Apr 20, 2017
Executives
David Baggs - VP, Treasurer & IRO Hunter Harrison - President and Chief Executive Officer Frank Lonegro - CFO Cindy Sanborn - COO Fredrik Eliasson - Chief Sales & Marketing Officer Michael Ward - Chairman
Analysts
Brian Ossenbeck - JP Morgan Chris Wetherbee - Citigroup Tom Wadewitz - UBS Allison Landry - Credit Suisse Amit Mehrotra - Deutsche Bank Ravi Shankar - Morgan Stanley Ken Hoexter - Merrill Lynch Brandon Oglenski - Barclays Scott Group - Wolfe Research Jeff Kauffman - Aegis Capital David Vernon - Bernstein Bascome Majors - Susquehanna Financial Group Jason Seidl - Cowen & Company Ben Hartford - Baird Cherilyn Radbourne - TD Securities Walter Spracklin - RBC Capital Scott Schneeberger - Oppenheimer Duran Marabala - Deutsche Bank Justin Long - Stephens Brian Konigsberg - Vertical Research Partners
Operator
Good morning, ladies and gentlemen, and welcome to the CSX Corporation First Quarter 2017 Earnings Call. As a reminder, today's call is being recorded.
During this call, all participants will be in a listen-only mode. 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
Thank you, Sherlyn, and good morning everyone. On behalf of the management team I would like to welcome you to our first quarter earnings call, and also thank you for your interest in CSX Corporation.
This morning we are being represented by our Chief Executive Officer, Hunter Harrison; our Chief Marketing Officer, Fredrik Eliasson; our Chief Financial Officer, Frank Lonegro; and our Chief Operating Officer; Cindy Sanborn. Now, before we begin the formal part of our presentation this morning, let me remind everyone that the presentation materials, our safety and service measures, our quarterly financial report and our press release announcing our new guidance and dividend and share repurchase are all found on our website at CSX.com under the investors section.
In addition, following this presentation later today, our webcast replay and the 10-Q will be filed. And so now let me turn your attention to Slide 2 of our presentation.
Here are our forward-looking disclosure statements outlines the risks and uncertainties of forward-looking statements. There will be a number of them this morning during our presentation, and I imagine quite a few during our question-and-answer session.
So I would encourage you to take those forward-looking statements in the full context of this disclosure statement. On Slide 3 is our non-GAAP disclosure statement.
While CSX does file all of its financials in accordance with US GAAP, we are providing some non-GAAP financial measures in addition to the GAAP financial measures to help you better understand the business. But these measures are not a substitute for GAAP.
Finally, I would say that we have close to 30 analysts this morning, and so I would encourage everyone to play nicely in the sandbox, so to speak. You will have one primary and one follow-up question, so that everyone can be heard and we use everyone’s time wisely.
And before I turn the presentation over to the team, let me also remind you that the earnings call today is limited to discussions of the earnings and the business of CSX only, and we will not touch upon matters that are currently the subject of the company’s annual meeting. And with that, it is my great pleasure and privilege to introduce our President and Chief Executive Officer, Hunter Harrison.
Hunter Harrison
Thank you, David, and thanks to all of you for joining us this morning. I guess my first comment would be I am back.
I didn't think this is going to happen, but [Indiscernible] hopefully – well, not hopefully, I think factually my last leg on this journey that I have taken on this railroad, [Indiscernible]. In the 50 years did I ever think that I would finish in Jacksonville a group of railroaders with the talent that they did this, and the franchise that is before us, and I am very, very excited about the opportunity.
I met yesterday with the first board meeting, formally with our board. I think it is safe to say that all of us were pretty excited about the opportunities going forward.
As I found here, [Indiscernible] there is a group of [railroaders]. There might be a little shift in direction, but this company is going to achieve things that some of you don't think could be achieved.
I'm not going to spend a lot of your time on the first quarter because I was only here for 30 days, and the three leaders here with their team produced those results are going to spend some time going through that with you. I certainly think it was a pretty outstanding quarter.
As an outsider certainly looking in and it builds the foundation for us to go forward on with our plans for the future. I would say that I was reflecting this morning on what I might say here today and I know if you look at the various [Indiscernible] that we deal with, certainly our investors are represented – certainly our employees are represented.
The one group that is so important to us that is not represented directly that I am [Indiscernible], and I am extremely excited. If you look at our service offering as it is today, there is a lot yet to learn but pretty good job in our bulk movement and cycles.
Do a good job in the intermodal area. I think all of us would say that in our core merchandise category, we can make some significant improvement.
I think the [majority] have already started down that road. And I think you will see some what I would characterize as some pretty dramatic changes in our cycles and I think you will see things like from Chicago to Florida markets that we will take two and three days out of that as a result of some strategies you are going to hear about today.
So I think that is pretty exciting for the customer base. So without me taking additional time let me turn it over to the team here, and let Frank give us some observations on the results in the quarter.
Frank Lonegro
Thanks Hunter, and good morning everyone. Consistent with the transformation that we are undertaking through Precision Scheduled Railroading under Hunter’s leadership and knowing that you are eager to ask questions this morning, we are going to be very efficient in the way that we discuss the numbers.
So with that as a backdrop, let us turn to Slide 7. The safety of our employees in the communities that we serve will continue to be a top priority for CSX and for this leadership team.
While the personal-injury frequency index was 9% higher year-over-year the absolute number of injuries was down slightly, and that is part of our continuing drive towards the ultimate goal of zero injuries. Our train accident frequency index was 25% improved with substantially fewer reportable incidents.
In terms of efficiency, we are continuing to drive both train length improvements and fuel efficiency gains, while our service levels remain stable on a year-over-year basis.
Cindy Sanborn
Thanks Frank. Let me just add a little bit.
First of all, it is very exciting to be working with Hunter here, and as the operating leader spend a lot of time with him. And so I will talk a little bit about the quarter, but I will talk about going forward how we are working on some of the items that Hunter has briefly alluded to this morning.
First of all, as you would expect, and has always been the case for CSX safety is our highest priority, and we will continue to focus on that not only employee injury performance, but train accidents in order to improve or make sure that the communities that we operate through we operate through safely. Turning to productivity, in the first quarter we delivered $123 million worth of savings.
Significant resource productivity drove this. Continued train length opportunities and reduction in crew starts, and also we saw some other support costs, particularly in engineering and mechanical labor cost also affecting us positively in the quarter.
But I think what we really want to hit on here is how we think about our business going forward to drive to and in the past six weeks we have done a couple of key things I will just highlight this morning. One, we have adapted our operating plans to incorporate some of our unit train business into our merchandise business – merchandise service.
And this allows us to do a couple of things, as you think about our 28 hour train dispatch, our variable train dispatch, we did that in order to improve our train length and we have done that and very successful with it. But I think what is helping us continue to move forward with train length and cycle time improvement is adding the vast network into the merchandise service, so now we can have a more balanced network with a more highly likely probability of seven-day a week service and still keeping the length of the trains where it is productive.
This also serves our customers well as we are able to improve dwell time in our terminals as a result of these changes. The second item that we have been working on is reduce our – changing or converting our switching operations in some of our traditional pump yards into a flat yard model.
We have 12 pump yards across the system. To date we have converted four of those over into flat switching operations.
This has allowed us to reduce – support resource efficiencies, particularly in managing the infrastructure that is necessary to support in pump yards, in the pumping process, reduce that as well as at the end our plan has been focusing on improving the cycle times through those terminals. So we have been able to do both of those things.
As we look forward, we expect to continue to reduce several pump yards. We don't have a hard and fast specific number.
We look at each one individually. We will make sure we are making the right decisions to improve both productivity and service.
And I would also say that as we look at our quarter one measurements, our network performance measurements we are seeing as we have implemented some of these changes I am talking about, improved dwell time, improved velocity across the network and we think that will compound the effect of some of the changes that we are making to lead us to feel very comfortable moving forward that will actually have record productivity in 2017 following our previous record productivity in 2015. So overall I think the team is doing very well coming together with some significant changes as we adjusted to the reductions in management headcount as part of our first quarter initiative.
We saw a lot of change there and we are continuing to see change, and we are driving that effectively I believe, and we will continue to do so incorporating that into our business model going forward.
Frank Lonegro
Thanks Cindy. Those are great insights for the analysts and for the investors.
Going forward as we implement Precision Scheduled Railroading you will see what we believe is a powerful combination of improved safety, improved service and improved efficiency that exemplifies a great railroad. We believe that that powerful combination will benefit employees, customers and shareholders alike.
Turning to Slide 8, the GAAP view of our income statement highlights the 10% year-over-year top line improvement, which has been achieved through a combination of volume growth, higher fuel surcharge recoveries, favorable mix and value pricing.
