CSX Corp (CSX) 2002 Q2 法說會逐字稿

We are delighted to have so many of you with us in person, and of course this is being broadcast on the web as well. We were delighted to have so many of you with us on that train trip as well. That was a good chance to have a good exchange. You have seen the numbers; we released them earlier this morning. They represent a continuance of the upward progress that we have told you we were going to produce at the railroad, primarily, but at the other businesses as well. Paul is going to go through those numbers in some detail and we will turn to Michael Ward to talk about CSXT and its performance for the quarter with particular focus on the operating side and the metrics and the overall direction and then we will get a more granular treatment by Michael Giftos of the revenues by various market segments.

Yesterday, Paul, Michael and I and some of the finance people and legal people and Alan in the back of the room went through that SEC required attestation preparation period and we will be meeting with the audit committee tomorrow morning at nine to review that process with them and look forward to attesting to the accuracy of our 10k and subsequent reports, the proxies and the 8k's and the 10Q's of the entire set of documents that the SEC ask us to attest. I think it is important that we say that so that you know we're fully prepared to stand by the numbers that are covered in those releases and frankly in any other releases.

One of the strengths, I think, of CSX is the validity of our numbers. It is the fact that we use conservative accounting. The fact that the numbers represent the earning power of the company and the fact that they are accurate and reflective of what we do; that there is no need to restate or redo the numbers, I think you can draw comfort from that. You know that seems to be the underlying issue here that is affecting the perception of companies, affecting confidence in the market and as more and more companies do the attestation, as the [Sourbeans Oxly] bill becomes law as it will next week I think we will see a restoration of confidence in corporate America.

I have been active as many of you know in that process to try and restore confidence in corporate America and the way we govern companies and that really starts seems to me with the fundamentals of the corporate compact. And those fundamentals have been lost sight of. And what are those fundamentals? Well you all know them. The problem is that other people who should have known them haven't lived up to them and the compact starts with the proposition that the shareholders own the company, and that management are not princes with royal prerogatives, they are employees. They have a duty to manage these enterprises, public enterprises in the interest of the shareholders.

And because there can be, potentially, conflicts between the interests of shareholders, and the interests of managers, we have a corporate governance structure that puts a great responsibility on Boards of Directors. Boards of Directors are there to supervise managers. And to see that managements really are faithful to their obligations to enhance the well being of the enterprise. Or as the Finance professors put it, to maximize the long-term discounted value of the corporation. That's really what management is there to do.

And boards of directors have very important responsibilities. I think responsibilities that have gotten lost sight of. For boards of directors to fulfil their responsibilities they have to be independent, right? For boards of directors to fulfil their responsibilities they have to be diligent. They can't be the handmaidens of management; they are the supervisors of management. And I think that as these things get talked about as they are getting talked about through the commission on corporate responsibility that I am co-chairing with Pete Patterson and through the efforts of the BRT to restate and toughen the codes of conduct, and through the rules of the New York stock exchange and the NASDAQ, there is a very health cleansing process going on in which a lot of bad practices are going to get routed out, in which a lot of bad people frankly are going to get routed out. A lot of questionable people are going to get routed out. A lot of questionable practices are going to get out.

All of which put a cloud over corporate America, over earnings statements, over Wall Street and over the results of what has been the most transparent and well governed set of economic undertakings in the history of the world. This is the time to recalibrate and reorder corporate America and Wall Street in accounting. And I think there is a lot of underway and a lot to come that is going to restore confidence in corporate America. But I wanted to make that statement because our numbers are coming out against the backdrop of serious concerns about the authenticity and the validity of what corporate executives do and say. So I wanted to say that so that you would have a backdrop for our numbers that will come. And with that Paul can we call on you for the quarterly review.

Thank you, John. It is good to be with you all. The attorneys have requested that we take the first 15 minutes of this morning and go over this statement. But maybe on second thoughts, maybe I can paraphrase and I think what we are saying here is that our assessment of the future which we may share with you are all based on our opinions about the regulatory environment, economic environment and as those things change, it is up to you all to stay on top of them and reassess accordingly.

