Good morning, ladies and gentlemen, and welcome to the CSX Corporation Fourth Quarter 2017 Earnings Call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode. Following the presentation, we will be conducting a question-and-answer session. [Operator Instructions] For opening remarks and introduction, I would like to turn the call over to Mr. Kevin Boone, Chief Investor Relations Officer for CSX Corporation. Thank you sir, please begin.

Thank you and good afternoon everyone. Joining me on today’s call is Jim Foote, Chief Executive Officer, Ed Harris, Executive Vice-President of Operations and Frank Lonegro Chief Financial Officer On slide two with our forward-looking disclosure followed by our non-GAAP disclosure on slide three. I would also like to highlight our upcoming investor conference scheduled for March 1st in New York. Registration information will be found on the CSX Investor Relations page. With that, it is a pleasure to introduce our President and Chief Executive Officer, Jim Foote.

Thank you very much Kevin. It’s great to have the opportunity to speak with you again today. Before we get started and going through the presentation, I’d like to thank all of you out there who sent their condolences concerning Hunter’s passing. Hunter was a true legend and CSX would not be in a position it is today without the tremendous changes that he was able to make during his time here. I am committed to seeing his vision through and making CSX the best railroad of North America. Before I get started, let me say again that as I said in the conference call on the morning of December 15 when I was named acting President and CEO. I am committed to follow through on implementing the scheduled railroad business model at CSX. After spending my entire career in the railroad business, I have experienced firsthand the benefits that are realized by customers and shareholders and changing to the scheduled railroad way of doing business. To reinforce my commitment to driving this change, I took steps quickly to emphasize this message. Just a few hours after assuming the position in my first official act as CEO, I advised the head of engineering to bulldoze one of the hump yards that Hunter had closed. Atlanta hump yard today is flat. There is no turning back. I did make changes to the sales and marketing structure to simplify the organization by collapsing the leadership group into three business units and aligning certain functions into other departments. I made changes in the operating department to bring clarity to the key responsibilities. The operating department both at the staff and field levels obviously has the most responsibility to execute and deliver the efficiencies and service improvements from schedule railroading. While we now have…

Thanks Jim and good afternoon everyone. Turning to slide nine, we are encouraged by the fourth quarter’s financial performance. The service and efficiency improvements Jim just laid out on the previous slide have generated momentum on the financial side as well. Reported revenue declined 6% but was flat on a comparable 13-week basis despite some gains across all markets and higher fuel recoveries were offset by the impact of lower volume and negative mix. Total expenses were 14% lower in the quarter, driven primarily by significant efficiency gains that benefit the tax reform on the company’s equity affiliates and cycling $116 million of cost [indiscernible] last years extra fiscal week. While I don’t plan to call out the impact of the extra week as I walk through the expense line items, we have provided that level of detail in our quarterly financial report. Labor and Fringe savings were driven by a 12% reduction in average headcount, incentive compensation was also lower driven in part by the reversal [Ph] about $28 million in former CEO stock option expense accrued in quarters one through three. MS&O expense increased by 5%. As a reminder though, fourth quarter 2016 MS&O benefitted in a $115 million real estate gain which was partly offset by real estate gains in this year’s fourth quarter as well as $70 million of efficiency savings. Fuel expense was up primarily due to the 23% increase in the per gallon price despite continued gains in fuel efficiency. The $29 million restructuring charge in the quarter and legislature [ph] departures of seven executives in early 2017 and those more recently. Equity earnings of affiliates is the new line item on the income statement, necessitated by the impact of tax reform on non-consolidated subsidiaries in the quarter. As we have done at the…

Thanks, Frank. For 2018 on the concluding slide here we expect revenue in 2018 to be up slightly with merchandising intermodal services offerings much better than last year. I expect to see more favourable results in the second half of the year. In the first half of the year, we will face tough comparisons on export coal rates which are linked to the price of the commodity. However, we see the coal markets continuing to remain healthy from a volume perspective. As we continue to improve our service, I believe we will begin to see increasing new opportunities as we look beyond 2018. I continue to expect improvement from a cross perspective. I reiterate we will continue to implement the scheduling railroading model and I see no reason to believe we can’t deliver the results that Hunter thought we could. We should see a solid step-down in the operating ratio every year for the next three years. I expect CapEx to be $1.6 billion down significantly from 2017; this is bang on where Hunter said we should be. I am committed to investing and maintaining a safe and reliable railroad. As we become more efficient, we are able to achieve more with each dollar we spend. As Kevin said, we have scheduled our investor day for March 1. We will provide additional details in our financial outlook at that time. I hope all of you can attend and look forward to meeting with you and discussing our plans in much greater detail at that time. And with that, I’ll hand it back to Kevin and we can have question and answers.

Thank you, Jim. In the interest of trying to get to everyone in the queue, I’ll ask our analysts to limit themselves to one question and a follow up if needed. Operator, we’ll now take questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Tom Wadewitz of UBS. Your line is open.

Yes, good afternoon. I had some questions for Ed. Is Ed on the call today, Ed Harris, sir?

Yes, I am Tom.

Okay, great. Good to hear your voice Ed and you know look forward to I guess hearing from you as part of the team. I know you haven’t been there long so it’s probably tough to have a strong read on things but I just wanted to hear your thoughts on what do you think is important to big changes in the network last year, the metric seemed to be very good at the present time, but what do you think are the most important things for you and the team to focus on the operating side to continue that momentum and to see the further improvement in financial result?

