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CSX (NASDAQ:CSX)
Q4 2017 Earnings Conference Call
Jan. 16, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen and welcome to the CSX Corporation Fourth-Quarter 2017 Earnings Call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode. Following the presentation, we will be conducting a question-and-answer session.

To ask a question, you may press *1. For opening remarks and introduction, I would like to turn the call over to Mr. Kevin Boone, chief investor relations officer for CSX Corporation. Thank you, sir.

Please begin.

Kevin Boone -- Chief Investor Relations Officer

Thank you, and good afternoon, everyone. Joining me on today's call is Jim Foote, chief executive officer; Ed Harris, executive vice president of operations; and Frank Lonegro, chief financial officer. On Slide 2 is our forward-looking disclosure, followed by our non-GAAP disclosure on Slide 3. I would also like to highlight our upcoming investor conference scheduled for March 1 in New York.

Registration information can be found on the CSX Investor Relations page. With that, it is a pleasure to introduce our president and chief executive officer, Jim Foote.

James Foote -- President and Chief Executive Officer

Thank you very much, Kevin. It's great to have the opportunity to speak with you again today. Before we get started on going through the presentation, I'd like to thank all of you out there who sent their condolences concerning Hunter's passing. Hunter was a true legend, and CSX would not be in the position it is today without the tremendous changes that he's been able to make during his time here.

I am committed to seeing his vision through and making CSX the best railroad in North America. Before I get started, let me say again that, as I said on the conference call on the morning of December 15 when I was named acting president and CEO, I am committed to follow through on implementing the scheduled railroad business model at CSX. After spending my entire career in the railroad business, I've experienced firsthand the benefits that are realized by customers and shareholders from changing to the scheduled-railroad way of doing business. To reinforce my commitment to driving this change, I took steps quickly to emphasize this message.

Just a few hours after assuming the position, in my first official act as CEO, I advised the head of engineering to bulldoze one of the hump yards that Hunter had closed. Atlanta hump yard today is flat. There is no turning back. I did initiate the sales and marketing structure to simplify the organization by collapsing the leadership group into three business units and aligning certain functions into other departments.

I made changes in the operating department to bring clarity to the key responsibilities. The operating department, both at the staff and field levels, obviously, has the most responsibility to execute and deliver the efficiencies and service improvements from scheduled railroading. But we now have more accountability within the operating department to ensure the hard work to implement scheduled railroading gets to the bottom line. And the biggest change is to bring in Ed Harris to help me.

Ed is a rock-solid railroad operations executive with over 44 years of experience. He and I were part of the leadership that transformed Canadian National. He worked for years with Hunter at both Illinois Central and CN, developing and implementing scheduled railroad. He understands what we are trying to accomplish here at CSX, and I trust, with Ed's help, we can deliver on the plan.

We have a ton of opportunity to harvest. We are aggressively developing more trip plans that are the essence to operating the railroad to schedule, plans that set specific route and time parameters that dictate how to move our customers' products across the network but also tell us when we don't, which highlights inefficiencies. We are on the right path to making CSX the best-run railroad in North America. I'd like to go into the presentation now and start with Slide 4, the fourth-quarter highlights.

We continue -- where we delivered solid results in the fourth quarter. We continue to show sequential improvement on key service metrics, including train velocity and terminal dwell. Here are the highlights. Adjusted revenue on a 13-week basis was roughly flat year over year, with volume down 2%.

Our adjusted operating ratio came in at 64.8%, a 220-basis-point improvement versus the fourth-quarter 2016. Earnings per share were up 31% to $0.64. Moving on to the next page, where we can take a look -- quick look at the revenue in the fourth quarter. Again, in the quarter, revenue was flat, a 2% decline in volume.

This reflects higher prices, which were offset somewhat by negative mix. A few comments on the larger commodity groups. In chemicals, revenue growth was up 3% despite lower industrial waste moves during -- due to a large project, which concluded earlier in 2017 but were still active in the fourth quarter of 2016. Crude-by-rail moves were also down in the period.

Auto was down 10%, about in line with the 7% lower U.S. and 15% lower Canadian vehicle production rate. Ag improved products revenue were down 5%, driven by lower export grain, which was down about 50%; feed ingredients, which were down, which was again offset somewhat by increases in feed grains. Coal revenues were up 4%.

Export coal volumes finished out a strong year, up 37% for the quarter. Shipments to our northern utilities were down substantially, but shipments to southern utilities were up 5%. Intermodal revenues grew 4%. International volumes increased as eastern port volumes continue to grow.

Our divested business was down. A business rationalization program shed about 7% of total intermodal volumes, which were offset somewhat by strong peak-season volumes. Again -- moving to Slide 7. We'll take a quick look at our operating highlights.

Again, as I mentioned previously, train velocity and dwell continue to see sequential improvement. Compared to the fourth quarter last year, train velocity was 15% better, and dwell was 10% better. While there remains to be a tremendous amount of opportunity ahead of us, I'm encouraged by our progress. Train length continues to be a focus by our team, and I would expect future improvement there.

Finally, total employees continue to fall this quarter as we improve efficiency, which requires fewer assets. Now I'll turn it over to Frank.

Frank Lonegro -- Chief Financial Officer

Thanks, Jim, and good morning -- excuse me, good afternoon, everyone. Turning to Slide 9. We are encouraged by the fourth quarter's financial performance. The service and efficiency improvements Jim just laid out on the previous slide helped generate momentum on the financial side as well.

Reported revenue declined 6% but was flat on a comparable 13-week basis, as pricing gains across all markets and higher crude recoveries were offset by the impact of lower volume and negative mix. Total expenses were 14% lower in the quarter, driven primarily by significant efficiency gains with the benefit of tax reform on the company's equity affiliates and cycling $116 million of costs by the last year's extra fiscal week. While I don't plan to call out the impact of the extra week as I walk through the expense line items, we have provided that level of detail in our quarterly financial report. Labor and fringe savings were driven by a 12% reduction in average headcount.

Incentive compensation was also lower, driven in part by the reversal of $28 million in former CEO stock-option expense accrued in quarters one through three. MS&O expense increased by 5%. As a reminder, though, fourth-quarter 2016 MS&O benefited from a $115 million real-estate gain, which was partly offset by real-estate gains in this year's fourth quarter as well as $70 million of efficiency savings. Fuel expense was up primarily due to the 23% increase in the per-gallon price despite continued gains in fuel efficiency.