,
As for the charge of the combined impact of increased fuel prices, inflation and volume, were nearly offset by the $123 million of efficiency savings that you heard Cindy reference. The focus on cost control and a rising volume environment produced incremental margins of over 70%, excluding the charge.
Bottom line, ex-charge CSX delivered record first-quarter operating ratio of 69.2%, operating income of $885 million, and a record first quarter EPS of $0.51. Turning to Slide 9, these financial results drove over $1 billion in operating cash flow, a nearly $300 million year-over-year improvement.
This improvement carried through to free cash flow before dividends of $630 million. Earlier this morning we announced a free cash flow target of around $1.5 billion for the year, which takes into consideration the combined impact of our earnings trajectory and a Capex reduction of over $100 million.
We continue to remain focused on returning capital to shareholders through a balanced deployment strategy. In the quarter, we distributed $166 million to shareholders in the form of dividends, while repurchasing 258 million of CSX shares.
Having now completed the two-year $2 billion program we commenced in April of 2015, we were pleased to announce a new one-year $1 billion buyback program earlier this morning. While ROIC was stable on a year-over-year basis, we fully expect that it will inflect more positively going forward as we continue to increase efficiency and reduce the asset intensity of our railroad.
Debt-to-EBITDA was also relatively stable as we continue to appropriately utilize our balance sheet and remain committed to a BBB+ Baa1 credit-rating. Turning to Slide 10, the volume outlook for the second quarter is largely positive with nearly 70% of our markets in the favorable category and over 20% of our markets in the neutral activity.
Only domestic coal is expected to be unfavorable in the second quarter.
Fredrik Eliasson
To just add a little color to that, if you look at the macroenvironment, several indicators support continued growth. Obviously the economy continues to grow at a modest pace, GDP in the 2% to 2.5% range for the full year and probably a similar pace in the second quarter itself.
The consumer sentiment continues to be at high levels, which helps many of our markets especially the intermodal market. At the same time though the truck market right now continues to see excess capacity.
But as we move through the year we do expect that to gradually improve in the second half and into ’18. And then, of course, on the favorable side export coal had a very strong year in the first quarter, 8.7 million tons that we moved in the first quarter.
We do expect that to taper off as we move through the year, but we still think that an upper 20 million range in terms of tons for the full year on the export side is a good estimate at this point. As we think about some of the headwinds, we think that auto production is clearly flattening out, and we think for the rest of the year relatively flat.
It is probably a good place to think about the auto business, and then while the core chemical market continues to grow at a nice pace we expect crude by rail to continue to decline both year-over-year and sequentially as we move through the rest of 2017. And then of course on the unfavorable side, we see our domestic coal business.
We talked about it in the fourth quarter, we lost some short-haul business but despite that we did about 15 million tons here in the first quarter on the domestic side and we expect a similar pace in the second quarter. But as you saw in the first quarter the quality of the revenue and the impact to the bottom line is still very strong and we expect that to continue as we move through the year.
It is obviously reflected in our RPU. So I would say overall we feel good about the top line.
We continue to expect our merchandise and intermodal business to grow at or above the economy as a whole, and it is nice to see coal revenue to be growing a little bit here this year as well. And lastly and echoing Cindy’s comments earlier, we are very excited about what this operating model can do for CSX, not just in terms of the bottom line, but really what it can do for our customers.
We are already seeing that from a service perspective both in terms of transit time, reliability and recoverability. So we feel very good about this change.
Michael Ward
Thanks Fredrik. A very helpful again commentary for the investors and for the analysts.
Let us finish up on Slide 11, with our first quarter results we are off to a very good start in 2017 and expect to accelerate the transformation to Precision Scheduled Railroading in the coming quarters. Earlier this morning you saw that we issued full year guidance, excluding restructuring charges.
To that end in 2017 CSX expects to achieve a mid-60s operating ratio, record efficiency gains that you heard Cindy mention, EPS growth of around 25% off of 2016’s reported EPS of $1.81 and free cash flow before dividends of around $1.5 billion. In issuing these expectations we assume, of course, that the coal markets and the overall economy will remain stable.
This morning we were also pleased to announce 11% or $0.02 increase in the quarterly dividend along with a new one-year $1 billion share buyback program. And finally we look forward to sharing our longer-term plans with you in the second half of the year.
With that we will be delighted to take your questions this morning.
Operator
Thank you. [Operator Instructions] Our first question comes from Brian Ossenbeck with JP Morgan.
Your line is open. Go ahead with your question.
Brian Ossenbeck
Thank you. Good morning.
Thanks for taking my call. Hunter, I guess my first one for you I know with have a scheduled day later in the year perhaps to hear more about the longer-term plan, but the initial impressions that were laid out in the file, could you just give us some context in terms of where do think the significant opportunities are to further streamline the network, you talked about monetizing real estate, which is a target that – any specific when you are there, and just in general if you think there is just too much track with too few [Indiscernible] going over there, just the ability to improve the network density and the design as you move forward over the next couple of years?
Hunter Harrison
Let me – I don’t think that this franchise is significantly different than others that we have overlaid this model with. Cindy touched on a lot of these things, and as we have talked internally, we don't have some ironclad numbers on what the headcount number got to be, what the pump closures got to be.
It is going to be what is smart to do. I don’t think that I have spent a great deal of time with Cindy and her team.
We are – I think step one was cutting through a lot of bureaucracy. We are getting through where we had nine-divisions, and so we are going to be going down to maybe a couple.
[Indiscernible] just cost money, and I think we are trying to streamline that. We are trying to get the right leadership in the right spot.
We have got nine dispatching offices. I don't think any railroad has nine dispatching offices, and we are going to make some efforts there.
There is efforts going on now promoting productivity, I would expect before the summer is up, we will have 550 or so locomotives [restored]. We will probably have 25,000 freight cars put up, and all of the associated costs that go with them, labor, material, and the locomotive fuel productivity, velocity, and a lot of things, dwell time in terminals I would say would come down dramatically.
Some of our facilities historically have they been overbuilt? Yes.
Like the auto railroad. But this railroad has had a special challenge.
If you look back at the mergers, there were more companies involved with mergers of that what is now the CSX than any other major railroad. So if you are going to place [Indiscernible] and we have four or five yards, well, it is because you have money to have a yard there if you go through some of these common points.
So, we are doing some things. For example, [Indiscernible] is a good example, where I think we have four yards there.
Cindy is helping me here, and I think we will be down to, maybe there is one super operation there. But I know we have a track of land there that is an operating proxy that needs to be a good deal of money.
So there is going to be some monetization of assets. So this is going to be more of the same at maybe a more rapid pace taking advantage of larger opportunities.
Brian Ossenbeck
Okay, great. Thanks Hunter.
So, just one quick follow-up just on the coal side, Frank or Fred, if you could just give us a sense is that the export market price and that really spiked pretty much after the quarter ended. So, just want to see if you thought that the mix, the favorable benefit that you saw in the first quarter is something that you would also be able to capture in the second and third quarter?
Thank you.
Frank Lonegro
Well, thank you. We don't forecast size, but we have said overall, over time that we do have indexes on our contracts on the export side that when things go well we share some of those economics, and when things aren’t as well, we take some of that pain.
Clearly this quarter, it wasn’t just export pricing that helped. We also see some pretty favorable mix and a lot of that mix we do expect to continue, but it of course, depends on where we see the utility business, for example, go in terms of resale replenishment of the inventories of through the years.
So, I think there's a favorable mix story and favorable sort of going forward but I think it's unclear at this point how favorable it's going to be through the year.
Brian Ossenbeck
Okay, thank you.
Operator
Thank you. Our next question comes from Chris Wetherbee with Citigroup.
You may ask your question.
Chris Wetherbee
Hi, great. Thanks, and good morning.
Michael Ward
Good morning.
Chris Wetherbee
I want to touch on the volume side, Hunter. If you could just sort of give your initial impressions on what you give sort of volume opportunities that are out there for CSX, obviously playing in the E3 automatically kind of think of the intermodal market and efficiency obviously played big and to being able to gain shareable from truck as well as your rail competitors.
Can you give us a sense as what your initial impressions are about sort of the franchise there and how you think about that going forward?
Hunter Harrison
Well, I'm obviously in 30 days, I've limited amount of knowledge. I will say that I think one of these starting things going forward with this organization as well as rail overall is the opportunity catch before us to get this off the hour.
And I think that we're set up in almost a perfect storm here to take advantage of that. If you look at that we have we start with a strong base to begin with, with great market that we serve up and down the East Coast and Chicago, Florida, and some really some growth areas, where there is congestion, the highway systems aren’t going to be able to contemplate everything.