We just completed a good quarter. I think we have a good story; a consistent story and we will touch on priorities and programs that we have been talking to you about. My overview is going to be relatively brief and then Mike and Mike are going to share what is going on in the company in more depth. The consolidated statement that you see here, points out that we are in 63 cents in the quarter that is up 12 cents from last year. Revenues were up 16 million, expenses down 40 for a $56 million improvement in operating income. Other incomes, the category where we house our real-estate activity and you can see that is down 33 million.

Last year, in the second quarter, we had a large sale of some Washington property again 32 million. This year, the large gain was in the first quarter. So what you are seeing is a timing mismatch and thus other income results are down. Interest expense is been lowered, some $19 million. That is partly due to the pre-funding that we did last year with our zero coupon convertible taking advantage of very favourable interest rates and anticipating some maturities this year. We've also entered into some floating rate swaps for our near term maturities and that contributed about half of the pick up that you see on the interest expense line. Overall, after taxes, net earnings is up 27 million to a 135 million. And at the six month point, CSX earned 203 million up $75 million from the prior year's first half.

Turning to the top line at surface transportation, all of our markets with the exception of coal were strong. In the merchandise area, this quarter was the first quarter in the past 7 that loadings increased over the comparable prior year period and that gives us encouragement about the direction the economy is heading. Also helping the top line is continuation of our pricing program, and our modal conversions and Michael Giftos is going to get into those in some detail.

Turning to the expense side of the house. Spending at surface transportation came down by some $44 million. Operating income was up $51 million and the fuel price accounted for about 20%, about a $11 million of that $51 million pickup. [You've said Paul] the slide says 21 million, that's the expense effect. But we also eliminated the fuel surcharge, which offset roughly $9 million of that cost variance. I think, if you have read the reports, you will see that labour expenses are down nicely. Headcount was down some 5%.

We also had a favourable event in the quarter; contract settlements net $11 million to the good. $15 million of that was a settlement at our inter-modal company and 4 million the other way - unfavourable - occurred at CSX Transportation. So we had 11 million in there non-recurring, but it doesn't really affect the comparison to last year very dramatically because you will recall that Mike Ward reported on our insurance recoveries last year which had about a comparable affect in the second quarter. Operating ratio at 84%, down 2.8 points at the same period last year.

This slide shows the quarterly projection: the quarter subsequent to the second quarter of the year 2000 when our earnings hit the taw. You can see in the first two columns, that it was the fourth quarter of the year 2000 that industrial recession began to affect us. There is a decline in car loadings there. And if you look over at this quarter on the right, you can see that loadings haven't gotten back to that same level that we experienced in the third quarter of the year 2000. I have been looking at operating income line; operating income at 293 million is up some 103 million from that third quarter of the year 2000 increasing by more that a third even though car-loads haven't quite gotten back. You will also notice that the revenue line is healthier even though car-loads haven't quite gotten back. So we are very gratified with the progress that has been shown with this quarterly sequence of operating results.

Turning to the marine service business segment, $25 million of operating income, these businesses are now performing right where we had envisioned them when we had restructured [Sea Land] in order to see the international shipping business. At CSX World Terminals, has earnings slightly below last year; a $2 million decline, half of which is accounted for by development project costs that were incurred and the other half reflecting continued weakness in our Hong Kong operation.

CSX Lines has hit its stride. Hawaii's profits were up somewhat. Alaska's were slightly down. The real strength in this business is now the fact that the Porto Rico trade which we had been reporting to you was losing money is now fixed. One of the carriers went bankrupt and their traffic has been absorbed by others in the trade. Our share in the Puerto Rico trade is up from 26% to 36%. We have one more vessel in that trade and our utilisation is up from 66% to 86%. So we think the red ink there is behind us and we are looking forward to continued strength from marine services.

Looking forward, we're quite optimistic that the economy is on the mend. We think that's going to help the top line and we think that a continuation of our pricing efforts and the conversion of truck traffic to the rails is going to continue move that top line in the right direction. We also established a lot of momentum in cost improvement and safety improvement and those programs will all continue.

