CSX - Q4 2014

Transcript

Operator (participant)

Morning, ladies and gentlemen, and welcome to the CSX Corporation Fourth Quarter 2014 Earnings Call. As a reminder, today's call is being recorded. During this call, all participants will be on a listen-only mode. For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation.

David Baggs (VP of Capital Markets and Head of Investor Relations)

Thank you, Wendy, and good morning, everyone. Again, welcome to CSX Corporation's Fourth Quarter 2014 Earnings Presentation. The presentation material that we'll review this morning, along with our expanded financial quarterly 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 and podcast replay will be available on the same website. This morning, our presentation will be led by Michael Ward, the company's Chairman, President, and Chief Executive Officer, and Fredrik Eliasson, our Chief Financial Officer. In addition, Clarence Gooden, our Chief Sales and Marketing Officer, and Oscar Munoz, our Chief Operating Officer, will be available during the question-and-answer session. 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 on the accompanying presentation on slide two.

The 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 about 30 analysts now covering CSX, I would ask, as a courtesy for everyone, to please limit your inquiries to one primary and one follow-up question. With that, let me turn the presentation over to CSX Corporation's Chairman, President, and Chief Executive Officer, Michael Ward. Michael?

Michael J. Ward (Chairman, President and CEO)

Well, thank you, David, and good morning, everyone. Yesterday, CSX reported fourth quarter earnings per share of $0.49, up 17% from $0.42 in the same period last year. This represents a new fourth quarter record for the company. Revenue grew 5% in the quarter to $3.2 billion, also a fourth quarter record, with broad-based growth across nearly all of our markets, reflecting continued economic momentum. Furthermore, the timely addition of operating resources enhanced sales through the product peak and supported strong volume growth. As a result, operating income increased 11% to a new fourth quarter record of $901 million, and the operating ratio improved 140 basis points to 71.8%. This quarter's performance is further evidence of CSX's ability to capitalize on economic growth that is helping to drive strength across the company's diverse markets. Turning to the next slide, I'll discuss our full-year performance.

The past four years have been transformative for CSX, and we have emerged a stronger company for our customers and shareholders. That strength drove new full-year records in 2014 for revenue at $12.7 billion, operating income at $3.6 billion, and earnings per share of $1.92, and the operating ratio remained essentially stable at 71.5%. That's an extraordinary testament to the work of the CSX employees because it follows a period during which we lost nearly $900 million of coal revenue as the country transitioned through changes in the energy sector. At the same time, the diversity of CSX's business mix generated revenue more than offsetting those coal losses. That growth, combined with inflation-plus pricing, efficiency gains, and cash deployment for share buybacks, generated modest earnings growth for the shareholders during this transition period.

These financial results are continued evidence that the company's employees, core strategy, and diverse business mix can create sustainable value for shareholders even in an evolving and challenging business environment. With strategic infrastructure investments, locomotives, and operating employees coming online, we expect service levels to gradually improve throughout 2015 to superior levels. With that, I'll turn the presentation over to Fredrik, who will take us through the top and bottom-line results in more detail. Fredrik?

Fredrik J. Eliasson (EVP and CFO)

Well, thank you, Michael, and good morning, everyone. Let me begin by providing a summary of our fourth quarter results. As Michael mentioned, revenue increased 5% versus the prior year on 6% higher volume, driven by broad-based strength across merchandise, Intermodal, and coal. Expenses increased 3% versus last year, driven primarily by higher volume, and included a $39 million G&A workforce reduction charge. Operating income was $901 million, up 11%, or $88 million versus the prior year. Looking below the line, interest expense and other income were slightly favorable versus the prior year period. Income taxes were $284 million in the quarter, reflecting higher pre-tax earnings for an effective tax rate of approximately 37%. Overall, net earnings were $491 million, and EPS was $0.49 per share, up 15% and 17% respectively versus the prior year period.

Now, let me turn to the market outlook for the first quarter. Looking forward, we expect a positive demand environment in the first quarter with stable to favorable conditions for 96% of our markets and unfavorable conditions for the remaining 4%. Looking at some of the key markets, chemicals is favorable as we continue to capture opportunities in the domestic oil and gas industry. Housing starts are expected to rise considerably in 2015, which should drive a favorable outlook across our construction markets, forest products, minerals, and waste and equipment. Automotive is favorable, driven by growth in North American light vehicle production and the recovery of volume loss to trucking last year. Strong Intermodal growth will continue as our strategic network investments support highway-to-rail conversions.

We expect domestic coal volume growth will be strong in the first quarter, attributable to cycling weaker first quarter 2014 volume and a new iron ore facility. Export coal volume is expected to be significantly lower in the first quarter, reflecting continued soft global market conditions. For the full year, our best estimate at this time is around 30 million tons. Overall, we anticipate high demand levels for our service will continue in the first quarter. Turning to the next slide, let me talk about our expectations for expenses in the first quarter. Beginning with labor expense, despite G&A workforce reductions, we expect first quarter average headcount to increase sequentially by 1% as we continue to ramp up operating employees to accommodate higher volume. This represents a 4% increase versus the prior year.

We expect 2015 labor inflation to be around $35 million per quarter in the first half and then moderate to around $25 million per quarter in the second half. This represents an increase from the $20 million per quarter level seen in 2014, driven by union wage inflation and payroll taxes. The union component is consistent with what you should expect to see across the industry as a result of national bargaining and reflects both the carryover of the July 1st, 2014, wage increase as well as a January 1st, 2015, increase. In addition, you will recall that we amended a locomotive maintenance agreement in June of 2014, which resulted in a $15 million shift between labor and the MS&O expense lines in both the third and the fourth quarters.

This trend will continue in 2015, and we will be cycling the expense shift during the first half of the year. Looking at MS&O expense, we expect the first quarter to be driven by inflation and volume growth in line with the trends seen during 2014. Fuel expense in the first quarter will be driven by lower cost per gallon, reflecting the current price environment, higher volume, and continued fuel efficiency through technology and process initiatives. We expect depreciation to increase around $10 million versus the prior year in each quarter in 2015. This reflects the ongoing investment in our business, partially offset by an asset life study conducted in the fourth quarter. Finally, equipment and other rents in the first quarter is expected to increase year-over-year, driven by higher freight car rates and incremental volume. Now, let me talk about our capital investment plan for 2015.

In 2015, CSX plans to invest $2.5 billion in our business. This represents a moderate increase from the 2014 level, and core investment is expected to be about 17% of revenue. In the chart on the left, you can see that about half the capital investment will be used to maintain core infrastructure to help ensure a safe and fluid network. Our equipment investment in locomotives and freight cars ensures CSX has an appropriate level of rolling stock to support commercial demand and improve on-time performance levels. In addition, we will continue to focus on strategic investments that support long-term profitable growth and productivity initiatives. In 2015, we're prioritizing infrastructure projects that will increase line-of-road capacity on the northern tier to improve fluidity and system velocity.

