CSX Corp (CSX) 2002 Q1 法說會逐字稿

Good morning and welcome to the CSX earnings conference call. All participants will be in a listen-only mode for the duration of today's call until the question-and-answer portion. If anyone would like to ask a question during today's call, please press star, one, and you will be announced prior to asking your question. At the request of CSX or its corporation, today's call is being recorded. If anyone has any objections, they may disconnect at this time.

I would now like to turn the call over to John Snow, Chairman and CEO of CSX Corporation. Sir, you may begin when ready.

Thank you, very much. And welcome to the conference call to review our first quarter earnings release. With me are Michael Ward and Paul Goodwin, Mike Giftos, Mark Aron and Andy Fogarty. By now, I hope you've had a chance to see the numbers, which were put out earlier this morning, around 9:30 or so. They indicate that while we're continuing to face a very weak economy, we made some progress in, on a number of funds, including operating income, which was up at about the Rail group and the Intermodal group, despite some fairly heavy head winds on the revenue side, with revenue down by some three percent and carload's off even more.

Strong performance on the cost side offset the revenue weakness, which is a real tribute to Mike Ward and the whole management team at Rail and Intermodal. There's just no doubt about the fact that the weak economy hit us and hit us hard in the first quarter.

But we are beginning to see some signs of a recovery, which Mike Giftos will address in his comment in a few moments.

As the economy comes back, we're looking for much, much stronger results for the rest of the year. Of critical importance, and really the foundation for everything else is the fact that the railroad is running well. Making strong progress on safety, on service levels, and costs.

And with the railroad running fluidly, we're able to manage with fewer resources. And you saw the headcount number down significantly, the locomotives down and the cars in service down. As Al Crown, the Chief Operating Officer at CSX, he likes to say "Better is cheaper."

So I think we're well positioned for the second quarter and beyond. I was particularly pleased to see yields continue to go the right way and the fact that operating ratio improved even with the very significant down turn in revenues.

It's clear that the integration problems, which plagued us for so long, are now well behind us and we're running as well or better than we were in the pre-Conrail days.

The basic strategy, the strategy you've heard Mike Ward talk about many times, of focusing on running the best possible railroad with close attention to performance against team efforts. That strategy is paying real dividends.

I'm also pleased to see the non-rail units also performing well. They turned in good results and we're looking forward to the rest of the year with a good measure of optimism. Confident that the company will produce much better results as the economy returns.

I now will ask Paul Goodwin to review the numbers in some detail. Following that, Michael Ward will talk about the railroad and rail operations and developments there, followed by Mike Giftos, with a look at our markets. Paul?

Thank you, John. My first chart is your chart number three and it calls for just a bit of housekeeping. I hope you'd read this disclaimer at your leisure, although it's certainly not a leisurely read. But it basically says our viewpoints about the future may not hold as the future unfolds. So, we issue this cautionary comment that you stay on top of the dynamic environment because we may not be on hand to update changes in our assumptions and changes in the environment.

The next chart shows our consolidated results for the first quarter. And down at the bottom of the chart you have two earnings per share numbers. Our earnings per share from continuing business operations for the quarter are 32 cents, up 22 cents from last year. After the cumulative effect of an accounting change, they were 12 cents -- a 20-cent differential. That reflects the implementation of financial accounting standard 142, which calls for the write off of indefinite , intangible assets.

Now, we announced earlier that intangible assets that we acquired in the late 80s and early 90s for engineering design and permit acquisition in Yukon Pacific Corporation, were written off in accordance with this accounting change.

But turning to the continuing business activities, there were three principle areas that drove the improved results. John mentioned the pickup and operation income -- $23 million higher than last year, despite a $61 million revenue decline. Expense takeout more than exceeded the revenue shortfall from same period last year. Other income was up nicely, driven, principally by a $36 million gain on a property sale.

Realty activities for the quarter total 43 million. And last year, in the second quarter, when they also totaled 43 million, driven by a large property sale. I explained that while these realty activities are continuing, they do fluctuate because we have a lumpiness, if you will, when large property gains are recorded. There will be quarters where this activity is in the low single digits, but on average, realty activity should range between 12 and $20 million per quarter.

Interest expense also improved. We had a benefit of $19 million from first quarter of last year. One-third of that reflects the lower interest costs resulting from our $460 million one- percent convertible bond issue in October of last year. About a third represents swapping fixed rate obligations into a variable rate payment and the remainder reflects just the decline in existing variable rate interest charges.

Turning to the next slide, surface transportation revenue. You can see that loadings in the quarter, traffic at surface transportation in the quarter was down some 4.2 percent. Revenue was down $54 million, or three percent, producing an increase in average revenue per load of 1.2 percent, the difference.

Coal declines accounted for some 60 percent of that revenue reduction, about $33 million, as last year's inventory build up wasn't with us, and in fact, the utilities declined resulting from the very mild weather we've been having, which we've been having.

The soft economy continued to affect the merchandise markets. Almost all the markets were down and collectively revenue declined in merchandise some $22 million. But we're encouraged by some pick-ups that we've seen towards the end of the quarter. In fact, automotive traffic and domestic Intermodal improved for the quarter as a whole.

And we're greatly encouraged that our customers are willing to pay for the value that they are receiving as our pricing program continues. And Mike Giftos will give you more on this top line development a little later.

Turning to surface transportation expense, costs came out to the tune of $66 million in the first quarter. The fuel price portion of that was the largest contributor at $40 million. Labor costs declined as the headcount was reduced by more than 2,600 people. Labor expense came down $20 million. And that all came out of the wage category as salaries and compensation was lowered, $28 million offsetting 8 million of inflation.