The $29 million restructuring charge in the quarter relates to the departures of certain executives in early 2017 and more recently. Equity earnings of affiliates is a new line item on the income statement, necessitated by the impact of tax reform on nonconsolidated subsidiaries in the quarter. As we have done at the CSX consolidated level, our subsidiaries also revalued their deferred-tax liabilities to reflect the new federal rate. Given the size of the impact this quarter, SEC rules require us to add this line item to the P&L.

Moving forward, this item should be an expense credit of about $10 million to $15 million per quarter. These expenses were previously part of MS&O and rent. Looking below the operating income line. 2016 results were impacted by debt refinancing, which lowered ongoing interest expense and were accompanied by a one-time $115 million debt- repurchase charge.

Shifting to the income tax line. In 2017, we received a $3.5 billion noncash benefit due to the revaluation of our deferred-tax liability. Adjusting for this and for the restructuring charge, our effective tax rate for the quarter was approximately 34%. This is lower than usual due to the previously mentioned stock option expense reversal and multiple state tax items and favorably impacting EPS collectively by about $0.03.

The deferred-tax revaluation and the restructuring charges are significant items that we believe are not indicative of CSX's future financial trends. Therefore, on Slide 10, and in our quarterly financial report, we provide adjusted non-GAAP measures for the fourth quarter and full year. Our fourth-quarter adjusted operating ratio was 64.8%, and adjusted EPS grew by 31% to $0.64 per share. For the full year, we achieved a 66.3% adjusted operating ratio, an improvement of 310 basis points from 2016.

The improved operating and financial performance and the benefit of share repurchases drove full-year adjusted EPS to $2.30, a 27% increase over last year's reported EPS. Looking at Slide 11. Adjusting for the restructuring charge, CSX generated $1.7 billion of free cash flow before dividends, doubling the free cash flow performance of 2016. Improved cash generation was driven by a $665 million reduction in capital expenditures as well as solid top-line gains and significant operating efficiency savings.

2017's initial capital investment plan is $2.2 billion. With Hunter's guidance during the year, we reduced that to $2.1 billion and ultimately finished closer to $2 billion for the year, a 25% decrease year over year. Continuing with this capital efficiency theme, Jim will provide his thoughts on 2018 capital investment in a few moments. Our strong free cash flow performance enabled us to reward our shareholders with a $0.02 per share dividend increase earlier this year and nearly $2 billion of share repurchases.

In total, we returned nearly $2.7 billion to our shareholders in 2017, an increase of over $900 million compared to 2016. Wrapping up on Slide 12. A strong finish to the year enabled us to meet or exceed all of the financial targets we reaffirmed on last quarter's earnings call. Delivering on our commitments will be a hallmark of this team and this company.

In addition to growing adjusted EPS by 27%, doubling free cash flow to $1.7 billion, and driving the adjusted operating ratio down to 66.3%, our successful transition to Precision Scheduled Railroading helped the company generate record efficiency savings of $460 million in 2017. With 2017 now in the books, I'm delighted to turn the presentation back to Jim to highlight our initial expectations for 2018.

James Foote -- President and Chief Executive Officer

Thanks, Frank. For 2018, on the concluding slide here, we expect revenue in 2018 to be up slightly, with merchandise and intermodal services offerings much better than last year. I expect to see more favorable results in the second half of the year. In the first half of the year, we will face tough comparisons on export coal rates, which are linked to the price of the commodity.

However, we see the coal market continuing to remain healthy for a -- from a volume perspective. As we continue to prove -- improve our service, I believe we will begin to see increasing new opportunities as we look beyond 2018. I continue to expect improvement from a cost perspective. I reiterate, we will continue to implement the schedule railroading model, and I see no reason to believe we can't deliver the results that Hunter thought we could.

We should see a solid step-down in the operating ratio every year for the next three years. I expect CAPEX to be $1.6 billion, down significantly from 2017. This is bang-on where Hunter said we should be. I am committed to investing and maintaining a safe and reliable railroad.

As we become more efficient, we are able to achieve more with each dollar we spend. As Kevin said, we have scheduled our Investor Day for March 1. We will provide additional details in our financial outlook at that time. I hope all of you can attend and look forward to meeting with you and discussing our plans in much greater detail at that time.

With that, I'll hand you back to Kevin, and we can have question-and-answers.

Kevin Boone -- Chief Investor Relations Officer

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

Questions and Answers:

Operator

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

Tom Wadewitz -- UBS -- Analyst

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

Ed Harris -- Executive Vice President of Operations

Yes, I am, Tom.

Tom Wadewitz -- UBS -- Analyst

Yes, OK. OK, great. Good to hear your voice, Ed, and look forward to, I guess, hearing from you as part of the team. I know you haven't been there long, so it's probably tough to have a strong read on things, but I just wanted to hear your thoughts on what do you think is important or big changes in the network last year.

The metrics seem to be very good at the present time. But what do you think are the most important things for you and the team to focus on the operating side to continue that momentum and to see the further improvement in financial results?

Ed Harris -- Executive Vice President of Operations

Well, Tom, I think it's obvious what Jim said. We're going to continue to follow Hunter's plan, pursuing scheduled railroad environment. That, in turn, will lead to less train starts, more engines in storage, less equipment, and a more fluid network. And the table has been set.

I read in one of Jim's earlier reports that the heavy lifting has been done, and I really agree that it has been done. I've been very impressed with the staff here at CSX. The field forces, I've had a chance to meet all my direct reports, and now, I am spending time with their staffs and just get the handle on the railroad. And I'll start hitting the field here probably within the next two weeks and follow through on the plan.

But the plan is intact as it stands right now, but I think we'll dig a lot deeper than where we're at today.

Tom Wadewitz -- UBS -- Analyst

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

James Foote -- President and Chief Executive Officer

Ed and I are in complete alignment. We both think alike, and we both think and speak Hunter. This is the way we learned how to run the railroad, so we're going to do the same things, train length, velocity, terminal dwell, continue to focus on driving down our fuel expenditure and running our trains with fewer locomotives, car miles per car day. We live and eat and breathe these metrics, and that's how you deliver the financial performance that we did at CN and Hunter did at CP.

So it might sound boring, Tom, but it's the same old, same old. It's exactly what you've heard all along, and we're well on the way to accomplishing that.

Tom Wadewitz -- UBS -- Analyst

OK. Great. All right. Thank you for your time.

Operator

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

Brian Ossenbeck -- JP Morgan -- Analyst

Hi, thanks for taking my question. So Jim, I just wanted to start where you ended up. If you can just give a little bit more framework around the 2018 financial outlook knowing you're going to discuss a lot more for the long term at the coming Investor Day. But if you can just break out what you think will be the major components of the revenue up slightly.