Well Tom, I think it’s obvious what Jim said. We are going to continue to follow Hunter’s plan of pursuing a scheduled railroad environment that in turn will lead to less train starts, more engines and storage, less equipment and a more fluid network and the table has been set. I read in one of Jim’s earlier reports that the heavy lifting has been done and I really agree that it has been done. I’ve been very impressed with the staff here at CSX, the field forces I’ve had a chance to meet all my direct reports and now I am spending time with their staffs and just get the handle on the railroad. I’ll start hitting the field here probably within the next two weeks and follow through on the plan, but the plan is intact as it stands right now but I think we’ll dig a lot deeper than now where we are at today.

Okay, that’s great. And Jim, if I can ask you to give your thoughts on just what the top priorities for execution in 2018 would be for you as well.

You know Ed and I are in complete alignment. We both think alike and we both think and speak Hunter. This is the way we learn how to run the railroad so we are going to do the same things. Train length, velocity, terminal dwell continue to focus on driving down our fuel expenditure and you know running our trains with fewer locomotives. Car miles per car day, you know we just – we live and eat and breathe these metrics and that’s how you deliver the financial performance that we did at CN and Hunter did at CP. So it might sound boring Tom, but it’s the same old, same old that’s exactly what you’ve heard all along and we are well on the way to accomplishing that.

Okay, great. All right thank you for the time.

The next question will come from Brian Ossenbeck of JP Morgan. Your line is open.

Hi guys thanks for taking my question. Jim, just wanted to start where we ended up, I think if you could just give a little bit more framework around the 2018 financial outlook knowing you are going to discuss a lot more for the long term at the coming investor day but if you can just breakout what you think will be the major components of the revenue up slightly, you are going to continue to it sounds like churns in the intermodal volumes. You’re looking for perhaps some volume headwinds and then just more specifically on the OR guidance looking for another solid step-down this year and every year for the next several years if you can give us a little bit more detail on that, you know what that looks like if it’s similar year to this year or is it going to kind of continue but at a slower rate from 2017?

Well Kevin will shoot me if I give away all of the details that he’s got planned for New York. But just again a little more flavour on what I said in my concluding slide. It is not the topline growth up slightly. It is kind of similar to what we’ve been through at CN and CP when you implement a new operating plan and you implement it as quickly and aggressively as Hunter did here. Clearly there was disruption in the network and if some business clearly went away. Then there was the intentional [indiscernible] marketing of the 7% of the intermodal traffic when we deviated and pivoted away from the hub-and-spoke system and closed the Northwest Ohio facility. I do not envision those kinds of disruptive changes occurring in the future in 2018 and so our goal right now on the merchandise side of the business is to earn back the trust of our customers and to begin to grow that business and so because it was only a few months ago, we were in gridlock and fighting with the customers and the [STB] [Ph] you know it would be naive to me to assume that all that business is going to come back to us in the second week of February. So as I said later in the year I think we’ll begin to have more success in growing our merchandise business segment but I’m being cautious in our forecast. Intermodal side of the house, again as our service metrics improve, I expect to see that comeback, we were successful in offsetting that 7% decline with a very strong fourth quarter especially the service that we deliver during peak season. So I would hope that intermodal will continue to do well and I personally have been meeting…

Okay, thanks for all the details Jim. A really quick one for Frank, if he could just tell us where you expect cash taxes to go relative to last year and then versus the 25 effective rates I would appreciate it? Thank you.

Thanks Brian. We gave you the effective rate obviously in Jim’s prepared remarks, remember obviously as you step down into the cash tax way from there you are going to have the essentially equivalent to 100% bonus depreciation and then you’ve got your state accommodation of cash and deferred. I think if you implied the same level of slip if you saw previously on a lower base you’ll get to the right answer. It’s going to fluctuate as it always does quarter-to-quarter, and year-to-year but that will give you a good place to start.

Okay, appreciate the time. Thank you.

Our next question comes from Allison Landry of Credit Suisse. Your line is open.

Good afternoon, thanks for taking my question. Jim, I was hoping I could ask a follow up question on Intermodal and you know given that you are essentially awarded the credit for building the CN intermodal franchise as we know it today. Do you see anything at CSX you know understanding the fact that it’s at a different spot and you know where CN was years ago. Is there any opportunity to build out CSX’s franchise in a similar way or do you plan to take it in a different direction altogether?

Well there is a lot more people in New York and Pennsylvania then there are into schedules and so I think we have an opportunity to move a lot more intermodal or right across the network. I see it’s just like we see in the rest of the business I see a lot of opportunity in terms of changing business processes, working at improving terminal fluidity, the same steps that we took at CN to improve the quality of the network and then the quality of the revenue stream associated with that. I also see a somewhat uniquely and opportunity here to really take a hard look at the input international track that’s coming in on the east coast and begin to determine ways in which we can market that business more effectively on east to west move and be more competitive there, and I believe my experience in growing the traffic flows on the CN out of Vancouver as well as the development, Prince Rupert will give me a little bit more insight into where to take the business. But first and foremost what we did at CN where we rolled out intermodal excellence and created an unbelievably sought-after service in Canada, that’s our first focus and I think we’re making great progress in delivering on that.