In the fringe cost area, increases in health and welfare about canceled out the fringe reduction from the lower employment level.

Other categories of expenses tended to offset. Materials, supplies and other was up as insurance recoveries and a tax refund last year did not recur. And these increases were offset by continuing cost takeout in the equipment rents area as better utilization drove those expenses -- those expenses lower.

Our operating ratio improved one percent to 88.9 percent. Absent the price and cost improvements that we've talked about -- a 4.2 percent volume decline traffic loss on its own in a high cost -- high fixed cost business such as ours -- would normally drive the operating ratio up a point-and-a-half to two-and-a-half points. So, we're gratified by the decline in operating ratio.

The next chart lays out our quarterly sequence of operating results at service transportation. And it starts with the second quarter of 2000, the in operating income, if you will. In the fourth quarter of that year -- the fourth quarter of 2000, the industrial recession hit us and traffic levels declined in a quarter that's normally seasonally quite strong. The quarter by quarter comparisons show generally improving operating ratio with seasonal interruptions for the weakness normally experienced in the first quarter.

The first quarter of this year, you will see traffic levels at 1698 are down from fourth quarter. That reflects seasonal declines in coal of 42,000 carloads and 28,000 intermodal loads -- what we would expect as a result of the first quarter seasonal weakness. But merchandise markets were flat to up, compared to the fourth quarter, which gives us some encouragement that the sixth quarter of recession is the last and that better traffic levels are coming in second quarter.

The next chart shifts from surface transportation to marine services. And, as you can see, the residual Sea-Land companies contributed three million more operating income this first quarter than last. At World Terminals, improvements -- slight improvements showed up in Hong Kong and our China business, which account for 80 plus percent of World Terminal's earnings. The decline in operating income reflects startup costs in the Caribbean and some shift of trans-shipment volumes at one of our terminals in the Caribbean -- Santa Domingo.

At CSX Lines, our domestic shipping company, market share has been improving as the 90 plus percent on-time service performance measured to the minute, I might add, has been helping us, particularly in Hawaii.

The Pacific is the principal story here. That's where the revenue strength has showed up as Hawaii's gains outshine a bit of a down tick in Alaska.

In Puerto Rico, we talked a good bit about Puerto Rico in prior quarters because of the weakness there. And following the fourth quarter of profitability in that trade, first quarter we narrowed losses somewhat from last year and are encouraged looking forward in the Puerto Rican trade, as will complete later this month. Its purchase of or shipping assets in that trade and should bring some stability to it.

Looking forward, looking forward for CSX as a whole, I think we see revenue growth from three sources. The economy, also from conversions from the highway particularly with our expanded network into the northeast, and third, the continued yield from our pricing program. We also look forward to wider margins as improved traffic level works on the profit leverage that's available to accompany with our cost structure.

In addition, continued cost reduction programs, which have gotten into high gear, should continue to drive the costs out.

So this should lead to positive cash flow and this year we're expecting positive cash flow in the order of 150 to $200 million and that will be an important step in the continuing improvement of the financial strength of our company.

With that, I'll turn it over to Mike Ward.

Thank you, Paul.

First, just a quick overview. As John and Paul have stated, we did have a pretty nice improvement, despite the economy and clearly the coal has been a big impact to us in these first quarter heating degree days. We're down about 14 percent. Our carloads are down almost 11 percent and Mike will go into that with some detail during his presentation. The core to that had strong impact itself on us.

The automotive is actually a little bit stronger than we expected. Slightly up on a year-to-year basis and we had actually anticipated with the zero percent financing that was offered in the fourth quarter of last year, that that would be down on a year-to-year basis. So we were somewhat encouraged by that strength in automotive.

On the service side, we continue to improve. As you know, we continue to set the goals for ourselves on our 18 key measures.

In the first quarter, we made 10 of our 16 goals. We were very close on four of those 16 and I'd say we missed two of the 16. If we compare to the fourth quarter of 2001, as we continue to improve service, 15 of the 16 measures that relate to service were equal to or better than the fourth quarter of last year. So, we continue to show continual improvement in these service measures.

On the base productivity, we saw some good improvements. Crew productivity was up quite a bit. Our locomotive efficiency improved. Car hire and locomotive leases were improved. And, as John mentioned, our headcount was reduced fairly dramatically on a year to year basis -- about 2,600, down seven-and-a-half percent versus the first quarter of '01. You all may recall that we had set a target for ourselves to reduce 700 or 800 during the course of this year. That's actually about 1,200 improvement versus the fourth quarter of this year. And I think we'd expect that we'd see some of those heads coming back on as the economy rebounds in the second half of the year and the normal heavy maintenance season of the summer comes on. But we took advantage of the lesser traffic to really aggressively reduce heads in this first quarter.

Finally, on the safety side, we made substantial improvement in safety -- over a 30 percent improvement in both personal injury and our train accident rates. And I would like to take just one moment to mention the Amtrak in derailment in north Florida, which occurred last week. It's a very regrettable accident. We are working very closely and fully cooperating with the National Transportation Safety Board in its investigation of the -- this derailment.

We can only make some limited comments. The rules of engagement with the NTSB is that they are the spokesmen about these type incidents. We can make some limited comments. One, this was a well-maintained line. It was operating in dry conditions with fairly new rail, ties and . It was inspected by a CSX roadmaster the day of the derailment and it had been inspected by an FRA inspector as part of a routine inspection process within 10 days of this derailment and he took no exceptions to it. So, it was a good piece of track. It's obviously a complicated issue to determine the cause of this and, as the fact become known, the NTSB will reveal those.