You're going to continue to, sounds like, churn some intermodal volumes. You're looking for, perhaps, some volume headwinds. And then just more specifically, on the OR guidance, looking for another solid step-down this year and every year for the next several years, if you can give us a little bit more detail on that, what that looks like, if it's a similar year to this year or is it going to kind of continue but at a slower rate from 2017?

James Foote -- President and Chief Executive Officer

Kevin'll shoot me if I give away all of the details that he's got planned for New York. But, again, a little more flavor on what I said in my concluding slide. It is not -- the top-line growth of up slightly is kind of similar to what we went through at CN and CP when you implement the -- a new operating plan, and we implemented as quickly and aggressively as Hunter did here. Clearly, there was disruption in the network, and some business clearly went away.

Then there was the intentional de-marketing of the 7% of the intermodal traffic when we deviated and pivoted away from the hub-and-spoke system and closed the Northwest Ohio facility. I do not envision those kinds disruptive changes occurring in the future, in 2018. And so our goal right now on the merchandise side of the business is to earn back the trust of our customers and to begin to grow that business. And so, because it was only a few short months ago, we were in gridlock and fighting with the customers and the STB, it would be naive of me to assume that all our business is going to come back to us in the second week of February.

So I said, later in the year, I think we'll begin to have more success in growing our merchandise business segment by being cautious in our forecast. Intermodal side of the house, again, as our service metrics improve, I expect to see that come back. We were successful in offsetting that 7% decline with a very strong fourth quarter, especially the service that we delivered during peak season. So I would hope that intermodal will continue to do well.

And I personally have been meeting with a lot of the major intermodal customers and confident that we can see some top-line growth. The kind of oddball in the equation here is what's going to happen with coal. Coal is very strong here for us. The outlook for export met and steam coal right now continues to be favorable despite everyone predicting earlier that it was not going to be.

So the question is, how long is that going to hang in there? And the challenges that we have with our domestic steam coal franchise, especially the northern utilities where they're being displaced by natural gas give us concern there. So again, we'll get into all of that top line in much greater detail with the business unit leaders at our investor conference. So there is a little flavor there. On the operating side, as I said, I see no reason, and Ed agrees with me, as he said, I see no reason that we cannot drive our cost structure lower and improve the efficiencies in the network, in line with what Hunter envisioned.

And as I said, again, I see step-downs. I see step-downs in that operating ratio over the next three years. The details in which -- how we get there from a train operating standpoint, from an engineering standpoint, from a mechanical standpoint, the timing of those in a little more greater -- in much greater detail with more flavor, we'll roll out again, so Kevin won't shoot me if I just blurted out the plan right now.

Brian Ossenbeck -- JP Morgan -- Analyst

OK. Thanks for all the details, Jim. A really quick one for Frank. If you could just tell us where you expect cash taxes to go relative to last year and then versus the 25% effective rate, I would appreciate it.

Thank you.

Frank Lonegro -- Chief Financial Officer

OK, thanks, Brian. The effective rate obviously in Jim's prepared remarks, remember, obviously, as you step down into the cash tax rate from there, you're going to have the, essentially, the equivalent of 100% bonus depreciation. And then you got your state combination of cash and deferred. I think if you implied the same level of split that you saw previously on the whole base, you'll get to the right answer.

It's going to fluctuate as it always does quarter to quarter and year to year, but that will be a good place to start.

Brian Ossenbeck-JP Morgan -- Analyst

OK. Appreciate your time. Thank you.

Operator

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

Allison Landry -- Credit Suisse -- Analyst

Good afternoon. Thanks for taking my question. Jim, I was hoping I could ask a follow-up question on intermodal. And given that you are essentially awarded the credit for building this CN intermodal franchise as we know it today, do you see anything at CSX -- understanding the fact that it's in a different spot than where CN was years ago -- are there any opportunities to build out CSX's franchise in a similar way? Or do you plan to take it in a different direction altogether?

James Foote -- President and Chief Executive Officer

Well, there's a lot more people in New York and Pennsylvania than there are in Saskatchewan, so I think we have an opportunity to move a lot more intermodal freight across the network. I see -- just like we see in the rest of the business, I see a lot of opportunity in terms of changing business processes, working at improving terminal fluidity, the same steps that we took at CN to improve the quality of the network and then the quality of the revenue stream associated with that. I also see, somewhat uniquely, an opportunity here to really take a hard look at the import, international traffic that's coming in on the East Coast and begin to determine ways in which we can market that business more effectively on east to west move and be more competitive there. And I believe my experience in growing the traffic flows on the CN out of Vancouver as well as the development of Prince Rupert will give me a little bit more insight into where to take the business.

But first and foremost, what we did at CN when we rolled out intermodal excellence and created an unbelievably sought-after service in Canada, that's our first focus, and I think we're making great progress in delivering on that.

Allison Landry -- Credit Suisse -- Analyst

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

James Foote -- President and Chief Executive Officer

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

Allison Landry -- Credit Suisse -- Analyst

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

James Foote -- President and Chief Executive Officer

No. I think we're going to be providing disclosure the same way I used to do at CN.

Allison Landry -- Credit Suisse -- Analyst

OK.

James Foote -- President and Chief Executive Officer

And that's kind of how we -- that's the guidance level that we're comfortable with.

Allison Landry -- Credit Suisse -- Analyst

OK. Sounds good. Thank you.

Operator

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

Scott Group -- Wolfe Research -- Analyst

Hey, thanks. Afternoon. Just a couple of follow-ups on the 2018 earnings framework. So Jim, can you just clarify -- I mean, I think fuel surcharges probably a 2-, maybe a 3-point help to revenue this year.

Are you including that in your commentary about revenue up slightly? Or are you sort of talking ex fuel? And then, maybe, Jim or Ed, can you give some sort of directional color on headcount for either the first quarter or for the year?

Frank Lonegro -- Chief Financial Officer

Scott, it's Frank. Why don't I jump in, and then Jim and Ed can go. The revenue guidance that Jim gave is all-in revenue, total revenue, and then headcount revenue commenting on it on a Q1 basis, although I believe it will be sequentially down every quarter, you're going to see us step down pretty much every year, '17 to '18, '18 to '19, '19 to '20, etc. We'll have a lot more commentary on that as we get to the Investor Day.

But, clearly, that's part of the equation to get to some of the outcomes that we're aiming for. On the headcount question, as we -- as is in our quarterly information, well, I should say what's in our quarterly information is our employee headcount. But in addition to the employee headcount reduction, we also have a significant reduction in the number of paid consultants that were here at CSX. And you add the consultants together with the employee number that's in there, we took out over 4,700 employees here and consultants last year.