Okay, great. And then, I apologize if I missed this, but did you guys provide the core pricing figure for the quarter?

Not in the specifics. What I said was that on a network basis clearly their volume was down 2%, our revenues were flat. We achieved greater than net 2% differential in price and that was offset to a degree by mix.

Okay. So, will you not be providing the similar like the same disclosure that you guys previously did?

I think we’re going to providing disclosure at the same way I use to do at CN.

Okay.

And that’s kind of how we – that’s the guidance level that we’re comfortable with.

Okay. Sounds good. Thank you.

Our next question comes from Scott Group of Wolfe Research. Your line is open.

Hey, thanks afternoon. Just a couple of follow-ups on the 2018 earnings framework, so Jim can you just clarify, I mean, fuel surcharge is probably a two, maybe a three-point help to revenue this year. Are you including that in your commentary about revenue up slightly or you sort of talking ex-fuel? And then maybe Jim or Ed can you give some sort of directional color on headcount for either the first quarter or for the year?

Hey, Scott. It’s Frank. I’ll jump in and then Jim and Ed can go. The revenue guidance that Jim gave is all in revenue, total revenue. And then headcount revenue comes on a Q1 basis, although I believe it will be sequentially down every quarter. You’re going to see us step down pretty much every year 17 to 18, 8 to 19, 19 to 20 etcetera. We’ll have a lot more commentary on that one as we get to the investor day, but clearly that’s part of equation to get to some of the outcomes that we’re aiming for.

And Frank, do you…

Go ahead, I’m sorry.

No. Go ahead. Sorry to interrupt.

On the headcount question, you know as we – as this is our quarterly information, well I should say, what’s in our quarterly information is a employee headcount, but in addition to the employee headcount reduction we also had a significant reduction in the number of pay consultants that were here at CSX and you add the consultants together with the employee number that’s in there. We took out over 4,700 employees here and consultants last year. Looking at next year if you take a look at what the ongoing attrition rate is around the company, of around say, on remaining headcount around 1,400 employees and then you add in again an aggressive look at getting the consultants non-employees out of here, you would think that we would come up with an annual number of around another 2,000 employee reduction in 2018. That’s our thoughts right now. We are grinding that – again grinding that plan right now and expect to have the details of that mix between employees, consultants, timing based upon attrition etcetera when we are in New York in six weeks.

Very helpful. I just want to make sure I understand, Frank, the way you answered my first question is about the surcharge revenue. So obviously your revenue includes you surcharge revenue. Do you think I’m right that there’s a two to three-point potential help to revenue this year from that? So you sort of saying x fuel that core revenue is potentially down this year? Is that sort of what we should take from your guidance?

Your two to three percentage point seems high to me, I mean, we’re tracking the forward curve and obviously have a good handle on what surcharge revenue would be on a year-over-year basis, but Jim’s comment was obviously on a total revenue basis as we get to the investor conference we can get the more around CAGRs in terms of longer term revenue growth etcetera, but now Jim commentary result.

Yes. That numbers is high based upon our assumption of what we expect a fuel price to be.

Okay. Fair enough.

As Frank said, it’s all and it includes fuel surcharges included in that number, but we’re no where near any kind of fuel price assumption increase that would drive that kind of increase in revenue.

Okay. Fair enough. And then my just last question. I don’t know if this is for Jim or for Frank. So as we think about the CapEx reduction and the earnings improvement and taxes, obviously much more free cash flow this year than we'd ever seen. So, how you would prioritize that free cash flow between buyback and dividend? And do you think just this new level of free cash flow let you revisit leverage targets? I know we’re not going to get those hard numbers today. We’ll get them at the Analyst Day. But we right in thinking that more free cash flow let you think about leverage ratios differently?

Well, it certainly gives you more coverage in terms of interest ratios and things like that. Its an input obviously that we’re having with the more as we look it up to capital structure and leverage conversations with the rating agencies coming up as well to understand the relative importance of debt to EBITDA versus et cetera to that, which clearly be an input to that as well . But clearly when you look at the abilities that you have to distribute cash there are only a handful of ways that you can utilize it. We’ve given you CapEx number. That would be acquisitive in the near term on small basis. So then you’re really talking about shareholder distribution, and the question is what the relative proportion now between dividends and buybacks. But it’s an active conversation right now. Obviously Jim is our new CEO, its perspectives will be discussing those with the board and look forward to sharing those with you in March.

Thank you, guys. Appreciate it.

The next question comes from Chris Wetherbee of Citi Research. Your line is open.

Hey. Thanks very much. I wanted to come back to your comments on pricing, Jim, specifically you discontinuing sort of the metric you’ve given us, but maybe you can help us with some comparability to the previous quarters, how you saw pricing specifically in the fourth quarter and maybe a little bit of sort of how you’re thinking about the outlook into 2018 particularly on the merchandise and intermodal side where there is some comparability versus truck. We’re seeing that market tight. I’m just trying to get a sense as you sort of think out in the fourth quarter than you look out to 2018 with those revenue targets, how we should be thinking about sort of the price lever within that mix?

I don’t know what – I have some idea what the guidance was given to you in the last in the third quarter in terms of price for merchandise. I believe that number was about 2.2% increase.

Not much in enrolled was 2.2 in Q3.