If you look at the advantages of rail would, from an environmental standpoint, from an energy standpoint. And if you look at an organization that is going to be able to take a combination of dual times and terminals about limiting terminals, which lowers cost, that at the same time then takes dual times now from an average of effectively a day or 25 hours or 26 hours of dual, down to 18 or so, and you say we're going to skip some terminals and you start to look at really what we used to talk about the strong competitive, that is not strong competitive, it's better than pro.
Now, the issue is the change and is tried to take that to the market place and to sell it and converted and change it. But that's where look the individual markets, I mean this can be just as we guess more the competitors out there, we'll stretch and fighting and win the business there.
The real opportunity has been is on the in the high wall.
Chris Wetherbee
Okay, that's very helpful. I appreciate that.
And then just a follow-up thinking about some of the guidance and we had to think about it a little bit beyond 2017. So, mid-60s for this year, we're having pull forward some of the benefit, but clearly some of the things you are going to be doing are going to be gaining traction as the year progresses.
Presumably you'll be entering 2018 at a better run rate. So, obviously I'm trying to jump the gun here a little bit and get some of this forward.
Look, before you might be ready to give it but when you think about 2018, and I think you got it wrong in the respect that it is sort of natural that some of the benefits you're acquiring in 2017 will be playing out in 2018 and maybe we're thinking about something like the low 60s or show a warn in 2018?
Hunter Harrison
Is that based -- send me your mail, Chris, and I'll fill it in. I think you're right on.
Look, this is not the first time this movie played out. We see opportunities, not going to happen overnight.
Is it going to exactly linear? No.
will be there be a fair step approach? Yes.
Do we have any barriers here? Structural issues, as we deal with the board discuss, we can't do what's been done before.
And even go beyond that? No reason.
Chris Wetherbee
Got you, that makes sense. Thanks very much, it's worth the shot.
I appreciate it.
Hunter Harrison
Okay.
Operator
Thank you. Our next question comes from Tom Wadewitz with UBS.
You may ask your question.
Tom Wadewitz
Yes, good morning.
Hunter Harrison
Good morning, Tom.
Tom Wadewitz
Hunter, I wanted to see if you could offer some thoughts on the opportunity at CSX versus what you saw at CP. I think of your approach being one of the things you do is simplify the flow of traffic and reduce work event.
If CSX has a greater complexity and the network begin with versus CP, that would have find maybe greater opportunity for cost take out in or as you take out that, that complexity right simplify things. So, that's the right framework and I wanted to see if you could comment on that and maybe compare the opportunity you see so far at CSX versus what you had at CP.
Hunter Harrison
Well, I mean, Tom, they're totally different franchises. The maker, the market.
As generally speaking, a lot of roads are in North America. So, you look behind your belt and you say look what is the best way to operate and run this franchise and I think that the -- there is a lot of talk about this is not a simple T operation that it got all the complexities and the density and the spaghetti bowls.
Well, the waiting, the hand led, eat his spaghetti and get rid of it. So, one of the things we've done, is the same the time we work diligently on is being sure that we're not going through terminals and process and cars just because the terminals there.
So, it's almost kind of the old term we use before the wide motocross, let's start on with this franchise. The last, and I was there yesterday when I talked to group but the last stop yard, it was built in North America, the last two, with one and way across which is the heart of this CSX in my view.
And the other one was our [indiscernible] in mid-80s. Markets have changed since mid-80s.
Demand of traffic that's bulk, that is intermodal, that is very nearly -- true trends. It don’t have to be sold it in Swiss, so you adopt that year your operating strategies to the market.
And I just think that there's much more of a natural fit to make some of the changes that we need to make here that will present even more opportunities to both year point for the complexity as said in the past and built in and simplified. This franchise, if you apply the marker here to some degree, adds more potential than anyone up there will.
Tom Wadewitz
Okay, great, that's helpful, I appreciate it. Then the second question of the follow-up would be, CSX approached intermodal has benefit different than I think what typical if you look at Norfolk, they have the corridor strategy.
I think that will be more characteristic maybe of the Canadian road. But CSX has this Baltimore Ohio hub strategy, and has talked about one in the South East.
Do you think that is the right approach to continue or do you think on the intermodal network is their opportunity to maybe simplify and go towards more of a kind of a origin to destination as opposed to sending it to the hub that you have in Baltimore Ohio? Thank you.
Hunter Harrison
Well, Tom, I don’t want to get into about there. I'm sure the people here they’ve have potentially a different better strategy given what they had to work with.
The operating groups challenge is to present velocity and speed in customer requirements to the marketing sales group and then given how well that service going to apply to the market, then its spreads changed job into this end of service to take that to the market. And I think a better product raw product this Wendy and team can produce the more successful and more latitude, it will give thread and technique till I think that I think the competition, we're going to get bears in our rear view mirror and they're going to be looking at the rear, we're going to be pass him on the left.
Tom Wadewitz
Okay, great. Thank you for the time, Hunter, I appreciate it.
Hunter Harrison
Yes.
Operator
Thank you. Our next question comes from Allison Landry with Credit Suisse.
You may ask your question.
Allison Landry
Good morning. Thanks for taking my question.
Hunter, Chicago has always been at the forefront of your mind and historically you've made comments that CSX used the Chicago belt and perhaps the Indiana belt for switching more than any of the other rail. So, now that you're in arguably a much better see to effects change.
Do you have any plan to pick Chicago and if so could you provide some content surrounding that?
Hunter Harrison
I don’t know that how quick to pick Chicago. But Chicago is a special issue.
And if you noticed in a lot of our what we've discussed and talked about, it hadn’t included Chicago, but those Chicago we here affectively carved out and are taking a different special type look at. Chicago has some real challenges to this all North American infrastructure.
Chicago cannot survive as it is today. You got law suits now, the imminent domain, had you want to take rail infrastructure to replace it with that one.
You got it right beside all here. Okay.
Everybody wants to grow, they want to grow in Chicago and it's not going to work. Now, the plus for us is this.
We own a lot of assets in Chicago and we can be a more significant player that in positions that been in the past. And only one move could change things in Chicago and so people have to be aware of it and not I don’t read, I'm not going to mention the term but just a stroke of a pen of a partnership could shift a lot of track away from Chicago, and infrastructure thing to people think it's need for Chicago will be needed.
For example, if you look at Kansas City today. Kansas City used to be a Chicago.
And we were little late in the real business and built tons of infrastructure and now you look at Kansas City and it's pretty much rail business relative to the infrastructure. So, Chicago is going to be gravy on top of this plan of what we eventually decide we're able to do with our partners and fellow owners and all the other entities that want to be part of Chicago.
So, it’s real opportunity is that we're taking a special look at.
Allison Landry
Okay. And when you refer to the stroke of a pen of a partnership, is that a single partnership that you have in mind or could it be multiple?
Hunter Harrison
Look, I don’t have anything in mind. I got four years contract, I want to go out and CSX with a green, with a blue and gold jersey running under the goal post, okay.
If even if I want to do something after that, it's up to them. I'm only pointing out that one of the challenges that's brought to my attention, almost every time, I'd be with the big customer, is real consolidation.
And in spite of the fact that which you might hear, in proper statement, we got to LA to a customer in South and West of adding service to New York and I'll talk to you about half of it. They don’t want to hear about half of it, they want to hear about all of it.
And until one easy and control movement rail is never going to have the competitive alternative to the highway. But what I'm just pointing out that for a lot of these reasons, Chicago was kind of a wild card.
Allison Landry
Okay. And then, as a follow-up question, how are you thinking about the coal network or other areas of the network that doesn't necessarily have as much density as you would like.
And I know there was sort of a question earlier in this round. But ask a little bit differently, is there any opportunity to short line any of this business and are there any carriers or holding companies that you think would be a good fit?
Hunter Harrison
Now, look I think that -- I think that you give us off to and buy into, what we say we're going to do, that you don’t need to think about short liners all the time. I do think that we do domestically move coal a little bit different than I'm traditionally used to, in a very disciplined close loop unit train operation that can be much more efficient.
You can't move unit train coal train for three days and then park them two days and then run them for three days and then move again to very efficiently. Now if you do that there is a higher pulse associated with it with higher cost maybe comes the higher price.
So what we are trying to do both with the -- is to create and encourage our super stores with us to create more disciplined approach what we can do with [indiscernible] and fewer locomotives and we can be more competitive for them and give them a constant supply of coal which is what they want and if we developed the reliability we need then it will all come together.
Allison Landry
Okay. Excellent.
Thank you for the time.
Operator
Thanks. The next question comes from Amit Mehrotra with Deutsche Bank.
You may ask your question,
Amit Mehrotra
Okay. Thank you.
Good morning. Thanks for taking the question.