Looking at next year, if you take a look at what the ongoing attrition rate is around the company of around, say, on the remaining headcount, around 1,400 employees and then you add in again an aggressive look at getting the consultants, nonemployees out of here, you would think that we would come up with an annual number of around another 2,000 employee reduction in 2018. That's our thoughts right now. We are grinding that -- again, grinding that plan right now and expect to have the details of that mix between employees, consultants, timing based upon attrition, etc., when we're in New York in six weeks.

Scott Group -- Wolfe Research -- Analyst

Very helpful. I just wanted to make sure I understand. Frank, the way you answered my first question is about the surcharge revenue. So obviously, your revenue includes fuel surcharge.

Do you think I'm right that there's a 2- to 3-point potential help to revenue this year from that? So are you sort of saying that ex fuel, the core revenue is potentially down this year? Is that sort of what we should take from your guidance?

Frank Lonegro -- Chief Financial Officer

Your 2- to 3-percentage point seems high to me. I mean, we're tracking the forward curve and obviously have a good handle on what fuel-surcharge revenue would be on a year-over-year basis. But I mean, Jim's comment was obviously on a total-revenue basis. When we get to the investor conference, we can give you more around CAGR in terms of longer-term revenue growth etc., but Jim's commentary was all-in.

James Foote -- President and Chief Executive Officer

Yes, that number is high based upon our assumption on what we expect fuel price to be. As Frank said, it's all-in. It includes -- fuel surcharge is included in that number, but we're nowhere near any kind of fuel-price assumption increase that would drive that kind of increase in revenue.

Scott Group -- Wolfe Research -- Analyst

OK, fair enough. And then my just last question, I don't know if this is for Jim or for Frank, so as we think about the CAPEX reduction and the earnings improvement and taxes, obviously, much more free cash flow this year than we've ever seen. So how do you prioritize that free cash flow between buyback and dividend? And do you think just this new level of free cash flow lets you revisit leverage targets? I know we're not going to get those hard numbers today. We'll get them at the Analyst Day.

But are we right in thinking that more free cash flow lets you think about leverage ratios differently?

Frank Lonegro -- Chief Financial Officer

Well, it certainly gives you more coverage in terms of interest ratios and things like that. It's an input, obviously, that we're having with the board as we look at capital structure and leverage, conversations with the rating agencies coming up as well to understand the relative importance of debt-to-EBITDA versus RCF, recorded debt, which clearly the -- important to that as well. But clearly, when you look at the ability that you have to distribute cash, there are only a handful of ways that you can utilize it. We've given you the CAPEX number.

I doubt we're going to be acquisitive in the near term, small basis. So then you're really talking about shareholder distributions. And the question is, what's the relative proportionality between dividend and buybacks? But it's an active conversation right now. Obviously, Jim is our new CEO.

He's got his perspectives. We'll be discussing those with the board and look forward to sharing those with you in March.

Scott Group -- Wolfe Research -- Analyst

Thank you, guys. I appreciate it.

Operator

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

Chris Wetherbee -- Citi Research -- Analyst

Hey, thanks very much. I wanted to come back to your comments on pricing, Jim, specifically you're discontinuing sort of the metric you've given us. I know you could help us with some comparability to the previous quarters how you saw pricing specifically in the fourth quarter and maybe a little bit of sort of how you think about the outlook into 2018, particularly on the merchandise and intermodal side, where there is some comparability versus truck. We're seeing that market tight.

I'm just trying to get a sense as you sort of think out in the fourth quarter then look out to 2018 with those revenue targets, how we should be thinking about sort of the price lever within that mix.

James Foote -- President and Chief Executive Officer

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

Frank Lonegro -- Chief Financial Officer

Merchant intermodal was 2.2% in Q3.

James Foote -- President and Chief Executive Officer

Yes. So our price in merchandise, again, in the fourth quarter was higher than that. So we continue to trend upward and, trust me, we continue to focus on price, the proper mix of volume and price. But clearly, a focus on price.

And it's one of the things probably that I'm most proud of in my career was while the rates in the railroad industry and [Inaudible] per revenue-ton mile dropped every year after year after year, starting with deregulation in the '80s, it was what we did at the Canadian National that puts the brakes on that continual decline in rates and started to move prices up. So I am a big advocate here of, as we work so, so hard to improve the quality of the product that we have, to get the sales team focused on what we're selling as a service, not a commodity, that we go after as much of a price increase as we possibly can under the restrictions that our existing contracts might have in place. So in terms of -- again, in terms of guidance, other than for me to tell you what we've done and not gonna get any more specific than that, and in terms of explaining on a quarter-by-quarter basis what our price was, we'll tell you the overall top-line breakdown in terms of volume and price to get to what the revenue stream is.

Chris Wetherbee -- Citi Research -- Analyst

OK. OK, that's helpful. I appreciate that context. A couple of weeks ago, a few weeks ago, there was a letter to the STB that, I think, kind of highlighted that from a service perspective, there's not going to be a lot of meaningful or really any meaningful changes kind of going forward.

You're just going to execute kind of on the plan that stands right now. Essentially, that suggests that Hunter got through essentially everything he wanted to get through, and now it's kind of more of just executing on the plan as you move into 2018. I guess, if you could just maybe give us a little bit of color around that. When you think about the various business, whether merchandise, intermodal, maybe coal, is there really anything else left to do from your perspective? And if so, kind of how much and maybe how that could kind of progress out, understanding we're going to get more color on this in March? Just trying to get a sense of maybe that comment specifically.

Thank you.

James Foote -- President and Chief Executive Officer

Well, in terms of the order of magnitude, deciding on one day to shut down eight major hump yards across your network is pretty dramatic and disruptive. And deciding to kind of blow up a long-thought-out strategy, hub-and-spoke intermodal network overnight, again, was pretty disruptive and dramatic. I do not see us having anything like that. Luckily -- and Ed and I have talked about that, luckily, we inherited the very hard work and difficult decisions that Hunter made for us earlier when he was here last year.

I think we would have come to the same conclusion that those things needed to be done. I just don't think I would have decided that we're going to do it all in one day on a Tuesday. So we are the beneficiaries of that very, very difficult work that was done by him and the team here. That is not to say that what we have here is a walk in the park.

We are going to continue to grind. Now comes the difficult part of getting these trains to continually to run at -- I mean, we're already hitting both velocities now that are at or near record speed in the history of CSX. When I came here, I think you have to go back to the steam engine passenger days to kind of figure out when you had train velocities that were -- are where we're at today. So the velocity of taking out the intermediate stops, improving the efficiencies of the terminals, grinding out on these trip plans now in order to improve both the origin -- the pickup at the customer location and delivery of the product and the car at the destination, driving train length, improving fuel efficiency, optimizing the use of distributed power.