Finally, looking at our investment in Positive Train Control, we have invested $1.2 billion through the end of 2014 and plan to invest an additional $300 million in 2015. As the implementation of PTC extends over a longer period of time, we anticipate spending at least $400 million beyond 2015. As a result, our current estimate for the total cost of PTC is at least $1.9 billion. Now, let me wrap up on the next slide. Overall, CSX delivered solid financial performance in 2014 with robust volume growth, offsetting the impact of last year's weather, network performance, and a weak coal pricing environment. We continue to see broad-based strength across our diverse business portfolio, and the strength is translating into more visible and more meaningful earnings improvements. CSX achieved double-digit earnings growth in both the third and the fourth quarters, and incremental operating margins expanded throughout the year.

For the full year 2015, CSX still expects to achieve double-digit EPS growth. Even as we cycle strong 2014 volume growth, we expect merchandise and Intermodal to again grow at a faster pace than the broader economy. We continue to target pricing above inflation as capacity remains tight across all modes of transportation, and we expect to deliver productivity savings approaching $200 million in 2015. Domestic coal volume should remain relatively stable in 2015 while the export coal market remains challenged. That said, we will be keeping a close watch on natural gas prices and heating and cooling degree days as we move through the year. Finally, we expect margin expansions to resume in 2015, which reflects improving service levels, a strong pricing environment, and continued economic expansion. Over the longer term, we continue to target an operating ratio in the mid-60s.

With that, let me turn the presentation back to Michael for his closing remarks.

Michael J. Ward (Chairman, President and CEO)

Well, thank you, Fredrik. The strong 2014 demand reinforced the importance of the freight rail industry and CSX in supporting the global supply chain and American competitiveness. The economic and environmental benefits of the freight rail network increasingly serve a country with a growing population and a critical need for transportation infrastructure. To continue delivering these benefits and creating value for its shareholders, CSX has transformed itself by forging new capabilities aligned with opportunities in energy, manufacturing, agriculture, and global commerce. We're generating record results by leveraging the most diverse business mix in the company's history with new opportunities across nearly all of the markets we serve. We remain focused on executing our core strategy of delivering service excellence for our customers, which drives our ability to grow merchandise and Intermodal businesses faster than the economy, price above inflation, and continue to drive improvements in asset utilization.

The company is poised for a bright future of strong financial returns and expansion, and we thank you for your ownership of and interest in CSX. 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, you may press star 1 on your touchscreen phone. The first question is from Thomas Wadewitz with UBS.

Michael J. Ward (Chairman, President and CEO)

Morning, Tom.

Thomas Wadewitz (Managing Director and Senior Equity Research)

Good morning, Michael, Fredrik, David. Wanted to see if you could talk a bit about utility coal and, I guess, your visibility to stockpiles and also how much risk you see if natural gas prices stay at current levels or go below in terms of switching from coal to gas and how that might affect.

Clarence Gooden (Chief Sales and Marketing Officer)

Good morning, Tom. This is Clarence.

Thomas Wadewitz (Managing Director and Senior Equity Research)

Yeah. Hi, Clarence.

Clarence Gooden (Chief Sales and Marketing Officer)

We see the stockpiles both in the north and south are pretty much where we expected them to be. They're at normal levels in both the north and the south. We think the comps in the first quarter will be very favorable for us when you look at what the weather was last year versus what the weather is this year. If these gas prices stay where they are now, which are around $3 or sub-$3, there could be some downside risk out in quarters two and three from what we have planned. But from right now, it looks to us like the rest of the year should be around flat going forward.

Thomas Wadewitz (Managing Director and Senior Equity Research)

Okay. Great. And then I guess a follow-up question that we've had such a dramatic move in oil prices. I think it's hard to get your arms around what the impact could be across your book. Obviously, there could be some risk accrued by rail or frac sand and pipe and so forth. But I guess given what you see right now, if you looked to second half of the year, would you expect that to come through and drive weakness in those areas, or how would you look at maybe not just first quarter but out a little bit more in terms of effective lower oil prices on your book of business?

Clarence Gooden (Chief Sales and Marketing Officer)

Right now, as we look out through 2015, we don't see any significant impact at all in our crude oil by rail into the eastern markets. Certainly, in our frac sand markets where we're moving into the Utica and the Marcellus area for the natural gas and the natural gas liquids, we don't think it'll impact the frac sand that we're moving into those areas at all.

Thomas Wadewitz (Managing Director and Senior Equity Research)

Okay. Great. Thanks for the time.

Operator (participant)

Thank you. The next question is from Allison Landry with Credit Suisse.

Michael J. Ward (Chairman, President and CEO)

Morning, Allison.

Fredrik J. Eliasson (EVP and CFO)

Good morning. Thanks for taking my question. Following up on Tom's question, how are you thinking about the sort of broader economic tailwinds that result from lower oil prices? And if we think about a scenario where let's just say, for argument's sake, that crude and anything shale-related evaporates, how do we think about where you could see upside in Intermodal or some of your other lines of business?

Clarence Gooden (Chief Sales and Marketing Officer)

Allison, we feel very positive about it. There's been some studies that come out that essentially only 10 states have employment that's directly impacted by the oil boom. It's less than 2% of the U.S. population. For us, the crude by rail is less than 2% of our business. For the average U.S. person, it's like in a tax break of almost $2,000 a year. So it puts a lot of dollars into the economy. From any indication that we see, it's a positive experience for the American taxpayer, for the American economy. So I think lower crude oil prices is very positive for our economy and very positive for CSX.

Allison Landry (Senior Equity Research Analyst)

Okay. Great. And then as my follow-up question, the $200 million of productivity gains, that's quite a bit higher than what you've generated in the last few years, which is average, I think, $130 million-$140 million. Is this inclusive of the incremental or unusual weather expense that you saw last year, or is that sort of on top of the $200 million?

Oscar Munoz (COO)

Allison, this is Oscar Munoz. I think a portion of that number is weather, although not as significant as you might think, probably 15% of that number, roughly.

Fredrik J. Eliasson (EVP and CFO)

Just to clarify on the $200 million, what we have is the operation's normal target of about $130 million-$150 million, plus we have about $50 million that is linked to the G&A workforce reduction program that we outlined, the severance charge in our fourth quarter.

Allison Landry (Senior Equity Research Analyst)

Okay. And then the rest would be weather?

Fredrik J. Eliasson (EVP and CFO)

Part of the operation's productivity savings is to cycle what we cycled last year, as Oscar outlined.

Allison Landry (Senior Equity Research Analyst)

Okay. Great. Thank you so much.

Operator (participant)

Thank you. The next question is from Rob Salmon with Deutsche Bank.

Michael J. Ward (Chairman, President and CEO)

Morning, Rob.

