CSX - Q1 2016

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the CSX Corporation First Quarter 2016 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 over to Mr. David Baggs, Vice President, Treasurer, and Investor Relations Officer for CSX Corporation.

David Baggs (VP of Investor Relations)

Thank you, Nicole, and good morning, everyone, and welcome again to CSX Corporation's First Quarter 2016 earnings presentation. The presentation material that we'll be reviewing this morning, along with our expanded 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 this morning, a webcast replay will be available on that same website. This morning, our presentation will be led by Michael Ward, the company's Chairman and Chief Executive Officer, and Frank Lonegro, our Chief Financial Officer. In addition, Cindy Sanborn, our Chief Operating Officer, and Fredrik Eliasson, our Chief Sales and Marketing Officer, along with Clarence Gooden, our President, will be available during the question-and-answer session. Now, before I turn the presentation over to Michael, 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, at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With nearly 30 analysts covering CSX, and out of respect for everyone's time, including our investors, I would ask as a courtesy for you to please limit your inquiries to one question, and if necessary, a clarifying question on that same topic. With that, let me turn the presentation over to CSX Corporation's Chairman and Chief Executive Officer, Michael Ward. Michael?

Michael Ward (CEO)

Well, thank you, David. Good morning, everyone. Yesterday, CSX reported first quarter earnings per share of $0.37, compared to $0.45 per share in the same period last year. Revenue declined 14% in the quarter, as strong pricing across nearly all markets, reflecting an improving service product, was more than offset by the impact of lower fuel recovery, market conditions that drove a 5% volume decline, including a 31% decline in coal and a $95 million year-over-year decline in liquidated damages. Turning to operations, CSX remained an industry leader in safety, and service measurements continued to advance in the quarter, consistent with our service excellence initiative to meet and exceed customer expectations.

Expenses improved 12%, driven by lower fuel prices as well as efficiency gains and lower volume-related costs, reflecting CSX's ongoing drive to aggressively reduce its cost structure as we continue to reshape the company in face of this challenging market environment. Including the impact of these cost-saving actions and the decline in liquidated damages, operating income decreased $139 million to $704 million for the quarter. At the same time, the operating ratio increased 90 basis points year-over-year to 73.1. Now I'll turn the presentation over to Frank, who will take us through the results and second quarter outlook in more detail.

Frank Lonegro (CFO)

Thank you, Michael, and good morning, everyone. Let me begin by providing more detail on our first quarter results. As Michael mentioned, revenue was down 14%, or $409 million, versus the prior year. With coal declining 31%, total volume decreased 5% from last year, which impacted revenue by about $140 million. In addition, fuel surcharge recoveries declined $139 million. We continue to see strong core pricing from an improving service product, which, for the first quarter, was up 3.1% overall and 4.0% excluding coal. However, these gains were more than offset by the impact of negative business mix in the quarter.

Other revenue decreased $85 million, driven mainly by cycling higher liquidated damages from last year, which totaled $105 million versus $10 million in this year's first quarter. Expenses decreased 12% versus the prior year, driven mainly by $133 million in efficiency gains, $78 million in lower fuel prices, and $64 million in lower volume-related costs. Operating income was $704 million in the first quarter, down 16% versus the prior year. Looking below the line, interest expense was up slightly from last year, with higher debt levels partially offset by lower rates, while other income was relatively flat to the prior year. And finally, income taxes were $212 million in the quarter, with an effective tax rate of about 37%.

Overall, net earnings were $356 million, down 19% versus the prior year, and EPS was $0.37 per share, down 18% versus last year. Now let me turn to the market outlook for the second quarter. Looking forward, we again expect volumes to decline in the second quarter. The challenging freight environment will continue as headwinds in coal, energy, and metals volume are expected to more than offset the markets that will show growth. Automotive is expected to grow as light vehicle production continues to be a bright spot in the economy. Minerals will benefit from the continued ramp-up of a new fly ash remediation project and continued highway construction, driving aggregates movement. Intermodal is expected to be neutral as we continue to cycle competitive international losses. This will be offset by secular domestic growth, driven by strategic investments supporting highway-to-rail conversion.

Chemicals volume is expected to decline as energy markets continue to be marked by low crude oil prices and reduced drilling activity, which will impact our shale-related products more significantly in the second quarter. At the same time, the core chemical markets remain healthy. Domestic coal will continue to be unfavorably impacted by low natural gas prices, currently around $2, and high levels of coal inventory at the utilities. As a result, we expect second quarter tonnage to be around 18 million tons. In addition, we anticipate a similar quarterly run rate for the second half, recognizing domestic coal volume will be largely dependent on weather. Export coal remains pressured by the strong U.S. dollar and global oversupply. As a result, we believe second quarter tonnage will be around 4 million-5 million tons and expect a similar run rate for the remainder of the year.

For the full year, we now expect around 18-20 million tons of export coal in 2016. Despite a slowly recovering domestic steel production environment, metals is expected to be unfavorable year-over-year as the market works off excess supply from a strong U.S. dollar and imported product. Overall, we are still facing significant coal headwinds and a freight environment that continues to experience pronounced challenges associated with historically low crude oil, natural gas, and other commodity prices, and a strong U.S. dollar. As a result, we expect second quarter volume to decline in the mid- to high single-digit range year-over-year. Turning to the next slide, let me talk about our expectations for expenses in the second quarter. We expect second quarter expense to benefit from the low fuel price environment and our ongoing focus on driving efficiency gains and rightsizing resources as we continue to reshape the company.

Over the course of the last 12 months, we have taken aggressive cost actions, with headcount down nearly 4,500 versus the prior year. These actions include our train length initiative, closing facilities in the coal network, consolidating the division headquarters, and streamlining mechanical and operations support functions. These actions, along with cycling the impact of winter weather last year, drove high efficiency gains in excess of $130 million, seen here in the first quarter. And for the full year, we now expect to deliver efficiency gains of around $250 million. Looking at labor and fringe, we expect second quarter average headcount to stay relatively flat sequentially. We expect labor inflation to be around $25 million in the second quarter, in line with the level seen here in the first quarter.