All of these initiatives are what drives the costs down, improves the quality of the product. And at the end of the day, in the most simplistic terms, is what you want to measure at what we're doing by having a lower operating ratio drives the operating ratio down. It's day in, day out, seven day a week work and process change. And now, that's what we're going to do.

That's exactly why I brought in Ed Harris. Nobody is more of a bulldog when it comes to getting a hold of these initiatives and getting them done. So the organization, we spent three hours this morning with all of the vice presidents going through each and every one of these initiatives and assigning accountability and responsibility, not to get it done sometime in the second week of June, but to come back to me and Ed in about 10 or 12 days with a plan on how we're going to implement every one of these initiatives. So again, Kevin's giving me the "don't give the story away" but in the 1st of March, we'll have our transportation people there, our engineering people there, our mechanical people there, to go through these strategies in detail and show you what we're doing to make -- to bring home these initiatives, and most importantly, get the results to the bottom line.

Chris Wetherbee -- Citi Research -- Analyst

OK, that's helpful. I appreciate the color. Thank you.

Operator

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

Matt Reustle -- Goldman Sachs -- Analyst

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

James Foote -- President and Chief Executive Officer

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

Frank Lonegro -- Chief Financial Officer

But over time, Matt, just to chime in, all three categories of the resource base, whether it's management, union, or contractors and consultants, you should expect all of those to be lower over time.

Matt Reustle -- Goldman Sachs -- Analyst

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

Frank Lonegro -- Chief Financial Officer

Yes, we're starting to take a look at that obviously. The question around revenue adequacy is both specific to railroad and then across the industry. It is through the cycle analysis rather than any particular year. And the other thing, obviously, that we always look at is whether the replacement costs, not lose the historical book value that is used also by the regulators in determining what's revenue adequate.

So nothing in the near term that causes any concern.

Matt Reustle -- Goldman Sachs -- Analyst

Thank you.

Operator

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

Ken Hoaxter -- Merrill Lynch -- Analyst

Great. Hey, Jim. [inaudible] but good luck to you, Ed and Frank, on moving forward. Maybe you can just talk a little bit about what has caught you off-guard or things that are maybe a little different in how things have changed at the rail.

I don't know maybe it's technology more advanced, PTC, something you have to learn, maybe kind of the learning steps for you, Ed, as you kind of get back and start tackling the precision-railroad model at a different rail.

Ed Harris -- Executive Vice President of Operations

Well, I'll tell you, Ken, that I've never been gone, to be honest about it, even when I retired from CN or moved on. I have consulted almost consistently, helping global infrastructure partners by railroad in Australia twice We went after Asciano one time, and then we ended up with Pacific National later than that. I've also consulted with Rio Tinto in Australia as well as Rumo in Brazil. And, quite frankly, being part of the Chicago study group, the AAR study group that was sponsored by six retired chief operating officers, Hunter was kind enough to put me on that committee, and we learned a lot about Chicago.

Unfortunately, their report, which belongs to Brigadier, sits on a shelf somewhere in the AAR headquarters, I guess. There are still a lot of good ideas there. So I can't say I've been surprised about anything operationally. I will tell you this: we have to take advantage of the technology that's out there.

Jim mentioned distributed power, and we're already starting our coal service more effectively with distributed power. I'm also a big proponent of run-through interchange, especially in a terminal like Chicago. I'd like to look in, and I've got a group looking into running directly back into the UP and BN and trying in all of our efforts to stay out of the belt only because we're giving up two days' worth of cycle when we do that, and I certainly would like to avoid that. And I wouldn't rule out use of short lines.

I've been on -- I've been chairman of Omnitrax's board for the last four years, and I've also been on the board of the track maintenance company up in Canada, both positions resigned when Jim was -- Jim and the board were nice enough to give me an opportunity at this job again. And a lot of people say I'm old. I just say I'm experienced. And I'm certainly really excited about the opportunity.

I'm excited about the staff that I've met here at CSX. And I'm telling you this group is focused and will be even more so focused. I wouldn't rule out the use of short lines for a shortcut route. I wouldn't rule out the use of partnering with our other Class 1 partners or carriers just to take advantage of maybe an opportunity to do some directional running and/or running long trains in -- directionally.

With our network, we've got a lot of options, maybe too many options, but we'll look at that as well, too. So thanks for the question. It's an honor to be part of Jim's team and certainly an honor to be back in the Class 1 fold again.

James Foote -- President and Chief Executive Officer

Ed -- he hasn't missed a beat.

Ed Harris -- Executive Vice President of Operations

He's exactly right.

James Foote -- President and Chief Executive Officer

He's forgotten in his -- what'd you call yourself -- golden age or whatever you are now.

Ed Harris -- Executive Vice President of Operations

League of extraordinary gentlemen.

James Foote -- President and Chief Executive Officer

League of -- he's in the league extraordinary gentlemen now. He's forgotten more about railroading than most guys ever knew. So when I inherited this role and this responsibility on some -- under some extremely difficult circumstances, the first person that I thought of that could come in here is -- to make sure that I was able to keep enough eyes on the property to make sure we didn't skip a beat was Ed Harris. And so he's lived up to all expectations by the team.

From the first day on the property, on a conference call, he jumps in, in the middle of a call to start challenging people about why they're weighing chemical cars in a hump yard. And so it's great to have Ed here, and he's doing a super job.

Ken Hoaxter -- Merrill Lynch -- Analyst

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

Ed Harris -- Executive Vice President of Operations

I would probably say, Ken, originations, you're right. We're doing very well there and really doing very well on the intermodal train side. I think in an effort to keep that business so service-oriented, closer on time, the other trains might take a bit of a hit. It's wintertime, too, as well.

This is a tough quarter to operate in. And the focus today will be as it is when I walked in the door. It's to reduce train starts, take some of that congestion out of the network, allow us to operate across the network on an on-time basis. And Jim mentioned it earlier, seven days a week, full-pin trains, I mean, from one end to the other we want to fill the train out and certainly go with the tonnage.

We've got enough power, we've got more power than what we need right now. And we've already started putting power up this year in regard to it. It's not a power question at all. It's probably more weather-related than anything else.

And the effort is on service and will always be on service where I come from.

