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CSX Corp. (NASDAQ: CSX) Q4 2019 Earnings Conference Call Transcript

CSX Corporation Q4 2019 Earnings Call

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the CSX Corporation Fourth Quarter 2019 Call. As a reminder, today’s call is being recorded. During this call, all participants will be in a listen-only mode. Following the presentation, we will be conducting a question-and-answer session. [Operator Instructions] For opening remarks and introduction, I would like to turn the call over to Mr. Bill Slater, Chief Investor Relations Officer for CSX Corporation, you may begin.

Bill Slater

Thank you, and good afternoon everyone. Joining me on today’s call are Jim Foote, President and Chief Executive Officer; Mark Wallace, Executive Vice President of Sales and Marketing; Kevin Boone, Chief Financial Officer; and Jamie Boychuk, Executive Vice President of Operations. On Slide 2 is our forward-looking disclosure followed by our non-GAAP disclosure on Slide 3.
With that, it is my pleasure to introduce, President and Chief Executive Officer, Jim Foote.

James M. Foote

Thank you, Bill, and good afternoon. I want to begin by thanking all of our CSX employees for another great job this quarter. They continue to show that they are the best operators in the industry. For both the fourth quarter and full year, they once again broke their own records and set new all-time low operating ratios. Our service is the best it has ever been and getting better. The key here is reliability. Our [0:01:23] operating a simpler, more efficient network, we are able to offer rail users a service that is truck-like inconsistency, but with lower cost and more environmentally responsible. More shippers are selecting us for their shipping needs when we have tremendous opportunity for growth.

Let’s now turn to Slide 5 of the presentation. Our financial results are straightforward with only a few unique items, which Kevin will point out in a few minutes. Fourth quarter EPS declined 2% to $0.99. The operating ratio improved by 30 basis points to a new record of 60% as continued operating momentum offset top line headwinds. For the full year, EPS increased 9% to $4.17, and the operating ratio improved by 190 basis points to 58.4%. These are truly great results considering the industrial economy’s second half performance.

Turning to Slide 6. Fourth quarter revenue declined 8% year-over-year, due to the continued impact of the softer industrial economy, intermodal lane rationalizations and coal headwinds. Merchandise revenue and volume declined 3% as growth in Ag and Food & Minerals markets was more than offset by declines in chemicals, auto and other markets. The Philadelphia refinery explosion and GM strike accounted for more than two-thirds of the volume declines in the quarter. Intermodal revenue declined 9% on 7% lower volume, primarily due to the impact of lane rationalizations implemented around the 2018 peak season. We have now lapped the impact of these changes. Coal revenue decreased 22% on 17% lower volumes with declines in both export and domestic markets, due to the impact of lower export demand and benchmark prices, as well as low natural gas prices. Lastly, other revenue declines resulted from lower storage revenue at intermodal facilities and lower demurrage charges.

Moving to Slide 7. Let’s review our safety performance. The full-year personal injury rate declined 15%, and we reduced the full-year train accident rate by 41%, including setting another company record in the fourth quarter for the lowest accident rate. This progress is a result of concerted daily effort on the part of the employees performing the work. At the same time, we still see areas where additional improvement is needed. In 2020, we will maintain our rigorous safety program focused on continuing education of our workforce, further strengthening rules compliance and empowering employees to have the courage to act if they see something unsafe. As I have said before, we will never be satisfied with our performance if just one of our employees gets injured while at work.

Moving to Slide 8. Let’s review our operating performance for the quarter. CSX set new all-time Company records for both velocity and dwell achieving significant year-over-year improvements, as well as strong sequential momentum. The combination of these improved metrics helped significantly increase car miles per day as we continue to translate incremental operating efficiencies into higher asset utilization across the network. We also continue to set fuel efficiency records operating below 1 gallon of fuel per 1,000 GTM despite typical seasonal headwinds in this quarter. CSX is the only US Class 1 railroad to have crossed this threshold. Fuel efficiency remains a key focus for the team, given the combination of financial as well as significant environmental benefits from reducing fuel consumption, and we believe opportunities remain to get even better going forward. Reducing emissions is important to us, our customers and the communities we serve. And we are proud to have been recognized by various institutions as leaders in sustainability for the transportation space.

On Slide 9, most importantly, we are translating these operational improvements into more reliable service for our customers. Trip plan performance set new records again this quarter with 83% of our merchandise cars and 95% of intermodal containers hitting their hourly trip plan targets. Additionally, we successfully completed the roll-out of individualized trip plan performance data to our merchandise and intermodal customers. Feedback on the tool has been very positive, and we believe providing this unique level of transparency to our customers will continue to differentiate CSX’s best-in-class service.

I’ll now turn it over to Kevin, who will review the financial results.

Kevin S. Boone

Thank you, Jim, and good afternoon, everyone. Turning to Slide 11, I’ll walk you through the highlights of the summary income statement. As Jim mentioned, total revenue was down 8% in the fourth quarter as the impact of lower intermodal and coal volume, as well as reduced fuel recovery, lower other revenue and unfavorable mix more than offset the benefit of pricing gains and merchandise and intermodal.

Moving to expenses. Total operating expenses were 9% lower in the fourth quarter, a significant achievement that reflects CSX’s ability to react to changing markets, while delivering record service levels. Overall, these results reflect the Company’s sustained operating improvements and significant gains in labor and asset efficiency. Labor and fringe expense was 3% lower, with average headcount down 7% or nearly 1,600. Efficiency gains were strong in the quarter, partially offset by inflation, other cost and incentive compensation, including acceleration of stock compensation related to certain retirement eligible employees.

Our ongoing refinement of the operating plan continue to drive savings from fewer crew starts, enabling a 9% year-over-year reduction in the active train and engine employee base, and driving a 7% improvement in crew utilization, as measured by gross ton miles per active train and engine employee. The workforce efficiency and management execution re-reduce over time across the operating department by nearly 15% sequentially, or approximately 30% versus the fourth quarter 2018. Additionally, the average active locomotive count was down 10% year-over-year in the quarter. The smaller fleet, combined with fewer cars online and freight car repair efficiencies, help drive a 9% reduction in the mechanical workforce, while also reducing mechanical overtime expense by over 40%.

Finally, we cycled a unique benefit in the prior year related to the railroad retirement tax refund. MS&O expense improved 20% versus the prior year. continued improvements to the train plan, combined with increased network fluidity have enabled an 8% reduction in crew travel and repositioning expenses. On the mechanical side, the lower locomotive counts also drove savings in MS&O, including a 26% reduction in locomotive materials and contracted service expense versus the fourth quarter of 2018. 

Real estate and line sales were $10 million lower in the quarter. We continue to see a pipeline of real estate opportunities. And for planning purposes, we currently expect gains in 2020 to be approximately $60 million, while the impact of these transactions will remain uneven from quarter-to-quarter. As you remember, in March of 2018, at our Investor Conference, we guided for $300 million in real estate sale proceeds over three years. We will significantly exceed this guidance with our expected 2020 results.