If we go to the next slide and we talk about our first quarter earnings. It's already been noted that the loads were down 4.2 percent, revenue down three. Of the $54 million decline in revenue, 32 of that was attributable to coal. And obviously that spread there is both our valued pricing and our mix and Mike will give us some good detail on that in a moment.

On the expense side, you'll notice our cost of service was down 87 million, or 11.6 percent. And I'd like to take just a moment to maybe detail a few of the elements of that $87 million cost reduction.

You'll note our fuel expense overall was down $50 million on a year-to-year basis. Forty of that was fuel price itself. So we had a $40 million benefit of lower fuel prices in this first quarter. The remaining $10 million, which will get us to the total 50, was fairly evenly split between the impact of the level of we saw and the improved deficiency we saw in the utilization of our locomotives. So roughly 40 million five million of efficiency and five million of volume of related aspects.

On the labor side, we actually had labor productivity driven by that headcount reduction of about $42 million of gross labor productivity savings, which was offset by about $21 million worth of wage inflation and health and welfare inflation.

So even after the impact of health and welfare and inflation, we had a net productivity improvement of $21 million, for 42 gross, less the $21 million of inflation.

We saved about $12 million from the impact of having less carloads to handle. So that was one of the benefits.

on car hire and locomotive leases, we reduced our expenses on a year-to-year basis. About $8 million as we continued the better is cheaper method of running our railroad.

The next major item is our operation support, which you'll note is about $16 million unfavorable on a year-to-year basis, which closely matches, actually exactly matches the change in material supply and other noted in our flash.

The primary driver of that $16 million difference is an insurance recovery that we had in the first quarter of 2001, for about $10 million. This insurance recovery was noted in our annual report at $40 million for the year. It will be approximately, give or take $10 million per quarter throughout the course of this year. What we will do as we go forward is what we did here in the first quarter, we will find productivity improvements which will offset the impact of this year-to-year difference due to the favorable insurance recoveries we made in the year 2001.

The other six million related largely to two events. One was the derailment we had in Rochester, New York. And the other, we had a couple of settlements of some prior year's personal injuries that drove that $6 million of difference. the G&A on system, we were unfavorable $5 million year to year. Two primary drivers on that. One is increased bad debt reserves. We took those up about $4 million, recognizing this tough economy was likely to impact some of our customers and we wanted to be conservative on our bad debt reserves. And we did have some property tax increases on a year to year basis.

Overall, expense is down $66 million, a 4.1 percent improvement, with operating income coming at 12 million improved or 6.6 percent. And, as Paul noted, a one point improvement in our operating ratio. If we look at a few of our key service measures on the next slide -- and I will not go through each one of these on our Web site. We do detail all 18 of our key service and safety measures and you can review those at your leisure.

I will note a few of them. Cars on line -- we continue to make improvements. It was a five- percent improvement on a year to year basis. And on some of the measures that may be a little bit more important to our customers, velocity improved eight percent on a year to year basis and average 23 miles per hour. Terminal dwell under 24 hours for a 12 percent year to year improvement. Our on-time originations, which is critical to get the trains out on times, over 91 percent overall and an 8.2 percent improvement. And on-time destination arrivals, which is a very, very important measure to our customers, we reached 81 percent for a 12-and-a-half improvement. So, we continue, on all of our key service measures, the eight-quarter pattern we've had of increasing the service we're providing to our customers, which supports our value, pricing and our modal conversion initiatives.

If we look at the next slide, on the safety side, you'll see both the goals we have set for ourselves for the year as well as our improvements that we made in the first quarter. We had set a goal for ourselves of a 30 percent improvement in personal injuries, after a 21 percent improvement last year. And, in the first quarter, we came in at about 32 percent improved. On FRA derailments, we improved 39 percent last year. Set a target of percent on top of that for this year and achieved 31 percent in the first quarter.

Finally, if we just do a brief look at the second quarter outlook, which is the next slide. Year over year, we think the revenue comparisons will improve. Mike's going to discuss where we see the economy at this point. We think there's some turning that's going on. And we obviously will continue our valued pricing and conversions.

The other thing that's worthy of note, at this point, we have about 20,000 cars parked. What we've been doing as the economy has been down, rather than letting those assets clog up our railroad and deteriorate our service, we've actually parked the cars. We have 20,000 parked now so as the economy rebounds, it'll simply be a matter of pulling those cars out of storage and re-deploying them as the economy rebounds.

Our productivity targets, we will achieve in the second quarter. And three major components there. One is the base efficiency of running a better service railroad. Better is cheaper. The second, we have two initiatives we have described before -- one is our auxiliary power unit. We will be putting those on close to 800 units this year. Each one of those will allow us to save roughly $10,000 a year in fuel savings alone as well as reduce some noise and pollution emission. So we're aggressively pursuing those in our own pace to put the 800 in for the year.

And finally on the, excuse me, the remote control locomotives are targeted to have 100 in place by year-end. We now have 13 deployed. We're making sure we do this in a careful manner to implement this safer means of switching cars in our yards and terminals. And we're making good progress and having good cooperation from the UTU in this implementation.

The two key sensitivities will probably not surprise you. One is where is the economy going? And then finally, where are fuel prices? At this point, they are, basically we hedged last year to about half of our fuel purchases 78 cents per gallon. That's where the market is at this point is 78 cents a gallon. So our anticipation is that's where it is now. Obviously events can change which may impact that.

With that, I'll turn it over to Mike Giftos and let him display for you some of the commercial activities.

Good morning and thank you, Michael.

First quarter to experience weak economy as John and Al and Mike have all indicated. And our revenue comparison year-over-year was off some $54 million, or three percent. However, as you can see on slide number two, page 18, we continue to enjoy some yield improvement as carloads were down 4.2 percent, revenue declined three percent, for an overall improvement in revenue per car.