James Foote -- President and Chief Executive Officer

Yes, both the origin -- when we changed the -- when we did redid the service design plan for the network, we improved, again, train fluidity, train velocity from terminal to terminal. Going back at origin and destination terminals is where our challenges were, which is not unexpected. And we have done -- made great strides in improving train originations. Now we need to get the final piece of the puzzle put together here, and everybody's focused on it.

Clearly, I am not and I don't think anybody in this company is happy with us telling our customers we're running this scheduled railroad that being on-time 50% is acceptable. That's not the goal. That's going to get fixed. I've told the customers that's going to get fixed and it's going to get fixed as quickly as we can.

Unfortunately, we've been hit by some pretty tough weather over the last couple of weeks but we're -- all eyes are on the problem.

Ken Hoaxter -- Merrill Lynch -- Analyst

Great. Thanks for the insight. I appreciate it

Operator

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

Brandon Oglenski -- Barclays Capital -- Analyst

Hey, good evening, everyone. Jim, Ed and Frank, congrats on the new team here. I guess -- just wish it was under different circumstances but life happens fast. We look forward to you guys carrying on Hunter's legacy here.

I just want to follow up on the revenue question, Jim, about just looking out at the industrial landscape here. It seems like core growth might even be accelerating in North America. And, obviously, we haven't even seen what's going to happen with the likely cash infusion we'll see from tax reform. So is there something about lingering -- just with that discussion on your on-time arrivals.

Is there lingering service issues that just give you pause on the top-line outlook for 2018? Or is it more strategic customer changes or a bigger focus on pricing over volume? How do we interpret that guidance?

James Foote -- President and Chief Executive Officer

I think the -- no, there's nothing wrong. Clearly, we need to continue to focus on improving the service product. Again, short answer is, when we had the serious service issues in the middle of the year, we lost some business. If you followed carloads, you can see that we lost some business.

And then later in the year, when it came to intermodal, we demarketed a significant portion of our business. So -- and then we had a major plant shut down in Florida, a fertilizer plant. That is short-haul but a lot of volume. We had some big, significant moves, industrial waste, last year that we don't have this year.

So yes, I believe -- and I speak with the head of our merchandise business unit every day because everybody's talking about we're going to have a 4% GDP run rate for the next four years or whatever it is you're talking about, why isn't the business growing. The underlying base business in our chemicals, in our paperboard, is solid and stable. We need to dig our way out of the -- some of these holes from the last eight, nine months. And, again, as I said earlier, implementation of this business plan hasn't historically maybe -- and again, it was -- implementation of this plan, doing it the Hunter way, was disruptive because he was very aggressive in making the changes, caused business to go elsewhere.

My experience is, in looking around and talking to other people, that business comes back when we smooth things out, and we are focused and working very, very hard to make the improvements in our service. That's just going to take a little time, and then it's going to take a little time for the people to trust in it and come back. But we are seeing some of those customers return already.

Frank Lonegro -- Chief Financial Officer

Brandon, one other thing, just to remind everybody. We're about to cycle the height of the net benchmark. We're probably close to around $100 per ton below where we were in the first quarter of last year. So even though [Inaudible] mutual volumes, you're going to move it at lower RPUs.

So just keep that in mind as you think through things.

Brandon Oglenski --Barclays Capital -- Analyst

OK. I appreciate the feedback. It's been a long call. Thank you.

Operator

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

Justin Long -- Stephens -- Analyst

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

Frank Lonegro -- Chief Financial Officer

Justin, on the CAPEX -- so remember, in the $1.6 billion that Jim gave, you've got about $200 million of Positive Train Control as part of that. So your, what we call core CAPEX is more in the $1.4 billion range. What's driving that reduction is a handful of pretty significant things, obviously a bit of a rolling stock holiday on both engines and freight cars for the foreseeable future. So I think that's sustainable.

Then you look at sidings and technology and things of that nature. That's really going to depend on how Ed and Jim look at the railroad and how we unlock productivity going forward. So, clearly, the rolling stock is going to hold. We're going to see a step-down in Positive Train Control from '18 to '19 and '19 to '20.

We'll give you a lot more color on this as we get into the Investor Day, but at a high level, I think you could probably figure out where we're headed.

Justin Long -- Stephens -- Analyst

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

Frank Lonegro -- Chief Financial Officer

Sure. So on where we are, we are at -- about half of the PTC footprint is operational. We will hit the compliance milestone at the end of 2018, which is that we will be hardware-compliant, and over half of our subdivisions that are requiring PTC will be implemented. So we are on track to do that, and then we will be on track to hit the final milestones in 2020.

Your OPEX question -- obviously, the OPEX has been ramping up since we started the project in 2008. In 2017, within our results, there's about $150 million of operating expense as part of our results. Ultimately, that could ramp up to somewhere in the $200 million to $250 million range into 2021 or 2022 after things roll off of warranty, etc. And remember, there's a big split there between what is cash and what's noncash, about two-thirds of the numbers I'm giving you are on the depreciation line, and then the rest are generally on the MS&O.

Justin Long -- Stephens -- Analyst

OK, great. That's really helpful. Thanks so much for the time.

Operator

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

David Vernon -- Sanford Bernstein -- Analyst

Hey, good afternoon, guys. And thanks for taking the question. Frank, I would ask the CAPEX question in a slightly different way. Two years ago, you signed off on a budget at about $2.7 billion.

This year's $2 billion. Next year's $1.6 billion. How do you get comfortable communicating to the board that we're not spending below sort of renewal CAPEX? I mean, this is a pretty aggressive cut in the capital budget on a 40-year asset. I'm just trying to get a sense for where you think maintenance CAPEX levels really are in the railroad.

And how do you get comfortable you're not getting below that level?

Frank Lonegro -- Chief Financial Officer

Yes, I think a good question. I liked your opening paragraph of your notes you put up [Inaudible]. But anyway, how do we get comfortable with it? It's because we're cutting in the right places and not cutting in the wrong places when we look at what we're doing from the number of track miles of new rail and the amount of ballast that we're putting down, the number of ties that we're putting down, and the bridges that we're working through. I mean, all that in the core CAPEX is largely the same that it has been when we had a $2.7 billion budget.

Remember, when you look at the $2.7 billion budget, about $600 million of that was engines. We also had a couple of hundred million dollars of freight cars in there. We had a big siding budget and a big technology budget as part of that. So when you look at where we're going to be in the next few years, again, the rolling stock, I don't see us needing to invest any significant amount of money.

Now, we may spend money on disturbed power and things like that but we're not going to spend money on new engines or new freight cars in the near term. We have over 20,000 freight cars in storage and -- I don't know, Ed, 800, 850 engines that we do have stored or scrapped.

