intermodal pricing, again a clarification question, lot of moving parts in the last few quarters with regards to fuel recapture or quite the opposite of lower fuel surcharge, firming truckload market or trucking market. If we strip all that out now on a base level going forward, we do see average RPU in intermodal flat or up going forward?

Up.

Okay. That's all my questions. Thanks very much.

Thank you. Your next question comes from Justin Long with Stephens. You may ask your question.

Good morning.

Good morning. Thanks for taking my questions, first one I had was on core pricing. You talked about overall core pricing being up about 50 basis points year-over-year, but could you talk about the headwind this number saw from the lower level of rail inflation. I'm just trying to understand the overall core pricing environment absent any changes in inflationary mechanisms. Would you describe it as stable or are you seeing some type of moderation?

Well, you saw core inflation was around 1.4% from global insight. When you took coal out of the mix, we were about 2.6% that was down from what it was a year ago, which was around 3.3% in the merchandise and the intermodal markets. So, we are pricing above rail inflation in our basic markets. The coal markets are being mainly impacted and influenced what's happening in the global coal market. So I would tell you that we are seeing stability in our general freight, in our general merchandise markets. As we are seeing capacity demands as just witnessed by the previous questions, we think that will firm up through the year as we go forward from where we are today. Depending on what happens to these coal markets, we think we have seen the near bottom start to approach in global markets in coal. So, the trend should be upward in the future in there.

Okay, thank you. That’s helpful. And as a follow up, I was wondering if you could talk about the industrial development opportunity and your current pipeline of projects seems to be pretty robust, is there any possible way to quantify how much this could contribute to volume growth in 2014.

I don’t have that number right off the top of my head. I am sorry.

Okay, that’s fine. Maybe you could just provide some color on some of the opportunities as far as industrial development and what you are seeing and just kind of how that pipeline looks in general?

Well one of the things that we are seeing as a result of the expansion in the oil and the gas industry is a lot of the development is happening in the Marcellus area with fractionators either located on CSX or on the short lines that be into CSX. We have 5 new fractionating facilities located on. So each one of those are producing between 15 and 20 cars a day of byproducts of the gas industry that are coming on to CSX. That’s positive for us. We have 2 new ethylene crackers that have been announced on CSX as a result of that. So those tend to be for lack better phrase, [annuities] going forward for us on CSX. So you are seeing a lot of developments in those areas. In the last I guess 18 months we have seen a lot of activity in general in industrial development as economies begin to expand with new industries on CSX. I think last year we announced almost $1.5 billion, $2 billion worth of new industries that are locating on CSX. So you are seeing a lot of economic activity now as economy is getting to expand.

Okay, great. That’s helpful. I’ll leave it at that. I appreciate the time.

Thank you.

Thank you. Our next question comes from Keith Schoonmaker with Morningstar. You may ask your question.

Good morning Keith.

Yes, thanks. I am in Chicago and actually calling you from an igloo this morning. I’d appreciate those comments on uncertainty of export coal demand and wanted turn to domestic with a couple of quick questions. Fredrik mentioned expectations of 2015 was probably the midyear and domestic coal volumes. I know there is no crystal ball, but I just want to clarify for your thinking that based on current information you expect domestic coal will be flat or up from here on say indefinitely next 3 to 5 years?

No, no, we expect growth in the mid to high single-digits for the rest of this year in 2014 in domestic coal.

And then beyond the current year?

Well I expect 2015 also be -- I don’t see much beyond 2015 right now at this point.

Okay. And then if I recall correctly, Illinois and Powder River Basins constitute about half of your recent utility carloads. And I’d like to ask about your expectations for next same time period 2 to 3 years from now?

2 to 3 years, right now you’re right; it’s running just slightly above 50% in both of those markets. So, we expect to see growth continuing in both, particularly in the Illinois Basin coals.

We’re actually making capital investments on that line near Illinois Basin to allow us to muster those unit trains more efficiently. When is that expected to be done, Oscar?

Again probably third quarter of this year.

So we’re putting infrastructure in because we do think that Illinois Basin is going to be a continual growing market for us.

You did that infrastructure’s track?

It’s (inaudible) to be able to assemble unit trains and move them more efficiently.

Thank you.

Thank you. Our final question comes from (inaudible) Macquarie Capital. You may ask your question.

Good morning. And thank you for your patience. My first question relates to again the outlook for the export coal market. Could you help us understand your leverage to recovery in met-coal across your book of business contracted and spot and also what your assumptions are with regards to this market in your guidance or double-digit EPS growth for next year?

The leverage in met-coal, is that your question?

The rebound, what kind of leverage…

Yes, how fast can you benefit from recovery in pricing? And then on volumes given that you have mix of contracted and spot business and if you could also clarify how much of your contracted business is up for renewal this year, that will also help?

Okay. Our export coal business is priced on quarterly basis. So our ability to leverage and to response to the marketplace, we would be able to do so on a quarterly basis.

So bid upticks, we can move…

And this fall within the quarter.

All right. And with regards to your guidance for ‘15, what kind of outlook do you have embedded for export coal?

I think what we have said is that, that is one market that we are concerned about in terms of how long we can see the sort of positive volume despite having the underlying commodity markets as weak as they are, but we haven’t given a specific number in terms of what we are assuming for 2015.

Thank you. And my follow-up is really regards to the past to your mid 60s operating ratio long term, can you help or shed some light on to, into what you mean by long term and the main drivers especially from the hurdle put by this hard winter?

Well, in terms of the mid 60s, we’ve talked about earlier on the call today. And we -- because of the fact that we’ve lost so much momentum in the $800 million of coal revenue that’s gone away, it has been pushed out longer than we have originally anticipated, we are going to have to get there little differently than our original plans, but we are still confident and as we look at our long-term modeling, as we look at our pricing, productivity and volume opportunities that we will get there, we are not going to put a timeframe on it today, but clearly that we need to be long term in order to be able to reinvest in the business the way we wanted to be able to do.

So, it could be [3 or 5] I guess?

We have not put a timeframe on that.

Thank you very much.

Well, everyone thank you for your attendance, interest in the company. And we’ll talk to you again next quarter.

Thank you. And this concludes today’s teleconference. Thank you for your participation in today’s call. You may disconnect your lines.