The yield improvement story, frankly, is somewhat understated because of the effects of the loss of the fuel surcharge this quarter. That accounted for some $10 million of revenue last year that we didn't have in the first quarter this year. And some relatively minor affects because of two successive quarters of a decline in the RCA. .

Additionally, this slide reflects all of our volume, including our intermodal volume and, as I've indicated to you on several occasions, the intermodal business really doesn't represent the strong yield improvement opportunity. It's intensively competitive, there's substantial excess truck capacity out there and the yields in the business remain balanced.

Let's look at the modal at the intermodal business in a little more detail on the next slide. In spite of the -- a decline in revenue of about three percent on flat volume, our operating income in the intermodal area was up six percent or $1 million. We really have a story of two very, very different markets. The international business in the first quarter was quite weak. The volume was down 6.5 percent. And revenue was down 10.6 percent. This was largely a reflection of the economy as well as, as I've explained in prior quarters, our international business in the past included some revenue attributable to movements on the railroads that we lost in April of last year. That business will recycle itself. And that negative quarter over quarter comparison should not exist as we move forward in exceeding quarters.

In contrast to the weakness in the international business, our domestic business we quite strong, with volumes up nine percent year over year and revenues up six percent year over year as we continue to enjoy some modal conversions that I've explained in prior quarters. If we look at the remainder of our rail business on the next slide, you can see an even stronger yield story, as carloads in the basic rail transportation commodity areas were down 5.8 percent and revenues were down three percent, reflecting our overall improvement in revenue per car up three percent.

Let's look specifically at some of those commodity areas. First of all, coal. We all know that the coal story is a story of a very, very difficult year over year comparison. We ended last year's first quarter with very, very low stockpiles, very, very high gas prices and a very cold winter. This year we ended the first quarter with excessively high stockpiles coming out of a mild winter and, frankly, a mild summer. Gas prices had dropped considerably and stockpiles were very, very high. That's reflected in the overall decline in carloads that you see of some 10.8 percent. We are, however, encouraged by the strong yield improvement as revenue went down some 7.7 percent.

That's a function of a couple of things. Obviously, our price -- focus on price increases continue. And we enjoyed average price increases of high single digits in the first quarter of this year on the coal contracts we renewed. And that excludes the effect of the coal business that's the subject of and litigation. We also enjoyed some substantial modal conversions in the first quarter of this year, generating $16 million of revenue in the first quarter, which we think will annualize to some $64 million as we're able to take truck-to-river movements and convert those to rail-to-river movements.

In addition, we're able to capture some business. Some business that previously moved to a LTV facility that shut down and shifted that to our Fairfield, Alabama facility. This placing imported that moved by barge.

So we're encouraged by certain aspects of our coal business. Certainly the yield story remains positive. The modal conversion story remains positive. And as we move forward in the year and the later part of the year, we expect our quarter-over-quarter volume comparisons to narrow.

If we look at our merchandise business, which is reflected on the next slide, we again see the affects of the economy with a decline in carloads to some 3.9 percent, almost four percent. But a less decline in revenue of two and a half percent, reflecting our continued focus on yield improvement.

In the first quarter of this year, we re-priced business that resulted in price increases of $30 million, averaging approximately four percent on those contracts.

Our focus on modal conversion continues. In the first quarter of this year we generated almost $15 million of revenue in the first quarter from highway conversions which will have an annualized impact or $62 million.

You will also notice in the merchandise commodity groups, a new commodity we refer to it as our merging markets. Frankly we were a little challenged on the . But what this reflects is the focus of our management group on certain types of business that are characterized by project orientation. These are markets that require an intense focus on particular projects, aggregates, markets, certain new projects that we're handling and we've separated those for management purposes. And your flash report indicates this and the numbers have been restated to reflect that reclassification.

Looking forward on the next slide. I will use my crystal ball to try to anticipate how we see our businesses going forward and there is some encouraging signs, as John indicated.

And, well let's first of all look at the left-hand column on this slide. Those categories that will continue to remain challenging as we move forward to the foreseeable future.

Our agriculture business, our AG products business are challenged. That's largely a function of a decline. And our export grain business. The coal business for the next couple of quarters will continue to be challenged as I've indicated in the, before, because of the high clouds that have built up and we certainly could use some help from a very, very warm summer.

If we move to the category, frankly, in this category there are -- there are some signs that I could be optimistic and think that even the flat is an understatement of how they might perform, but we're being cautious in this categorization. The paper business is, in CSX, is really two markets. It's many markets, but they fall into two categories. On building products side, that's been strong and will remain strong. The paper business, frankly, isn't showing the amount of strength we'd like to see at this -- at this time. But there are encouraging signs there, as well.

Minerals business -- we've had strength in roofing granules and sand offsetting weakness in some of the ores and clay. Those are commodity groupings in the minerals that largely are going to the paper business. Our emerging market business is expected to be flat. That's project oriented and certain projects will be starting up and others will be tailing off. And that's why we have that in the flat category.

Our intermodal business is showing some very interesting signs of a recent pickup, particularly on the international side. And we're encouraged by that. What we don't know is whether and to what extent the volume pickups may reflect the anticipation of a West Coast long shore strike. And that's why we have this cautiously in the flat category. But our domestic business continues to grow as we continue to take trucks off the highway.