Looking at MS&O expense, we expect inflation and the cycling of an operating property gain from last year to more than offset efficiency gains and volume-related savings. Fuel expense in the second quarter will be driven by lower cost per gallon, reflecting the current price environment, volume-related savings, and continued focus on fuel efficiency. We expect depreciation in the second quarter to increase around $15 million versus the prior year, reflecting the ongoing investment in the business. Finally, equipment and other rents in the second quarter is expected to increase moderately from last year, with higher freight car rates and the increase in volume-related costs associated with automotive growth, more than offsetting improved car cycle times. Now let me wrap up on the next slide.

CSX's first quarter results reflect challenging freight conditions, with low commodity prices and the strong U.S. dollar continuing to impact most markets, resulting in a 5% volume decline this quarter. However, as we continue to reshape the company, our focus on pricing for the relative value of rail service, driving efficiency gains, and aligning resources to the softer demand environment helped to offset those volume headwinds. Looking ahead, we expect macroeconomic and coal headwinds to continue this year. Low commodity prices and the strength of the U.S. dollar are expected to continue impacting many of CSX's markets. In particular, we now expect total coal volume to decline around 25% for the full year.

Looking at our expectations for the second quarter and full year, the impact of current market conditions on CSX's volume, particularly in coal, is expected to outweigh the positive momentum we are seeing in service, which drives pricing, efficiency, and rightsizing initiatives. In the second quarter, we expect mid- to high single-digit volume declines, with efficiency gains moderating from the level seen here in the first quarter. For the full year, in addition to the liquidated damages we cycled during the first quarter, as we previously discussed, we will also be cycling a significant property transaction in the fourth quarter. As a result, we continue to expect second quarter and full year 2016 earnings per share to be down from last year.

That said, we remain intensely focused on achieving strong pricing that reflects the value of CSX's service product, rightsizing resources with lower demand, and pursuing structural cost opportunities across the network. In particular, the aggressive cost actions we have taken over the last 12 months have helped to mitigate the challenging freight environment and weaker volumes. As a result of these initiatives, we now expect to deliver efficiency savings of around $250 million in 2016. With that, let me turn the presentation back to Michael for his closing remarks.

Michael Ward (CEO)

Thank you, Frank. As I think about CSX's first quarter performance, it's clear that the company's core earning power remains strong, even in an environment in which macroeconomic forces are putting significant pressure on most of our markets. We know 2016 will be a challenging year, and we are focused on delivering the highest level of performance and results possible. In this environment, CSX continues to reshape its business and network for the economy of tomorrow, maximizing growth opportunities in merchandise and intermodal, while also improving the profitability of those markets to help offset the loss of coal.

...As we look forward, this team is resolute in its commitment to further transform today's company. The CSX of tomorrow is built on the strength of our premier network, reaching diverse merchandise and intermodal markets. It is focused on delivering service excellence for customers to support pricing that allows us to continue investing for the next generation and drive ever more efficient operations. We will leverage technology to further improve safety, service, and efficiency as we continue to evolve our business for the realities of tomorrow's economy. As we make decisions today to make that vision of tomorrow a reality, we remain focused on achieving a mid-sixties operating ratio longer term and delivering compelling value for you, our shareholders. Now we'll be glad to take your questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. To ask a question, please press star and then one. Our first question comes from Ravi Shanker of Morgan Stanley. Sir, your line is now open.

Frank Lonegro (CFO)

Morning.

Ravi Shanker (Managing Director)

Thanks. Good morning, everyone. So a question on the productivity savings. Clearly, your first quarter performance was pretty amazing, with the 133 compared to the full year run rate. You did bump up the full year, but by less than you kind of exceeded your prior guidance for 1Q. Can you just talk about, you know, the cadence for the rest of the year and why that appears to step down so much versus the first quarter number?

Cindy Sanborn (COO)

Sure. This is Cindy. I think we're off to a great start, which reflects a lot of hard work by all of our team to bring the $130 million of productivity in the first quarter. As I think about how 2015 progressed, we had a lot of initiatives that we started in the beginning of the second quarter and on into the third quarter around rightsizing of our coal facilities, as well as our train length initiatives. So we'll be bumping up against those comps going forward. I also would say there was some benefit to a milder winter this year than what we had in 2014-2015 in the first quarter.

That said, you know, we are never done in working on our productivity initiatives, and the pace of change here has intensified, accelerated, and we will continue to bring everything to the bottom line that we can, keeping in mind that we have to balance that with serving our customers, and we won't compromise safety in that effort. And as we go forward, and you think about the run rate going forward of $40 million-$50 million in the next three quarters, that is higher than our historical run rate, with exception of 2015, in terms of productivity that we'll be able to deliver.

So, if there's more to get, we will absolutely get it, and we'll be able to update you on that if we see that in future conversations, either on the quarterly or in Frank's roadshows.

Ravi Shanker (Managing Director)

That's great color. If I can ask one question on coal. You know, just what's your outlook for the rest of the year? Obviously, you've given us your guidance, but, you know, going into 2017 and 2018, I mean, just any new thoughts on the outlook for coal in the medium term?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Sure. This is Fredrik. So, you know, we guided you to about 25% down for the full year. We did on the domestic side here, in the first quarter, did about 17 million tons, and our view is, as we think about the next couple of quarters, we like to think that we're gonna be at that maybe 17 million-18 million ton range on the domestic side. And on the export side, we did almost 6 million tons in the first quarter. Traditionally, the first quarter is a little bit stronger than the other quarters, at least it's been like that the last couple of years. We also enjoyed some spot moves here in the first quarter that we don't necessarily see in the remaining three quarters, so maybe 4 million-5 million tons a quarter on the export side.

So that gives us that $22 million-$23 million range for coal guidance per quarter as we move through the year versus the 23 million tons we did in the first quarter.

Ravi Shanker (Managing Director)

Great. Thank you.

Operator (participant)

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

Frank Lonegro (CFO)

Morning, Ken.

Ken Hoexter (Managing Director)

Great. Good morning, Michael. And just wanted to follow up on the employees. You know, great job on the larger-than-expected reduction, down 14%. But maybe if you can walk us through, why was the average cost per employee up? You know, last few quarters, I guess we've seen it down 5%-9%. This quarter it was up. Maybe you can talk a little bit about what's in that number. Is there incentive comp or anything else that drives it, and what should we look forward for that going forward? Thanks.