Yes. So our price in merchandise, again in the fourth quarter was higher than that. So we continue to trend upward and trust me we continue to focus on price. The proper mix of volume in price, but clearly a focus on price and that’s one of the thing probably that I’m most proud of in my career was while the rates in the railroad industry and a cent per revenue per mile dropped every year after year after year starting with the deregulation in the 80s, it was what we did at the Canadian national that put a brakes on the continual decline in rate and started to move prices up. So I’m a big advocate here and as we work so hard to improve the quality of the product that we have to get the sales team focus that what we’re selling is a service not a commodity that we go after as much of a price increase as we possibly can under the restrictions in our existing contracts, that contracts might in place. So, in terms of guidance other then for me to tell you what we’ve done, I’m not going to get any more specific in that. And in terms of explaining on a quarter by quarter basis what our price was, we’ll tell you the overall topline breakdown in terms of volume and volume and price to get to what the revenue stream is.

Okay. Okay. That’s helpful. I appreciate that context. Couple of weeks ago, few weeks ago there is a letter to the STB, I think kind of highlighted that from service perspective there’s not to be a lot of meaning or really any meaningful changes kind of going forward you know, you just execute kind of on the plan that stands right now, essentially that suggest that Hunter got through essentially everything he wanted to get through and now it's kind of more of a just executing on the plan as you move into 2018. I guess if you could just maybe give us a little bit of color around that when you think about the various business, merchandise, intermodal maybe coal, is there really anything else left to do from your perspective? And if so, kind of how much and maybe how that could kind of progress out? Understanding we’re going to get more color on this in March, just kind of get a sense on maybe that comment specifically? Thank you.

Well, in terms of the order of magnitude, deciding on one data shut down eight major hump yards across your network is pretty dramatic and disruptive and deciding to kind of blow up a thought-out strategy, hub-and-spoke intermodal network overnight, again, it was pretty disruptive and dramatic. I do not see us having anything like that. Luckily Ed and I have talked about that. Luckily we inherited a very hard that work in difficult decisions that Hunter made for us early, when he was here last year. I think we would have come to the same conclusion that those things needed to be done. I just don't think I would have decided that we’re going to do all in one day on a Tuesday. And so we are the beneficiaries of that very, very difficult work that was done by him and the team here. That is not to say that what we have here is a walk in the park. We are going to continue to grind. Now comes the difficult part of getting this trains to continually to run at – I mean, we’re already hitting both velocities now that are ever near record speeds in the history of CSX. So when I came here I think you have to go back to the steam engine passenger days to kind of figure out when you had train velocities that were all what we’re at today. So the velocity of taking out intermediate stops is improving the deficiencies of the terminals, grinding out on these trip plans now in order to improve both the origin, the pickup at the customer location, deliver a delivery of the product and the car at the destination, driving train length, improving fuel efficiency, optimizing the use of distributed power, all these initiatives are…

Okay. That’s helpful. I appreciate the color. Thank you.

Our next question comes from Matt Russell of Goldman Sachs. Your line is open.

Yes. Thanks for taking my question. Just first to start off on labor and that potential for additional headcount reductions, just want to make sure I understand that correctly. It sounds like you still see quite a bit of opportunity to take out labor costs on the existing volume base. Can you talk about how much of that is tied to management and consulting type labor and in any context around that? And how much is tied to just swing in volumes?

In terms of the breakdown between management and various different crafts, as I said we’re grinding this up right now and it will be a little more detailed on that in about six weeks. So I just – that plan, again, that we’re looking at -- we’re looking at the attrition rates, the attrition by craft, that kind of thing, as well as how aggressive we can get on some of the consultants. So again, when that plan is complete by the New York Times we’ll be able to give you some set of view on that.

But overtime, Matt, just to chime in all three categories of resource-based whether its management union or contractors and consultants, you should expect all of those to be lower overtime.

Okay. That’s helpful. And just one follow-up on tax, in regards to the STB revenue adequacy determination, is there any potential change there with what's going on? Tax rate is coming down that would impede your ability to base rates, raise pricing? Have you thought through or having conversations there?

Yes. We’re starting to take, look at that obviously the question around revenue adequacy in both specific to railroads and then across the industry it is through the cycle analysis rather than any particular year. And the other thing obviously that we always look at is whether if there’s a placement cost not that the historical book value that was used also by the regulators determining what's revenue adequate to. Nothing in the near terms that causes new concern.

Thank you.

Our next question comes from Ken Hoexter of Merrill Lynch. Your line is open.

Hey, Jim, tough as to why, but good luck to you Ed and Frank and moving forward, maybe you can talk a little about what has caught you off guard or things that are maybe a little different? And how things have changed at the rail, I don’t know maybe it's technology more advance, PTC something you have to learn maybe kind of the learning steps for you Ed as you kind of get back in and start tackling the precision railroad model at a different rail?