On the favorable side, our chemical business -- in the beginning of the year, we had some very unfavorable year over year comparisons. But recently, in certain key commodity areas in this group, we're seeing some very, very favorable year or year comparisons, particularly in plastics and textile chemicals, which are very encouraging signs. Our phosphate and fertilizer business remains quite strong. Our Bone Valley, which is our south Florida phosphate production facilities are operating at 80 -- at 96 percent of capacity. And we're enjoying a strong export movement as a result of that.

The food and consumer area is quite strong and we're looking for continued modal conversion in that area, which will drive favorable comparisons to the quarters ahead. And, finally, the metal business. We're quite encouraged about that. If we look at the first quarter of this year, the metals business, as a whole -- the carloads were off 4.9 percent, with a two-percent decline in volume. But what was going on in that business in the first quarter is we were successful in converting a substantial portion of the outbound product from truck to rail.

The inbound product, the more traditional products that we handled I the past, were quite weak. We're seeing some strengthening in the steel orders. Factory utilization is up. Scrap prices are up and raw steel costs are increasing, as well. Accordingly, we expect the inbound products to increase and with our continued growth on the outbound products, we're encouraging that -- encouraged that our metals business could be an attractive story as we move forward through the remainder of the year.

So in conclusion, obviously service is the key and we continue to focus on service. It continues to improve. We continue our intense focus in taking trucks off the highway with our modal conversion efforts. We will continue our sustained focus on yield improvement and we're waiting for the economy to recover.

Prior to preparing for this day, I looked at our 2000 volumes. First quarter 2000 and how those compared with this year. It was rather revealing because the first quarter of 2000 is when many people recognized the industrial recession. The industrial decline and the economy really began. We went through 15 consecutive quarters of declines in industrial production with only modest increases in the last 15 consecutive months, excuse me. With only modest increases in the last two months.

But if we compare our quarter one of 2002 with our quarter one of 2000, our carloads were down some 8.1 percent. Our revenue was down three percent, reflecting the two-year focus on yield improvement.

But as the economy begins to recover, as we begin to recapture a portion of that eight percent decline in volume, and as we continue our focus on modal conversion and yield improvement, we certainly have the recipe for leveraging our fixed cost network and contributing substantially to the bottom line improvement in both operating income and free cash flow.

And I look forward to answering the questions you may have.

Michael, we thank you and with that, we conclude our formal presentations and will open the floor for questions.

Thank you. Once again, to ask a question, please press star-one on your touch tone phone. You will be announced prior to asking your question. To withdraw your question, press star-two. Once again, to ask a question, please press star-one.

And your first question comes from from J.P. Morgan.

Jill?

Ma'am, your line is open.

Jill, can you hear us?

We'll take the next question and try her once again after. Your next question comes from from Morgan Stanley.

Hi, guys. Just had a question about cost because that really is the only thing that was a little bit different than my forecast going into the quarter. And it seems to me these three cost items at the railroad that were a little bit higher than the run rate we saw last year, despite the fact that your volumes and revenues are down.

And Mike, you touched on some of it, but you kind of broke it down differently. In terms, you talked about an accident and some accrual rates, so maybe that explains it. But the materials and supplies Conrail rents and inland transportation all had a pretty descent step up considering that we had down volume. I just wondered if maybe you could explain or just to walk us through some of that so we can get a better feel for the run rate for the rest of the year.

the materials another, , as I indicated there is the $40 million we noted in our annual report -- about 10 million a quarter. That was probably the primarily driver. We did have, as well, that Rochester derailment and we had a couple of ...

How much did that derailment cost you?

It was about $3 million.

OK.

And then, we had some prior years personal injuries that came in a little higher than we reserved, which made up most of the bulk of that. When the Conrail rents and, maybe, Paul, you could address that, if you would. I think you're a little more familiar with the Conrail issue.

Yeah. The -- in Conrail, they had an accident in the first quarter, which we reflected. And there was also an Indiana state income tax adjustment as a result of audit. Those are -- those are, basically, the things that affected the quarter.

Paul, do you know about how much those would be? Because I assume I can strip those out for the rest of the year.

It's five million in total -- the sum of the two.

OK.

And on the inland transportation -- that's primarily the transfer price between intermodal and CSXT. And, basically, flat on a year to year basis.

OK. And if I could ask one other question. It was just -- and forgive me if I missed this. I had to cut out for just of the call. But intermodal yields went down and I'm not sure if that was -- did a mix change or fuel surcharge going away or I'll -- just one of you -- maybe Mike could just address -- either one Mike could address the yield drop intermodal.

Yeah. As I indicated -- as I indicated earlier, , the intermodal decline in yields is a function of a couple of things. First of all, that's intensely competitive business. As we all know, there are lots of excess class eight trucks on the highway. And some of the business we picked up -- some of the shorter haul business is moving at lower yields.

Secondly, as I've indicated in prior quarters, a year ago we lost a piece of business that came from the West Coast on our western network to one of the other railroads. That was -- that business, though, the cars themselves, we enjoyed the revenue from the eastern portion of that move, as it's a transcontinental move. So, the carload count did not change, but the revenue declined because of the western revenue and that had -- that had about a $12 million impact on revenue in this second -- in the first quarter.

The second quarter of this year, that will recycle so that negative quarter over quarter comparison will not continue as we go forward. And, finally, the fuel surcharge was in effect for intermodal business last year. That will, by the way, be going back into effect this year on a few days ago. Because the trigger for the intermodal fuel surcharge, not the rail surcharge, was triggered and at about a 1.5- percent increase will go into effect starting on April 15 of this year. We did have the fuel surcharge in the first quarter of last year.

So it was a combination of the fuel surcharge, the western revenue, and frankly, competitive factors and those business areas that affected the yield in the intermodal area.

Great. Thanks so much. Appreciate it.