The first one is just on the operating expectations for this year. It looks like the OR target of the mid 60s implies around 800 million year-over-year on your profit improvement.
It just seems by our estimate at least that only about 300 million of that will come from revenue growth and improved fixed cost absorption which leaves about call it somewhere close to half a billion dollars of absolute reduction in the cost base. So first of all is that the type of cost take out that you hunter in the team and are targeting to realize this year and just for our own, my own avocation, how does one achieve sort of half a billion dollar of cost take out without maybe driving a significant amount of disruption at least in the near term.
Thank you.
Frank Lonegro
Amit, let me, it's Frank, let me take that one first and then turn it over to Hunter for additional commentary. In the targets that we gave you one of the things that we mentioned was record productivity embedded within that is obviously the prior record of $427 million in 2016 so clearly you can have your own estimate in terms of how much we will exceed that to a very good start in terms of the $123 million of efficiency.
I think from just a line item perspective other than fuel you should expect us to continue to drive cost out across the board in terms of the various items there when you look at better service you look better productivity, you look at the ability to absorb volume with literally no additional cost associated with that, you get huge flow through from what your expectations are on the revenue side. So we are kicking one off cylinders here in terms of the volume side, the pricing side and the efficiency side so that's what gave us the confidence to put out the targets that we did this morning.
Michael Ward
Yes, I mean I don't want to add more example that which you want to look at odd numbers just the achieve it. Taking on some initiative to take the 1000 position, those 1000 positions were a lot of more voluntary and there was store room that is what we are all position that has not touch any of the [inaudible] we are going to utilize the people internally we have, we are very sensitive to your comment about the disruption and the moral and we have at [inaudible] but it is a little higher when normal and so I think if you had the [inaudible] member on it and I haven’t got into that kind of level yet but I think the potential is there that sometime around the first half of the year by the end of, there would be probably be a similar number taken out also now we didn’t take any of those to take some real cost without impacting the service or safety or anything else.
These are just a different ways to doing things. We are bringing some job own.
We have, I don’t know all of that, 250 or 300 boys in India, we are reviewing those jobs back here but [inaudible] also some job but I am really [inaudible] worried about India right now I am worried about CSX [inaudible] America, so there is a lot of opportunity and I don’t think that there was a breach as far as we do the job and we have the ability to do that we can achieve all these things that we dealt that.
Frank Lonegro
Okay, one other point on the folks in India, there are contractors not employees but obviously we're going to in source that work and really look to absorb that with the existing workforce. I know Cindy also had some points, she wanted to make here.
Cindy Sanborn
I just put it in a couple of broad categories as I think about it. [inaudible] mentioned the reduction in the management that took place last month, I think as you think about [inaudible] conversions and so forth those types of actions I would call core operations and we expect to do more of that.
Volume absorption, we are seeing our outlook with a higher level of volume for us to move and we think we can absorb that of more efficiently than putting resources back one for one and then I would also say, some of the, looking back and some of the improvements that we have made other railroads [inaudible] I would call it network efficiency cars online velocity [inaudible] those types of things, we think will see improvement improvements there. So I would call that just network efficiencies going forward.
And when you put all that together that's what's given us our confidence to move forward with that with another record here.
Amit Mehrotra
Right. Well thanks for all that.
Let me just ask one follow up if I could. Frank, on your comments about productivity, maybe I'm thinking about incorrectly but I feel like productivity is different than absolute reduction in the cost structure?
Because productivity is in my view the way I understand it you're optimizing the cost structure to maximize the incremental, may be minimized to detrimental but it doesn't necessarily mean the cost structure is declining. So you guys achieved 72% incremental operating margin in the quarter which is unbelievably great.
Is there a way to understand or help us in terms of what was that was actually fix cost absorption? What was that actually absolute reduction the cost structure?
Frank Lonegro
So, when we think about productivity and how, I would say keep score internally, we do look for structural cost reductions. So a big part of that record productivity, structural cost reductions meaning each line item in the expenses is going to get lower again I'm excluding fuel just given the price environment that we're in but we are focused on fuel efficiency as well.
I think there as you can see from an incremental margin perspective, we're also a very good start with about 72% incremental for the first quarter when you understand what we're trying to do on the cost side and you will understand what the volume outlook looks like I would estimate that the incremental margins were actually improve throughout the year which is going to give you the bottom line to flow through the revenue that we are bringing up.
Amit Mehrotra
That's great. Hunter, one last one for me if I could.
Can you just comment on your relationship with the union so far? You have the company has over 20,000 union employees, can you just talk about those initial meetings and conversations and just in the context of all the operational changes to come?
That’s it for me. Thank you.
Hunter Harrison
Well, I hope it's pretty good. I've worked most of my career.
The first four years alongside of the various roles that now make up the effects and those some of the leadership I've had some, I mean terrible what I say here, I had some bad things conversations, exploring new opportunities with those individuals. It's not real common for a new CEO to get me in and I don't care what your name is in the labor leaders to be bringing in a [inaudible] that just now, [inaudible] but at the same time I [inaudible] to be approached unofficially at least, the conversations about potentially there was something like an hourly agreements that has been extended in some part of the US system and now the Canadian national that we developed.
It is very encouraging to say that, even that there are dialogue like that and one of the things that, the beauty of that would be, a couple of things that the people should think that one: those agreements guarantee people position that’s important today people they certainly have job and they have the job guarantee and that’s very important in people and at the same time for us it lowers our, potentially our cost, 30% to 35%. So we're going to have some squabbles.
They don't like to see their people disrupted nor do I but you got to do which you got to do some time. And so there'll be some, I'm sure there'll be some, comment but all I care about is the bottom line and profit and I hope that in turn we're very sensitive to the employees in the part they play in this.
So I think we'll do fine with it.
Amit Mehrotra
Okay. Thank you for answering my questions, I appreciate it.
Operator
Thank you. Our next question comes from Ravi Shankar with Morgan Stanley.
You may ask your question.
Ravi Shankar
Thanks. Good morning everyone.
Hunter, just to summarize tie-up everything you said in the call so far in terms of playbook the precision railroading playbook that you've so effectively deployed several times before at other railroads, do you think that's kind of directly applicable to CSX here or do you think the complexity of the network here involves changes to the way that it's been under before and also CSX has in recent years had a playbook of deemphasizing coal and becoming more of an intermodal rail. Do you agree with that and do you think that kind of becomes part of your playbook as well.
Hunter Harrison
Well, the question was, yes it was. I think, is the more complexity there in the network the better model you can apply to it, you can get more advantages or opportunity but if you just got a linear street line railroad because there would be lot of people can do that into the model to that.
So this has certainly, those implications. Now, strategically going down there in the line as to far as, look I think, if you look at three years out of five years, out of ten years that we need to understand that the world is going to continue to change though and we need to be flexible and to have a plan that allows us to change with those changes, okay.
And we got things going on as we speak from energy standpoint, what is the future of fossil fuel, what is the future of crude, how much influence of the environment is going to have? What is the next we are going to do with the railroad, you go ahead inject rail, you drive manage huge warehouse of Amazon and so the supply chain is going to change and we have to be, going to be some of the game that are traditional [inaudible] we have to be more flexible and more creative to be able to deal with those changes in the world.
Frank Lonegro
I mean we have to emphasized call CSX, the coal has been the emphasize by the utility and so we want as much business as we can what is called, but we will deploy our strategy where we can capture the growth and create the bottom line value for CSX through excellent service to our customers.
Ravi Shankar
Got it and your vision of your intermodal, is this largely, I think you spoke about service initiatives a little earlier on the call, but it is largely a case of improving the service levels and gain to a point where it become super-competitive versus struck or are you looking for more demand improvement from macro or kind of being able to take price and segments. So between service and demand and price kind of which do you think is the most important level for intermodal?
Hunter Harrison
I don’t know that, the market would have you believe, to begin with, we are not going to sit here and let our precious service the kind of commodity and so that there we create in service and I would [inaudible] at this we are just in time an intermodal get real hot, if you look back and do a little history, you will see that prior I am in, it was not going to our 20% [inaudible] you let interest rate and they are going back up after, I just can’t tell you when they do people do move merchandize will be rewarded because caring are going to go up. The beauty is this the quicker we move it, the cheaper it is and so it goes on itself and so we turn the equipment quicker, we give better service to the customer and we got the lower cost and then we can may more convincing and it all fits in this model.
Ravi Shankar
Thank you.
Operator
Thank you. Our next question comes from Ken Hoexter with Merrill Lynch.
You may ask your question.
Ken Hoexter
Good morning. Hunter, you sound well I look forward to your tenure at CSX.
If you noted you're going to be an advocate for customers in your intro remarks. Is that a change in how you're going to attack the plan?