Fuel expense was $37 million favorable or 15% year-over-year in the quarter. These savings were driven by a 7% decrease in the per-gallon price, but were further aided by lower volume and significant efficiency improvements. Our enhanced focus on utilization of distributed power and energy management software, combined with training — train-handling rules compliance, drove a fourth quarter record fuel efficiency. Full-year 2019 fuel efficiency was also in all-time best for CSX.

Looking at the other expense items. Depreciation was relatively flat year-over-year. While we did recognize $10 million in additional expense this quarter, due to a 2019 depreciation study, this was more than offset by other items, none of which were individually significant. We expect depreciation expense to increase approximately $50 million to $60 million in 2020, reflecting the continued impact of the recent study, as well as a higher net asset base. Equipment rents expense increased 9% as the impact of inflation and other items more than offset the benefit of lower volume-related costs and efficiency gains. Equity earnings increased $7 million in the quarter, due to higher net earnings at our affiliates.

Looking below the line, interest expense increased primarily due to higher debt balances, partially offset by a lower all-in coupon. Other income decreased $4 million as the Company recognized a $10 million make-whole premium on their early redemption of $500 million of long-term notes in October. This was partially offset by increased income from higher investment balances.

Income tax expense decreased $45 million due to lower pre-tax earnings and further, aided by a certain state tax matters and federal legislative benefits. Absent unique items, we would expect an effective tax rate of approximately 24.5% for future quarters.

Closing out the P&L, as Jim highlighted in his opening remarks, CSX operating income declined 8% year-over-year in the fourth quarter, reflecting the challenging volume environment. Despite the tough backdrop, the Company delivered another record operating ratio of 60%, a 30 basis point improvement over the fourth quarter 2018.

Finally, turning to Slide 12. Turning to the cash side of the equation on Slide 12. In 2019, capital investment declined $88 million or 5% year-over-year. While overall capital investment declined, investments in our core track, bridge and signal infrastructure saw an increase of 13% as we continue to prioritize investments that provide safe and reliable train operations. Overall, our reduced asset intensity, especially enrolling stock, has enabled us to sustain lower levels of capital investment without compromising safety or reliability. The level of PTC spending has also come down significantly in the last two years.

Free cash flow has continued to be a key focus for this team. Generating operating productivity while driving improved capital efficiency has produced differentiated free cash flow conversion. Growth in CSX’s core operating cash flow generation, including improvements in working capital, drove a 9% increase in adjusted free cash flow to $3.5 billion in 2019. We returned over $4.1 billion to shareholders in 2019, including nearly $3.4 billion in buybacks and over $750 million in dividends. Additionally, we are exiting 2019 with nearly $2 billion of cash and short-term investments, which combined with another year of substantial free cash flow generation, provide significant opportunities to reinvest in the business and continue to return cash to shareholders.

With that, let me turn it back to Jim for his closing remarks.

James M. Foote

Great, thank you, Kevin. Let’s turn to Slide 14 in our outlook for 2020. We expect underlying economic demand to remain relatively consistent with current levels. It took industrial activity awhile to cool off, and it will take a while to heat back up. Based on this, we expect full-year revenue to be flat to down 2% versus 2019. This forecast includes more than $300 million of top line headwinds from the coal business, driven primarily by lower export coal volumes and pricing. For the first half of the year, the merchandise business will continue to lap the higher economic level — the higher level of economic activity from the first half of 2019, but we expect merchandise volume growth to turn positive in the second half of the year. We expect intermodal volumes to increase in 2020 as we have now fully lapped the lane rationalization impact and look to grow the re-engineered network. As to the operating ratio, our goal is to operate as efficiently as possible while ensuring we maintain our reliable service product. Our focus is on growing the business and in that context, we are targeting cost efficiencies that will not inhibit service. There are additional cost levers out there for us to pull, but we must make sure we are well positioned to capture new business and respond to demand when industrial production moves up.

Looking at the 2019 operating ratio results, we again outperformed our real estate target of approximately $100 million a year. Adjusting for this outperformance implies a baseline operating ratio of 59%. Despite roughly $300 million of operating income headwinds in 2020 related to export coal and non-core items such as lower real estate gains, higher depreciation and lower other revenue, we still expect to realize enough incremental savings across the business to maintain or hopefully, even improve our margins.
For capital allocation, our first call on cash is maintaining the integrity and reliability of our railroad. As Kevin noted in 2019, we again significantly increased investments in rail infrastructure, spending more on rail, ties, ballasts and signals, and we expect to maintain this level of investment going forward. In total, we project capital expenditures for the year of $1.6 billion to $1.7 billion, in line with our 2019 targets. In the absence of any high return growth projects, we expect the next principal use of cash flow will be continued return of capital to shareholders through both dividends and additional share buybacks. Importantly, we are committing to doing so in a way that maintains our strong investment-grade credit rating.
Over the last two years, we have accomplished many exciting things at CSX and fundamentally transformed the way the Company does business. However, none of us are resting on that success. In fact, we have only scratched the surface of this Company’s potential. I believe the best is yet to come for CSX as we continue our journey to be coming the best railroad in North America.

Bill?

Bill Slater

Thank you, Jim. In the interest of time, I would like to ask everyone to please limit themselves to one question and one follow-up only if necessary.
With that, we will now take questions.

Questions And Answers

Operator

Thank you. We will now be conducting the question-and-answer session. Our first question comes from Brandon Oglenski from Barclays Capital.

Your line is open.

Brandon Oglenski

Hey, good afternoon, every

one, and congrats on a pretty good year relative to pretty difficult conditions. Jim or I don’t know if Mark Wallace is on the line. But do you guys mind digging a little bit deeper into your macro assumptions behind the flat to down 2% revenue assumption? I think you did call out some headwinds in coal as well. Do you mind just repeating that again?

Mark K. Wallace

Yeah, sure, Brandon. It’s Mark. So going into 2020, we expect a continuation of the current macroeconomic trends to continue as we know the consumer economy remains strong, but PMI and IDP and other macro indicators suggest we’re not going to see a near-term increase in industrial activity. IDP is projected to be relatively flat for the year and the PMI read in December was 47.2%, which was the second worst since ’09 and the fifth consecutive month signaling contraction. So given this, we’re not forecasting a hockey stick recovery, but any improvement in the macro environment would be upside for us.

Despite these challenges, we’re going to continue to get better at what we can control, providing high quality service to our customers and executing. We have not changed our outlook for long-term revenue growth. Intermodal, as we’ve said many times, I think — we think we can grow 2-ish times GDP and merchandise GDP plus. So we’re going to stay close to our customers, watch things and see if the sentiment improves throughout the year, but clearly, as I said, we’re not forecasting any type of a big recovery in the year.

Brandon Oglenski

Okay. And I guess it’s a related follow-up. Mark, can you just tell us how the marketing strategy and sales strategy has changed at CSX, especially related to intermodal and merchandise?

Mark K. Wallace

Yeah, sure. I mean, we — in 2019, we spent a lot of time revamping the entire sales and marketing organization. We’ve changed a lot of people, brought in some great talent. We’ve actually developed a strong marketing team, no longer a pricing team as we’ve discussed in the past. The marketing team is doing a fantastic job working hard, doing actual marketing activities and looking for opportunities to gain share and from truck and going after — and providing the sales team with those leads and those opportunities to grow our share as we are leveraging this fantastic service product that the Jamie and his operating colleagues have provided the sales team to sell.