Your next question comes from from Salomon Smith Barney.

Good morning, gentlemen.

Morning.

I was wondering if either Mike or John could address where we might be relative to the ongoing contract negotiations because obviously you all had made some real productivity improvements. But as seems to be the theme, healthcare costs continue to be quite difficult to contain and obviously those that are an important issue in the current round. I'm just trying to get some sense of when you think the PEB might be in force or whether we can come to some kind of a resolution across the table sometime later this year.

, I think that whole question is still very much up in the air. We've made some good progress, you know, with some unions on the all-important issue of cost sharing on healthcare. We and the other are very concerned about the explosion in healthcare costs and are convinced that the only way to really get containment of healthcare costs is to give the user of the healthcare services a bigger stake in the game.

And that's essentially what we've done in several cases here, as you know. We want to generalize that and we want to make that applicable to the, to the, our employee base as a whole. As we do that, I think we'll be able to reign in this demon of exploding healthcare costs.

But I think it's too early to say really what timetable we're on here. We are hopeful that this all can be resolved later this year. But I think it, I would be going way out on a limb if I made any real forecast at this time. Mike, would you want to add anything to that?

No. I mean, we continue our negotiations and we're, none of the unions at this point are asking to be released from the negotiations and the mediations. We are continuing the dialogues and hopeful we'll get this resolved.

But that health and welfare is a sticky issue, as you know, .

Right. And then just one other question and this would be, I guess, for Mike Giftos. Could you give us some sense, you talked and you were very helpful in elaborating, you know, what degree of pricing you saw. Could you give us some sense, as you look the latter three quarters of this year -- how much business in those remaining three quarters and how it might break out. Because, obviously, what you've repriced in first quarter may only represent part of the -- of the total book of business that rolls over. Could you give us some sense of how much, in their coal and merchandise, has actually rolled over in 1Q. And then, perhaps, as you look at the next three quarters of 2002, how much addressable business is remaining the current calendar year, in those two categories -- coal and then merchandise?

Well, I can -- I can give you a directional sense of that, . I don't have those precise numbers in front of me. But you're quite correct. A lot of the price increase we see is the rollover effect from price increases that were achieved last year that are recognized this year in the quarter over quarter comparisons. But we do have a sizable portion of our -- of our merchandise business that's available for repricing in the remaining three quarters of this year.

As I have indicated at prior meetings, out of our $3.5 billion of revenue, in the merchandise area -- this year, roughly 2.3 will be available for repricing. The other billion dollars is roughly under a contract that has term that will not make it available for repricing. And that's available almost equally divided through the four quarters of this year. In the coal business, it tends to have contracts that are up for repricing in the latter part of the year. Over the -- over the course of this year we'll have a substantial volume of those contracts available for repricing throughout the remainder of this year, in the vicinity of about $400 million.

Mike, do you have any sense of -- on the coal business, has just a small part of that repriced, relative to this year? Is it mainly the effects from last year's renewal? Do you have any sense of how much got repriced of that 400 million in 1Q?

Yes. Yes, I do. In the coal business, the first quarter impact from price is $10 million.

OK. But do you know what that represents of the 400 million in contract to be repriced?

I don't have that -- I don't have that specific revenue number with me today.

All right. Very good. Thank you.

Your next question come from from CSFB.

Hi. It's and . How are you guys?

Good, .

Could you talk a little bit about the capital side of things, with regards to revenue and yield comparisons or yield being a little bit better. Maybe it's for Mike Ward. Maybe for John Snow. Could you talk about how this railroad will use incrementally less capital going forward, if that will, indeed be the case, vis-à-vis how you're earning revenue?

You mean, as the economy comes back, , how do we see the ...

Well, or maybe it was how you look at it on the unit basis, going forward, I mean. Can you manage this company on incremental business with incrementally less capital? If so, how do you do it? If not, why not?

Well, this, you know, the nature of cost structure of a railroad is very heavily fixed costs. So the capital is really already out there. And as the economy comes back, we'll be shredding additional revenue and additional volume over a capital base that's already basically in place. Drawing back into use locomotives we already own that are sitting idle in some cases. The 20,000 cars that Michael talked about that are sitting idle. As that comes back, as the economy comes back, and we re-employee those resources, we will be moving down our cost functions.

That is, we will be, since we're a declining cost business, we'll have lower per unit costs. And those lower per unit costs will definitely help yield and help returns. So, we will be getting better utilization of our capital because a lot of our capital today, as Michael said, is sitting idle. So I think the basic answer is a very strong affirmative yes. We'll get better utilization of our capital as the economy returns.

But I think both Michael Ward and maybe Michael Giftos want to add a thought to that.

Yeah. The one that I'd like to add is obviously, Gary, that first, let's call first couple of waves of growth here. We could just re-deploy that as assets and as we continue to improve, we even create more of those.

But the other element of it is a lot of trains today -- as you know, we run a scheduled merchandise and intermodal network, and we're probably running in the low 60s on their capacity utilization at this point. So as the economy rebounds, we can add those cars to those existing trains and not have to deploy more crew members or more locomotives to basically move that volume.

So I think the leverage we'll get as the economy rebounds here in the second half will be very strong and lead to some nice returns on those incremental revenues.

I don't have anything to add to what John and Michael have said, but I would like to just correct a number. I previously had stated and I previously made with respect to the coal contracts because somebody did hand me those numbers.

As I indicated, the first quarter impact from price increases in our coal business was $10 million. As we re-priced $90 million worth of our domestic coal business, enjoying attractive yield improvements. We'll have about $140 million of business, additional business, on the domestic side that we can re-price this year. Almost all of it in the last quarter of the year.