I reported at earlier meetings that this year we expect to generate on the order of $200 million in free cash flow. We're on track to accomplish that. As a matter of fact we are on track with all of our credit improvement ratios. We're on schedule, the schedule that we have laid out on our longer-term plans. One last fact that I think you will be interested in; many of you are probably familiar with it - BBB Rail Debt securities are now trading at 66 basis points, better than BBB counterparts in all of industry and that's a more than double spread the spread that we experienced this time last year. So I think it reflects the faith that investors are putting in our industry and the fact that we represent pretty good investments. With that I will turn it over to Michael Ward. Thank you.

Thank you Paul. As we look at the second quarter, I think we are pretty gratified by what we were able to accomplish. We continued our year over year improvement as Paul mentioned, revenues were up versus the prior year. [Automotive], we had some nice strengths we didn't fully anticipate. Coal continued to be challenging in the second quarter but Mike is going to give you a lot of details on that service, so I will stop my comments there. Our service continues to improve. Nine quarters in a row now where we have improved out service levels. Our base productivity targets are being achieved. As you have heard us say many times before, better is cheaper. And we think that running a better service railroad and a more efficient railroad dries out your cost as well. And safety has been improved substantially. We have put in a new safety leadership process this year and is has really started to have some vibrancy in the helping us further improve our safety numbers.

Take a look at some of the details on the quarter. We made $51 million, more than 21% - year-to-year improvement. As you can see, that was driven by about 7 million of improvement in revenue and 44 million of improvement on the cost. One of the big elements was labour and fringe, $26 million down 3.9%. And there were a couple of factors rolling within that category as you know by looking at the flash we were down year to year by about 1700 positions. That actually understates the effect of the quarter [indiscernible] they are mid quarter heard count. For the quarter actually we were about 2000 less more or more on an average and that snap shot didn't give a full portrayal of that, it was just a mid-year count.

In addition we are starting to see some of the benefits of the 30-60. Reduced overtime - due to the fact that we are running more efficiently. And we did have a mark to market that we had to do on our executive compensation that gave us a favourable variance in this category. But, all in all, a nice strong story in the labour and fringe side.

[indiscernible] you will notice $16 million unfavourable on a year to year basis. You may recall that Paul alluded to that we had 10 million a quarter of insurance recoveries every quarter years. That will be one of the challenges we had to overcome as we producing these better results. So 10 of that is basically driven by these insurance recoveries the year before.

The other major driver within there is the 4 million contract dispute resolution. When the ConRail fees, 6 million favourable. Three major drivers within that, fairly evenly spread. One was basically better efficiency on the shared areas. The employee counts are down; they are running a little bit more efficiently. Secondly there are some lying down costs that we had in 2001 that we do not have this year. And the third is their safety is much better. Using Com Rail 1, the [gold hireman] for the smaller railroads and their safety numbers are much better. PI reserves are therefore improved on a year-to-year basis.

Equipment rents - 4 million improved, 2.9% primarily driven by the better velocity of our cars. Less cars are online.

Depreciation, flat. I am sorry inland transportation was 5 million favourable. That is probably a little bit deceptive at $15 million favourable, contract dispute was in that category offset by that $10 million of increase foreign line hold due to domestic container growth in the quarter.

Depreciation - Flat, which is probable not what you would expect. What happened there is that we found in the fourth quarter of last year that we were understating car retirements in our asset base. And we fixed it. That produced about a 2 million dollar favourable in this quarter pretty much offsetting what the normal 2 million dollar increase in depreciation we would have expected to see in this quarter. If we look forward, in the third quarter we would expect depreciation to be 2 to 3 million dollars above the year before and more like 7 and 8 in the fourth.

As we look at fuel - $19 million favourable. As Paul mentioned, 20 of that was price. We were up about 1 million due to the volume increase and 2 million down due to efficiencies in the use of our fuel. And I think it is worth repeating that the $20 million price favourability was offset by that $9 million on our fuel surcharge, which is about 11 million net impact.