Well, I’ll you and that I’ve never been drawn to be honest about it even when I retired from CN or moved on, I have consulted almost consistently helping global infrastructure partners by a railroad in Australia. We went after Seattle [ph] one time and then we ended up with Pacific national. Later then that I’ve also consulted with the Rio Tinto in Australia as well as RUMO in Brazil, and quite frankly being part of the Chicago study group, the study group that was sponsored by six retired chief operating officers, Hunter was kind enough to put me on that committee. And we learned a lot about Chicago. Unfortunately the report which belongs to Brigadier, sits on a shelf somewhere in the AR headquarters like, yes, there are still a lot of good ideas there. So I can’t say, I’ve been surprised about anything operationally. I will tell you this. We have to take advantage of the technology that’s out there. Jim mentioned the strategy of power and we’re already starting our coal service more effectively with distributed power. I’m also big component of run-through interchange, especially in a terminal like Chicago. I'd like to look in and I’ve got the group looking into running directly back into the UP and BM and trying in all of our efforts to stay out f the belt, only because we’re given up two days worth of cycle when we do that. And I certainly would like to avoid that. And I want to rule out use of short lines. I’ve been Chairman of OmniTRAX board for the last four years and I’ve also been on the board of the TRAX Maintenance Company up at Canada. Both positions resigned when Jim and the board were nice enough to give me an opportunity at this job again. And you know lot of people say, and well I will jus I’m experienced and I’m certainly really excited about opportunity. I’m excited about the staff here at CSX. And I'm telling you this group is focused and will be even more so focused. I won’t rule out the short lines for a short term route. I would rule out the use of partnering with our other Class 1 partner certain carriers just to take advantage of maybe an opportunity to do some directional running and/or running long trains and directionally with our network we’ve got a lot of options, maybe too many options, but we’ll look at that as well too. So, thanks for the question. And it’s an honor to be part of Jim’s team and certainly an honor to be back in the Class 1 fold again.

He hasn't missed a beat. He forgotten – he’s forgotten in his – what do you call yourself? Golden age or whatever you are now. He's in the league of extraordinary gentlemen now. He’s forgotten more of our railroad and the most guys ever knew. So, we’re not in here at this role and his responsibility under some extremely difficult circumstances, the first person that I thought of that could come in here is to make sure that I was able to keep an eyes on the property to make sure we didn't skip keep a beat with Ed Harris. And so he's lived up to all expectations that team from the first day on the property on a conference call. He jumps in the middle of the call to start challenging people about why they're weighing chemical cars in the hump yard. And so it’s great to have Ed here and he’s doing a super job.

Great. Thanks for that both of you. Appreciate. And I guess just my follow-up would be any reason for on-time arrivals still down in the 50s while originations have stepped up? And I guess just as you think about that. And then I guess follow-on to that is, do you kind of follow-on with the Hunter camps and the whiteboard session in terms of working on the culture change at the company as you do that?

I would probably say, Ken, originations, you're right, we’re doing very well there and really doing very well on the intermodal train side. I think in an effort to keep that business service-oriented closer on time the other trains may take a bit of a hit. It's wintertime, too, as well. This is a tough quarter to operate in. And the focus today will be as it is when I walk in the door is to reduce train starts, take some of that congestion out of the network, allow us to operate across the network on an on-time basis and Jim mentioned earlier seven days a week full filled trains I mean, from one end to other we want to fill the train out and certainly go with the tonnage. We got enough power, we've got more power than what we need right now and we’ve already start to put the power this year in regard to it. It’s not a power question at all. Its probably more weather-related than anything else. And the effort is on service and we’ll always be on service where I come from.

Yes. Both the origin, when we change – we did the service that design plan for the network, we improved, again, train fluidity, train velocity from terminal to terminal. Going back at origin and destination terminals is where our challenges were which is not unexpected and we have done a great strives in improving train originations. Now, we need to get the final – the final piece of the puzzle are put together here and everybody is focused on that. Clearly I am not, and I don’t think in this company is here with us and telling our customers we’re running this schedule railroad that being on-time 50% is acceptable. That's not the goal. That's going to get fixed. I told the customers that’s going to get fixed and it’s going to get fixed as quickly as we can. Unfortunately we’ve been hit by some pretty tough weather over the last couple of weeks, but we’re all eyes are on the problem.

Great. Thanks for the answer. Appreciate it.

Our next question comes from Brandon Oglenski of Barclays Capital. Your line is open.

Hey, good evening to everyone. And Jim and Frank, congrats on the new team here. I guess just wish it was under different circumstances, but life happens fast. We look forward to you guys carrying on Hunter’s legacy here. I just want to follow-up on the revenue question Jim, about just looking out at the industrial landscape here it seems like core growth might even be accelerating in North America and obviously we haven’t even seen what’s going to happen with the likely cash infusion we’ll see from tax reform. So is there is something about lingering, you know just with that discussion on your on-time arrivals, is there lingering service issues that just give you pause on the topline out for 2018? Or is it more strategic customer changes or a bigger focus on pricing of a volume. How do interpret that guidance?

I think no, there’s nothing wrong. Clearly we need to continue to focus on improving the service product. Again short answer is when we have the serious service issues in the middle of the year, we lost the business. If you followed Carlos, you could see that we lost the business. And then later in the year when it came to intermodal we demarketed a significant portion of our business. So and then we had a measure a plant shutdown in Florida, fertilizer plant, that is short-haul but a lot of volume. We had some big significant moves industrial waste last year that we don’t have this year. So, yes, I believe and I speak with the head of our merchandize business unit every day, because everybody is talking about we’re going to have 4% GDP run rate for the next four years or whatever is we’re talking about, why isn’t the business growing. The underlying base business in our chemicals, in our paperboard is solid and stable. We need to dig our way out of some of these holes from the last eight, nine months. And again as I said earlier instrumentation of this business has an historically maybe again it was implementation of this plant is doing it the Hunter way, what disruptive because he was very aggressive in making the changes caused business to go elsewhere. My experience is and looking around and talking to other people that business comes back when we smooth things out and we are focused and working very, very hard to make the improvements in our service that just going to take a little time and then its going to take a little time for the people to trust it and come back. But we are seeing some of those customers that have returned already.