Rob Salmon (Senior Equity Research Analyst)

Hey. Good morning, guys. As a follow-up to Allison's question, could you give us a sense in terms of what sort of network, how quickly you're expecting the network to return to normal and what sort of key velocity and dwell metrics we should be looking for as we're thinking about that $200 million?

Oscar Munoz (COO)

Thanks, Rob. So the productivity initiatives are broad across a lot of different aspects: volume absorption, specific initiatives, certainly weather, winter sort of overlap. But I think if you think of the incremental resources that are coming online, it's going to just reestablish the discipline that we've had over the past three or four years around the internal operations of both scheduled and the unscheduled networks. And specifically, while velocity will be a bit of a lagging indicator as we'll dwell, the public measures you see, I think dwell in particular will be a key metric to watch. Internally, we have intermediate and home terminal dwell that we're monitoring. But I think the dwell, I think, will be an area that you can focus on. And when it stops dwelling there, it increases cost in a big way, and that'll be the first focus and benefit from the incremental resources.

Rob Salmon (Senior Equity Research Analyst)

That's helpful. Did you guys quantify the savings expectations for the employee management workforce reduction program? Was any realized in the fourth quarter?

Fredrik J. Eliasson (EVP and CFO)

The estimate is about $50 million for the overall program, which labor is the largest part of that, but there's also some other MS&O savings. To the question around anything that was realized in the fourth quarter, no. None was realized really in the fourth quarter.

Allison Landry (Senior Equity Research Analyst)

Perfect. Thanks so much for the time, guys.

Operator (participant)

Thank you. The next question is from Thomas Kim with Goldman Sachs.

Michael J. Ward (Chairman, President and CEO)

Morning, Thomas.

Thomas Kim (Senior Industrials Equity Research Analyst)

Good morning. I just wanted to ask about the fuel surcharges. If we go back through history, the last time oil prices collapsed the way that they did, your recovery was quite effective in capturing the fuel cost savings. As we look forward to this year with, obviously, the precipitous drop, do you think that your fuel surcharges are well-placed to ensure that you're able to fully sort of neutralize the impact of lower surcharges with the drop in fuel?

Fredrik J. Eliasson (EVP and CFO)

Yes. This is Fredrik. Yes. We do think we have a fuel surcharge mechanism that is effective. It's not a profit driver, but it makes us neutral to fuel price volatility. There are periods such as when the prices decline that we get the lag benefit, which we saw here in the fourth quarter. And likewise, when fuel rises, our fuel surcharge mechanism lags a little bit, so we have a little bit of a detriment there. But overall, the fuel surcharge is working well, and we think that we are neutral to any sort of price volatility with the exception of the lag effect.

Thomas Kim (Senior Industrials Equity Research Analyst)

That's great. That's very helpful. I guess just in terms of this decrease, obviously, certainly beneficial for customers, how do you think that this helps you in terms of your ability to push through higher GRIs during the course of the year or just in general pricing?

Clarence Gooden (Chief Sales and Marketing Officer)

Well, Thomas, this is Clarence. I think it's a positive for us. It's less cost, obviously, overall in the package to the customer. So as we push for our price increases, it makes it more powerful as we go to the customer in the overall package.

Thomas Kim (Senior Industrials Equity Research Analyst)

Great. Thanks very much.

Operator (participant)

Thank you. The next question is from William Greene with Morgan Stanley.

Fredrik J. Eliasson (EVP and CFO)

Morning, Bill.

William Greene (Managing Director and Senior Equity Research)

Hi. Good morning. Clarence, can I ask you a follow-up a little bit on that pricing comment? So I would guess that we're going to start lapping some of the big export coal price declines. So that's going to make our comps, I would think, a bit easier in 2015. And of course, the overall market is a lot stronger, particularly on the truck side. So I think that would be helpful to your pricing dynamic. So is there any flaw in the logic to think that pricing for CSX in 2015 should be stronger than it was in 2014?

Clarence Gooden (Chief Sales and Marketing Officer)

No. I think you're absolutely correct. I think you'll see much stronger pricing in 2015 than you did in 2014. Absolutely.

William Greene (Managing Director and Senior Equity Research)

Okay. Then maybe for Fredrik or for Oscar, as we think about the cost structure insofar as volumes disappoint us this year, so they're unexpectedly weak, how much of your cost structure is variable? How much can you sort of tweak that $200 million higher if you had to, and how much is more fixed such that as you dedicate these resources, locomotives, employees to move the current volume, we run the risk that we create a higher fixed cost structure in the second half, let's say?

Fredrik J. Eliasson (EVP and CFO)

Well, I think if you go back to 2008, 2009 timeframe, you can see what we did there, which was pretty remarkable in terms of variabilizing the cost structure. In the scenario that we don't think that you're going to be correctly predicting or forecasting, but if volume would be softer than we are currently anticipating, we do have the opportunity to take cost out more than what we have in the current plan. We've proven that in the past, that our cost structure is more variable than perhaps some people might think.

Clarence Gooden (Chief Sales and Marketing Officer)

Yep. I think it's important to note that volume is not weak.

Oscar Munoz (COO)

Right. Now, we're answering a hypothetical question, Bill. Specifically, when you think of crews and locomotives, probably the most expensive aspect of that, I've got roughly 1,000 people in the pipeline, and I've got roughly 1,000 people potential attrition. So that, I think, offsets itself. And then on the locomotive side, we've got lease returns that we can work through. So I think citing back to the old days of 2008, 2009 when we sort of did the math and proved the variability that has come into this industry. So we monitor that very closely.

William Greene (Managing Director and Senior Equity Research)

Yeah. Yeah. No. Things look strong, obviously. It's more just folks worried, "Is the oil price indicative of some weakening that's bound to come?" So just trying to think through what your flexibility is. Thanks for the time.

Operator (participant)

Thank you. The next question is from Ken Hoexter with Merrill Lynch.

Michael J. Ward (Chairman, President and CEO)

Morning, Ken.

Ken Hoexter (Managing Director and Senior Equity Research)

Good morning. Just a quick question on export coal. Clarence, can you talk about what is left on contract within the export side and what is still variable? Just looking at the market rates, it just seems like stuff, the export coal side, just shouldn't be moving at these prices. So maybe just some thoughts on the export side.

Clarence Gooden (Chief Sales and Marketing Officer)

Well, we have about 40% of the export contracts are currently export coal movements are currently under contract. The rest of it is up for negotiation. Does that answer your question?

Ken Hoexter (Managing Director and Senior Equity Research)

Yeah. Is that kind of typical at the 40%, or are we seeing increasing amounts coming on too?

Clarence Gooden (Chief Sales and Marketing Officer)

I would say that's fairly typical this early in the cycle. Most of those metallurgical contracts, as you're aware, tend to go more on quarterly basis but still tend to follow the traditional line of thinking, which pretty much settles in March, April.