On the intermodal side, again as Jim has alluded to, we’re through our lane rationalizations that began in late 2017. We have a great intermodal network that we’re leveraging, and we’re excited to sell our — as Jim said, our 95%-plus trip plan compliance or trip plan performance numbers and even higher in some other — in some lanes is exciting, and customers are taking note and we’re executing and doing really well with our intermodal customers there.

Brandon Oglenski

Thank you.

Operator

Thank you. Next, we have Tom Wadewitz from UBS. Your line is open.

Thomas Wadewitz

Yes, good afternoon. Wanted to see — I appreciate the detail on coal, the perspective. I think that $300 million is a revenue number. Any thoughts on how we might think of that in terms of an EBIT number, is that a — presumably a fairly high incremental margin? Is that a 50% incremental margin or how do you think about the EBIT headwind related to the coal revenue comment that you provided?

Kevin S. Boone

Hey, Tom, it’s Kevin. We really never broken down the profitability between our different segments. But we’ve always said that the coal business is obviously a very attractive business for us, and we’re going to continue to move as much coal as we can, but that’s probably as far as we want to go there on the profitability side.

Thomas Wadewitz

Okay. What about — I guess, a thought in terms of the pricing assumption you have for seaborne. I mean, it seems like see, Queensland benchmark look like — I think it went down to — or the market went down to the $1.30 [Phonetic] [0:23:35] area, you’ve kind of I think come back to $1.50 Phonetic], is there any sense within that coal headwind, kind of, what you’re assuming broad brush for the seaborne prices for met?

Mark K. Wallace

Yeah. Tom, it’s Mark again. The met benchmark — and again, the met is about 65% of our export coal. The benchmark prices have continued to decline as the global production has weakened. And currently, there are about $150. As a reminder, our contracts reprice quarterly. So you should expect to see a bit of a drag on the RPU into Q1. But that’s kind of where it is, and we’ll see what happens throughout the year. As a reminder, this time last year, the met prices were coming into the first quarter of the year were about $220.

Thomas Wadewitz

So you just assumed they kind of stay where they are today, is that the right way to think about it?

Mark K. Wallace

Correct. Yeah. So we’ll see the — overall for coal, we’re going to see a step-down in the first quarter, but sequentially throughout the rest of the year, we don’t think it’s going to get any worse on the RPU.

Thomas Wadewitz

Okay. Thank you for the time. I appreciate it.

Mark K. Wallace

Sure.

Operator

Ken Hoexter from Bank of America Merrill Lynch. Your line is open.

Ken Hoexter

Great. Hey, good afternoon. And just maybe Jim, looking at the expense side, you’ve kind of accelerated cost here, but if volumes are going to be down, maybe you can talk about if most of the PSR gains are over, how do you think about moving along with reducing expenses in light of these reduced volumes in contrast to your statement about being cautious about not going too far to be prepared for the rebound and specifically, like any employees?

James M. Foote

Yeah, I’ll ask Jamie to give a little color on it here, but there are significant amount of cost reduction embedded in that guidance that we provided just to offset inflation and other cost increases that we set out in terms of the increases in depreciation, et cetera. So — but this game is not over, and we’re going to do the first and more formal thing is to make sure that we are well positioned to provide a really good quality product to our customers in the future. And again, I’ll let Jamie offer a little more color on the specific initiatives.

Jamie Boychuk

Absolutely. Ken, we’re continuing to look for good improvements this year on fuel. Definitely, towards our car hire end of things. We’re finding, as we become more fluid out there and the railroad moves better, our bigger yards are able to do more for us. So we’re looking at getting rid of more other route miles. Our locomotive fleet continues to go in a great direction as we utilized to get more miles out of our engines, which again turns into fewer asset costs with respect to repairs and parts and really, it just keeps on chipping away.

Each and every day, we’re getting involved and getting into what’s going on out on the ballast line, and that’s probably the most important piece that the team is doing as we’re getting on the ballast line and we’re walking out there and looking at each industry looking at how we switch on, how can we do things better and by getting out of headquarters and making sure that all of the right team, including myself is out there each and every week taking a look at what we can do different and better not only does it give us an opportunity to continue to reduce costs, but continue to improve the product that we’re able to supply, Mark and his team to get out there and gain some more business as we keep on moving along.

Ken Hoexter

Thanks, Jamie. But I guess maybe — I was trying to be more specific on the employee side right. So employees were down over 1,500 year-on-year. Is that something you would see accelerating at this point given the volume declines or is that holding? I just want to understand given Jim’s commentary over not taking out too much to be prepared for the rebound?

James M. Foote

Well, as we’ve said before, our focus is on labor cost, not just headcount reduction. We made a significant reduction in the labor cost and not just targeting heads. So we’ll continue to look for ways to reduce our labor cost. And as we did in this quarter and as we’ll do in every quarter that we have to manage the Company, we’ll do what’s necessary around here based upon what we see in terms of business activities. Right now, it’s kind of given your guidance that we think especially on the merchandise side of the business, there’s going to be some reasonable stability sequentially in terms of where the volume line should be and that’s — and an increase on the intermodal side. And we’ll manage the headcount according to that, if it goes sideways or downward, you guys get the numbers every week. And if you miss a week or something, we’ll point it out to you that which direction the numbers are going in.

Ken Hoexter

Great. And just a quick follow-up, Jim. The arrivals really jumped — or maybe, Jamie, from 53% on time two quarters ago to 85% now. Is there something beyond just execution that you’re kind of — that you want to highlight, I guess, on the positive side, something really strong performance there?

James M. Foote

No, I mean, look at the team is executing, the guys are out in the ground, taking a look at everything we can. We’ll probably — I can tell you right now, we’re going to crank the times a little bit. We’re going to pull some times out of our trains. We’re going to get things moving faster on the network with respect to cutting out some hours on how long it takes to get across the network. And that number might bump down a little bit into the next quarter because we tighten things up. So that’s a gauge for us to make sure that our assets and people get to the other end, so we can turn them back, but at the same time, when I see that number start to go up, it tells myself and the team that on the service design side, we can take a look at, we’re moving some hours and times from our trains getting across the network.

Ken Hoexter

Appreciate the thoughts. Thanks guys.

Operator

Allison Landry from Credit Suisse. Your line is open.

Allison Landry

Thanks. Good afternoon. So, obviously, this year you have a number of headwinds that you outlined, and that was really helpful. But I just want to understand and also you’ve talked about more to do on the cost side. But just broadly speaking, do you need a more normal volume environment in order to really leverage those costs and get the OR even lower, somewhere in that mid- to high-50s. How should we think about that in terms of the different revenue environments?

Kevin S. Boone

Yeah. Hey, Allison, it’s Kevin. Clearly, we’ve outlined more cost savings that we think and there’s runway to continue to do that. The model we’re setting out here is, we’re positioning ourselves for growth and really to leverage that when the growth comes. And so, I think we’re very excited about the model we’ve created. There is a lot of leverage in this model to really drive the revenue at a high incremental margin, that’s what we’re looking forward as Mark and the team are diligently pursuing growth opportunities for us. So — but as Jim just explained, too, if the volume environment gets worse than what we expect, we all know we have to react. We did it last year. We came into 2019 thinking revenue was going to be $500 million higher. We had to react after in the second quarter. And Jamie and the team pulled together, we came up with a new plan based on the volumes that we saw from that point on and we adjusted. And I think we did a great job. So we’ll do it again if we have to.