So if I look at these numbers in total, I feel pretty good about them. We had some one-times in there, about 11 million from those contact dispute settlements but we had $10 million [indiscernible] by way of insurance recoveries. I would view both of those sort of as a [warsh]. We had about 11 million dollar favourable net on the fuel side. So that is about a 40 million dollar improvement in run rate of the operation. I feel very good about that operating ratio as Paul mentioned at 84, 2.8 points better than last year.

We turn to the service side. As I mentioned we had nine quarters in a row of improved service. As you know better services are really the foundation of how we are running things. Because it is really a foundation for a lot of what we do. First it's key on our mobile conversion program. Secondly it really facilitates our value pricing. And thirdly better is cheaper. And as we run more efficiently we find that our cost profile gets better. So if we look at our service measures and I have a few of them up here, but all 18 of our key measures we have been using for the last several years are in the packets that were distributed to you. If you had a chance to glance at those, all 18 of those were improved on a year over year basis.

If you look at these charts closely though, you may notice that a few of them dip down from where we were in the first quarter slightly. And this really fell into three buckets. It was velocity measures, our slow water measures and our crew measures. And the reason for that, if you look at this chart in a little bit more detail, you would notice that the same thing happened in the second quarter of last year. It is a seasonal impact. The second quarter of the year is when we start our maintenance programs.

So when you have track gangs out there, you have to put slow orders on and it does slow down your velocity a little bit. It hurts some of your crew efficiencies. SO it was an expected phenomenon, actually when we set our targets we knew that was going to happen. And so on those three categories we did see a slight decline from the first quarter. All the other measures were actually improved both against the second quarter of last year and against the first quarter of this year, so we continue to see service improving. I'd like to highlight a few of them on this chart.

Cars online - 231 000, that's as low as we have ever had them since the ConRail split continuing our downward trend as we run more efficiently. Locomotive setback hours - 11 a day. Again low as we have ever been. Velocity - 22 and a half miles and hour - 6.6% better than last year. Terminal dwell down to twenty two six - 8.9% better and once again the best we have ever had our dwell numbers. One-time originations up to 92% and was 6% improved and was another all time high. So a lot of these measures were really getting best-ever kind of performance. Arrivals up to 78% - 8.3 improved. So all in all we're feeling good about where we are taking our service, the way we are treating our customers, and we are excited about making it 10 in a row here in the third quarter.

If we turn to the safety side, as I mentioned we put in a new safety leadership process this year and Al Crown and Mike Cantrell on this team are really driving and engaging all of our employees on how do you be safe at this new safety model we have. And I think results are very encouraging. In the personal injuries, we improved 32% in the second quarter. You may recall last year, we improved 21% another 32 on top of that. On the derailment side we are also 32% improved after a 39% improvement last year. And on both of those we're exceeding our goals that we had set for ourselves this year.

Finally, just looking forward year over year we anticipate the revenues will continue to improve. We are very comfortable to hit our service and productivity targets. We think we have got some good momentum and the sensitivities are the ones you would expect. The economy, where fuel prices are and what happens with the weather and thankfully the lord has given us some hot weather this summer to get those coal inventories down a little bit and hopefully he will keep co-operating. So with that I will turn it over to Michael Giftos.

Well thank you Michael and, again, welcome. Well, the second quarter produced some gratifying results. Year over year our revenue improved some $7 million about a half a percentage point as the effects of our modal conversion initiatives. The continued focus on yield improvement coupled with an assist from the economy, which is clearly showing some signs of rebounding, allowed us to achieve these year over year gains. We are pleased to see that we have had five consecutive months now where industrial production has increased. Last year's inventory dry down has largely ended and these are all very very positive things for a number of our industrial based commodity groups.

If we look at this chart, you can see that this is the first quarter since the fourth quarter of 2000 where we have had year-over-year quarterly improvement in operating revenues. I'd like to direct your attention to that faint red line below the yellow bars. That line reflects what our revenue would have been if we excluded coal from those revenues. And as you can see, last year the over all strength of coal masks the effects of the economic recession, the industrial recession that reduced our revenues to the gold bar level. There as we began to see the improvement in the overall economy in the first quarter of this year you can see a rather rapid assent in our overall revenues excluding coal. And this year the negative impact of coal is frankly doing exactly the opposite of what the positive impact did last year.