Frank Lonegro (CFO)

Hey, Ken, it's Frank. You're right, headcount was down about 13%-14%, while the labor and fringe line was down about 9% or 10%. So your comp per employee is about 4% or 5% higher. There's a couple of drivers. Some of those are industry related, and some of those are CSX specific. Clearly, you have general wage inflation of, you know, say, 4% a year or so. And then what probably is the biggest driver for us is health and welfare inflation. You know, as the industry is reducing resources, you know, you've got fewer employees to spread the, you know, the health and welfare costs over. So both of those are industry in nature.

In terms of maybe some CSX-specific dynamics, as you furlough employees, generally, those are gonna be your less tenured employees with lower all-in wages. And then maybe as a last point, Ken, when you look at a year-over-year number of employees in training, there were significantly more employees in training in the year ago quarter than there are currently, just given sort of where we are on the resource side, and training pay is less than marked-up pay. So you've got three or four moving parts in there. That hopefully answers your question.

Ken Hoexter (Managing Director)

... That does, that's a great follow-up. And, and I'm sorry, I missed David's comment. Are we allowed one follow-up, or is, is it one question?

David Baggs (VP of Investor Relations)

Yes, you can have a follow-up.

Ken Hoexter (Managing Director)

Okay. So just on the coal market, Michael, can you look forward and tell us, you know, I know you've talked in the past about matching cash for plant closings that were mandated in 2015 and 2016. Is there something, you know, that now is done, and we should see that pace decelerate as you look forward? I just wanna understand. It was a great answer by Fredrik on what we're seeing now, but I just wanna understand, is there something else that is gonna continue to drive this? Is this just market dynamics as far as closings, or are there more that's gonna structurally change the market and continue the pace we've seen on the decline?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Sure, Ken, this is Fredrik. Yeah, frankly, based on this very low demand levels we're seeing, as we go through plant by plant and look at the closures that we expect in 2016, 2017, and 2018, which really covers all the announced closures that we, that we have on our network. Based on our outlook that we have for the rest of the year now, which is consistent with the guidance, there's only less than 1 million tons that we have in for those plants that have announced to, to close, which means that the closure side of things is really behind us to a very large degree as we move forward, because of the fact that the demand levels are so low.

Ken Hoexter (Managing Director)

Really helpful. Appreciate the feedback. Thanks, guys.

Operator (participant)

Thank you. Our next question comes from Brandon Oglenski of Barclays. Your line is now open.

David Baggs (VP of Investor Relations)

Morning, Brandon.

Brandon Oglenski (Director and Senior Equity Analyst)

Hey, good morning, everyone, and, you know, difficult environment right now, but can you guys help us on, on the top line? So I know you, you talked about mid-to-high volume declines for 2Q. But how do we think about the contribution from price within the headwinds from mix? Does that get easier or more challenging as we progress through the year?

Fredrik Eliasson (Chief Sales and Marketing Officer)

This is, Fredrik again. Yes, so second quarter and probably even third quarter are gonna be challenging quarters from a volume perspective. It's not really until we get to the fourth quarter, where we have a little bit easier comparisons year-over-year, both on the coal side and on the kind of general merchandise side and then as well. We are gonna have a negative mix with us, as long as our coal business is declining as fast as it is, then our intermodal business is growing as fast as it is. Clearly, you know, we are very transparent about what we're doing from a pricing perspective, and, and that's gonna continue to be helpful as we move through the year.

Brandon Oglenski (Director and Senior Equity Analyst)

But I guess what I was getting at is more from the top-line perspective. Should we be thinking a similar outcome then, where mix is, I think you even said this in the prepared remarks, that mix might offset the favorable impact from pricing looking forward, and so top line could be down a little bit more than volume?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Well, I think that as you try to model out what we're doing, we're kind of giving you the individual components, and the one piece we haven't talked about is, of course, fuel as well. So, you can put those pieces together yourself. We give you very, very explicit in terms of what we're seeing in each individual market. We certainly expect continued strong pricing as we move forward, and then, of course, we have the variance of fuel, whatever that is going to do.

Brandon Oglenski (Director and Senior Equity Analyst)

Okay, thank you.

Operator (participant)

Thank you. Our next question comes from the line of Brian Ossenbeck of J.P. Morgan. Your line is now open.

David Baggs (VP of Investor Relations)

Morning, Brian.

Brian Ossenbeck (Managing Director)

Hey, good morning. Thanks for taking my call. I had a quick question on just the impact of the U.S. dollar. You know, the trade-weighted index is about 5% off from the peak. You're still calling out some pretty negative headwinds for the near term on commodity prices, both on the exports and on disruptive imports. Do you think if it stays at this level, Fredrik, that you start to see some relief towards the end of the year? Or do you think you need another, you know, 5% down move to really get some relief from some of these commodity markets?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Well, you know, the dollar is still well above kind of its ten-year average or so forth, but it is clear that it's been helpful in certain areas, the fact that it has taken a step back the last two months or so. One area where we have seen that is in the export coal side, on the metallurgical side, where the benchmark actually has stepped up a little bit from, I think, a low point, $81-

Brian Ossenbeck (Managing Director)

Mm-hmm.

Fredrik Eliasson (Chief Sales and Marketing Officer)

For the Queensland index to 84. And I think the benchmark or some of the spot moves are actually even higher than that at this point. And we're also seeing, while it's not directly dollar related, some of the potential tariff and countervailing duties that we're seeing in the metals business. We're starting to see drive down some of the imports into the country, which is starting slowly but surely, I think, to heal our metals business as well. But it is fair to say that even with that sort of a relief over the last two months on the dollar, you are looking into the fourth quarter, I think, until you're gonna start seeing meaningful improvements in the volume performance.

Brian Ossenbeck (Managing Director)

Okay, great. Thanks. And then on the productivity side, you mentioned that the Train length initiative is basically approaching a one-year anniversary, so comps are gonna get a little bit tougher. But maybe if you can just recap the last year, some of the accomplishments and what you think is reasonable for, in that context, for some of the goals looking out through the rest of this year and into 2017?

Cindy Sanborn (COO)

Sure, Brian. Thanks. We over the year of 2015 saw 16% gains in our train length, and we're up to about 6,500 feet, 6,400 feet in total. We saw probably the smallest incremental change in the fourth quarter, as we had really largely put in place all that we felt comfortably we could in maintaining service to our customers. We are bumping up against challenges in the single track territory, where our siding length is a bit of a limiter for us. Going forward, and in this year, we are planning to increase siding length in our corridor from Nashville to Cincinnati.