Allison Landry

Okay.

Kevin S. Boone

The math will just work out in terms of what the margins are should the business levels come back. We’re building a tremendous company here with great operating leverage to take advantage of incremental volumes when they come back.

Allison Landry

Okay. That’s definitely helpful. Maybe just — on that point but specifically to your expectations for intermodal volume growth this year if truck rates remain weak for some period of time through 2020, is there a point at which you might be willing to give a little bit on price to maybe drive some of that traffic into the network or will you just wait for capacity to shore up and then wait for the volumes?

Mark K. Wallace

No, listen. Allison, we’re not going to be cutting prices to grow the business. I think the team here is — CSX has worked way too hard to do everything we’ve done to provide our customers with exceptional service out there. Large portion, the vast majority of our intermodal network on the domestic side is under long-term contracts anyway. We’re not looking to grow by just going out and slashing rates. That’s not our game plan. That’s not our — that’s not what we’re going to do. But the truck environment is still pretty loose to build as we saw it last quarter. We don’t think there’s going to be any meaningful snap-back or tightening there, but clearly, if that happens, it will be a demand-driven environment event and that would be good for intermodal, if that happened.

Allison Landry

Thank you.

Operator

Amit Mehrotra from Deutsche Bank. Your line is open.

Amit Mehrotra

Thanks, operator. Hi, everybody. Kevin, just wanted to quickly confirm the $300 million for coal, that was a revenue number, right.

Kevin S. Boone

Absolutely. That was a revenue number.

Amit Mehrotra

Okay. Yeah, that makes sense. And it’s obviously imply 15% decline, any help on how we can — maybe you can provide some color on what’s the split between the volume and revenue per yield on that? What’s the makeup of that and then, I thought you had said last quarter the D&A expenses were going to tick up sequentially by about $15 million. We obviously didn’t see that. Just wondering what — if there is any impact to the first quarter, what should we think about from a sequential from a D&A perspective?

Kevin S. Boone

Yeah. I’ll handle the D&A question and I’ll pass over the coal to Mark.

Mark K. Wallace

You want to do D&A first.

Kevin S. Boone

Yeah. On the depreciation, we did expect from the life study to have a little bit of uptick here in the fourth quarter, which was offset somewhat by some smaller items, so we basically netted out to zero. I did guide for 2020 in the $50 million to $60 million range incremental depreciation year-over-year. So we’ll still see some bump-up from the life study and some incremental capital spend next year, let’s say, expectations, so no change to 2020 expectation there.

Mark K. Wallace

Amit, on the coal side, let me run through the coal environment and hopefully, we can get to the — your answer without me answering it just specifically, but…

Amit Mehrotra

Okay.

Mark K. Wallace

Starting with export. As we’ve talked about before, it’s been a tale of two cities between met and thermal. As we guided through the year of 2019, our expectations for export coal was around 40 million tons. We slightly missed that number coming in around 38 million. I tried to rounded up to 39 million, Kevin will allow me to do so. It had to be 38 million. But we now expect this year to deliver low 30s for 2020. As I said, we expect the declines both for met and thermal, but probably larger for thermal than on the met side.

On the thermal side, again, it’s one-third of our export shipments where we’ve seen large volume declines given low natural gas prices and mild winters in Europe, obviously impacting the coal demand there and the API2 benchmark. As we talked about a little bit earlier, $55 per ton, so really low. On the met side, again it is mostly a price story — not a volume story but a price story. Back to my comment earlier, the prices have continued to slide down to about a $150 per ton today. So that’s kind of what we see on the export coal front.

Amit Mehrotra

Okay. That’s very helpful and then just one follow-up for me. Kevin, we saw, I guess, a pretty sizable uptick in the labor and fringe per employee. I know there is — you called out some acceleration incentive stock comp. So I’m just wondering what’s the right way to think about that line item in 2020, because you have regular inflation, but you guys have also been kind of focusing on managing over time and with the volume environment being what it is, there could be some cross currents there. So if you can just talk about that. And if I missed it, just help us think about how headcount will be at the end of 2020 as well? Thanks.

Kevin S. Boone

Yeah. You talked about the incentive comp as a little bit of headwind to that number when you calculated. The other thing that you have to remember in the fourth quarter is, we have a lot of our capital teams, particularly on the engineering side that go over into vacation and once — a lot of their labor through the year is going towards capital, but once they go on vacation, it starts to hit our OE expense. So, there is a bit of seasonality to our per employee cost. And so, that’s what you saw there in the fourth quarter.

Amit Mehrotra

But it was a year-over-year number. It was up over 4% year-over-year.

Kevin S. Boone

Yeah, I think some of that impact as well and then obviously the inflation that like I said within that number. There’s a little bit of mix as well. But going into next year, I wouldn’t see any significant rise in our per employee cost. What was the other part of the question?

Amit Mehrotra

Just the year-end headcount in 2020?

Kevin S. Boone

Yeah, I think, look, we have a lot of momentum, obviously, that we’ve been carrying through the 2019 that will go into 2020. We’ll continue to focus on managing attrition, there’s a process here where we look at every job that comes available and ask ourselves, given the new model or whether that job is necessary. So we’ll continue to evaluate those. With the lower volume, there’s opportunities on the operating side that we’ll find. So we’ll continue to manage the labor side. It’s not all about headcount. It’s about over time, which we saw some great success in four quarter. We have big targets next year to continue to drive the overtime down as well. So it’s across the board on the labor savings.

Amit Mehrotra

Okay. All right. Thank you for the time, gentlemen. Appreciate it.

Operator

Brian Ossenbeck from J.P. Morgan. Your line is open.

Brian Ossenbeck

Hey, thanks for taking my question. Mark, I wanted to ask you about the pricing environment, especially given the softness here to start the year in rail volumes and the industrial economy as mentioned. In the last quarter you gave some indication of same-store sales and how they were trending. So, just given the backdrop and what we’re seeing on the rail indices from a pricing perspective, I wanted to see what you thought was kind of the current market temperature when it came to price, realizing you just commented on not gaining volume for price. So when [Indecipherable] the market will be helpful?

Mark K. Wallace

Yeah. No, I was going to repeat, but we’re not. So — but within merchandise and intermodal, our same-store sales pricing in Q4 was about in line with what we saw in Q3, which again was the strongest, I think — I said back then was the strongest we had seen in the past three years. And our contract renewals, the pricing on our contract renewals that came up in the quarter exceeded our same-store sales pricing. So clearly, the team is doing a great job to value the product for the service that we’re offering to customers, and we’re pleased and I’m pleased with the great work that the team is doing on the pricing side.

Brian Ossenbeck

And in terms of the inflation indices, do you have a lot of exposure in the contracts that are going to actually reset lower in this coming year or is that not?