Ken Hoexter (Managing Director and Senior Equity Research)

Okay. And then just a follow-up on the service metrics issue. You hit on the dwell and velocity. Oscar, can you talk about the on-time performance? It just seems like it continues to remain at that 50% level. What needs to happen to get that back? Is that decreasing congestion? Is it just getting the more locomotives and crew? Can you walk us through that a little bit?

Oscar Munoz (COO)

Yeah. We really are down to that point, Ken, that locomotives are the biggest last sort of aspect of this. We got 200 over the course of 2014. I'll get roughly 100 here in the first quarter, another 150 or so in the second quarter. Our service measures and a lot of things will be almost pretty significantly correlated to the arrival of those locomotives. Crews have been trickling in over the course of the year, so we're in pretty decent shape there. It is a power issue up against this great volume that we're getting. It's important, though. We are, in essence, open for business. Our fluidity has gotten a little bit better across the network. Our customer structure is improving. I mean, the span around our misses is a little bit narrower.

We got crews and locomotives coming online, and the infrastructure that we've been building has improved fluidity. So we're feeling good about where we are starting the year.

Ken Hoexter (Managing Director and Senior Equity Research)

Wonderful. Appreciate the time.

Operator (participant)

Thank you. The next question is from Brandon Oglensky with Barclays.

Michael J. Ward (Chairman, President and CEO)

Morning, Brandon.

Speaker 27

Hi. Good morning. This is Keith Mori for Brandon. Could you give us an idea of the costs associated with improving service levels this quarter tied to the recovery? And kind of when should we think these costs start to go away? Oscar, you mentioned that service levels are starting to improve, the cost structure is starting to improve. Should we start to think that's a first-half event?

Fredrik J. Eliasson (EVP and CFO)

Yeah. So this is Fredrik. I think if you go back to the third quarter, we were somewhere around $15 million-$20 million of what we call service-related costs because the network wasn't performing at the level we wanted. The fluidity wasn't there, so extra overtime and equipment rent and so forth. Here in the fourth quarter, probably pretty similar to that. And as Oscar outlined, as we get the additional locomotives, we should see the fluidity improve and therefore see reduction in overtime, improvement in our equipment rent, etc. And that's going to come gradually. I think it's unrealistic to think that it's going to be meaningful here in the first quarter because while the weather has cooperated so far, we're not through it yet. And generally, that slows things down.

But as you get to the second quarter and we get the brunt of the equipment, specifically the locomotives that we're expecting, I think at that point and late in the second quarter, I think you should start seeing some significant improvements.

Speaker 27

Okay. And then I guess the follow-up, what kind of inspired kind of the recent workforce reduction program? When you look across the operations, are there any other strategic initiatives that you can kind of point to or talk about that have similar type cost impacts?

Fredrik J. Eliasson (EVP and CFO)

Well, I think in terms of the G&A workforce reduction, it simply was an opportunity for us to streamline some functions, stop doing some of the things that we had been doing, and just process changes allowed us to be a little bit more aggressive there. We've had a program in place for 6, 7 years now to try to offset inflation. We've been able to do that. But this was just a way to be a little bit more aggressive on that side. Through the pipeline of productivity initiatives that we have as a company, not just for 2015 and 2016 and 2017, where we tried to get that 130-150 a year, we continue to work very hard. That's a big part of the value equation for CSX, and it has been over the last decade. It's going to continue to be over the next decade.

Speaker 27

All right. Thank you for the time.

Operator (participant)

Thank you. The next question is from Chris Wetherbee with Citi Research.

Michael J. Ward (Chairman, President and CEO)

Morning, Chris.

Chris Wetherbee (Senior Equity Research Analyst)

Hey. Good morning, guys. Thanks. When you think about the double-digit earnings growth for 2015 and you look at sort of the various buckets of the opportunities that are presented, where do you think sort of the potential risk could come from? Clarence, you talked about the domestic coal side sort of up in the first quarter and I guess implied sort of down in Q2, Q3, and Q4 based on flat for the full year. Does it come from there if natural gas prices stay at these levels or dip down? I guess I just want to get a rough sensitivity of the variability of the model. I know you talked about cost too. So just some color there would be great.

Fredrik J. Eliasson (EVP and CFO)

Sure. I mean, with any plan that you put together, there are challenges and there are opportunities. And I would say that the challenges that we're seeing is on the coal side and on the crude side. Right now, we feel that on the domestic side, that what we think flat is the right place to be, there's probably more downside than upside to that. Export, we outline that we expect export volumes to drop close to 25% for the year. And crude, while we're not hearing from our customers that there's any change in the shipping patterns, clearly, we're monitoring that closely as well. But if you look at the opportunity side, I think you've heard about our productivity initiatives, close to $200 million. We expect to grow our non-coal business faster than the economy as a whole. And the pricing environment continues to get stronger and stronger, frankly.

So when you add all that up, we feel that double-digit is the right place to be. Nothing is ever slam dunk because it wouldn't be meaningful guidance if it was, but it is something that we think we can achieve.

Chris Wetherbee (Senior Equity Research Analyst)

Okay. That's helpful. And then just a follow-up, just thinking about the pricing dynamic that you just mentioned, certainly seems like it's firming up into 2015. When you think about Intermodal and the relationship to truck with declining fuel surcharges, it would still seem that there's the ability to price that business up at a reasonable pace given what's going on in the truck market. But just wanted to get some rough sense. Do you feel a cap to some extent if we see diesel prices continue to fall from where they are currently?

Clarence Gooden (Chief Sales and Marketing Officer)

Chris, this is Clarence. I think there's a very positive trend in the Intermodal pricing. We see that the truck issues still remain there even with the 34-hour rule that's been turned back. There's capacity issues. There's driver issues. Even with Class 8 truck orders being up, there's still the issues of being able to get the drivers to move the business. So we think there's a lot of pricing opportunities in Intermodal itself.

Chris Wetherbee (Senior Equity Research Analyst)

Okay. Perfect. Thanks for the time, guys. Appreciate it.

Operator (participant)

Thank you. The next question is from Ben Hartford with Baird.

Michael J. Ward (Chairman, President and CEO)

Morning, Ben.

Ben Hartford (Senior Equity Research Analyst)

Hey. Hey. Good morning, guys. Just turning the attention to the longer-term margin outlook and the reiteration there, a lot of focus on 2015. But if we can put 2015 aside, what is contemplated in terms of, I guess, maybe what's required to get to the mid-60s OR target long-term, if you could speak in kind of broad strokes as it relates to coal and crude and then base pricing and productivity gains and service normalizing and those types of items? I mean, how are you thinking about the calculus to get to that mid-60s target?

Fredrik J. Eliasson (EVP and CFO)

Yeah. This is Fredrik. Clearly, we expect to start moving towards that mid-60s here in 2015 after having absorbed that close to $900 million of coal loss over the last couple of years. And we're going to make some meaningful improvements towards there. Now, if we think about the three components, it's ultimately price, volume, and productivity. The last decade, it was more probably price and productivity. And as we think about the next decade, I think it's going to be more evenly split between the three as we continue to see good volume opportunities for us. We continue to have a strong, healthy pipeline of productivity initiatives, not just for 2015 but in the years beyond that as well. And then pricing environment after having been a little bit slower over the last couple of years, I think, is becoming more vibrant as well.