I mean after you've left obviously we heard keep talk about fixing ruffled feathers and a customer focus. So now it sounds like you start this with a little bit of a different tact.
Maybe you can just talk about that a bit.
Hunter Harrison
I have in my whole career in fact one of the reasons why I'm sitting here was I have to be an operating guys that [inaudible] okay. I have got a little reputation [inaudible] people look at your bill and that wouldn't they do on the ground, but look there's no one more sensitive than I am and more [inaudible] than I am of the business that our customers yield, okay.
I am the greatest advocate in the world which you could sit in some of our meetings when we talk about service and we talk about [inaudible] because that’s not just about creating pain and suffering for our customers which I don’t want to see creating. One example of a customer turn over a period just when we are going to do a transition that sense any problem or issue from it didn’t exist, okay.
So I am going to do a little coaching couple of mine and actually anticipate had a response.
Ken Hoexter
Let me just read it, something you talked about on the union because the US has changed like historically have been a little bit different right in terms of all the rails coming to negotiating in one team against kind of the all the unions in one group. You always had things may be a little bit differently in Canada, can you, is that something you think you need to shift how you would address that as you move forward?
Hunter Harrison
Well, I think, if you look back, the parts when I was parts of the U.S. operation, we were not part of handling.
So negotiated our labor agreement and then we can do that now we are going to have some dialog it appears to me and I have had a chance to some of my colleague about it but it appears to me that some of the big -- if you will or seven or they start to see the world differently than if they start to see the world differently and then on one page and that's makes a lot of sense to have this one big care conference negotiated for us. I would much prefer I think us to sit down with our employees and do what's the best for the organization and employee.
So I think that all those things that deal with policies and all we will take a look at it and see how they see the world and how we see going forward and what's the most appropriate action.
Operator
Thanks. Your next questions comes from Brandon Oglenski from Barclays.
You may ask your question.
Brandon Oglenski
Yes good morning and thanks for taking my question and Hunter definitely welcome back and I know there is a lot of investors excited to see you back in the field. So surprisingly though it just keeps coming back we hear it a lot that length of farm, and the short length of farm from the east coast just means that the return on invested capital or the margin potential is not as high as railroads or some of the stuff going out, out west in the US can you just talk to that dynamic and whether or not you think length of plays a lot of determination in the ultimate profitability of the network.
Hunter Harrison
Well [indiscernible] the markets of the market. We don't get a chance to make the market.
I know this the more productive we are the better we are at cost controlling that cut inflation -- controlling cost okay will put us in the position that says people used to say -- 800 miles plus you could make -- well that's not true. If you are operating -- 90s it's true.
The operating ratio is 58 it's wrong. So it's I don't really, necessarily while on the short it's the bottom-line margin that we can make out the business and what I don't think we set the price out there.
The market sets the price which we want to play or not. And we keep ourselves competitive with the market both with long and short term.
Brandon Oglenski
And if I could, kind of also that question maybe what Ken was asking well there is some fear that as you go through these operations changes and focus more on service that maybe some of your customers are disruptive from the way business is done in the past is there potential here that you see some share shift as you go through this transition period or do you think as service improve you could actually improve top line at the same time.
Hunter Harrison
Yes. That's the story.
That's why you provide good service. It starts with your product but you don't have the product you don't have anything.
So we start with the product and the better we make that product the more we can extract in value added both in market share and whatever the revenue. So this is not one set of the game.
It's the revenue up and cost down and investor get rewarded and it's fun. Okay.
Brandon Oglenski
We look forward to Hunter. Thank you.
Operator
Thank you. Your next question comes from Scott Group with Wolfe Research.
You may ask your question.
Scott Group
Hey thanks. Good morning everyone.
So maybe Fredrik can you isolate the strength and export pricing from the mix benefit of losing the short haul business and understand what bigger impact in the quarter and can you just kind of confirm it if the guidance for the year assumes kind of export pricing stays where it is or that it does come down in the back half of the year and then bigger picture on call maybe for you Hunter, we can see this quarter how profitable the coal franchise is if we kind of assume that coal resumes at secured in the next couple of years do you think that maybe could impact the ability to get to us sub 60 OR in a couple of years?
Fredrik Eliasson
So let me take your first part of your question first. I would say that the majority of the [indiscernible] change was stable mix, with favorable mix on one hand that some of that short haul traffic obviously went away which was short in marginal but also we saw a more replenishment of utilities in the south versus last year where if you recall not for gas prices were tremendously low for design and then also on the export side we saw additional traffic going into the Virginia which is generally little bit of a export there that is longer length of haul so we had a couple of things that was favorable from a mix perspective that certainly helped so that was the majority of the driver that we saw.
And then turning to question about the coal franchise to Hunter.
Hunter Harrison
My numbers, my analysis as a short timer don't include some big goal, if coal comes back stronger than anticipated it's very – will it change any of these numbers, I don't think so. If you look at the last story we get the same thing -- and you will get to the numbers well I think that group has done an excellent job and they continue to do it I think they bound through 60 it through with their life 58 so no I don't think that I have set longer term almost – western Canada that I can't retract it.
I just take longer term coal is not something that rails should depend on. Now it can take a while to transition out it's not going to happen overnight and we might see another 10-15 years but longer term I don't think that fuel I mean coal is going to be the energy source of the future.
Scott Group
Okay and just the part about coal pricing assumed in the guidance in the back half.
Hunter Harrison
Well overall, side that we follow in this index after the variety of them and as you can see in the forward curve currently that is coming down as we move through second half of the year and that certainly then our expectations as well but we will ultimately see where the market ends up.
Scott Group
Okay. Thanks and then Hunter since this is your first call, there is couple of things that I want to address.
There is some people that presume that ultimately M&A is part of the strategy and maybe you can talk about that and then also in some of your past, you have brought some people on in terms of the team should we be expecting something similar here?
Hunter Harrison
Well look I don't know what I can say but I would emphasize, okay M&A has nothing to do with this strategy here at all okay. And one thing I take very proud and the integrity okay I am telling you there is no such plan.
Even I don't have hands I have got four years it's not going to happen in 10 years [indiscernible] is a lot to play with the hand and bill okay and we got a good hand here. Now do we have a couple of midst, maybe but we are looking internally in fact that was last night talking about some people.
I am not sure that we have – that we have taken advantage of all the internal talents that we have here. But if we hint avoid that we have that we need then we can – we always have the ability to go externally.
If there anybody wants to get the work force the list is long and we don't have any restrictions about who can leave and can't go here, they can't go there. We are okay, work here they can leave.
Okay. In fact if they want to go some other railroad let them go.
But we have got we will not have a short of talent and resources to be on the railroad that we described.
Scott Group
Okay. Thank you.
Operator
And your next question comes from Jeff Kauffman with Aegis Capital. Your line is open.
Go ahead and ask your question.
Jeff Kauffman
Thank you very much. Welcome back, good to have you back on.
My questions have been asked six ways to Sunday how CCX differs from some other rails you have been at but what I would like to know is at CP there needed to be a capital investment and sighting and some other portions of the rail to achieve the things you wanted to achieve. CN it was different investment can you talk a little bit not so much about multiple yards because we have been built through acquisition but talk about the capital plan at CCX and is there investment that needs to occur for what you need to do and kind of how we think about that strategically.
Michael Ward
Well. Overall just to look at it without starting to break it down, I think it's clear to me that the capital investment will come down overtime.
It has been a good deal since the last few years about -- if you take a look at just what's been spent the last few years on locomotives you would say we are not going to have to do that for a while if we get 550-600 locomotives stored and I can know one of our previous experiences there that we count as numbers and we said well maybe we can take couple of year holiday for locomotives and we did and I think fifth year holiday. So well, we don't have to spend anything on locomotives generally for four, five years clearly a lot of the replacements that were issued with the yards are not there clearly if we have sighting that are too short for the longer train we are certainly not going to leave those sit on the ground and not being utilized so we will pick up 165 [indiscernible] railroad included with the another 6500 and that will we got 13000 and the only thing we capitalized is in the labor we don't have to capitalize the rail and so there is some ways save capital and another issue of overlook is this the better productivity you have with capital the more you can put in.
the higher productive you are good in lower with 100 miles main productive stuff is the productivity factor -- but I think my numbers were that over three or four year period we can see 500-600 million reduction in the capital spend and then there are points where you will potentially trend back up and if we don't have something else like coming along to help with our capital spend and I am not big of some percent of revenue we should work that that way and out whatever is the revenue is but I think overall to answer your question there will be some positive for free cash flow out of the reduction in capital.
Jeff Kauffman
Okay. Well Hunter thank you for your answer and best of luck to you all at CCX.
Thank you.
Michael Ward
.
Operator
Thank you. Your next question comes from David Vernon with Bernstein.