Brandon, one other thing just to remind everybody, we’re about the cycle of the height of the net benchmark. We’re probably closed to 100 bucks per ton below where we were in the first quarter of last year. So even though gets some mutual volumes you’re going to move it up to lower RPU. So just keep that in mind as you think of things.

Okay. Appreciate the feedback. It’s been a long call. Thank you.

Our next question comes from Justin Long of Stephens. Your line is open.

Thanks and good afternoon. So I wanted to start with a question on CapEx. You gave the guidance for 1.6 billion in 2018. Is that a good annual run rate to think about going forward? I was just wondering if you could talk in more detail about what's driving the reduction relative to last year and the sustainability of those cuts?

Hi, Justin, on the CapEx, so remembering the 1.6 that Jim gave, you got about 200 million of positive train control as part of that what we call core CapEx is more in the 1.4 range, what’s driving that reduction is a handful of pretty significant things obviously a bit of rolling stock holiday on both engines and freight cars for the foreseeable future. So I think that’s sustainable. Then you look at sidings and technology and things of that nature that we’re going to depend on how Jim looks at the railroad and how we unlock productivity going forward. So clearly the rolling stuff is going to hold. We’re going to see a step down in positive train control from 2018 to 2019 and 2019 to 2020. We’ll give you a lot more color on this as we get into the Investor Day, but at a high level I think you could probably figure out we’re headed.

Okay, great. That’s helpful. And maybe as a quick follow-up on PTC, could you share your latest plans as it relates to the timing of that rollout and I’m also curious what you’re expecting for the PTC operating cost this year and how that compares to what you saw last year?

Sure. So on where we are. We are at about half of the PTC footprint is operational. We will hit the compliance milestone at the end of 2018 which is that we’ll be hardware-compliant and over half of the subdivisions that are requiring PTC will be implemented. So we’re on-track to do that. And then we will be on-track to hit the final milestones in 2020. Your OpEx question, obviously the OpEx has been ramping up since we started the project in 2008 in 2017 within our results there’s about 150 million of operating expenses part of our results. Ultimately that could ramp up somewhere in the $200 million to $250 million range in say, 2020, 2021 or 2022 as the things roll off warranty etcetera. And remember there’s a big split there between what is cash and what’s non-cash. About two-thirds of the numbers have given you our own depreciation line and then rest are generally on the MS&O.

Okay, great. That’s really helpful. Thanks so much for the time.

Our next question comes from David Vernon of Stanford Bernstein. Your line is open.

Hey, good afternoon guys and thanks for taking the questions. Frank, I want to ask the CapEx question in a slightly different way. Two years you signed off a budget at about 2.7 billion, this year’s 2 billion next year’s 1.6 billion. How do you get comfortable communicating to the board that we’re not spending below sort of renewal CapEx, I mean, this is a pretty aggressive cut in the capital budget on a 40-year asset. I’m just trying to get a sense for where you think maintenance CapEx levels are in the railroad and how do you get comfortable you’re not getting below that level?

Yes. I think good question. And I’d like to open in paragraph for your note to put up. But anyway, how do we comfortable with it? It’s because we’re cutting in the right places and not cutting in the wrong places. When we look at what we’re doing from the number of track miles of new rail, the amount of balance that we’re putting down, the number of ties that we’re putting down, the number of bridges that we’re working through, I mean, all that in the core CapEx is largely we’re saying that it has been $2.7 billion budget. Remember when you look at the $2.7 billion budget about 600 million of that was engine. We also had a $2 million of freight cars in there. We had a big siding budget and the big technology budget as part of that. So when you look at where we’re going to be in the next few again, the rolling stock, I don’t its needing to invest any significant amount of money. Now we may expect money disturbed of power and things like that, but we’re not going to spend money on new engines for new freight cars in the near term. We have over 20,000 freight cars in storage and we’ve had 850 engines [Indiscernible] scrap.

Almost over 900.

900 locomotives serviceable, usable, ready to go locomotives and we're already putting 100 – we put a 133 that includes the 133 that we’re going to put in this year as we include -- improved fluidity. I do not envision us needing to spend any significant money in the next few years at least in the foreseeable future as far as I’m concern on things like expanding intermodal terminals and doing things like that. We can improve the productivity in all of our facilities to the point where they should be functional as the way they see in today. And it’s actually free up facilities for maybe use for other purposes, and if we can find other use form, they are for sale. So in terms of the -- you look at kind of the last five-year run rate in terms of rail, in terms of turnouts, in terms of turn rail, in terms of size installed, in terms of balance, we are spending the same amount of money that’s historically been spent by CSX to make sure they are safe and reliable network. When Hunter came in he had many engineering firms come in as anyone would do and the reason I know that was my second day on the job, I went to the engineering department, that’s a first thing you want to know, what kind of railroad we’ve got and this is a very, very well maintained, not gold plated physical plant. And we intend to spend the same amount of money and keep his plant in excellent working shape in the foreseeable future and – but we don’t need to spent money on the things that have been spend in the past and won’t do that unless there's some huge compelling reason for us to do that.