The three of those components together with continued good cash deployment of the free cash flow is the way we get there. It's continued to do the sort of blocking and tackling that we've done over the last couple of decades that got us from kind of the high 80s down to the low 70s. We're going to continue to push that going forward.

Ben Hartford (Senior Equity Research Analyst)

He has a couple of specific questions. Does it require a strengthening of the pricing environment from current levels, 1, and 2, from a coal standpoint? Does it require any improvement in the coal markets relative to whatever the baseline is for 2015? I guess those are the two key concerns in terms of the sensitivities that we have.

Fredrik J. Eliasson (EVP and CFO)

Yeah. I think we're going to try to stay away from too much of the detail around specific pieces because generally, as I said before, whenever you put a plan together, I think it will be obsolete as soon as you put the plan together. But in terms of pricing specifically, inflation-plus pricing is critical to everything that we do. We are not necessarily banking on coal on the domestic side coming back significantly from where it is today. It would be nice to see, but that's not necessarily anything we're banking on. Export coal, we're in a down cycle at the moment. And two years from now, who knows what it's going to be? But we think there's enough other factors within our business to drive that earnings growth without just focusing too much on the coal business itself.

Ben Hartford (Senior Equity Research Analyst)

Okay. That's helpful. Real quick, if I could get just a clarification on the tax side, what are you assuming for a tax rate for 2015?

Fredrik J. Eliasson (EVP and CFO)

Yeah. Generally, we see a tax rate as right around 37.5%. It was a little bit lower this quarter because of some tax credits that we got. But generally, about 37.5%.

Ben Hartford (Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. Our next question is from Cherilyn Radbourne with TD Securities.

Michael J. Ward (Chairman, President and CEO)

Morning, Cherilyn.

Cherilyn Radbourne (Managing Director and Equity Research Analyst)

Thanks very much, and good morning. It was certainly nice to see your pricing improve sequentially. I just wonder, given the nature of the contracts you have in place, how long should we expect it to take before the tightness in transportation capacity, which really emerged in Q2 2014, is more fully reflected in your same-store pricing?

Clarence Gooden (Chief Sales and Marketing Officer)

Well, our pricing is. Thank you for noticing, by the way, that it improves sequentially. It's like sometimes watching paint dry to watch those numbers go up. I think you're going to see it improve sequentially each quarter going forward. We have momentum in it. We are constantly watching what happens in that pricing. About 20% of our contracts will renew in the first quarter. We expect to get very strong pricing in the first quarter. As the year progresses, I think you'll see it improve sequentially in each of those quarters, particularly in our non-coal business.

Cherilyn Radbourne (Managing Director and Equity Research Analyst)

Okay. That's helpful. And just a quick follow-up, your quarterly materials mentioned that resource constraints impacted your ag shipments in Q4. Just curious whether there were other areas where you missed out on the full volume opportunity because of resources?

Clarence Gooden (Chief Sales and Marketing Officer)

Mainly in our ag business and in our aggregates, our stone business. We were constrained in both those areas in the fourth quarter. That has improved significantly here in the first quarter. Our aggregate business in the first quarter, except in some of our northern areas where it's been weather-impacted, has significantly improved as well as in our ag business.

Cherilyn Radbourne (Managing Director and Equity Research Analyst)

Great. Thank you. That's it for me.

Operator (participant)

Thank you. The next question is from David Vernon with Bernstein.

Michael J. Ward (Chairman, President and CEO)

Morning, David.

David Vernon (Managing Director and Senior Analyst)

Hey. Good morning. Thanks for taking the question. Hey, Fredrik, given what we know right now about fuel prices and obviously given the outlook for kind of flat domestic and down export coal, would you expect full-year revenue in 2015 to be up or down relative to 2014?

Fredrik J. Eliasson (EVP and CFO)

I would expect it to be up, but clearly, that depends on ultimately what you think about the fuel itself. But we do expect, as I said, our overall merchandise and Intermodal business to grow faster in the economy as a whole and the domestic to be flat and the export coming down. But I still think we have an opportunity to grow the revenue. The key part here is the fuel surcharge is really a pass-through for us. So even if the overall revenue number comes down because of fuel surcharge, really, it doesn't impact the bottom line except for the lag, as I said earlier.

David Vernon (Managing Director and Senior Analyst)

Okay. Then maybe just as a quick follow-up, how does the service metrics and stuff like that play into the pricing environment? Obviously, Clarence, you've sort of made the point here that you're expecting pricing to accelerate next year. Is that in line with the service recovery? Are you expecting to be able to kind of take that rate up kind of independent of trucks maybe getting a little more modally competitive and the service level still being weak?

Clarence Gooden (Chief Sales and Marketing Officer)

I think the answer is yes to both questions. I think just the overall capacity issues in all of the modes of transportation, whether it's barge, truck, or rail, has given us a positive pricing environment and certainly as our services improved. And I'd like to point out that we had a point of inflation last summer. Our service has been continually improving since last summer. In fact, this fall, in our fall peak, we had an excellent fall peak with UPS, for example, being one of our prime premium service partners. Our service has been continually improving, and that makes it much easier for our sales force to go out and get the rates up.

David Vernon (Managing Director and Senior Analyst)

All right. Thank you.

Operator (participant)

Thank you. The next question is from John Larkin with Stifel Nicolaus.

Michael J. Ward (Chairman, President and CEO)

Morning, John.

John G. Larkin (Managing Director)

Hey. Good morning, gentlemen. Thanks for taking the question. Just with the service levels having remained stable but maybe not where you'd like to see them or your customers would like to see them, what was the decision thinking behind keeping your CapEx just a little bit greater than last year? There was one railroad in the west that dramatically increased their CapEx. Why didn't you decide to do that to try and accelerate the service recovery?

Fredrik J. Eliasson (EVP and CFO)

Well, I think we took it up slightly, and that's really a reflection of the fact that we do need to get the power. And that's where the biggest area is enough opportunity to make an impact on the service recovery. So maybe we could have gotten more locomotives, but the reality is that we can't get more locomotives right now. But even with the locomotives we're getting and our internal repair opportunity, because we do have a fair amount of locomotives internally that we're bringing back in revenue service, that perhaps other railroads might not have that opportunity. And that's a cheaper form of capacity than buying new ones.

John G. Larkin (Managing Director)

Got it. Thanks. And then as a follow-on to the service-related issues, some of the service problems, I guess, are caused by issues beyond your control, i.e., all the connecting traffic over Chicago. Can you talk a little bit about how Chicago is operating now and how the railroads have worked together to try and increase the fluidity over that critical hub?