That is presently limited to 6,500 feet, so we are making some structural adjustments to help us continue it, and we should see those investments being in place and available to us in the back half of this year. So I would also say that one of the benefits of the initiative that we've seen is the ability to flex as seasonality impacts volume. So in summer months, we feel that with a little bit less volume that's typically out there, that we'll be able to continue to utilize train length and in terms of reducing our costs, gives us ability to variabilize where we haven't before. And certainly, if anything changes, either up or down, we'll be able to adjust accordingly to maintain train length.

We feel really good about the initiative, and our team in the field has done a fantastic job putting it in place.

Brian Ossenbeck (Managing Director)

Okay. Thanks a lot for your time.

Operator (participant)

Thank you. Our next question comes from Chris Wetherbee of Citi. Your line is now open.

Frank Lonegro (CFO)

Morning.

Chris Wetherbee (Senior Research Analyst)

Great. Thanks. Good morning, guys. Maybe a question for Cindy, just following up on the productivity. When you think about the increase from the 200 to the 250, if you could maybe break down sort of those specific components a little bit, just sort of looking at the puts and takes on some of the expenses. I'm just kind of curious, kind of where that comes from, maybe how much is weather, maybe how much is headcount? I want to get a sense there.

Cindy Sanborn (COO)

As far as going forward, let me make sure I understand your question. Going forward, or, or, or what?

Chris Wetherbee (Senior Research Analyst)

The incremental between $200 million and $250 million for the target for the full year.

Cindy Sanborn (COO)

Well, I think a lot of it is the initiatives that we already have in place. I think the benefit to potentially go higher is to be able to continue to rightsize and streamline, which has also been a big part of our initiative. So, we've got technology, and Michael mentioned in his prepared remarks, you know, utilizing that in automation. So it will be some additional benefits to headcount, I believe.

Chris Wetherbee (Senior Research Analyst)

Okay. Okay, that's helpful. I appreciate it. And then, Fredrik, maybe a question for you on the sort of market outlook, I guess. Putting coal aside for a moment, it seems like we're still sort of maybe a bit weaker than seasonally expected, at least as far as the outlook for the second quarter. Just want to get a sense of the last couple of weeks, we've seen some challenges, intermodal has sort of slipped back again. I just want to get a sense of kind of how you feel about where we stand with volumes, the economy, just generally, you know, outside of some of the specific pressure points like coal.

Fredrik Eliasson (Chief Sales and Marketing Officer)

Sure. I mean, if taken to the highest level from where we see the economy, I think we still see the overall economy progressing in that 2%-2.5% range, kind of uninspiring growth. Clearly, we're still dealing with the aftermath of what we saw last year, both on the energy side and also the strength of the dollar and the low commodity prices. As I said earlier, that's gonna be with us for at least another two quarters, and is also why we guided to volumes to be down a little bit more year-over-year, sequentially in the second quarter. Specifically, the last couple of weeks, to your question, you know, we look at our four key markets, merchandise, intermodal, coal, and auto.

Our merchandise business has stayed, probably some of the two strongest weeks, frankly, the last two weeks. But then we have seen some weakness in our coal markets, which is consistent with our guidance. We also had some operational issues with some of the terminals we serve on the export side that impacted our volumes. Our auto business was very strong early on in March. We probably had 65% of our, of our, cars under load, and that's kind of cycling through that right now, but we continue to see good strength there for the rest of the year. And yes, we have seen a little bit of weakness in the intermodal space over the last few weeks, but I don't think anything that is has structurally changed there.

It's gonna be a tough second quarter, but I don't think it's a reflection of where the economy is heading or anything like that.

Chris Wetherbee (Senior Research Analyst)

Okay. That's very helpful. Thanks for the time, guys.

Operator (participant)

Thank you. Our next question comes from line of Tom Wadewitz with UBS. You may now ask your question.

David Baggs (VP of Investor Relations)

Morning.

Tom Wadewitz (Senior Equity Research Analyst)

Yeah, good morning. Wanted to ask either Michael or Fredrik on pricing. You continue to get, you know, very good pricing in merchandise and intermodal, and then I guess the total is a bit less. How do you think that changes? Does that—I mean, is that something that you kind of sustain through the full year? And is there a point where if you say, you know, rail traffic doesn't—I mean, you're saying it's gonna be weak for a couple of quarters. Is there, you know, does the same store price you're getting decelerate through the year and it's somewhat of a timing impact? Or would you say, you know, "Hey, look, we can just keep doing this, and we're kind of, you know, immune to softness in truck.

We're, you know, immune to rail excess capacity." Just wondering if you could kind of talk about that, because the numbers look pretty good or very good in intermodal and merchandise, but it just seems like there's a lot of excess capacity out there.

Fredrik Eliasson (Chief Sales and Marketing Officer)

Yeah, we're certainly not immune to what's going on in the marketplace, and I think you've seen a reflection of that here in the quarter versus the fourth quarter, as you've seen a sequential downtick in our pricing. There obviously are specific drivers of that. We work with our customers on a deal-by-deal basis to understand their needs and what opportunity to drive price is. A critical component of supporting our price right now is, of course, the fact that our service product has improved significantly, and I think our customers value a long-term access to our network and the markets that we provide. Clearly, the market is softer now than it was a year ago, and but yet, our pricing is frankly up year-over-year as well. And so, we're gonna work with our customers.

Our pricing is gonna reflect what the market allows us to do. At the same time, it's critical for us to be able to price so we can reinvest in our business, and that's been a strategic imperative of ours for a long time. But underlying all our pricing is a service excellence for our customers.

Tom Wadewitz (Senior Equity Research Analyst)

... So that, I mean, that having been said, do you think it's more likely that you see stability through the year in your same-store price? Or do you think there's some risk that you see deceleration in that as we look forward?

Fredrik Eliasson (Chief Sales and Marketing Officer)

You know, we really don't forecast price. You'll have an opportunity to see price as we disclose our earnings each and every quarter. But, you know, strong pricing is important to what we're trying to do strategically. And we're gonna work with our customers to make sure that they get the service that they need to be successful in their marketplace. And at the same time, we need to be able to continue to reinvest in our business.