James Foote -- President and Chief Executive Officer

Almost -- over 900. Nine hundred locomotives that's serviceable, usable, ready-to-go locomotives. And we already put in 100 -- we put 133. That includes the 133 that we [Inaudible] put in this year as we improve the fluidity.

I do not envision us needing to spend any significant money in the next few years, at least in the foreseeable future as far as I'm concerned, on things like expanding intermodal terminals and doing things like that. We can improve productivity in all of our facilities to the point where they should be functional as the way they stand today and actually free up facilities or maybe use for other purposes. And if we can't find another use for them, they're for sale. So in terms of the -- if you look at kind of the last five-year run rate in terms of rail, in terms of turnouts, in terms of curve rail, in terms of ties installed, in terms of ballast, it's -- we are spending the same amount of money that's historically been spent by CSX to make sure they have a safe and reliable network.

When Hunter came in, he had many engineering firms come, as anyone would do. And the reason I know that because my second day on the job, I went to the engineering department. That's the first thing you want to know, what kind of railroad you've got. And this is a very, very well-maintained, not gold-plated physical plant.

And we intend to spend the same amount of money then keep this plant in excellent working shape into the foreseeable future. And -- but we don't need to spend money on the things that have been spent in the past and won't do that unless there is some huge, compelling reason for us to do that.

Ed Harris -- Executive Vice President of Operations

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

James Foote -- President and Chief Executive Officer

And if we need to extend sidings, we'll do it smart, and we'll use rail from other locations to relay that, to use that rail in these other locations. So we'll do it smart but we are not -- in any way, shape, or form not keeping this railroad in a fantastic condition.

David Vernon -- Sanford Bernstein -- Analyst

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

James Foote -- President and Chief Executive Officer

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

David Vernon -- Sanford Bernstein -- Analyst

All right. Thanks for the time.

Operator

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

Fadi Chamoun -- BMO Capital Markets -- Analyst

Yes, good evening and thanks for taking my question. Jim, I just wanted to kind of circle back on the culture a little bit and what's going on with CSX. I mean, a number of the former CSX leaders have left, and now the leadership transitioned to you and you brought on a very capable operator in Ed Harris, and that's all great. I just wonder if you can talk a little bit about the morale of the rank and file.

Do you feel that you are supported? Do you feel that the vision that you've laid out in -- that Hunter laid out and you're continuing on with precision railroading is kind of supported across the organization?

James Foote -- President and Chief Executive Officer

Yes, my belief -- and I've said this from the very beginning, extremely impressed, just like Ed said. Ed's been here a week, not even. And as Ed said, the people here are very impressive. These are great railroaders.

They're hard workers and they want to do a good job, just -- they're looking for a little guidance and they want to be a success. Everybody in life wants to be a success. And this model, the scheduled railroad model, is the way to turn CSX around and make it, as I keep telling everyone, the best-run railroad in North America. So I have a high degree of confidence that the people here are bought-in to what is we're trying to accomplish [Inaudible].

You've got to understand it wasn't that long ago there was a lot of chaos going on around here. As I said, with a lot of changes that were being made in -- for Hunter, who's done what he did in about eight months, what we did at CN in about three years, I can only imagine the pace of change and how chaotic that was for the team here. Since that point in time, everybody has been focused in -- on what it is that needs to be accomplished. Unfortunately, under the circumstances, I have not had enough time to get out into the field.

But Ed is going to go out in the field. I have plans already in place for me to get out and basically visit every location on the railroad and meet with every management person on the company and talk to them and tell them, make sure they understand what it is we're trying to accomplish. And the feedback that I've gotten from the unsolicited emails from just some employees all over the network is that they want to let me know that they support me and they're welcoming me to the company, whether it's mechanical people in Pennsylvania to just people in -- all the way here in the headquarters office. So I'm confident that we're going to be able to get out -- Ed and I are going to be able to get out with the rest of the people, the management team and talk to people over the summer.

Fadi Chamoun -- BMO Capital Markets -- Analyst

OK. Thank you.

Operator

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

Ravi Shanker -- Morgan Stanley -- Analyst

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

Frank Lonegro -- Chief Financial Officer

Ravi, it's Frank. No, we did not. You should expect significant efficiency gains, obviously, in connection with the revenue guidance that Jim gave and the OR expansion guidance that we gave. In terms of inflation, you obviously have a pretty significant reduction in inflation year over year.

Obviously, we've had a real big inflation year in 2017. I think you'll see that step down quite nicely in 2018. The health and welfare bogey that was out there in 2017, we've sort of gotten through that one. The healthcare trust on the union side's back to fully funded.

So we don't have that catch-up like we did in 2017. So we ought to be in better shape in terms of inflation going forward in 2017 -- or 2018, but we did not give specific dollar guidance.

Ravi Shanker -- Morgan Stanley -- Analyst

Got it. So in 2017, you said that you'd do your record year of productivity. Will you do another record year in 2018?

Frank Lonegro -- Chief Financial Officer

Come see us in March.

Ravi Shanker -- Morgan Stanley -- Analyst

Understood. Thank you.

Operator

Our next question comes from Ben Hartford -- excuse me. Our next question will come from Bascome Majors with Susquehanna International.

Bascome Majors -- Susquehanna International -- Analyst

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

Frank Lonegro -- Chief Financial Officer

The incentives in terms of annual cash bonus for management -- and actually, we have some unions on it as well, are 100% aligned with the types of targets we've set in the past and the types of targets that we'll set in the future, specifically operating income and operating ratio. And then as we go forward for multi-year incentives, those will be operating income and free cash flow.

Bascome Majors -- Susquehanna International -- Analyst

Thank you.

Operator

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

Walter Spracklin -- RBC Capital -- Analyst

Thanks very much and good afternoon, everyone. Frank, you talked about inflation, how it was going to step down. Are you indicating that your overall cost or rail inflation is expected to go negative or just step down from the higher rate that's --

Frank Lonegro -- Chief Financial Officer

Less of a hurdle

Walter Spracklin -- RBC Capital -- Analyst

Less of a hurdle, OK, makes sense, OK. And so on that basis -- I know, Jim, you're not guiding on price, but is there any reason why you wouldn't be able to continue to exceed the inflation, the rail inflation that you're seeing in the marketplace with your pricing?

James Foote -- President and Chief Executive Officer

Well, I think as I told you before, I think that the -- again, what I said about the prices earlier in terms of the merchandise, what they were and what they were in the quarter, I can't really talk about future prices but if you kind of look at what we've done and if you go make your own assessment as to what they'll be next year and the year after.