Mark K. Wallace

No. I mean, the — on the thermal side, those are annual contracts. So they will reset sort of now. On the met, as I talked about earlier, they reprice every quarter, but clearly, so the met benchmarks being $140-ish or $150-ish, $150 a ton in Q4 will sort of reset those contracts in Q1. So yeah.

Brian Ossenbeck

Okay. Thanks, Mark.

Operator

Scott Group, Wolfe Research. Your line is open.

Scott Group

Hey, thanks. Afternoon. So, I think you talked earlier about $300 million of operating profit headwinds. So, I presume that’s coal plus any of the discrete cost stuff. I just want to review that discrete cost thing. So I got real estate and depreciation. But maybe, Kevin, can you just walk us through any of the other discrete cost headwinds that you see in 2020?

Kevin S. Boone

Yeah. I think we — obviously, we called out the real estate sales this year. In 2019, we realized roughly $160 million. The guidance for that is $60 million, which I talked about in my opening comments, the depreciation step-up of $50 million to $60 million versus what we saw in 2019 are the items outside of coal that we really kind of called out.

Scott Group

Anything on the other railway revenue or the other income that you want us to be thinking about?

Kevin S. Boone

Yeah, I think where we’re run rating today is probably a consistent — a good way to think about it going into next year. So there will be a little bit of headwind on the other revenue side, as our customers demurrage cost of lowered going down over the year. So we’ll ask a little bit higher other revenue in the first half of the year and kind of normalize to where we are right now.

Scott Group

Okay. And then just lastly, when we get back to revenue growth? What are the right incremental margin? It sounds like you’re positioning yourself, you said for incremental margins. Is that 50%, 60%, 40%? How should we think about incremental margins when we get back to revenue growth?

Kevin S. Boone

Probably the best incremental margins that other businesses would be envy itself.

Mark K. Wallace

At some level, it does matter where the business comes, but we have a lot of trains that have capacity. So, obviously, in those situations on the merchandise manifest business when we’re adding a car to the back of a train — existing train, there’s not a lot of cost you add to it, a little bit of car higher, a little bit fuel. But I think the incremental margins will be quite attractive.

Scott Group

Thank you, guys.

Operator

Chris Wetherbee from Citi Research. Your line is open.

Christian Wetherbee

Hey, thanks. Good afternoon. Wanted to ask about the revenue line. So if you take out the $300 million from coal and headwinds, so it seems like you’re guiding revenues kind of up a little bit to maybe up 2.5% or so. We know we have some headwinds from other revenue with some of the ancillary stuff from earlier in the year — last year. How should we — thinking about maybe that cadence, is it merchandise volume had improved as we go through the year in addition to intermodal volume? Maybe if you could help sort of bridge some of that gap because I would have thought mix might have been a negative 2%? So, any color would be helpful there.

Kevin S. Boone

Yeah. Sure, Chris. So we talked about coal being a significant headwind down sort of mid-double-digits, as Jim alluded to. In intermodal revenue, we expect in 2020 we’re going to return to GDP plus environment as we lap our lane rationalizations and as I said many times, our service product is strong with 95%-plus trip plan compliance. So, I think very good momentum there.

On merchandise, we exited 2019 really well positioned to grow with a strong service product and I think even despite the tough environment and the tough comps year-over-year, we can see a slight improvement — revenue growth in the first half and with a stronger second half.

Christian Wetherbee

Okay. Should maybe inherently ex-coal volume up for the full year, does that sound right?

Kevin S. Boone

I would say that, yeah, absolutely.

Christian Wetherbee

Okay.

James M. Foote

If it — again in the merchandise business segment, if it hadn’t been for the two really specific items, which I pointed out, the refinery explosion and the GM strike, we would have been close to flat this year in terms of volumes in merchandise, which is significantly different than the rest of the industry. And so, we’re reasonably positive as the business environment begins to, at what point in time? I don’t know, when that’s going to happen. This is not the new norm. This is kind of a natural evolution, things go down and then they go back up. When these things start to go back up, we would expect to see merchandise volumes begin to increase. And intermodal, we have always said, we believe we have a fantastic intermodal franchise, we have fantastic intermodal service, and we had to bite the bullet over a two-year period to re-engineer the franchise to make it better as we go into 2020. We knew that’s what we were doing. And now we’re going to see, as Mark said, hopefully, grows 2 times GDP. So, put those together and 60% — 80% of our business should be doing extremely well. Unfortunately, all four discrete segments of the coal business are getting hit simultaneously, which is difficult for us to overcome.

Christian Wetherbee

Okay. Okay, that’s very helpful color. Appreciate the time. Thank you.

Operator

Thank you. Next, Bascome Majors from Susquehanna International. Your line is open.

Bascome Majors

Yeah. And good evening, guys. I wanted to go back to the service levels, you improved your trip plan performance in the carload business by 7 full points in this quarter. It has been pretty steady in the mid-70s before this gap higher, can you dig a little more into how you’re able to drive such a big improvement in 4Q if there’s any — if that’s sustainable or are something lumpy there? And as you look forward, is the conversation with your customer is changing? Is — are you feeling that this yields excess carload business growth over some period of time? You just tell us how that’s going on the ground. Thank you.

James M. Foote

I’ll start off with the product that we were able to create here and then let Mark touch on some of the feedback he’s getting from the customers. But look, it — we’ve got a fantastic team of railroaders out there with CSX, and we’ve gone through this transition over the past 2.5 years, almost three years. And trip plans was a difficult piece for us to work on as a group. We tackle the first piece of intermodal, which Mark just mentioned, the team has been knocking it out of the park over 95%. We still haven’t achieved internally what we want to achieve for a trip plan on the merchandise side. But it is day-in and day-out grinding discussions talking with the field working inside and out with each and every one of our operators in order to move up each percentage point. So we have, I’d like to say, the most stringent trip plan with respect to a two-hour buffer and that’s it. We measure empties, which I don’t believe any other railroad does. And we work really hard hand-in-hand, seven days a week, driving that product. So I would say that we’re going to continue to see that, that percentage improve as we continue to prepare and get Mark’s team ready to jump out there and make those sales.

Mark K. Wallace

And intermodal, we measure to the minute.

Jamie Boychuk

Yeah. Intermodal, absolutely.

Mark K. Wallace

Within two hours. So if we missed by a minute, it’s a trip plan failure. October 1, we rolled out trip plans. As Jim said in his opening remarks to our customers, on ship CSX in December, I think, on the 2, we rolled our trip plan performance out to all our merchandise customers, so they have total unprecedented visibility to every car whether it’s a load, whether it’s an empty on the CSX network. These are unprecedented visibility to their trip plans to what we’re doing, how we’re how we’re doing in every lane, every car and customers love the tool, something they’ve never know railroad has ever provided this type of visibility. Listen, it’s been having an impact.
I think going back to Jim’s comments a few minutes ago if you look at our carload performance in Q4, we were down 3%; the industry was down 5%. If you take out the PES, the impact of PES refineries and the GM strike, we were flat in merchandise; rest of the industry down 5%. Clearly, customers are responding to that type of level of performance and rewarding us with their more of their business and we’re winning share every day from trucks. And we’re going to continue to push. And as this performance plus 83% for the quarter was great. We’re hitting high 80s today and low 90s with some customers. And we’re going to continue to — I know, Jamie is not satisfied and team is not satisfied with that. So as we get better, continue to push and become more truck-like and provide great service. And we’re going to be rewarded with more business.