Tom Wadewitz (Senior Equity Research Analyst)

Oh, okay. Do you just have a quick thought on where export, or I'm sorry, where domestic coal inventories are?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Yeah, our domestic inventories are at very high levels. If we look at the north, it's well above 112 days, I think is the latest data that we have. In the south, it's even higher than that, about 170 days or so, versus kind of a normal range of 55 days-70 days of burn. So we got plenty of inventory at our customers, which will take a fairly significant time, I think, to get down to more normalized levels. It's gonna be depend both on, of course, where the natural gas prices are, but also dependent on where we see the summer here in terms of how much burn we get.

Since we've been moved towards kind of a peaker, and the kind of that incremental demand levels, we are even more weather dependent than we've been in the past to try to work some of these stockpiles down.

Tom Wadewitz (Senior Equity Research Analyst)

Okay, great. Thanks for the time. Appreciate it.

Operator (participant)

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

Fredrik Eliasson (Chief Sales and Marketing Officer)

Morning, Allison.

Allison Landry (Senior Equity Research Analyst)

Good morning. Thank you. So following up on, on, I think it was Ken's question earlier, lots of puts and takes on the labor line. But as I think about total labor and fringe expense in the second quarter, you know, typically, we see it decline on a sequential basis. But should we think about it being roughly flat versus the first quarter, or do you expect it to be a little bit higher?

Frank Lonegro (CFO)

You know, Allison, I think if you look at where we are on an absolute headcount basis, what we've guided to is sequentially flat, which is down about the same percentage on a year-over-year basis that you saw in the first quarter. You know, clearly, the inflation will continue to impact, as will the health and welfare piece there. So I'd say flat to up slightly would probably be the right thing to look at.

Allison Landry (Senior Equity Research Analyst)

Okay, great. And then, thinking about the service metrics and in particular, train speed, it seems that CSX is lagging the other rails in terms of returning to levels seen in 2013. Is there anything specific driving this, and when would you expect to get back to peak productivity levels?

Cindy Sanborn (COO)

Well, Allison, you know, when it comes to service, we're constantly working with Fredrik and his team and making sure we are providing that service product that our customers need, and we're really never satisfied with where we are. So the balancing act here is how to trade that off with productivity and efficiency and make sure that back to what Fredrik's talking about, we're earning the ability to reinvest in our business. So I think when I look at it as to where we are, I alluded to it a little bit earlier, you know, we have some opportunities. We're seeing great performance in our double track territories.

It is a little bit more challenging in the single track territory, and we are making some investments to improve that in one of the core routes that we have between Nashville and Cincinnati. We will continue to work on making adjustments as necessary to serve our customers well.

Fredrik Eliasson (Chief Sales and Marketing Officer)

The train length initiative has some impact as well, right?

Cindy Sanborn (COO)

That's what's driving the single track challenge.

Allison Landry (Senior Equity Research Analyst)

Got it. Thank you for the clarification.

Operator (participant)

Thank you. Our next question comes from Robert Salmon of Deutsche Bank. Your line is now open.

Fredrik Eliasson (Chief Sales and Marketing Officer)

Morning, Rob.

Robert Salmon (VP of Associate Analyst)

Hey, good morning. I guess following up with Tom's question, we're certainly seeing some really strong pricing across the overall network. If I look last quarter, the delta between the same-store sales pricing, which obviously includes coal and the merchandise intermodal, which kind of strips it out, expanded last quarter. Can you give us, help us better understand, what drove that? Was this kind of unique to the quarter, or should we, or was there adjustments that were made across the network that are gonna impact the duration of the year as well?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Make sure I understand your question a little bit better, Rob.

Robert Salmon (VP of Associate Analyst)

You know, if I'm looking at kind of the delta between same-store sales at 3.1 and the core merchandise, intermodal pricing at 4.0, it's about 90 basis points. If I look back to the fourth quarter, the split was about 40 basis points. Should I think about, you know, you know, what drove that, that kind of step up in that split last quarter? Was it something unique because of some closures or just how the volumes were coming on within the intermodal?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Sure.

Robert Salmon (VP of Associate Analyst)

Sorry, within your coal network, or is there, or were there underlying adjustments that we should be thinking about having an impact for the duration of the year as well?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Sure. No, the delta there is pretty much exclusively driven by the fact that we have taken some pretty significant action in our export coal business. That is a reflection of what the marketplace allows us to do or forces us to do right now to optimize our bottom line. So that's really driven by export coal more than anything else, the fact that that spread has increased.

Robert Salmon (VP of Associate Analyst)

Got it. And so inherent in the guidance is export coal volumes coming down, so we should see less of a headwind as I look forward.

Fredrik Eliasson (Chief Sales and Marketing Officer)

I guess that's one way of looking at it. That's probably, yeah, that's probably one way of looking at it.

Robert Salmon (VP of Associate Analyst)

That helps. I guess also to get a little bit more color in terms of the intermodal RPU. The sequential decline, obviously, fuel had an impact there. But I would imagine the bigger impact in terms of the first quarter was just the declines, the mix of the business with international being under so much pressure and the uptick in domestic. Was there any impact in terms of the looser truckload market impacting intermodal RPU as well? Or were those two factors the entire explanation of the sequential decline here?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Yeah, most of the impacts were because of fuel. We also did see some mix impact in the quarter, in both international and in our domestic, little shorter length of haul that impacted as well. But, most of our business in our intermodal space is under long-term contracts. So while the spot market does affect a portion of the business, most of it is really, impacted by longer term trends, not these shorter term issues that we're facing. So, while there were some challenges in the quarter, our pricing in intermodal space is still positive.

Robert Salmon (VP of Associate Analyst)

Appreciate the color.

Operator (participant)

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

Frank Lonegro (CFO)

Good morning.

Scott Group (Managing Director)

Hey, folks. Morning, guys. So, I'm not sure if you can help us kind of frame the earnings guidance a little bit better. I don't know if year-over-year is the right way to look at it, but if reported earnings were down 18% in the first quarter, are you expecting kind of similar declines in the second quarter, maybe less negative, more negative? And I know that you have tough comps on the liquidated damages, so maybe sequentially is the right way to think about that. I don't know, but if you can help kind of frame that guidance a little bit closer.