You may ask your question.
David Vernon
Hey good morning. Hunter maybe just a quick question for you on the presence of the share asset areas the old legacy of acquisition is that sort of joint operations in some of the bigger eastern metros create any challenges or opportunities for you when you think about railroad model into the CFX?
Michael Ward
Well I don't have to, I have not spent in my first company days a lot of time in that area and I'm limited on my knowledge there and I don’t want to try to mess you with the stories that I've heard a lot of best of. Cindy, you got any comments there?
Cindy Sanborn
Yes David, I think we are always looking for efficiencies where we hand off car whether to the joint facility and then this car rail or IHP in Chicago and there's nothing that really jumps off the page but as we've said many, many times everything's on the table and if we can find opportunities, we will certainly take advantage of them.
David Vernon
But do you think there are any sort of constraints because you're tied to a schedule that maybe the Conrail serving for, that means both your and the Norfolk needs and it's harder to change or is that something that's probably not an issue?
Cindy Sanborn
That's really not an issue. It's in all of our best interest to serve our customer better and they just simply supply the last mile service and do a very good job of it and we work very closely together on making sure that the efficient and effective for customers.
David Vernon
Okay. And Fredrik, may be just as a quick follow-up, when you look at same store sales pricing, I hear your comments on mix in coal and I think what I've heard is where we should expect that to continue to happen but I think in the intermodal merchandise the deceleration in the core price, is that something that we should also expect to kind of happen here or we starting to see some signs of improvement in that domestic intermodal market that would help kind of assure that number?
Fredrik Eliasson
Well, this is just to clarify also and I am not sure that will really go to a question. The mix was obviously out of the same store sale number, which is why we are doing it.
In fact, once again we don't forecast price but I think it's clear that we've been in a place over the last few years where there's been a fair amount of exits capacity in the marketplace and all our customers as Hunter alluded before have alternatives, so we have got a price-to-market. The key thing is, is I look forward now between what I think you guys write a lot about which is that there's a structural change coming and closing an attractable market with some of the ELD limitations and the shortage of drivers and hopefully getting to better placement and capacity perspective.
And coupled that, what we're doing with this operating model where I already see a significantly improved service. I think there's an opportunity as we move into '18 to really capitalize on that.
So we feel good about where we are, we've priced the market each and every day and as we move forward we will do the same.
David Vernon
But many as everything I worry are right now are we starting to see things kind of improve sequentially or we're still kind of in a soft patch on the domestic market?
Fredrik Eliasson
I see some opportunities on the stock market side I follow closely where things seems to be moving in the right direction. I do think that obviously if you see some of the -- and you thought this more than I do on the trucking side as there has been some challenges out there but I see that the light is coming close at the end of the tunnel and supply and demand should be getting to a better place as we move through the second half of the year end and take thing.
David Vernon
All right. Thanks very much for the time, guys.
Fredrik Eliasson
Thanks.
Operator
Thank you. Our next question comes from Bascome Majors with Susquehanna Financial Group.
Your line is open. You may ask your question.
Bascome Majors
Yes. Thanks for fitting me in here.
Just real quickly on the attrition rate, can you guys help quantify that for us whether in percentage terms or the number of people per year?
Hunter Harrison
I think they were working on some numbers for me and let me clarify something that I'm trying to, we all have kind of dramatically a different type of explanations for, I'm talking about contractors, consultants, employees, all of the above everybody to get the cheque. Okay, I think that I'll correct this if I'm wrong, that the attrition is going to come in at that 9% level range, 8.5% to 9%.
And so, if you look at those numbers as opposed to where we are, you use some kind of order or magnitude of what we get absorb without adversely affecting people.
Bascome Majors
Yes. Thank you for that and Hunter as we take a step back, if you look recently at least, management canters have been based in the short term on operating income in the longer term on a mix of ROA.
And as you in the reconstituted board looked at the outcomes you want to drive over the next four years, is there a change to that coming? How do you want to incentivize this in your management team to accomplish what you want to accomplish?
Hunter Harrison
Well yes, I think that quarterly, look, I am not obsessed for example with the operating ratio. The more I try to get away from it the more people push me back in the middle of it.
I mean clearly there's some, there are issues that are return on your name it, capital equity that whatever there are more material ways over a longer timeframe to look. The problem gets to be as we're incorporated into your yearly, daily operation and make the conversion because there is a lag period that you go through.
I think a lot of businesses and I think we are a little bit that we have to address is this, we've got our compensation system so complex the employees won’t understand it, I mean you have gone too far but I think that's something that the board talked about this week it happens facing committee discussed it and I think it's something that we want to be sure that we are motivating the right behavior with the employees of return effectively on caption. One of the rules of this model is this, they'll spend $1 in precious capital and so your growth been explore every operating alternative.
And so, I think there's going to be a push that way more and more for return numbers than rather than just roll margins on operating ratio.
Bascome Majors
Into that point, I'm sorry?
Fredrik Eliasson
But once I get, on the you have talked about the long term being ROA. ROAs half of it and operating ratio has got the other half of it.
I just want to make sure you knew both of it.
Bascome Majors
Appreciate it. Is there a possibility for a free cash flow component, is that something you guys are considering?
Hunter Harrison
Yes, free cash flow works. I mean, in all of the above, it’s how you weigh those factors, and if you do you do those things in a material manner.
Everyone has got some downside too. You focus this year on free cash flow and you make some inventory decision to make some artificial goal which deals you next year.
So, it really takes a material approach from management and sometimes that’s hard to put together.
Frank Lonegro
And certainly a focus on cash is important as you saw in the quarterly financial report we put out last night and the guidance we put out and we're certainly being transparent in terms of free cash flow and how we are calculating it and what the goals are for the year. So that's a new thing for us.
Bascome Majors
Hunter and Frank, thank you for the color here.
Operator
Thank you. Our next question comes from Jason Seidl with Cowen & Company.
You may ask your question.
Jason Seidl
Thank you operator. Hunter welcome back.
Everyone else hello. Couple of quick things Hunter, looking at intermodal clearly it's an opportunity in the East.
In your eyes, what's the most important piece of intermodal and how to get it more profitable for the railroad?
Hunter Harrison
Well I mean clearly, it's pretty simple formula. Cindy talked about this morning and the longer the train, but here the train, the lower the cost the better we can be in the terminal.
And the service factor, that’s how you get to do. Get personal, get the toiler, get the container get it on the train, get it to its destination and get it on the ground and have it available for the customer.
And it’s not so much, if you do the job right and this organization has done a pretty good job there. I mean I look at some of our numbers that I am learning and with our domestic business we are like up in the mid or higher 90s which is pretty admirable with pretty demanding customer as they should be demanding.
Like UPS, I mean UPS, just all I want you to do is right what we say intermodal if they were to stay under it. You say you are going to be here third morning, x/x, be here.
And if you do that, okay, it's not sometimes we make these things too complex and you simply get it to move it, do what you say you are going to do it and be efficient with. Are we looking at some time saving that we can do little bit here and little bit there continually but I think we are going to do fine there, we are going to get even better there but and then we'll at the same time take advantage of this merchandize network.
Jason Seidl
And Hunter, is the offering is big it needs to be? Does any investment beyond the typical investment that goes and it needs to be made at intermodal?
Hunter Harrison
Well I mean Fredrik and probably and Frank can speak to that better than I can. I know that, look I know this company is going to be in a much better position from a base stand point that if we see the opportunity we are ready to make whatever investments we need to take advantages of opportunities in the market out there.
Frank Lonegro
Yes and we talked about it before over the time. In terms of the network itself, we're 95% double stack clear which is a critical as opposed to driving efficiencies.
We are opening one new customer in a live space that we felt was needed which is in Pittsburgh in July and we are looking at longer term terminals that we announced in Carolina the CSX terminal we talked about and we are also to Hunter’s point earlier trying to see where their opportunities to leverage existing facilities and have perhaps combined things to create value that way. So, Hunter have been a great supporter in the franchise in what we are trying to do.
And the essence of precision railroading is about running a scheduled network at a high level reliability and that is what we have been doing and we are going to do it more so going forward.
Jason Seidl
All right. I've look at my follow-up.
Hunter, let me hear your opinions on CSX the rest of the rail industry pushing towards one-man crews and when do you see that as a viable option?
Hunter Harrison
I am not a one-man crew advocate. Now, there are special circumstances, there are different issues, I mean clearly if you're switching a race track or you're switching a mine track with one track or something, there's applications that we have today for one person.
But today to take a 20,000 ton train on line of road with one person, I don't think it’s good business. Then why I don’t think that and shame on us that we don't have in my view the quality control to do it.