Oscar Munoz (COO)

Hey, John. It's Oscar. You know what? We've had, knock on wood, a good almost 11+ weeks where Chicago's been on what we call a normal alert level. And so that's the good news. The communication and coordination that you referred to, we've always known it's been critical. It's been ramped up both at the most senior levels of the industry but also at the local level with that Chicago Terminal Coordinating Office and the efforts around that. And so everybody's working closely around that. We've had a couple of fits and starts. Chicago was incredibly cold last week. We mustered through that. We all take our turns in the barrel of being a little struggling through various interchange points. But by and large, the entire industry is working very closely and very well so far with that. Now, next few weeks, we'll test us again.

And then, of course, when volume returns here in the spring peak, week nine or so, we're focusing on that. But so far, so good, John.

John G. Larkin (Managing Director)

Appreciate it. Thank you.

Operator (participant)

Thank you. The next question is from Bascome Majors with Susquehanna Financial.

Michael J. Ward (Chairman, President and CEO)

Good morning.

Bascome Majors (Equity Research Analyst)

Good morning. You've talked before about the Intermodal margins in your portfolio rising to a level fairly in line with the rest of your business with the exception of coal and chemicals. Can you just give us a little update of where Intermodal margins are tracking directionally versus your other businesses today and whether or not the big drop in diesel prices is going to impact the profitability of Intermodal going forward?

Fredrik J. Eliasson (EVP and CFO)

Yes. This is Fredrik. Yeah. So if you look at the margins, when you exclude chemicals and coal, it's pretty much in line with the rest of our merchandise business. Because of the fuel surcharge that we have in place in the Intermodal business that essentially mirrors the trucking industry, when you see price volatility, when prices come down as they have done here on the fuel side, what happens is not so much that this is a volume play for the industry. It's really the fact that our margins in our Intermodal business gets a little squeezed because we are more fuel-efficient. So more of the dollars from fuel surcharge in Intermodal goes to the bottom line. Net for CSX, that's not the case but just on the Intermodal business itself. So there is some margin squeeze when fuel comes down, but it's not significant.

The statement that it's in line with the rest of our business is still a true statement.

Bascome Majors (Equity Research Analyst)

Okay. Thank you for that color. Just one question on export coal. I know the pricing comps get much easier year-over-year as we go forward. What do you expect sequentially in Q1 as we think about that business?

Clarence Gooden (Chief Sales and Marketing Officer)

What do we expect sequentially in coal?

Bascome Majors (Equity Research Analyst)

In export coal pricing?

Clarence Gooden (Chief Sales and Marketing Officer)

As far as the pricing goes, we think it's going to be flat.

Bascome Majors (Equity Research Analyst)

All right. Thanks for the time, guys.

Operator (participant)

Thank you. The next question is from Jeff Kauffman with Buckingham Research.

Michael J. Ward (Chairman, President and CEO)

Morning, Jeff.

Jeffrey Kauffman (Director and Equity Research)

Hey. Good morning, everybody. Thank you for taking my question. Mike, I have a question about a comment you made on your CNBC interview yesterday where you had mentioned that the suppliers that you were working with out of Bakken to ship the crude by rail to the East Coast, you had thought that at $35 oil that they could be competitive. You obviously understand a little more about this than we do. Could you help us understand because you mentioned the frac sand volumes were just fine. The crude by rail's moving fine. What gives you confidence that you would continue to see these types of volumes at $35 crude?

Michael J. Ward (Chairman, President and CEO)

Well, one, it's not at 35, but we think they could continue with existing facilities to be competitive. As you know, once you've made that investment, you can get back in there and refrac those and get additional without additional huge capital outlays. So we think in the short to intermediate term, which certainly includes all of 2015, we think that the shipments we've been seeing roughly 3.5 trains per day continues and maybe even grows a little bit. Longer term, if the prices stay at those levels, there's questions whether the capital will go back in for new facilities, Jeff.

Jeffrey Kauffman (Director and Equity Research)

Okay. No, I just wanted some clarity on that. Mike, thanks so much and congratulations.

Michael J. Ward (Chairman, President and CEO)

Thank you.

Operator (participant)

Thank you. The next question is from Scott Group with Wolfe Research.

Michael J. Ward (Chairman, President and CEO)

Morning, Scott.

Scott Group (Managing Director and Senior Analyst)

Hey. Morning, guys. Wanted to just clarify a couple of things on coal. How much is the new iron ore business? And is that inclusive in your commentary on flat domestic? And then when you think about those moving parts of iron ore, less export coal, fixed variable, and on the domestic side, how should we think about yields in 2015 in coal, positive or negative?

Clarence Gooden (Chief Sales and Marketing Officer)

Well, the iron ore is a large move. It's both a prior and a subsequent move, meaning that the raw material comes in, is processed, and then goes out as a finished product of iron ore. And the yields you should consider going forward to be very positive. But it's included in your domestic coal. But it is included in the domestic coal. Yes.

Scott Group (Managing Director and Senior Analyst)

Okay. That's helpful. And then just one for you, Fredrik.

The past few quarters, you've given us kind of some rough parameters or guidelines for how you think about earnings in the current quarter. This first quarter's kind of a tougher one just because of the comps and weather last year. Any color or comments you want to give us on first quarter earnings? I'm guessing given the comps, it's going to be a good amount better than just double-digit earnings growth, but any additional color you have would be helpful.

Fredrik J. Eliasson (EVP and CFO)

Yeah. I think that's what we tried to lay out, the kind of key assumptions by expense item in the presentation itself so you know how we're thinking about it, gave you some of the components there. Clearly, you're right that the first quarter, I think, will be a strong quarter and supportive of our double-digit earnings growth for the year.

Scott Group (Managing Director and Senior Analyst)

Okay. Thank you, guys.

Operator (participant)

Thank you. The next question is from Jason Seidl with Cowen & Company.

Michael J. Ward (Chairman, President and CEO)

Morning, Jason.

Jason Seidl (Managing Director)

Hey. Good morning, everyone. How are you guys today? Great. Just want to focus a little bit on some of the non-coal export side. Obviously, we've seen sort of Russia sort of in and out of the wheat market. And then this morning, I think Shell received some favorable product classification rulings for condensate export. Could you talk about things that could provide upside to the numbers on the export side for you guys?

Clarence Gooden (Chief Sales and Marketing Officer)

All right. You're talking about export in terms of condensate or export in terms of coal?

Jason Seidl (Managing Director)

Of export in terms of anything. Non-coal. Non-coal.

Clarence Gooden (Chief Sales and Marketing Officer)

Non-coal. Most of the condensate that I'm aware of that's being exported out of this country is mostly being exported over to Gulf. So for example, Mexico and the United States a couple of days ago have a major exchange of condensates and heavy petroleum products that are being exported and exchanged mainly through the Texas refineries. So that's where you'll see most of it. The East Coast has some condensates that'll be exported through Yorktown, but they're very small numbers that impact us. So we're not seeing a lot of that activity that you're describing in the condensates.