Frank Lonegro (CFO)

Hey, Scott. Frank. Yeah, you're right. We did guide that the second quarter would be down on a year-over-year basis. You're also right that when you look at the second quarter of last year, it was an all-time record for us in terms of operating income, EPS, and operating ratios. So we have a significant comp that we have to work through in the second quarter. We tried to give you as much granular guidance as we could as we look at it over the next three months. Certainly, we gave you some very specific tonnage guidance around coal and then overall volumes in the mid- to high-single-digit range, just given the softness in the economy, and certainly, the coal headwinds play into that.

You know, we're going to continue to focus on the things that we have, you know, the most impact on, certainly safety and service, you know, productivity. Cindy mentioned a run rate of $40 million-$50 million in the second quarter, an improving service, you know, product, as well as, you know, continued, strong value pricing. So, you know, you add all of that up, and, we come to the conclusion that earnings are going to be down. If you want to talk sequentially, generally speaking, second quarter earnings are better than first quarter earnings, you know, if you just look historically at that.

Scott Group (Managing Director)

Yeah, I mean, I guess what's tricky about it, if you look at the past couple of years, you've seen kind of significant increases in earnings first quarter to second quarter. If you go back further, it's more smaller increases in earnings. And I guess I'm struggling with the right way to think about the seasonality.

Frank Lonegro (CFO)

Well, like I said, I think you'll see, you know, sequential earnings improvement. We have not sized that, but I think you'll see a typical seasonal pattern, unless, of course, coal disappoints even further.

Scott Group (Managing Director)

Okay, and then just one quick follow-up. So I think on one of the earlier questions, you said that total labor costs should be kind of flattish 1Q to 2Q. So that implies like a 10% increase in comp per employee in the second quarter, year-over-year. I just want to make sure that that's right.

Frank Lonegro (CFO)

No, I think what I was trying to do is to help Allison see that on a flat headcount number with the inflation that's fairly typical and a moderating productivity environment, that it would be essentially flat to up a little bit. But again-

Scott Group (Managing Director)

In terms of total labor expense?

Frank Lonegro (CFO)

Total, total labor and fringe, that's right. Comp, comp per employee.

Scott Group (Managing Director)

Okay. All right. Thank you, guys.

Operator (participant)

Thank you. Our next question comes from Jason Seidel of Cowen and Company. You may now ask your question.

Frank Lonegro (CFO)

Morning, Jason.

Jason Seidl (Managing Director)

Good morning, guys. I want to think a little bit longer term here. Could you talk about rightsizing the network beyond just furloughs and repurposing maybe some locomotives? Where are you at in that stage, and what really can be done in some of the network that might be just losing just too much traffic for you?

Cindy Sanborn (COO)

Well, if you'll indulge me here a little bit, Jason, I think, you know, the changes that we're making in our company are not short-term reactions to, you know, temporary economic conditions. So everything is on the table in terms of how we look at our network. I think what you've seen us do is rightsizing in the coal fields with some specific facility reductions that we've made starting in the third quarter last year, which would be Erwin, Tennessee, Corbin. We announced a consolidation of a division in Huntington or from Huntington to other divisions, and also reducing our yard operation and car operation in Russell, Kentucky.

On the rest of our network, and we'll continue to work in the coal network and in the coal fields on making the right decisions, while still serving the customers that we have there. When we look at the rest of the network, we're focusing very hard on density, which is part of our Train length initiative. It's really kind of the underlying component of Train length initiative. So as we look at our main arteries, how can we continue to drive density there, which then also allows us to streamline some facilities, around that. So, you've seen us do that with some of the mechanical reductions that we announced that we were going to make in some of our car facilities.

Fredrik Eliasson (Chief Sales and Marketing Officer)

... and then, you know, going forward, too, beyond just simply network type of actions are, technology implementation that allows us to do, to automate. So, we are looking at this as the ability, from my perspective, to create the plan and execute a plan that helps CSX thrive in a rail industry that is fundamentally changing. And so we will continue to drive all of these initiatives and look for ways to tweak them to get even better efficiency while still, and I have to say, it's very important to us that we serve our customers and have a service product that meets or exceeds their expectations.

Jason Seidl (Managing Director)

So, is what you can do in the coal network done right now, or is there more to come in terms of rightsizing that particular piece of your network?

Fredrik Eliasson (Chief Sales and Marketing Officer)

I would say, you know, we're never done in any of this. And, you know, we've taken some really large steps. We'll continue to look at as the demand for our services changes, and it will change, we will take the appropriate steps to take out the costs that need to come out. You have also seen us, you know, publicly put into the STB some discontinuance of service on routes where the mines are shut down, and we will continue to take those types of actions, but we'll be aggressive with it. But keeping in mind that it's a very profitable business for us, and we want to also serve the customers that need our service.

Jason Seidl (Managing Director)

Okay-

Fredrik, you may want to mention the change in some of our pricing on the origin side.

Fredrik Eliasson (Chief Sales and Marketing Officer)

Sure, sure. And I mean, obviously, we work hand in hand with Cindy's team here to help her drive productivity, not just in the coal fields, but elsewhere in terms of train length initiative and so forth. But specific to Michael's point, we have changed the way we price our coal in the coal fields to drive efficiency. So we've gone away from pricing zones, so to speak, or rate districts, towards specific point-to-point pricing that better reflects the reality of operating into certain branch lines and so forth, and the maintenance that has to occur there. And we will price more efficient loading points differently going forward, which is tough discussions to have with our customers, but at the same time, I think there's an understanding that this sort of a transformational change, you need to do something different.

There are a lot of things that we're doing cooperatively with Cindy to try to help drive out costs, but still protect our service going forward.

Jason Seidl (Managing Director)

Right. Guys, that's great color, and I appreciate it. My follow-up is on the intermodal side. You know, clearly, there's slack capacity in the truckload marketplace, and in fact, you could argue it probably got a little more slack here in 1Q. When you talk to your intermodal customers, how are they viewing that? Are they viewing that slack capacity in the trucking market as just a temporary blip, where they'll maybe take advantage of it, or are they viewing this as longer term, they want to play the spot market maybe a little bit more than they have in the past?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Yeah, as I said before, that we have a significant portion of our domestic business is under long-term contracts. And I think those customers that participate there in those products do value the long-term access to our network and the capabilities that we provide. There's certainly, right now, excess capacity, which is reflected in the spot pricing. I would say, though, that as we look at some of the underlying drivers there, especially new orders for trucks, which is coming down pretty rapidly, you still have the challenges in terms of driver retention and escalating costs there. And we have the, probably the biggest impact that I think all of you have followed, and we certainly follow as well, is the ELDs next year and the impact that that will have definitely as we get into the second half of 2017.