But right now, my only think to add to that is, if I see any capital spend and maybe in some siding extensions that would be – but quite frankly our average train length is less than our siding length as it is today, we still need to be pushing train length, train capacity and then we start watching delays if we get into that.

And if we need to extend that we’ll do it smart and we’ll use rail from other locations to rely that, to use rail in other location. So we’ll do it smart, but we’re not in any way shape or form not keeping this railroad in a fantastic condition.

And just maybe as a quick follow-up, do you feel comfortable that that the network as it’s been invested did they could handle the longer trains and running a little bit faster? Or do you think there’s a risk that you might see some CapEx creep back into the outlook a year or two down the road?

We’re not planning on doing anything in terms of train length and distributed power that hasn’t been done on another railroad for a decade. So this is just a question of implementing strategies that have been tried and proven effectively across North America and clearly we have the physical plants in the assets to be able to do it.

Alright. Thanks for the time.

The next question comes from Fadi Chamoun of BMO Capital Markets. Your line is open.

Yes. Good evening and thanks for taking my question. Jim, I just wanted to kind of circle back on the culture a little and what’s going on with CSX. A number of the former CSX leaders have left and now the leadership transition to you and you brought on a very capable operator and that Harris and that's all great. Just wonder if can talk a little bit about the morale of the rank-and-file, do feel that you are supported? Do you feel that the vision that you've laid out -- that Hunter laid out and you are continuing on with precision railroading regarding is kind of supported across the organization?

Yes. My belief and I said this from the very beginning, extremely impressed just Ed said, it’s been here a week not even and as Ed said, the people here are very impressive. These are great railroaders. They are hard workers. And they want to do a good job. They just -- they’re looking for a little guidance and they want to be a success. Everybody in the life wants to be a success. And this model – the scheduled railroad model is the way to turn CSX around and make it as I keep telling everyone that the best railroad in North America. So, I have a high degree of confidence that the people here are bought in to what is we’re trying to accomplish. You got to understand it wasn’t that long ago. There was a lot of kiosk going on and as I said with a lot of changes that were being made in for Hunter has done what he did in the past eight months, what we did at CN in about three years, I can only imagine the pace of change and how chaotic that was for the team here. Since that point of time everybody has been focussed on what it is that needs to be accomplished, unfortunately under the circumstances I have not had enough time to get out into the field but Ed’s going to go out in the field, I have plans already in place for me to get up and basically visit every location on the railroad and meet with every management personnel on the company and talk to them and tell them and make sure t hey understand what it is we are trying to accomplish and including the feedback that I’ve gotten from the unsolicited emails from just some of the boys all over the network is that they wanted and let me know that they support me and they are welcoming me to the company, whether it’s mechanical people in Pennsylvania to just people and they are always here in the headquarters office. So I’m confident that we are going to be able to get up and Ed and I are going to be able to get out with the rest of the people, the management team and talk to people over the summer.

Okay, thank you.

Our next question comes from Ravi Shankar of Morgan Stanley. Your line is open.

Thanks guys, just a couple of follow ups here. Sorry if I missed this earlier but did you give your expectations of cost inflation and productivity gains target for 2018?

Hey Rob, it’s Frank. No, we did not. You should expect significant efficiency gains obviously we’ve been in connection with the revenue guidance that Jim gave and the OR expansion guidance that he gave. In terms of inflation you ought to see a pretty significant reduction and inflation year-over-year, obviously we got a real big inflation here in 2017 and if you see that step down quite nicely in 2018 the help and welfare above you that was up there in 2017 you know we sort of gotten full value in the health care trust and [Indiscernible] back to the fully funded to kind of that catch up like we did in 2017. So we ought to be in better shape in terms of the inflation going forward in 2017 or 2018, but we did not get specific dollar guidance.

Got it. So in 2017 you said that you would do your record year of productivity, will you do another record year in 2018?

[Indiscernible]

Understood. Thank you.

Our next question comes from Bascome Majors with Susquehanna International. Your line is open.

Thanks for taking my question. For Jim or Frank, can you help us with how middle management is intensified to deliver the financial outcomes and investors are expecting from you guys. And how if at all that has changed since Hunter joined almost a year ago?

The incentives in terms of annual cash bonus for management and actually get some unions on it as well are 100% aligned with the types of targets we’ve set in the past and the types of targets that were set in the future specifically operating income and operating ratios. And then as we go forward for multiyear incentives those will be operating income and free cash flow.

Thank you.

Our next question comes from Walter Spracklin of RBC Capital Markets. Your line is open.

Thanks very much, good afternoon everyone. Frank, you talked about inflation, how it was going to step down. Are you indicating that your overall costs or rail inflation is expected to go negative or just step down from the higher rates that?

Less of a hurdle.

Less of a hurdle, okay. Makes sense, okay. And so on that basis I know Jim you are not guiding on price but is there any reason why you wouldn’t be able to continue to exceed the inflation, the real inflation that you are seeing in the market wise with your pricing?

Well I think as I told you before, I think that the – again what I said about the prices earlier in terms of merchandise what they were and what they were in the quarter you know not – I can’t really talk about future prices but as you know if you kind of look at what we’ve done and then you don’t make your own assessment as if you know look well that will be next year and the year after.