Jason Seidl (Managing Director)

Okay. And anything on the export Ag side?

Clarence Gooden (Chief Sales and Marketing Officer)

The soybean market is pretty heavy, mainly out of Norfolk and out of Mobile. And we are seeing quite a bit of activity in those areas.

Jason Seidl (Managing Director)

Okay. And as a follow-up, guys, getting back to pricing, we saw it in our survey that we do to the shipping community that we published yesterday. When you're talking about an acceleration throughout the year, I'm assuming this is obviously going to be ex-coal, but where are you going to get the most bang for your buck? Is this primarily in your truck competitive business?

Clarence Gooden (Chief Sales and Marketing Officer)

On the pricing side?

Jason Seidl (Managing Director)

Yes.

Clarence Gooden (Chief Sales and Marketing Officer)

I think we're getting it across all segments of our marketplace. If you look, margins are tight right now. So we're able to get pricing in those areas in our bulk commodities. We're able to get pricing, particularly in the truck side of the business that's coming up. So pricing right now is very much in favor of the carriers.

Jason Seidl (Managing Director)

Okay. Gentlemen, thank you for your time as always.

Operator (participant)

Thank you. Our next question is from Matt Troy with Nomura.

Michael J. Ward (Chairman, President and CEO)

Morning, Matt.

Matt Troy (Executive Director)

Hey. Good morning, guys. A lot of people out there talking about the decline in fuel prices lowering the absolute per-mile cost for trucking. Obviously, Intermodal rates are going to go down as well as the surcharge is declining there. But just curious, academically or in practice, are you hearing from any of your customers about a desire to switch from Intermodal back to trucking? Some folks are speculating that. I would think not. A, you just can't switch a whole bunch of business into an industry that doesn't have capacity. But given that prices have come in, I figured I'd ask the question, are you seeing it? Do you see it as a risk to Intermodal in 2015?

Clarence Gooden (Chief Sales and Marketing Officer)

We absolutely do not. The big issue that has been in trucking remains the big issue in trucking, and that is driver availability.

Most people that I'm aware of don't want their sons to grow up to be truck drivers. And so truck drivers become an issue. People don't want to be away from home 5, 6, 7 days. There's issues in passing the drug test to get a commercial CDL. There are barriers to entry now in becoming a truck driver and getting new Class 8 trucks purchased. And the cost of getting into the business is much higher. So it's more than just having the capacity itself. It's all the issues that surround it. So we see Intermodal, in fact, growing. Our Intermodal business grew faster last year than the GDP the country did. If you look at the AAR data, Intermodal in general grew faster than the economy did last year. So I think what you're reading in the periodicals is people writing that don't have anything to write about.

Matt Troy (Executive Director)

Right. I agree. It's more of an academic observation. Lower fuel surcharges don't create drivers. I guess my second follow-up question would be natural gas. If you look at the futures curve, it's implying pretty much $3-ish for the rest of the year or well into the year. I know that Appalachian coal, from a switching perspective, has been out of the money for some time. Should we just think about the vulnerability in your domestic coal business being Illinois Basin at current levels of $3? And have you kind of triangulated in your guidance a nat gas price assumption in your earlier comments of up Q1 flat for the year? Just wondering what might be at risk because last time we saw gas down here, stockpiles were north at 200 million tons. We're at a six-year low at 130 million tons. So that variable obviously won't hurt.

Just trying to triangulate what might be vulnerable if we stay at $3. Thanks.

Clarence Gooden (Chief Sales and Marketing Officer)

Well, about 47%-48% of our coal business today comes out of Northern Appalachia or the Illinois Basin. So we try to look around $3-$3.50 at natural gas as a number that if you get much under that, we start to hurt a little bit in our burn. So those are the numbers that we triangulate, I guess.

Matt Troy (Executive Director)

Okay. And in Illinois Basin, you're not hearing anything about switching from those customers yet?

Clarence Gooden (Chief Sales and Marketing Officer)

Well, I'm not sure exactly what you're asking, but what we're seeing is a lot of our customers are moving to the Illinois Basin coal, which is good for us because it gives us a longer length of haul, gives us higher RPU, and it's a good thing for us. Right.

Matt Troy (Executive Director)

I was just more talking about the switching sensitivities of the various sourcing basins, but I got it. Okay. Thank you.

Operator (participant)

Thank you. Our next question is from Cleo Zagrean with Macquarie Capital.

Michael J. Ward (Chairman, President and CEO)

Morning, Cleo.

Cleo Zagrean (Equity Analyst)

Good morning and thank you. And happy new year. My first question is also with regards to the domestic coal business. Can you help us think just more specifically around the sensitivity of EPS for 2015 to ±5% or whichever way you think is good for a band in domestic coal volume around that base case of flat for this year? What would ±5% domestic coal do to EPS for 2015 given the profitability in the new profit setup, the new mix, and also given the fixed variable structure that we've seen affect earnings so far? Thank you.

Fredrik J. Eliasson (EVP and CFO)

This is Fredrik. I think that in terms of fixed variable, that is less of an issue. I think in terms of sensitivities, clearly there are sensitivities. If coal comes down and is not flat, that's going to be sensitivities to our EPS guidance. But at the same time, as we said, there are opportunities to offset that. So there's a lot of different pieces that go into our guidance. So I think it's a little bit dangerous to go down and isolate specific pieces. When we add all the things up as I said earlier and we think about the business as a whole and some of the vibrancy we're seeing in certain markets and some of the productivity opportunities, the pricing, we feel that we can absorb some of those sensitivities on the coal side.

But we have to wait and see, and we're going to have to get a couple of quarters under the belt until we get full visibility into what is doable and what's not doable for the year.

Cleo Zagrean (Equity Analyst)

Thank you. And my second question is with regards to operating ratio excluding fuel. You've highlighted deservedly that fuel is a pass-through. So I would appreciate any help you can give us to think about the performance of the business ex this noise in the revenue and expense line. Are you looking at a path for OR, ex-fuel, any kind of progression that you have in mind that you can share with us so we can track performance on that basis? Thank you.

Fredrik J. Eliasson (EVP and CFO)

Well, the positive lag in the quarter itself here for the fourth quarter was about $23 million, and I think $16 million year-over-year.

So that was favorable coming from fuel. We also saw a little bit of favorability because wholesale prices, I think, came down faster than the retail prices. And it's the retail price that our fuel surcharge is tied to. So what we paid at the pump probably declined faster than the fuel surcharge revenue itself. So that's another benefit that we saw here this quarter. But overall, frankly, if you look at a margin expansion on operating ratio, since it's not a profit element, if fuel prices come down, it's actually generally slightly positive to our path towards a 65% operating ratio longer term. But as I said, overall, not a profit element. There are some lag effects. And here we saw an additional lag perhaps here in the fourth quarter of the fact that wholesale prices went down faster than retail prices. And that's.