So while this is a soft environment right now that will be with us for a couple of quarters, I think the fundamentals that we've talked about for a long time is very much intact. And we're seeing that in the partnership with the truckers that we continue to build on to allow us to do the long haul and them do the pickup and the delivery, which solves some of their strategic challenges. So, it is softer, but we do think that's a temporary issue and that the basic thesis of our intermodal investments and our bullishness on intermodal long term, the 9 million loads, et cetera, is very much intact. And frankly, the fact that we're getting still very much positive pricing in intermodal space, even in this environment right now, I think bodes well for the long-term prospects for our intermodal business.

Jason Seidl (Managing Director)

Well, thanks for the color, Fredrik. And, and everyone, thank you for your time as always. It's much appreciated.

Operator (participant)

Thank you. Our next question comes from Ben Hartford of Baird. Your line is now open.

Frank Lonegro (CFO)

Morning, Ben.

Ben Hartford (Senior Equity Research Analyst)

Good morning. Yeah, thanks, Fredrik. Maybe just taking the other side of the intermodal equation on the international side, obviously, there's a lot of discussion about the implementation of SOLAS and the container weight rules, but any thoughts about how that's going to look on the other side of 2016 and longer term, if and when those rules are implemented?

Fredrik Eliasson (Chief Sales and Marketing Officer)

Yeah, we are trying to understand that ourselves, frankly, and, I think, we are learning from our customers. It could be opportunities where people ship earlier, potentially. But at this point, I think it's a little unclear exactly what the impact will be.

Ben Hartford (Senior Equity Research Analyst)

Okay, that sounds good. Thanks.

Operator (participant)

Thank you. Our next question comes from Jeff Kauffman of Buckingham Research. Your line is now open.

Frank Lonegro (CFO)

Morning, Jeff.

Jeff Kauffman (Director)

Hey, good morning. Congratulations in a tough environment. You know, my question on efficiency has been asked, but let me, Cindy, come back to you a different way. Gross ton miles are down about 9%-10%. Where are you right now in terms of locomotive capacity, say, locomotives online, locomotives in storage? I'm surprised I'm not seeing more of a reduction in cars online, you know, kind of flat to down 1% over the last year. Can you help explain to me some of these dynamics and what you can and can't do there?

Cindy Sanborn (COO)

Sure. So I'll talk about locomotives first. If you compare first quarter of 2015 to this quarter, we actually have about 400 less locomotives, active, which is about 10% in line with, you know, the volume reduction that you talked about. Within that, embedded in that is the fact that we've got 275 stored, but there's also another 96 that are lease returns that will be returned in the second and third quarter of this year that we've already pulled out. So, we feel like we're fairly decently in line with the GTM reduction in our workload reduction, in our resource takedown as a result of that.

It also allows us, if, you know, we get surprised on the upside, we have the ability to pull more locomotives out. I would also add that we are receiving locomotives in our long-term purchase plan. We received 26 locomotives of that 100 total in the first quarter. So, that's kind of the puts and takes around locomotives, and we are very obviously focused on right-sizing our resources around both locomotives, employees, and cars, and I'll talk about cars here as well. In terms of what you're seeing with cars online, we have about 13,000 cars stored right now versus 5,500 this time last year.

When you look at cars online, the cars that are actually stored don't come out of the count for a fairly long period of time, about 36 months. It's a standard that we all have. So if you include those additional cars that were pulled out in the first quarter, we're down about 4% in terms of cars online, if you take those out of cars online numbers. So again, we feel like we're fairly well resourced appropriately for the demand that we have.

Jeff Kauffman (Director)

Okay, that's all. Thank you very much.

Operator (participant)

Thank you. Our next question comes from Justin Long of Stephens Inc. Your line is now open.

Frank Lonegro (CFO)

Good morning, Justin.

Justin Long (Managing Director of Equity Research)

Good morning, and thanks for taking the questions. So I know you aren't giving specific EPS guidance beyond expectations for a year-over-year decline, but there have been several puts and takes since the January call, and I just wanted to get a sense if your expectation on the magnitude of that EPS decline has changed. When you put it all together, has your overall earnings outlook for this year gotten better or worse, or is it about the same as it was three months ago?

Frank Lonegro (CFO)

Hey, it's Frank. I think when you look at the full year, clearly we knew this was gonna be a down year. I think in terms of the puts and the takes, coal has gotten, you know, worse on a relative basis versus what we had walked into the year with. You know, we knew we were gonna have soft volumes in the merchandise side, especially with the dollar and the commodity prices. Intermodal is hanging in there, especially on the domestic side, and then we're over-delivering on productivity versus how we set out the year. And so you add all of those up, and I'd say we're pretty much in line with where we had originally thought.

Justin Long (Managing Director of Equity Research)

Okay, great. That's helpful. And then just one quick modeling question. So I wanted to ask what you're expecting on the change in incentive comp this year, just based on your current plan for 2016. Do you expect a major year-over-year change in incentive comp in the next quarter or two?

Frank Lonegro (CFO)

Well, obviously, that depends on, on how we do against our, our internal, plans, and clearly, those are designed to align with the interest of the, of the shareholders. We reset it every year, as of January 1. If you remember, in 2015, we began to, to roll off, incentive comp in the third and the fourth quarter. So, I wouldn't suggest any meaningful change in, in the first and the second quarter, and then, we'll update you, depending on how we're doing, as the year goes on in terms of incentive comp year-over-year, as we get out into the back half of the year.

Justin Long (Managing Director of Equity Research)

Okay, great. I'll leave it at that. Thanks for the time.

Frank Lonegro (CFO)

Thanks.

Operator (participant)

Thank you. Our next question comes from Tyler Brown of Raymond James. Your line is now open.

David Baggs (VP of Investor Relations)

Morning.

Tyler Brown (Financial Advisor)

Hey, good morning. Hey, hey, Frank, just I believe in your 10-K, you guys mentioned that in 2016, you guys are expecting to have a 53rd week this year. Can you just talk a little bit about what the expected impact in Q4 would be? I mean, is it, is it basically adding that extra week of operations, an extra week of earnings? And then in a similar vein, how would it impact the optics of Q4 traffic?