So you have got one person on the train and you have a air hose failure or a drill bar or whatever, as the one person going to deal with the delays of the customers the domino effect and all that and then in some of that go hearts, tell me well, we're going to have people in trucks along the ride away with all these materialism and now they'll be dispatched to the train to help the engineer, the one-man crew and as said well it's not one and then it's one point whatever piece, particularly the day with where rail is relative to take the issues and the whole issue commentary obligation. I just don't think that it's something that we're focusing on.
If you look at the payload, and people will shudder what I say this, when my peers with labor leaders if you look at the cost of the other person on that train that's has gotten rid of the payload of X, it's relatively drop in the bucket that the value of that person can bring as an additional eyes and ears and you came watch both sides of the train. And just, we've got a lot of things in the ABCs that we need to get better it before we start talking about one-man crew, then I guess before we total with that, we'll have -- we run the electric train with nobody up there with somebody with a reason is somewhere around it.
I don’t know having go and get the demand but I had figured out more, so.
Jason Seidl
All this and I appreciate the thoughts as always. Thank you for your time.
Hunter Harrison
Okay.
Operator
Thank you. Our next question comes from Ben Hartford with Baird.
You may ask your question.
Ben Hartford
Thanks for fitting me in. Hunter, I am just curious about your, we've talked a lot about intermodal on the call but curious about your go-to-market perspective on that the focus has been on the operational side and improving service and efficiency for the customers but if you think about being innovative and creative and flexible as you see CSX's IMC partnerships, do you see opportunities to expand into new partnerships with new IMCs or even kind of even kind of go more direct to market on the intermodal side as you think about a marketing strategy.
Do you have any perspective on that? Thanks.
Hunter Harrison
Under certain circumstances I think all work. I think there is a lot of things that we can do intermodaly that for whatever reason they may try before and it's then got away from it, but am a big as it could have be as repricing.
One of the things that you have to do in our model which you'll hear a lot about is balance. And when you look at the graph, the intermodal for instance and it's kind of survive more lend and it keeps showing very denied and then it sync down on Sunday, it's just money that's being wasted.
And I tried one experiment. When you hear, you listen to the market and you listen and you hear service, service.
And so, we say, well we haven’t run three trains on Friday night, so maybe we can discount on Saturday and Sunday to move some of that business from Friday to Saturday and Sunday. And so, we discounted 15% and 20%.
Just how many people came Friday? Nobody.
Everybody went Saturday and Sunday. So, you start to find out what the real market is out there.
So, there is a lot of creative things I can see today, that we are going to have dispatch or sitting there at two o'clock in afternoon selling the slots. Then I get eight slots left that are going to be opened in less and they are going to discount.
I see that my personal view is we will see a day where there won't be full contracts as such as we think about. They will be half but there will be shorter even in late and so I think there is a lot of things to do the way we compensate sales people, for example.
And lot of things that rail can do that we can't, I mean, will stuck in the mud with that we can be much more creative to supplement this standard and low product.
Ben Hartford
Thanks for that, best of luck.
Hunter Harrison
Thanks.
Operator
Thank you. Next question comes from Cherilyn Radbourne with TD Securities.
Your line is open, you may ask your question.
Cherilyn Radbourne
Thanks very much and congratulations on a strong part of the year. Fredrik, I wonder if you could talk about after margin how you feel that the volume with for 2017 versus how you felt that the time at Q4 call and just what influence that had and the team confidence in providing 2017 guidance this morning.
Fredrik Eliasson
Sure. I would say that coming out of the I guess election, I am not sure it has anything to do with it but at the end of the year we did see little bit of up take in our volume and our projections through the year.
I'm not sure that it's transferred into the macro numbers at this point but we did see a little bit more volume and perhaps who anticipated at the beginning of the year. We obviously also saw a coal market on the export side that improved beyond what we had anticipated originally even though we still expect it to taper off as we moved through the year.
So, I would say that there is probably a slight increase in topline projection but it really isn't the foundation for what we did here in terms of the guidance that incremental change. It is the item that what we have done here over the last quarter or so to put ourselves in the position coupled with Hunter's arrival here and his operating model that has allowed us to do this.
Cherilyn Radbourne
Okay. So, it's more the operational side then.
Hunter Harrison
Which Cherilyn, gives the flow through obviously to the bottom line.
Cherilyn Radbourne
Right. And then just a quick one on CapEx, you have adjusted down by about 5% for 2017, can you just talk about what you've already found room to trim there?
Frank Lonegro
Sure, so you are right. We started out the year with about 1.97 billion in core capital meeting before you get the positive train control.
We trimmed little over a 100 million from that number as we gave you the free cash flow numbers for the year. What we really did was we looked at all of the network investments and then to pause some of those given the fact that we are making terminal changes operating plan changes we have higher expectations for service products and so we really got to give that sometime to sync in before we decide exactly where we want to deploy some of that network capital.
And then, on some of the return seeking projects to the point Hunter made earlier, we really looked at ways that we can get there through better process, better execution of that process and better accountability etcetera. So, we found some opportunity on both of those category.
Cherilyn Radbourne
Thank you, that's all from me.
Operator
Thank you. And next question comes from Walter Spracklin with RBC.
You may ask your question.
Walter Spracklin
Yes, thanks very much and welcome back Hunter.
Hunter Harrison
Hi, Walt.
Walter Spracklin
My question is on the free cash flow and how that's going to go into your buyback program leverage. I know you announced $1 billion new program here but I know how you've always liked your buyback.
Leverage doesn't seem to be an issue at all and if I don't know if you huddled with Frank here little bit and talked about longer term where you want to see your leverage ratio go to and as a result and with the free cash flow you are going to generate from your initiatives. Could we see a much more expanded buyback in the billion dollar announcement here this morning?
Hunter Harrison
Well Frank spent a lot of time this week with the board and the finance committee and I have believe it or not got the back up from that discussion and be a little more operating focused and let me let Frank help you there.
Frank Lonegro
Yes, we had a great discussion this week and obviously you have heard us reiterate the BBB+/Baa1. Today you saw the size of the program for the next 12 months obviously as we get more and more monthly quarters under our belt and we get an understanding of the free cash flow numbers both for coming quarters and coming years.
We'll take a hard look at whether or not we are deploying the capital in the correct way to shareholders in the correct amounts and we always look at the balance sheet and try to determine what the appropriate place is given really the cyclicality of the business on the merchandise and intermodal side as well as the capital intent for the business and making sure we preserve the access to the marketplace that we need in tougher time. So, we want to stress test the numbers that we have internally to make sure if there is in fact a holding line or any can see decline that we can stomach that.
So, we think we are on pretty good shape with good numbers up for you in the quarter and the forward guidance as well as the buyback and the dividends. So, right now we feel like in pretty shape.
Hunter Harrison
Yes. Also, I don't think our policy going to be different than what we you have been familiar with, okay.
If you look at allocation basal, the first call is going to be always reinvestment in this railroad and hopefully we got opportunities to make the appropriate returns there. If those don’t present their self, then we're going to look at other ways the most efficient ways as Frank described to return that case to the owner, whether it's through buyback, dividend, combinations thereof, will always be a little debated about what your structure is and what kind of fund you are managing and which customers want which.
But I think we, I think the board yesterday had our both for two days estimating these and the board meeting, that a third discussion of our policies there and there was a great deal of common understanding in directionally which way we need to go.
Walter Spracklin
Okay. This is the second question here is on the competitive response to your initiatives both from a service standpoint but also from a operating standpoint as you get lower cost, your ability to more efficiently and higher profitability services for customers.
And I am just interested in what the competitive response might be that might cause problems for you Hunter, in terms of what you're trying to achieve. I know you've always had a great view on pricing, the pricing is what the market dictates but often we hear when market share shifts, they want it on price.
So, is there a risk that a competitive response might come in and may put problems on how you can effect change or make them a little longer to achieve at the end of the day? Do you have any views on that?
Hunter Harrison
Yes. Then they ought to be careful.
If that's the response, look, as I think it's just pretty simple response. As long as we provide the service we talk about today and we become and we are going to get there the low cost carrier, okay, we got to worry about to tell you.
I don't know what they are going to do in the way of response that is smart, is they can do that first. After competitors doing things stupid, that's good.
And sometimes it's short term pain but I don't think that I'd see anything out there but this they are going to have some different response than they've had six months ago than what they are going to have in the future that's going to set this organization back. We get an agenda, we have got a wonderful customer base, we are going to see some organic growth.
I'm convinced we're going to see some market share growth. I got to be a little patient there but this is going to come together.
And I don't think a lot of what takes places is going to be negatively impacted by the competition.
Walter Spracklin
Is there, there is a view out there that it can be emulated that some of your initiatives can just be copied and the efficiency you achieve can be followed by your competitors or anything you'd respond to that with regards to what you're doing and a unique way you are doing it that will make it more difficult for the competition to copy you?