OK. And Mike, could I follow up with you and ask you about General Motors, if there's anything that's worth adding?

Well, General Motors discussions, obviously, continue. As I've indicated in the past, we've -- we offer General Motors a very, very attractive product. We think that our service continues to be outstanding. We're meeting their service objectives. And the pricing package that we've offered General Motors, we believe is very fair.

, let me just add one further thought on your first question. The first quarter, reflected our operating with low demand levels. Right? Which means we were operating on a higher portion of our cost functions than we will be as demand expands. So, part of what we had to overcome in the first quarter was not only normal inflation that had to be offset. But the fact that our actual per unit cost, everything else the same, were going up because we were operating at a higher, inherent per unit cost since we're a decline cost industry and we were on the higher end of that cost curve.

So, the first quarter had not only the problems of inflationary costs, but an inherent higher per unit cost. As the economy comes back and demand expands, we will be able to realize lower per unit costs because of the fundamental nature of our cost functions, moving down the cost curve.

Thank you.

Your next question comes from from JP Morgan. Ms. , your line is open. Ms. , you might want to check the mute function on your phone. One moment. Ms. , your line is open.

Maybe we'd better move on.

OK. One moment. Your next question comes from from Deutsche Bank Securities.

Hey. Thank you. Good morning.

Good morning, .

Mike Ward, in looking at your service metrics, you said, you know, that you had done 10 out of the 16. You had achieved four. You were close. A couple that you missed. I'm just curious, what else do you think needs to be done in your organization to consistently hit all of those metrics?

And do you worry that some of the improvement that you've seen is because of the lower demand environment or are you worried at all that bottlenecks will materialize or service disruptions will creep back into your system if we get back into a healthy economic situation?

OK. A couple of questions there, but on the missing, or being very close on a couple of them, I don't find that troublesome at all, because what we do is we're actually trying to set stretched goals here to really get the organization to try to take it to new levels.

So missing two of them, and the two we did miss were industrial switching excellence, which is the local service hitting the customer's windows, and we came in at 89 percent versus our goal of 91. And on , we had a goal of 21.9 and we had 23.6.

So, you know, clearly we have to focus on those, but in general what we're doing is setting stretched targets here. So if we're just barely off or making them, I think that really doesn't trouble me because we continue to show continual improvement for the customers.

On your issue, though, of -- and we will continue to set those goals higher and as you get better, it obviously gets a little bit tougher to reach these higher and higher standards. So I'm not troubled by that at all. Al Crown and Jim Fallon on the team are very focused on delivering for our customers.

As the economy rebounds, I'm not particularly concerned that it will impact our service levels. Right now, our terminals are very fluid and, as I indicated, a lot of the trains we're running now really are under-utilized, so it's just a matter of adding a few more cars to each train as the economy rebounds. So I don't really think it'll create a lot of negative impacts to us.

You know, maybe as a couple of years go by and the traffic grows pretty dramatically, you're going to reach some step functions there. But at any time during the next year, year and a half, I think the capacity we have out there easily handles what the business without impacting at all what the service levels are.

OK. Very good. And, next question and then I'll turn it over. On the truckload conversion side, is it possible for you to quantify at all, you know, the number of truckload conversion opportunities you saw during the quarter? And, you know, what is it that you ultimately think you can, you know, you can do, number-wise, truckload conversion opportunities back onto rail traffic?

Yes. I can. We track our opportunities very, very carefully. We've instituted a new tracking system that ourselves and marketing folks update virtually weekly. In fact, we identified in the first quarter of this year, $182 million worth of opportunities that are in the log that we're currently pursuing. And that number was probably updated today and is even higher. In the first quarter, we won $15 million that was recognized in the first quarter, with an annual impact of $62 million.

And we're confident that we're going to get some 400,000 truckloads off the -- off the highway this year. If you ask me to quantify how much this can be, I don't know. But I think it's, obviously, a key thing that we and all are focusing on. And we remain real optimistic that the product we have to offer will be attractive to our customers as we continue to take trucks off the highway.

OK. Thank you for your time.

You're next question from from Bear Stearns.

Yes. Good morning. Just a couple questions on expense line items, revisiting a couple of these things. With the labor and fringe line item, you really did a great job of being aggressive taking out employees and reducing the headcount number. But if you look at the per employee cost, it rose seven percent for -- in looking at the railroad, year or year. And my sense was that you had a pretty significant increase in that same item in fourth quarter, with 7.4 percent.

But fourth quarter seemed to be some incentives that were impacting it. I'm wondering, if we look, going forward, is this the number that continues in second quarter or third quarter that you have that significant increase on a per employee basis? Or is there something else on the comp that's affecting it? And also, if you can kind of break down how much of that -- is that all benefits or is that kind of two percent wage increase and five percent, due to benefits?

You've got me stumped, . I have not looked at the -- what is the cost per employee. And to really break that down, why don't we do this? We'll have to do a little research and get the details on that and we give you a call and let you know about that. But I don't have that numbers handy.

OK. That's fair enough. I appreciate that. One other question, then, on the expense side. On the equipment rents, that's been something you've really been improving a lot as you run the network better. You've talked about these cars that you have parked -- the 20,000. Are there still cars that were put on in kind of longer term leases, when you had some difficulties, '99 and 2000, that will come off lease that you can actually get rid of, that will reduce that expense line item. Or, for the most part, have you taken out of the system already the cars that you would -- were leasing that you would get rid of?

Well, any of them that were on short-term lease, we clearly have retermed. We do have some equipment on longer-term leases and it really varies by equipment type. Some, we expect to rebend in the second half. We're, obviously, holding onto those. I don't think we have any big lease renewals that are about to be .