Jamie Boychuk

The one piece to remember on trip plans for us, what Mark and his team has taken beyond what I think anyone ever thought trip plans were going to be. Trip plans are more of an internal metrics, so we can see how we were doing and look at costs as well as getting hour-by-hour across the network by putting this out to the customers, put the pressure definitely on the operating team, but guess what, we are hitting it. And look, we got a little bit more work to go, but we’ve taken this beyond what I think anyone ever thought trip plans could be.

James M. Foote

And going from whatever the number was over the last couple of quarters, say, 75% to 85% in terms of the carload trip plan compliance. Two years ago that number was 35%. The reason we have to give our visibility and tracking mechanisms to our customers is so that they will trust us to try our new service product to prove to them that it is as reliable today as a truck. When a couple of years ago, your trip plan compliance was 35% and you were trying to get a customer to switch from moving his freight in a truck to rail, he didn’t have a lot of confidence that the — his freight was going to get to his customer on time when you’re on-time performance was 35%. So that’s why it’s so important that we focus on this metric. And then, we’re so confident that this number would be reliable and consistent, but even more importantly, that customer believes that, that product is reliable and consistent. So he is willing to shift. He’s always been willing to pay the 15% premium to buy the reliability in a truck. We need to show him through this transparent tool that he can trust us to get his product there when we said we’re going to get it there.

Bascome Majors

Great. I appreciate it the comprehensive answer from everyone. Thank you.

Operator

Justin Long from Stephens. Your line is open.

Justin Long

Thanks, and good afternoon. So I was wondering if you could give a little bit more color around what the guidance assumes for that quarterly cadence of consolidated volumes. Is it the right way to think about it that we should see something like a low- to-mid single-digit decline in the first half and then something like a low-single-digit growth number in the back half as the comps ease?

Mark K. Wallace

Yeah. Clearly, we’re lapping some — going up against some tough comps here in the first quarter as I — in the second quarter of the first half as I said. We had a pretty good environment in the first half of 2019. But we got a great service product. And we’re going to do as much as we can. As I said, I think we’re going to be able to do well in intermodal in the first half and in merchandise, hopefully, eke out some positive volume growth in merchandise. But we will, as we sort of get into the back half of the year, we think that it will be a little bit stronger than the first half for sure.

Jamie Boychuk

Yeah. I think, Justin, you’ll see throughout the year going first quarter will mark the low point from a growth perspective. That’s probably across all of the — not only revenue, but operating income, EPS across the board. And then from there — and this is a lot of just based on the comps as we get in the back half of the year lapping some of the coal and some of the other headwinds that we saw in 2019, that growth should improve.

Justin Long

Okay. But when you put together all the pieces, do you think in the second half of this year, volumes can be up on a year-over-year basis, is that the assumption?

James M. Foote

Yes.

Justin Long

Okay. Great. And then, secondly on free cash flow, obviously, that’s a highlight of the business right now. So I wanted to ask in 2020 and beyond, what’s the right framework in your mind to be thinking about for the free cash flow conversion percentage? And then, also on buybacks, Kevin, maybe you could provide a little color on the magnitude you’re expecting in 2020 relative to what we saw last year?

Kevin S. Boone

Yeah. Free cash flow conversion, our goal is to remain — keep that high. We have some headwinds in terms of cash tax rate that will — over time, that’s going to trend higher. We’re going to do everything we can on — to offset that with working capital initiatives and really taking a look at our capital program and how efficient we can be on that side to save dollars there. So, a lot of opportunities. I don’t think we have any plans to go back to the old ways of very low free cash flow conversion that we saw historically from not only CSX, but the industry. So we — that’s something we pride ourselves in. We continue to strive to maintain and have every plan to.
On the buyback, we are taking in $2 billion of cash, as I mentioned, end of the year. It gives us a tremendous amount of flexibility. There is no reason for us to retain $2 billion of cash on our balance sheet. So that allows us some flexibility going next year to be opportunistic when the markets present opportunities and we’ll do that. We’ll also look at the dividend as well. So we have a history of returning cash to shareholders, and we’ll continue to do that.

Justin Long

Okay, great. Thanks for the time.

Operator

David Vernon from Sanford Bernstein. Your line is open.

David Vernon

Hey, Mark, I just wanted to dig in a little bit more on the expectation that intermodal is going to get better, it sounds like you were thinking in the front half we might start to see a return to growth. How are your intermodal partners kind of talking to you about the outlook for the business in terms of their ability to actually attract share? We’re coming off a year where domestic intermodal is down, call it, whatever 5%, 6%. What’s going to flip that switch that’s going to get that volume to start coming back on to the network?

Mark K. Wallace

Yeah. Let me split it up a little bit and talk both intermodal on the international side, on the domestic side. But the international business, it was down less than domestic. We’re still continuing to see — going into the early part of 2020 and hopefully, for the rest of the year, we’re continuing to see good growth there on the international side with inland port strategy and some new service offerings with our customers. But the overall market remains soft. But we are doing well with picking up some business there.
I think — listen again, customers are not responding to our repositioned network. It’s moving faster and more reliably and more efficiently. And they like to service, and we’re doing well to grow the intermodal franchise. And we’re lapping those lane rationalizations, those are all behind us now and we’re growing from that. So, again, we think — given the environment and given the service product we got and we can grow this thing.

David Vernon

Okay. Maybe just as a follow-up, as you think about the improved service, obviously, some business is under contract. Is that going to give you a better leverage to kind of get some even better than sort of run rate pricing going forward, or should we be thinking about that as being kind of the standard and you’re going to be using service more to drive growth than to really try to extract more value from the existing book?

Mark K. Wallace

Well, we attack it from all fronts, right. We’re going to — we’ve got long-term contracts with our customers, and there’s rate escalators in there and we’re going to — but we’re going to continue to grow with them and bring on more business and get price where we can get price. And again, we’re not giving away our service. And so, we’re going to attack it from all fronts.

David Vernon

All right. Thanks, guys.

Operator

Cherilyn Radbourne from TD Securities. Your line is open.

Cherilyn Radbourne

Thanks very much. Good afternoon. Just wanted to ask a question in terms of performance evaluation, and how you differentiate between performance improvements that may be associated with lower traffic volumes on the network versus improvements that would be associated with sustainable process optimization that would remain once volume growth returns?

Kevin S. Boone

I think when we look at productivity, the way we measure it here internally, it is a lot easier to drive productivity and a growing volume environment because first, you got to — in a declining market, you got to offset the decline in revenue before you even generate any productivity. So, the fact that we’re able to offset the headwinds that we have talked about a lot on this call implies a lot of productivity this year, and there’s a lot of smaller things that are adding up to big numbers across the board. When I look at the overtime percentages and I look at a lot of different things, those aren’t being driven by lower volumes. That’s a lot of blocking and tackling, even at the D&A side, we’re getting a lot more productivity out of our employees than we ever have. So, we measure productivity internally. It’s certainly harder to — it would — if I can tell you right now, we would have realized a lot more productivity this year in an increasing volume market if that was the outlook for us.