Frank Lonegro -- Chief Financial Officer

Let's go back to Bascome's question one second. On the multi-year trajectory in the incentives, it's operating ratio and free cash flow, not operating income and free cash flow. On the one-year incentives, it is operating income and operating ratio.

Walter Spracklin -- RBC Capital -- Analyst

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

Frank Lonegro -- Chief Financial Officer

So you asked a good and fairly complicated question given the moving parts. Remember a couple of things. Jim mentioned what we're doing on the intermodal side and what we've done in 2017. That's gotta cycle through from a volume perspective.

We did have some plant closures and project completions and things that Jim mentioned. So those have to roll through. Even if you look at export coal and say it's volume-neutral, you do have a fairly significant step-down in the benchmarks. So you have to have all of those things as part of your equation.

When you look at merch and intermodal, there's going to be obviously one level of pricing that we're assuming, but when you cycle a big RPU difference in the export coal, your headline number may not be impressive, but that's part of what we're dealing with in 2018. And then the fuel obviously should -- to Scott's earlier question, should be up next year given what the price of fuel is.

Walter Spracklin -- RBC Capital -- Analyst

OK. And last question, just generally, kind of on guidance in general. I mean, you've obviously, in the past, been quite transparent and very good with providing that guidance. And I've just noticed a lot of repeated questions here as we try to understand some of what you're saying in terms of your outlook here.

Are we just in this kind of interim period before your March Investor Day? And are we going to move back toward a little bit more of clarity with regards to what your 2000 -- or your next year guidance is? Or is this kind of more of -- demonstrative of the new norm in terms of what the -- what disclosure you'll be providing on a go-forward basis?

James Foote -- President and Chief Executive Officer

Specifically as it just relates to price?

Walter Spracklin -- RBC Capital -- Analyst

No, no. Your volume outlook used to delineate on a kind of category-by-category basis. You gave tonnage with regards to export coal. Your earnings guidance was kind of in a more explicit range.

James Foote -- President and Chief Executive Officer

Again, yes. I mean, in terms of price, as I said earlier, I mean, this is the kind of discussion that I've historically done in other lives in the industry. So this is probably the new norm in terms of just price discussion. In terms of everything else, I expect that we will continue to be as transparent as the company has been in the past.

And I think, yes, your conclusion that are we hedging until we get to the investor meeting is accurate. We'll be a little more forthcoming on some of these topics in New York and again be in a position there to answer the questions at that time.

Walter Spracklin -- RBC Capital -- Analyst

OK. That's fantastic. Looking forward to it. Thank you.

Operator

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

Jason Seidl -- Cowen and Company -- Analyst

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

James Foote -- President and Chief Executive Officer

Again, yes, some of it might not come back. Some of it, we might not want back. And some of it is already beginning to return. So it's going to be kind of a mixed bag.

If you assume that when a company makes a decision to go to a different transportation service provider, they probably won't do it for a couple of weeks. Maybe they'll commit for a year. And so that -- as we look our way through this issue, if you assume that the service problems began last year around June, July, that's probably when we saw some of the business beginning to move away. And so I would -- I am optimistic, and we are working with our sales team to have a good understanding there of -- if I need to go and talk to the customers [Inaudible] would change things and things are better, I've told sales guys I'm willing to go out and do that.

I know Ed's willing to go out and meet with customers. I've already met with a lot of customers. They want assurances that scheduled railroad does not mean disruption. And we're able to explain that, and now they want to say, "Show me." And as we've said throughout the call today, that's our No.

1 goal right now, is to show them. And I believe, and history repeats itself, to what my experience has been in the past, when we show people that we're better and we're substantially better than we were and substantially better than the competition that the business will begin to come back. But it's not something you can just flip a switch on. You've got -- in some cases, you've got to win back the trust of the customer, and that's the plan going into '18.

Frank Lonegro -- Chief Financial Officer

Jason, you know that the comps are harder in the first quarter.

Jason Seidl -- Cowen and Company -- Analyst

Yes, no. It sounds like you guys will at least get a chance to win back -- you have a few months to win back that confidence here before some of these maybe year-long commitments renew. A follow-up question, real quick. You guys got back into the Baltimore tunnel project after getting out of it.

Just wondering the thought process behind that.

James Foote -- President and Chief Executive Officer

No. My commitment was -- again, there was a lot of dialogue with the city, the state, the federal representatives, the ports. And, literally, I mean, I was on the job about 2 1/2 weeks and was asked to go sit in the U.S. Senate building and discuss the Baltimore tunnel project with those people.

And what I told them was that we would -- Hunter had said no. We are not taking federal money to double-stack this tunnel. We don't need it, we don't need to double-stack tunnel. And what I told the individuals that I met with was that I would undertake to take my own look at this project and run the numbers again in terms of where we saw growth, where, if we needed to double-stack the tunnel and also look at whether or not there are alternatives to double-stacking the tunnel that meets the needs of the growing port, meet the needs of our customers, and meet the needs of the government officials in terms of moving these public works projects forward.

And we are in the process of working our way through that, have not reached a conclusion. When we reach a conclusion, we'll go -- I will go back personally, and I will go back and meet with those groups and tell them what our decision is. But we haven't completed the work yet to be able to do that.

Jason Seidl -- Cowen and Company -- Analyst

Well, that's good color. I appreciate the time as always, gentlemen.

James Foote -- President and Chief Executive Officer

Thank you very much.

Kevin Boone -- Chief Investor Relations Officer

Operator, that ends the call.

James Foote -- President and Chief Executive Officer

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

Duration: 82 minutes

Call Participants:

Kevin Boone -- Chief Investor Relations Officer

James Foote -- President and Chief Executive Officer

Frank Lonegro -- Chief Financial Officer

Tom Wadewitz -- UBS -- Analyst

Ed Harris -- Executive Vice President of Operations

Brian Ossenbeck -- JP Morgan -- Analyst

Allison Landry -- Credit Suisse -- Analyst

Scott Group -- Wolfe Research -- Analyst

Chris Wetherbee -- Citi Research -- Analyst

Matt Reustle -- Goldman Sachs -- Analyst

Ken Hoaxter -- Merrill Lynch -- Analyst

Brandon Oglenski -- Barclays Capital -- Analyst

Justin Long -- Stephens -- Analyst

David Vernon -- Sanford Bernstein -- Analyst

Fadi Chamoun -- BMO Capital Markets -- Analyst

Ravi Shanker -- Morgan Stanley -- Analyst

Bascome Majors -- Susquehanna International -- Analyst

Walter Spracklin -- RBC Capital -- Analyst

Jason Seidl -- Cowen and Company -- Analyst

More CSX analysis

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