No. I mean in terms of looking at that line item going forward. It gets a bit more difficult to get the year-over-year improvement in that line item?

Well, yeah. You start getting into lapping yourself a little bit, so it does get a little tougher to show the same level of improvement. But we did improve in the first quarter in both locomotive leases and care hire. Roughly five or $6 million, so even a better running railroad, we're still showing some good improvements and we think we'll continue to. But it is a little tougher to show as dramatic improvements once you start lapping yourself.

OK. Right. And one last question. And, in that, Mike Giftos, you went over the lines that as specific commodity segments in your outlook for those. Are there any that you can point to and say here's an example where clearly the economy's turning? And I know there was kind of some sense to those truckload conversions, which is good. And, you know, some things in combination. But is there anything really clear that shows the economy is getting better or is it still a pretty murky picture?

Well, I think clearly in the chemical area, the first, the first three weeks of this month, we're seeing year-over-year comparisons that are up in certain commodity areas by double-digit amounts that in the first quarter of this year, the year-over-year comparisons were a negative. And plastics is a good example of that.

The question is are we looking at, are we looking at inventory replenishments or are we looking at some fundamental strengthening and underlying demand so that this would be more sustainable as we move through the year? But the chemical area, which was very, very hard hit by the recession, is showing some very, very attractive, very favorable year-over-year comparisons in a number of commodity areas. And that's a roughly a billion dollar business for us, one-seventh of our revenue, that were the year-over-year comparisons in the first quarter were a negative.

OK. Thanks very much for the time. I appreciate it.

You're welcome.

Your next question comes from from Prudential Securities.

Hi. Good morning. Question bring you back to the expense side again for the comp and benefits. Number of employees came down significantly. Can you give us some more insight as to where you see the balance of employees coming back versus volumes coming back on? Is there a way for you to quantify how much is temporary versus permanent?

Well, I think we still have some people on furlough. I think we have two to 300 people still on furlough. We will not bring them back until the traffic rebounds. We were up in the seven, 800 range in the fourth quarter of last year. So as the 30, 60's kicking in, people are retiring, we're bringing back some of those that we did furlough.

Our anticipation, and we will have the ability to gauge this some, as the economy rebounds as we expect, we'll be bringing back some people. If it doesn't, we won't.

So, I don't know if I'm answering your question or not, , but I guess where we see it is, if we're bringing back people now it'll probably be primarily the maintenance away for the summer programs. And in the T&E -- the train and engine service -- as the traffic rebounds.

Right.

So, those would be the two primary areas we would increase every time we rebound. And we'll do the maintenance away in any circumstances. Obviously, we have to maintain our track structure in good shape.

Very good. Thank you, very much.

You have a question from from Merrill Lynch.

Hi. Good morning. Michael, just a follow up on that question on the employees then. If you --- you've been saying that there are no more employee cutbacks planned. As a matter of fact, you might bring them back. Where would we see productivity improvement coming from? Would it be from -- if the revenues don't come on board as quickly, would be see more employee cutbacks or what would we see be done to improve that productivity?

And then, Paul, just a quick question on cap ex. I'm looking that the -- the cash flow looked to be about162 million. Can you give us a breakdown of spending? What was IT as a percentage of that?

Well, I guess, on the productivity side, obviously, as explained later -- earlier -- as the volumes increase, you get some productivity. You have that by exploiting these fixed costs more over the entire network. But in addition to that, we have our programs and our Six Sigma initiatives, which are attacking a number of specific cost areas to drive productivity, as well as our APUs in the implementation of the remote control locomotives. All of those are going to be pretty strong engines as well as the continuation of improvement of our locomotive utilization and our car hire.

So, a lot of our key drivers are going to really give us good base productivity. And, again, we'd only bring the people on as required for that additional business and we do have a lot of capacity on existing trains, to bring it on, before we ever get to the point that we have to bring those employees on. So, we're fairly comfortable for the year. We our productivity targets. And, as the economy rebounds, we'll, in a measured way, bring back the additional people. But we have a lot of initiatives, that really are focusing on other areas than just straight headcount reduction.

Great.

Regarding the capital -- the capital budget for the year. At surface transportation, it's 950 million and at the other units, it's about 75. Of that total, about 40 million is targeted for technology. And I would assume it's pretty evenly distributed throughout the quarters of the year.

Great. And one follow up, if I may. Just because there was a lot of discussing earlier about the intermodal -- I guess, seeing a less western revenue. Can you tell us about the -- give us an update on the express lane -- the high-speed lanes with . Is that where we're seeing the decreases in cross-border traffic? And then, you know, I guess and announced a new high-speed lane for the northeast today. Is that kind of where you're seeing some of the competition or is it just lower volumes?

Well, the express lane product that I think you're referring to is the product that we introduced with Union Pacific about a year ago.

Right.

That's moving, that's not moving in our intermodal service, that's moving in our more traditional merchandise network. It's growing at very, very attractive rates and there continues to be significant demands, increase demand for that product as the service continues to consistently perform as advertised.

So that, that is the express lane story. In terms of the intermodal business, the competition in the intermodal business is from a multitude of fronts. You know, the truckers are intense competitors and with the excess capacity that they've had. And the lower fuel cost, at least there for a while, they were taking some of our market share. And of course Norfolk Southern runs a terrific intermodal network and we and they are always looking at a lot of the same business.

Great. Thank you.

Once again, to ask a question, please press star-one.

Do you have a question?

I'm sorry, at this time, there are no further questions.

Well, we thank you very much for being with us and look forward to seeing you in the months ahead. Thank you.

You may disconnect your line. Your conference call has concluded.