Cleo Zagrean (Equity Analyst)

So I'm sorry. So in a lower fuel price scenario, should we expect that you are finding it easier to reach that mid-60s target sooner?

Fredrik J. Eliasson (EVP and CFO)

Yeah. It's immaterial in the scheme of things. But if you just think about the fact that you're adding, for example, $100 million to the revenue line and you're adding $100 million to the expense line since it's not a profit driver, the operating ratio of that is 100% because you're not getting a margin on that. So as fuel price comes down and your fuel expense goes down a corresponding amount, you actually get a little bit of benefit from it.

Cleo Zagrean (Equity Analyst)

Very much.

Operator (participant)

Thank you. The next question is from Keith Schoonmaker with Morningstar.

Michael J. Ward (Chairman, President and CEO)

Morning, Keith.

Keith Schoonmaker (Director of Industrials Equity Research)

Morning. I'd like to ask about the 2% decline in chemicals revenue per unit. Is this simply a mix issue where growth in crude, where the shipper provides a tank car, is having a mixed effect on this, or is there something else at work?

Clarence Gooden (Chief Sales and Marketing Officer)

Absolutely. You are correct.

Keith Schoonmaker (Director of Industrials Equity Research)

Thus, there's no read-through to lower margins on this business that I could derive just from that.

Clarence Gooden (Chief Sales and Marketing Officer)

Right. That's correct.

Keith Schoonmaker (Director of Industrials Equity Research)

And then a follow-up question on modal shift. I think the commentary in the quarterly report indicated automotive growth was constrained by customer transportation modal changes. Could you elaborate on that, please?

Clarence Gooden (Chief Sales and Marketing Officer)

In the early part of last year and the heavy freezes that were occurring, some of the automakers pulled business off of the rail and went to the haulaway carriers. The haulaway carriers would not take the business without contracts' duration of around 6 months for obvious reasons. That's what you're seeing there. Thank you.

Operator (participant)

Thank you. The next question is from Justin Long with Stephens.

Clarence Gooden (Chief Sales and Marketing Officer)

Morning, Justin.

Justin Long (Managing Director and Equity Research Analyst)

Good morning and thanks. First question I had was on service. With the locomotives coming on the next couple of quarters and the service improvements being correlated to this additional power, as you mentioned, Oscar, is the expectation that you can get back to normal service levels that we saw in 2013 by the end of the second quarter absent any major weather event?

Oscar Munoz (COO)

Yeah. I think normal service levels, those were record service levels back then. I think we will gradually steam up to that area as the locomotives arrive, and it'll be gradual over the course of the year. Not quite ready to commit to those high levels that quickly. Again, we have a spring peak that goes from week 9 through week 23. That's the end of June. So I think there'll be some lagging effect. But again, I think you're going to see the efficiency, the productivity, and of course, the growth that we've seen all together start to come together certainly by the second half of the year.

Justin Long (Managing Director and Equity Research Analyst)

Okay. Great. And second question I had was on pricing. I just want to get a better sense of how the pricing environment has improved. And I was wondering if you could provide any more color on how recent renewals have been trending. Generally speaking, I mean, are you seeing something closer to the mid-single digits on renewals versus the 2.5%-3% overall core pricing that you've posted recently?

Clarence Gooden (Chief Sales and Marketing Officer)

Justin, my friend David Baggs tells me numbers are not my friend, so I can't give you a specific number. But I would tell you that I am very pleased with the pricing that we're getting. It has been very positive, and you will be very pleased when we report our numbers for the first quarter this year.

Justin Long (Managing Director and Equity Research Analyst)

Fair enough. I appreciate the time. I know it's been a long call. Thanks.

Operator (participant)

Thank you. Our next question is from Donald Broughton with Avondale Partners.

Michael J. Ward (Chairman, President and CEO)

Morning, Donald.

Donald Broughton (Managing Director)

Good morning, Clarence. It turns out mamas aren't supposed to let their babies grow up to be truck drivers. Otherwise, I thought it was cowboys. But I'm glad to learn that this morning. That said, a year ago on highway diesel - and obviously, that's not the price you all pay - but averaged $3.96 a gallon. Looks like we're on course for it to average $3.10 a gallon or less in the first quarter this year. I know you're getting base yield, and you're doing a great job there. But just the fuel surcharge overall, can you kind of give us some parameters? Is it the absence of the fuel surcharge and a drop from what is essentially $4-$3 a gallon or almost? Is it 1% yield headwind, 2% yield headwind, 5% yield headwind?

What does it represent for your overall book of business?

Fredrik J. Eliasson (EVP and CFO)

Yeah. I don't think we have the math here in front of us to do that. You do have the total fuel surcharge revenue that we report to the SEC that I also think is actually in our quarterly flash. So you can look at the total revenue from fuel, and then you can model that out, I think, to get a sense depending on different highway diesel prices, what the impact would be.

Donald Broughton (Managing Director)

All right. So I'll just back into it that way then. Thank you, gentlemen.

Operator (participant)

Thank you. Our final question today is from John Mims with FBR Capital Markets.

Michael J. Ward (Chairman, President and CEO)

Morning, John.

John Mims (Transportation and Logistics Equity Analyst)

Hey. Good morning. Thanks for slipping me in here. A question on the chemical book. If you exclude crude oil and oil and gas comments for a minute and just look at just more traditional volumes, can you provide some color or just outlook on demand and pricing and contracting for your activities down in the Gulf and just your non-oil-related volumes?

Clarence Gooden (Chief Sales and Marketing Officer)

Yes. The other lines of chemical business has grown about 2%-3%. That's pretty much in line with what the chemical industry has been growing. Actually, it's a little high on the plastics end, growing at about 2%-3% over what it's been for the last six or seven years. Pricing has been very good in the chemical side of the business, particularly in the renewals that have occurred in the fourth quarter and are, in fact, occurring in the first quarter. So we're very pleased with what we're getting in the pricing in those areas. Does that answer your question?

John Mims (Transportation and Logistics Equity Analyst)

Yeah. No, it does. It's helpful. And what's the split between your traditional chemicals versus your oil and gas right now within that segment?

Clarence Gooden (Chief Sales and Marketing Officer)

Oil and gas is a major part growing of that portfolio, but the plastics part of the business is still the largest by far.

John Mims (Transportation and Logistics Equity Analyst)

Is there percentages you can give? I mean, I know you've put out numbers as far as what gas is for the total book, but just within chemicals.

Clarence Gooden (Chief Sales and Marketing Officer)

I don't have it off the top of my head.

John Mims (Transportation and Logistics Equity Analyst)

Okay. All right. If I can just back into something.

Fredrik J. Eliasson (EVP and CFO)

All right. Thanks a lot. Other questions have been answered.

David Baggs (VP of Capital Markets and Head of Investor Relations)

Yeah. Thank you, everyone, for your attention, and we appreciate it. We'll see you next quarter.

Operator (participant)

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