Frank Lonegro (CFO)

Yeah, so let us get a little deeper into the year, and, that's a good, a good Q3, Q4 question for us. You know, we hit this, about every six or seven years, and it's to really normalize the number of days in every quarter, the number of weekend days in every quarter, the number of holidays in every quarter, and it gives us a better, comparable. But one of the things we have historically done and you can expect us to do going forward, we will give you the very specific, you know, revenue and expense and, and operating income and operating ratio numbers for that 53rd week, on the fourth quarter call.

Cindy Sanborn (COO)

Okay, great. And then, Fredrik, I am curious about this new fly ash move that you noted in minerals. Is this a result of the coal ash regulations from last year, and do you think this is kind of the tip of the iceberg, or do you think this is more of a one-off project? It just seems to me that minerals has been one of the few areas of strength.

Fredrik Eliasson (Chief Sales and Marketing Officer)

Yeah, no. Fly ash is a byproduct of burning coal, which must be remediated by the utility plants, and obviously, it can also be used in the production of concrete. We do have a significant uptick in interest in looking at opportunities to move this to a variety of landfills. This is the first move that we've been able to secure, and we do think there are more opportunities as we move forward, to capitalize on that and put products together for our customers that make sense.

Tyler Brown (Financial Advisor)

Okay, very interesting. Thank you.

Operator (participant)

Thank you. Our next question comes from Donald Broughton of Avondale Partners. Your line is now open.

Frank Lonegro (CFO)

Good morning, Donald.

Donald Broughton (Managing Director and Chief Market Strategist)

Good morning, everyone. Just real quick, you at least optically appear to become more and more aggressive in share repurchase in the recent quarters. Refresh us on how you think about that. Is it a fixed dollar amount you're putting towards share repurchase? And so if the stock price falls, you're gonna buy more, or is it some other metric that's determining the level to which you're being aggressive in share repurchase?

Frank Lonegro (CFO)

No, we're being very ratable about it, as a, as a matter of fact. I mean, we have, you know, guided previously that it would be about $250 million-$260 million a quarter. So I think all you're seeing is us, being the beneficiary of deploying that in a, in a lower stock price environment. And so, that ratable approach will buy you more shares, obviously, in a lower price environment, and less shares in a higher price environment. So, we're not, we're not trying to pick the stock, we're trying to run a good railroad. And so as the price goes down, we'll, we'll buy more; as the price goes up, we'll buy fewer.

Donald Broughton (Managing Director and Chief Market Strategist)

Perfect. Thanks.

Operator (participant)

Thank you. Our last question comes from John Barnes of RBC Capital. Your line is now open.

Frank Lonegro (CFO)

Morning, John.

John Barnes (SVP of Financial Advisor)

Hey. Hey, good morning. Thank you, thank you. Hey, going back on Donald's question, you know, from a share repurchase perspective, and it looked like, you know, maybe CapEx in 1Q is a little bit lower, and you've talked about some of the rationalization of infrastructure and that kind of thing. Can you talk about maybe the CapEx outlook, not just for this year, but going forward? Should we see a continued trend lower as, you know, whatever the metric is, I guess percentage of revenue is probably not the right measure anymore, but, you know, should we expect it to trend lower? And if so, how do you reallocate, you know, maybe that free cash flow?

Frank Lonegro (CFO)

Sure. As you know, we entered this year and put a plan together on the capital investment side that took out over $100 million on a year-over-year basis, and that was just reflective of the environment that we're in. As you look forward, I think we have some significant things that'll be rolling off. Positive Train Control would clearly be one of those, and as we look at the asset intensity of our business, there may be some opportunities on the infrastructure and the equipment side. At the same time, as you heard Cindy mention, making sure that we can keep pace with the train length opportunities that we have and investing in sidings going forward is gonna be important for us.

Technology investments will also be important for us, and making sure we have a good, safe, and reliable railroad is gonna be important for us. So, I mean, I do think you'll see some moderation over time as we continue to target 16%-17% of revenue as our long-term goal, and I think we have line of sight to that over the next few years. So I do think you'll continue to see us deploy capital in a balanced view with capital investment stream as first priority, second priority being dividends, and then the third priority being buybacks. So I think you'll continue to see us take that balanced approach.

John Barnes (SVP of Financial Advisor)

Okay. All right. Very good. And then, you know, Fredrik, just on the coal outlook and I guess longer term, you know, you've got a huge shift in the portfolio makeup of Eastern Utilities. Southern Company just announced another plant site for a nuclear reactor in South Georgia, you know, to go along with continue building a Plant Vogtle. I mean, you've got this incredible amount of electricity production coming online from nuclear. You know, I know you've talked a little bit about the plants that are targeted to shut down from 2016 to 2018, but you know, is there any concern that as you go out farther on that curve, that you start to see additional coal facilities shut down as a result of maybe some of this nuclear, you know, beginning to come online?

Fredrik Eliasson (Chief Sales and Marketing Officer)

You know, I think we have seen a lot of change over the last couple of years. Who would have thought that, you know, in four years we would lose $1.4 billion of coal revenue, and we're pretty much on target here in 2016 to lose at least $500 million of coal revenue. And so, clearly, based on where natural gas prices are right now, there's an economic interest in diverting a lot of the utility plants away from coal towards natural gas and in some instances, like you pointed out, to also to nuclear.

We do think, though, that where we are at these very depressed levels, both because of natural gas prices being so low and most likely at an unsustainable low place, and the fact that stockpiles are also very, very high, that there are opportunities to see some pickup at some point. But there's no doubt that the trend on the utility side is downward going forward, but I don't think at anywhere close to the pace that we've seen here over the last four to five years. So we're monitoring that very closely. We're, of course, also looking at the direct impact of the regulation that is gonna come potentially kick in here, as we get into 2020 and beyond.

But I think as we look at the next couple of years, we have seen a significant portion of the pain behind us, and right now, it's about seeing where natural gas prices will stabilize and when do we get through this overhang in the stockpiles to get back to a more normalized level. When that happens, we'll see where it is, but the general trend is obviously it is going to. It's a downward path.

John Barnes (SVP of Financial Advisor)

Okay. Thanks for your time. Appreciate it.

Frank Lonegro (CFO)

All right, everyone, thank you for joining us, and we will see you again next quarter.

Operator (participant)

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