James M. Foote

We can — I mean, I — we can look at the metrics and to Kevin’s point, give me a growing environment, it’s easier to run the railroad. Right now, we’re in tough conditions to put up the numbers that we’re putting. But ultimately, if you take a look at the metrics and where the metrics are sitting, how do you know that things are — that we are improving even in the environment we’re in, the cash is falling out. If we were hitting metrics and the cash wasn’t falling out, then there’d be a point made, hey, it’s easier and it’s all because of volume base. But I think we’ve proven that, along with our metrics going in the right direction, the cash is falling out in the savings.

Kevin S. Boone

And many of these changes are transformational in nature and therefore, sustainable. We are not just kicking the can down the road. We are fundamentally in every respect changing the way we run this Company, and these changes that are resulting in these efficiency gains are to a large degree is going to stay with us as we go forward.

Cherilyn Radbourne

Okay. All of that makes sense. Maybe just by way of a quick follow-up, as operating ratios across the industry start to converge and maybe it’s in the high-50s, what metrics do you think that investors should pivot to start focusing on to differentiate between the various franchises, whether it’s ROIC, free cash flow conversion or some other metric?

Kevin S. Boone

Cash flow, we talk about it a lot around here, I think we’re pretty proud of our cash flow conversion. It’s not easy to both improve OR and generate a lot of cash flow, and I think we’ve proven that. So that’s really the differentiator that we see out there. And as we shift longer term, we’re here to drive operating income growth as well. So those are the two things that I think we’ll be focused on.

Cherilyn Radbourne

That’s all from me. Thank you.

Operator

Jordan Alliger from Goldman Sachs. Your line is open.

Jordan Alliger

Yeah. Hi, just a quick question. We talked a lot on the coal side about the export front, can you touch base a little bit on the domestic side, and how much of that $300 million top line headwind might be tied to that or is it really all on the export side? Thanks.

Mark K. Wallace

Yeah. No. Sure. On the domestic side, there is some impact. I don’t think it’s going to be as much of a negative impact in 2020 as we’ve seen going forward. Net gas prices, unfortunately, have remained stubbornly low dropping to about $2 recently. But — and we did not see the surge in prices that we saw in the fourth quarter of 2018. When they hit like $4 for a couple of weeks. But for core — for utility coal to be competitive, prices would have to increase from the current levels. And total electric demand would need to increase. Yes, as we all know in many locations, coal is used for peaking generation. And so, our upside is always seen or many cases seen when we have these extreme weather conditions and cold. Unfortunately, or fortunately, for the people on the call in the northern half of the country, you’re not seeing a much cold weather, but that’s bad for utility coal. So the natural gas capacity has not been stretched so far this year. But for 2020, we do see and we do expect that our utility tonnage will be relatively flat as we have had some wins, offsetting some market declines.

Jordan Alliger

And just a quick follow-up on the coal pricing, does domestic coal revenue per carload, I mean, does that stay positive or is it positive? I shouldn’t say stay, I’m not sure that’s the question.

Mark K. Wallace

There’s going to be — there — on the domestic utility?

Jordan Alliger

Yes.

Mark K. Wallace

Well, again, it will be down, just given where things are. Those contracts are multi-year contracts with our customers. But there are price adjustments. But we have minimums in the contracts with all these tied to them, but we do expect a little bit of pressure on coal — on utility RPU.

Jordan Alliger

Great. Thank you very much.

Mark K. Wallace

No problem.

Operator

Ben Hartford from Baird. Your line is open.

Benjamin Hartford

Okay. Thanks for getting me in here. Kevin, just had a perspective as we move beyond 2020 and the model evolves one — toward one of a growth focus as this operating plan takes hold, this 59% OR target here for the full year for 2020 and as Mark had said, we’re near trough level, cycle trough levels for PMI ratings and industrial related activity. To what extent, do you view 59% or thereabout as a representative trough or a floor for this model’s OR as we look ahead to the next decade or so? Why would not that be the case?

Kevin S. Boone

Why wouldn’t 59% be the floor?

Benjamin Hartford

Why couldn’t 59% be the cycle floor for dealing with trough levels of PMI readings and we’re looking out toward growth? Why shouldn’t this 59% OR or thereabout be viewed as a representative trough for a floor for this model’s OR going forward?

Kevin S. Boone

You say floor, you’re meaning that is — why wouldn’t it get better from here?

Benjamin Hartford

Correct. Yeah. Can we treat this as a cycle trough, this 59%, the low point?

Kevin S. Boone

Well, I think as we look longer term and maybe Jim has some comments on this as well. We’re really going to focus on growing operating income and generating EPS growth in the most effective way. We talked about the leverage we have we built in this model. So, we think, given everything that Jamie and his team have done that we can drop through revenue at a very high incremental margin, so that implies pretty good outcome on the margin side, but we’ll have to think about what’s the most effective way is to grow operating income and — at a very high return. So those are the things that I think as we get further out, we’ll have to contemplate. But it’s — we have a better service. So clearly, getting price for service as we’ll go after and — but it’s really operating income and cash flow that we’ll be striving for in the next few years beyond 2020.

Benjamin Hartford

Perfect. Thank you.

James M. Foote

Right at — 42-or-so margins and as Kevin said, easier for that number as our — for our margins to improve our operating ratio to go down with increasing volumes. Our long-term strategy is to continue to leverage our service, regain business that has been lost from the industry, while maintaining what I consider to be extremely good margins and grow our operating income, cash flow and earnings per share of the Company.

Benjamin Hartford

Understood. Thank you.

Operator

Ravi Shanker from Morgan Stanley. Your line is open.

Ravi Shanker

Thanks. [Indecipherable]. Just a quick one, again on coal, you said that you probably hit the worst-ever 1Q and then things kind of normalize from there if the benchmark stays where it is. Given your, the kind of, take-or-pay as you have on the volume side and kind of the way the contract reset. If the benchmark stays where it is for, let’s say, the next three to five years or forever, is all of the coal impact going to be isolated in 2020 or is there like another leg to come in 2021?

James M. Foote

Oh my gosh, Ravi. Coal benchmarks stay here. That’s not going to be happy.

Ravi Shanker

Sorry, I’m making you do math at the end of the call.

James M. Foote

Yeah. Listen, I’m in no position to speculate what’s going to happen to coal internationally, whether it’s thermal, met. I mean, again thermal is going to be driven internationally by the demand for coal — agility coal in India and other places, Turkey, Pakistan, it’s going down. It’s — in the next 10 years, it’s probably not going to — we’re not going to be shipping anymore to Europe. And on the met side, again, it’s industrial production worldwide. It’s cyclical. These things…

Ravi Shanker

Right, right. I get that. I mean, I get that. We don’t really have any visibility of where coal is going to go. But my point was, if it didn’t change starting tomorrow, if it just stayed where it was, are your contracts all going to just lap and kind of completely reset in 2020 or is there more to come in 2021?

James M. Foote

No, no. They would — it would keep going. It would lap.