Hunter Harrison
Couple of that would. It's on eBay for a $1000, I mean, it's the market, if not then we can't get it recopy that some of the competition used to work for all of those to get copy rights business.
It's not secret, okay. It's one thing to write its play book, okay.
A lot of companies keep sitting down and give you yes and no, okay. The key is you got to have players that can execute.
You don’t have to play, you're going to execute. You steal every play but you all.
So, I hope they do copy but if they copy us, I think they might be more efficient and I'll look at other rails generally speaking much more is our partners is our near competitor. Of course, we had so much airline business too here.
So, we have that. The secrets in this, I miss them.
Walter Spracklin
Fair enough, thanks very much.
Hunter Harrison
Thank you.
Operator
Thank you. Your next question comes from Scott Schneeberger with Oppenheimer.
You may ask your question.
Scott Schneeberger
Thanks, good morning. Hunter, I was curious, just your comment taking two to three days out of the Chicago Jacksonville route, I'm curious what type of time it would take to do such a thing and is that unique because the Chicago should we expect that more broadly then?
Hunter Harrison
Well, that's I think you expect it broadly. If you look at the overall velocity, I mean, I just used Chicago for an example and how quick can you see it, you can see it overnight.
I mean, we are starting to reach schedules at railroad, I know that the main company has gotten especially Florida pretty well reworked and done and that’s been I've been doing some looking, work for towards and on. And so, we're going to kind of go up the line, we will have what you have been used to before with every guy have its own trip plan.
One plan, they only get re-tripped and re-tripped, you got one plan, we got to tell the customers going to be 83 hours door-to-door and we're going to do it. And one of the ways to do it is this.
Look, I -- we've get a lot of good things going, we got some things, we got to say. Our train speed is not right out of it, our merchandise train speeds between terminals is like 18 miles an hour.
We got the potential to be at 27, 28, and you start taking numbers like that and then you avoid terminals and rather than drive into a terminal and dwell for 26 hours you can drive by that one and skip that 26 and pick up a little here and you do the math and don’t take long, you get to Florida two or three days quicker depending on where at large you are going. That's just an order of magnitude that impact both service and cost and asset turns and all of the stuff is good.
Scott Schneeberger
Great, thanks. And then just some of the -- with regards to this year's operating ratio guidance, what is the one big bucket item that you think could where you could outperform and then maybe a bucket item where you are most nervous where you may underperform?
Thanks.
Hunter Harrison
That's how way late wake at night worry about that in that regard. If something happens that I'm not aware of or there is some geopolitical or something happens in Washington or something like that but I mean this is a pretty simple formula of there something that most of us have been in our whole life and they'll have to do this railroad, and that's how we got to do to get these things accomplished.
Now, I mean obviously look, people, when you take a 1000 people as an organization, that's a bit hit. It's a big saving right there.
That's a lot of it, but the other thing that you look at, the rail cars, the train starts, the start and the yard starts with the closest to the hub. All those things, those are natural that kind of about working capital will be then go -- we weren’t going to be with the best part for some of these entirely.
Retires, and these old up gear, they don’t like them anymore. So, we have moved a lot of profit there but this is going to happen.
Scott Schneeberger
Great, thanks.
Operator
Thanks. Your next question comes from Duran Marabala with Deutsche Bank.
Your line is open, you may ask your question.
Duran Marabala
Yes. Thank you.
Good morning. Thank you for taking my question.
Hunter, I guess just one question from me on the revenue side. I am wondering, is there any sort of revenue that you see on the book of business that maybe doesn't meet the return thresholds and maybe needs to be demarcated.
I know some of that did happen with CP sort of early on in the process there. Thank you.
Hunter Harrison
No. Look, there is some odds and ends that just pops every once a while with the individual move or something.
Everybody goes through a little bit of that, but generally speaking I mean for instance then maybe they're here to point those kind of things out and obviously if they were there and I was coming, you might have been motivated to get them out of there. You have to and so no we are not going to demark and we're looking at marking.
Duran Marabala
Thank you, that's helpful.
Operator
Thank you. Your next question comes from Justin Long with Stephens.
You may ask your question.
Justin Long
Thanks and good morning. I know it's still early but I was wondering if you could talk about any structural changes to the network that we could see this year as it relates to divestitures of non-core assets and when thinking about that mid-60s OR guidance for 2017, does that include the impact of any real-estate gains?
Hunter Harrison
The second part, no we don't include any real-estate gain. The real-estate gain is it where they are and that's been discussed internally, are all gravy but I can tell you that the experience in the past, there are lots of opportunity up there, even now in Chicago.
And it's a big number in my book and it's something that we will be sensitive to and talk to about. It's not going to drive the business but it certainly going to be in the bucket and the blender when we make certain operating decisions about where we operate from and locate and let me make sure I understood the first part of the question.
Justin Long
Just asking about the potential for divestitures at some points in this year, maybe some short line assets that you would view as being non-core to the franchise?
Hunter Harrison
There is not anything. Look, there is a lot of initiatives going on here that I am sure that I am not even aware of yet that but to my knowledge there is nothing of any large metrics that we are looking at what we’ve been both the knowledge just getting better what we do with the franchise that we have.
Justin Long
Okay. And secondly, Hunter you made the comment earlier that this franchise has more potential than any other you've dealt with.
With that in mind do you think there is a path for this business to have industry leading margins or do you think there are structural limitations getting to an OR level that we've recently seen from the Canadian route.
Hunter Harrison
No, I think you can have the industry leading margins, I think you will have. The only issue there in massive world is if I can get all that done before I have to go, I'd like to be here to cut the ribbon, that's kind of big deal it's just a little personal goal but there is no reason that structurally certain I know knowing that this railroad it can now become the greatest road in north America.
If it's greatest in North America, it's probably greatest in the world. And let me just [indiscernible] people look at this.
I went to Canada the first time as an American and meant not fun to begin with, but I got there and seeing it just can do with great restructuring coming out of that deal and it's impressive numbers but the one thing they did is a problem, do not expect the Canadian railroad to ever achieve numbers like the US rail, it's just not structurally possible until our operating ratio went to the leading operating ratio in North America. And then just what the US roads did.
The US roads did, look we're going to improve but don't think we are ever going to reach the level of the Canadian road, it's just not structurally possible. So, it's got something new with what you're paid for exists and where do you reside, but it's the same vein, that whole board up here does mean that much.
Justin Long
Okay, great. I appreciate the time and we are all looking forward to watching this play out.
Hunter Harrison
Thanks.
Operator
Thank you. And our next question comes from Brian Konigsberg with Vertical Research Partners.
You may ask your question.
Brian Konigsberg
Hey, good morning. Thanks for bidding me in and welcome Hunter.
And just almost all my questions have been answered. I think an award is deserved for many of the analysts still coming up with stuff this late into the call.
But I guess just the one thing just for the model sake, obviously Hunter you've got an employment contract that has been stamped and we're still waiting for the result of the shareholder meeting. We'll expect that to go through most likely.
So, how should we be baking in kind of the share grants and additional payment set have been agreed upon so far throughout this year in cash flows and into these share baseline?
Hunter Harrison
Yes. I'm not sure that it's appropriate for me to address that, let me let Frank address that.
Frank Lonegro
So, in terms of the share based compensation, obviously we book expense on that one onto the Black-Scholes model and we've done that in terms of the guidance that we've given you. In terms of the shareholder vote, obviously you heard David's opening remarks and we're not going to touch on that one.
But the free cash flow number that we gave you for the year is excluding the existing restructuring charges and any subsequent restructuring charges that might happen in the second quarter.
Brian Konigsberg
And so just presumably the share count could does not reflect any grants at this point but that can certainly change at their shareholder meeting. Is that -- I am just saying the share grants, I presume it's not in the numbers now and likely not in the guidance that was provided but that could change after the shareholder meeting that could be baked in our next discussion if it's approved.
Frank Lonegro
The numbers we gave you, the around $1.5 billion in adjusted free cash flow excludes the cash impact of the things that we're discussing both in the first quarter and perhaps things that could happen subsequently in the second quarter. Is that cleared now?
Brian Konigsberg
Yes. I could follow-up on that offline but that helps.
Thank you.
Frank Lonegro
Okay.
Operator
Thank you. And this does conclude the question and answer session.
At this time, I will turn the call over to Hunter Harrison for closing remarks.
Hunter Harrison
Well, thanks very much for joining us in a very simulating goal. Hopefully, we have answered all your questions.
And I got a rental key. So, if you'll excuse me.
Thanks.
Operator
This concludes today's teleconference. Thank you for your participation in today's call.
You may disconnect your lines at this time.