Bascom’s question, one second, on the multi-year trajectory and the incentives, its operating ratio and free cash flow not operating income of free cash flow on the one year incentives it is operating income and operating ratio.

On the volume side then if we look at your price mix and volume as your component to your revenue up slightly, if we make the assumption that your pricing is going to exceed inflation it would suggest that your part – your volume will be negative for next year, if that’s the wrong read let me know but is there – is this just a function of some of the what you mentioned about the prior volatility in some of your end markets with regards to coal or other or am I you know are we not to take that view of negative volume and a negative volume environment and perhaps associate it with mix?

So yes, that’s a good and fairly complicated question given the moving parts. Remember, a couple of things. Jim mentioned what we are doing on the intermodal side and what we’ve done in 2017 that’s got to cycle through from a volume perspective. Now we did have some plant closures and project completions and things that Jim mentioned, so those have to roll through. Even if you look at export coal and say its volume neutral and you do have a fairly significant step down in the benchmarks, so you have to have all of those things as part of your equation. When you look at merchant intermodal there is going to be obviously one level of pricing that we are assuming that when you cycle a big RPU difference in the export coal your headline may not be impressive but you know that’s far over what we are dealing within 2018. And then if you obviously should -- to Scott's earlier question, should be up next year given what the price of fuel is.

Okay. And last question just generally kind of on guidance in general, I mean you’ve obviously in the past been quite transparent and very good with providing that guidance and I’ve just noticed a lot of repeated questions here as we try to understand some of what you are seeing in terms of your outlook here. Are we just in this kind of interim period before your March investor day and are we going to move back towards or a little bit more of clarity with regards to what your 2000 or your next year guidance is or is this kind of more of demonstrative of the new norm in terms of what disclosure you have been providing on a go-forward basis?

Specifically as it just relates to price?

No, your volume outlooks used to delineate on a kind of category by category basis. You gave tonnage with regards to export coal, your earnings guidance was kind of intermodal explicit range...

Again, yes, in terms of price as I said earlier, I mean this is the kind of discussion that I’ve historically done in other lives in the industry. So, this is probably the new norm in terms of just price discussion. In terms of everything else I expect that we will continue to be as transparent as the company has been in the past and I think yes, your conclusion that are we hedging until we get to the investor meeting is accurate. We’ll be a little more forthcoming on some of these topics in New York and again we have – be in a position there to answer the questions at that time.

Okay, that’s fantastic. Looking forward to it. Thank you.

Our next question comes from Jason Seidl of Cowen and Company. Your line is open.

Thank you operator. Hey gentlemen, thanks for taking the question. Quickly, can you talk a little bit about the cadence of the volume expectations for next year? Do you expect to get some of that business that you guys lost in 2017 back as your service levels improve?

You know again yes, some of it might not come back so we might not want back, and some of it is already beginning to return. So it’s going to be kind of a mix bag if you assume that when a company makes a decision to go to a different transportation service provider they are probably going to do it for a couple of weeks, mainly they commit for a year. And so as we look our way through this issue, if you assume that the service problems began last year around June, July that’s probably when we saw some of the business begin to move away and so I would – I am optimistic and we are working with our sales team to have a very good understanding there – if I need to go and talk to the customers there and if we change things and things were better. I've told the sales guys – and they can do that. I know they are willing to do that. I know they are willing to out and meet the customers, I have already met with a lot of customers, they want assurances that you know scheduled railroad does not mean disruption and we are able to explain that and how they want to say show me. And as we’ve said throughout the call today, their number one goal right now is to show them and I believe and history repeats itself towards the experience has been fast and we show people that we are better and we are substantially better than we were and substantially better than the competition that the business will begin to come back. But it’s not something we can just flip a switch on, in some cases you’ve got to win back across to the customer and that’s the plan going into 2018. And just I mean you know that the comps are harder in the first quarter.

It sounds like you guys will at least get a chance to win back that – you have a few months to win back that confidence here before some of these maybe your long commitments renew. Follow up question real quick, you guys got back into the Baltimore tunnel project after getting out of it, just wondering the thought process by now.

No, my commitment was you know again there was a lot of dialogue with the city, the state, the federal representatives, the ports and literally I mean I was out of job about two and a half weeks and with years [ph] to go and in the U.S. Senate building and discuss the Baltimore tunnel project with those people and what I told them was that we would – Hunter had said no, we are not taking federal money to double stack this tunnel, we don’t need it. And that we don’t need the double stack tunnel. And what I told the individuals that I met with was I would undertake to take in my own look at this project and run the numbers again in terms of where we saw growth where if we needed to double stack the tunnel and also look at whether or not there are alternatives to double stacking the tunnel that meets the needs of the growing port, meet the needs of our customers and meet the needs of the government officials in terms of moving the public works projects forward. And we are in the process of both working our way through that, have not reached a conclusion. When we reach a conclusion I will go back personally and I will go back and meet with those groups and tell them what our decision is. But we haven’t completed the work yet to be able to do that.

Oh, that’s good color. I appreciate the time as always gentlemen.

Thank you very much.

Operator that ends the call.

Thank you so much everyone. Look forward to seeing you in New York in about I guess six weeks or whatever it is and again having a great dialogue with you at that time.