Kevin S. Boone

There’s not a contract that’s going to expire in 2020, where there’s another shoe to drop, so to speak on — if the commodity — underlying commodity prices to stay the same. I think what the volumes today represent is what the underlying commodity prices are at. So, all else equal, there is no long-term contracts within our export coal business that are set to expire after 2020.

Ravi Shanker

Got it. That’s what I was getting at. Maybe just one more kind of, you guys implied that you’re going to see a significant incremental margins when the volumes come back, that kind of implies that you haven’t necessarily downsized your operations completely for the cyclical volume environment you’re seeing right now. Maybe some of the other rails have. If volumes don’t come back until the back half of next year, at what point do you guys say that, hey, maybe we can cut some more on the cost side here?

Kevin S. Boone

We watch this daily. It was kind of like, let’s just kind of transition back six months ago when everybody was saying, man, in the second half of 2019, it’s just going to be gangbusters, and we were saying, I don’t see it. And we were responding accordingly and making the appropriate steps on the cost side to make sure that we delivered almost double-digit earnings growth this year in an extremely difficult environment, and we’ll do the same this year as we go each and every month and assess where we are. And — are the volumes better than or worse than what we expect them to be right now and we’ll respond accordingly.

Ravi Shanker

Very good. Thanks, guys.

Operator

Walter Spracklin from RBC Capital Markets. Your line is open.

Walter Spracklin

Yeah. Thanks very much. Thanks for sneaking me in here. I want to go back, Jim. You were talking a lot about the improvement in operating metrics that you had and how that’s improving service and Mark is certainly echoing that. You mentioned about how you’re using that to convince the truck customer to switch over. What evidence are you seeing that they are capitulating here and moving over, are they waiting for some other factor to consider? Is it — or are you going to — do you look at 2020 and see an opportunity for a notable share gain against truck coming up into 2020? Any thoughts on share gain opportunity against truck?

Kevin S. Boone

Yes. Well, let me touch it real briefly. It took us decades, it took the railroad industry decades of poor service to drive the business off the railroads onto the trucks. We are not going to get the business off to highway back on to the railroad in two weeks. So we’re going to have to earn it. As we were talking about earlier, we’re going to have to not only put up good metrics but prove to the customers that these metrics are as equal to a truck and that this business model is sustainable. In the past, I’m sure they’ve had a lot of railroad guys that have walked in and said, hey, trust me take your business off to truck, put it on the railroad, I’ll get it there on time. And the next thing six months later, it wasn’t performing as well, and that customer lost business as a result of his conversion from truck to rail. He is skeptical and rightly so. We need to prove to that customer that this is a long-term, as I said, structural fundamental change in the way we do business. And when we do that, we’ll continue to see where we grow our merchandise and intermodal volumes at a rate that is faster than the industry. Is that going to be 1% greater than the industry? Is that going to be 1.5% greater than the industry? It isn’t going to be 12% greater than the industry. It’s going to be incremental quarter after quarter after quarter, year after year after year, where we have outsized growth relative to the industry that’s going to prove this business model.

Walter Spracklin

Let me turn around and ask that same question now against your rail competitor. We’ve talked to a number of your customers, they’ve confirmed the service metric improvement. Jim, you’ve had experience of running — working with a company that has had a significantly better operating ratio than its competitor. Is that an opportunity for share gain against rail if your operating metrics, as they have shown here, continue to improve and certainly, relative to the competitor, are we — could we see a more notable upward shift in your share gain opportunity against your rail competitor?

James M. Foote

Well, I think it’s different than — our business environment here in the eastern half of the United States as I would say, is significantly different than the business environment in Canada. We have billions of dollars of opportunity available to us from truck. Customers today that are shipping products with us in a boxcar that are also shipping 50% to 60% of their product in a truck because the truck is more reliable. I want that opportunity, which is billions. It is crazy for me to go over there and price my service as a commodity that try and pick up a couple of million bucks of the other railroad. That’s the business model that has run the railroad industry down for decades. And that is not the business model that we are pursuing.

Walter Spracklin

Got it. That makes a lot of sense. Appreciate the time.

Operator

Allison Poliniak from Wells Fargo. Your line is open.

Allison Poliniak-Cusic

Hi, guys. Thanks for taking my call and my question. Just wanted to talk, you made a lot of progress on the operations over the past few years. And you talked about the levers that you can pull in 2020. If you — as you look at those, which ones do you feel could be the most challenging, particularly in this environment if there is anything?

Kevin S. Boone

The levers are always challenging. As we said, if we wanted to just take — and I’ve been saying this for the last six, eight — we have been saying this for the last six, eight, 10 months or more. If the business had dropped off 10%, 12% in a couple of weeks in a traditional kind of recession scenario, it would have been easier for us to go in there and find the equivalent amount of costs and take it out of the Company. When it was a slow drip week after week, month after month, a percent here, a percent in the half year and continue to down, down, down, down, down, it was more difficult for us to respond to that because we were fearful that we would — and as we expressed again here today, we would cut service in areas where we were in an attempt to reduce cost, and we would perpetuate the downward trend by driving more business off the railroad and on to the highway. So that is a challenge, where can we cut and where can we maintain our levels of service. If the volumes continue to decline, it creates opportunities for us. And at some point in time, you just get a little more aggressive. We have not done that and — but we have the ability, if it was necessary.

Allison Poliniak-Cusic

Great. And then just trying to be optimistic, if we do get may be even more significant inflection in the back half. Just any of those levers sort of get moderated or pull in a little bit?

Kevin S. Boone

Boy, we’re really — we are optimistic. We like to think we’re realistic. We are optimistic. We expect 80% of our business — our merchandise business and our intermodal business to do quite well this year, especially as we said, in the second half of the year. If for no other reason, then we just get easier comps. And yeah, if the business comes back, which clearly we hope it does, well, it’s going to. Not a question, as I said, this is not the new norm. Business is going to come back. It is — all of our businesses are cyclical. It’s just a question of when does it come back. We’re — all we’re saying is, as of right now, we’re being a little more pessimistic about — I don’t expect all of a sudden volumes to jump up 5% in the — on May 12. We’re going to wait and see. We’re going to be cautious. We’re going to be vigilant in making — and we have to do that in order to manage the Company. And if things come back, we’ll be in a position to handle the volume and grow the business. Jamie?

Jamie Boychuk

Look, as Jim said, this isn’t slash-and-burn exercise that we’ve been going through. It’s controlling the costs. And on the operating side, we work very, very close with Mark and his team. As the business starts to come back, we’re going to be prepared for it. We’re going to be ready for it. We’ve got the assets. We make sure we have the people, and we don’t leave alone behind. So this is purely being a controlling — and look, we need to continue to control the cost because the businesses are coming back as quick as we may have thought it does, then we’ll do that. But we will be prepared to grab every carload that starts to come towards us.

Allison Poliniak-Cusic

Great. Thank you.

Operator

And we have no further questions.

James M. Foote

All right, great. If there’s no further questions, thank you so much for joining us today and look forward to seeing you on the road at the next conference or on the next call. Thank you.

Kevin S. Boone

Thank you.

Operator
[Operator Closing Remarks]

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