But if we look at all of our commodity sectors in the second quarter excluding coal what you see is that our revenue has improved a rather healthy $55 million or 4 percentage points. And that 4 percentage points is quite in line with the type of revenue growth numbers that I share with you a few weeks ago that we expected to achieve as we move forward to reach our revenue growth goals. The key negative impact this year was clearly the coal business. So let's take a look at our individual commodity groups for a second starting with coal. Our coal volumes were down 10%, our coal revenue was down a less significant 8.7%. The total revenue was some $398 million. We enjoyed a yield improvement of 1.6%. We've enjoyed our price improvement program continued. In the second quarter this year we generated some $11 million of additional revenue from price. The yield story reflected on this slide understates the positive effect of our yield improvement program because of the very important contribution that our modal conversion initiatives have contributed to our coal business.

In the second quarter of this year, we moved 8000 car-loads of river coal. We've supplanted trucks to the river and took it directly to utilities to [indiscernible] which were previously moving on the river bed. The average revenue per car of those 8000 cars was $400. The average revenue per car of our basic coal business is $975 per unit. If you exclude out model conversions, our yield improvement for this quarter would have doubled the 1.6% that you see on this slide. Our pricing efforts in the coal business remain vibrant and we are encouraged by that.

Let's look at our auto business. Auto business has been a terrific contributor to CSX this year. Our revenues are up some 8.5% to $231 million on six and a half percentage points of car-load growth. The revenue per car increased almost to a percent. Now I don't want to suggest that 2 percent revenue per car improvement is a price play because it isn't. It is largely a function of mix and longer haul movements moving at higher revenue per car numbers. We are encouraged by the auto business this year. It has been a very pleasant surprise. The auto companies are forecasting production levels in the second half which are about 16 and a half million domestic units. That's well above our original projections in the year and that has clearly been a pleasant surprise offsetting some of the coal weakness.

If we now move to our inter-modal market sector, terrific story, terrific growth in our inter-modal business this year. We achieved an 8% growth in car-loads, almost nine and a half percent, 9.2% in revenues to some $296 million in total revenue. Revenue per car also increased in this sector. That is quite a difference than what you have seen in prior presentations. When we have been here we've generally seen the relation between revenue and car-loads in the inter-modal sector being quite the opposite. And I pointed out to you that this traditionally isn't and I don't think will be a significant pricing opportunity. But what is going on particularly in this commodity sector this year is the modal conversion's we have achieved through our load-board initiatives are coming in at higher revenues. And our longer haul of higher rated business is coming in at higher volumes as well. So we are very, very pleased by the inter-modal story this past quarter.

Turning to our merchandise business, the merchandise business, the markets were mixed. Overall, we enjoyed almost a one and a half percent increase in both [indiscernible] and revenue to some $893 million of revenue. We had some weakness in our agricultural products segments. Poor compulsory prices are depresses and the over movement of feed grains to those poultry and pork production facilities has been down over the entire year. Car-loads are down some 5 and a half percent and revenues are down 4.8%.

Our minerals business has also been week we found some foreign sources are supplementing domestic sources of minerals in the relatively small market. And in our metals business, year over years was slightly down as well. That's largely a function of us not moving the outbound product that we enjoyed in the second half of last year - the finished steel product. The metals' producers are running at capacity. They are moving the products directly to the end users as soon as they are produced. And they are doing that by truck today. As well see those inventories build up probably during the auto shut down we hope inventories will accumulate and we will again enjoy the type of outbound metals product movement we had in the second half of last year.

On the other hand in our merchandise commodity groups, chemicals were quite strong. Revenue improved in that commodity group by some 3.6% to $233 million on car-load improvement of 1.6%. Our emerging markets unit was quite strong growing at some 6% growing on a car-load growth of 1.8%. And the real star performer in our merchandise commodity area in the second quarter was our fertiliser business growing in revenues some 10.5% on a 13% car-load growth. The yield story is masked by that phos and fertiliser business. That's terrific business for ... [tape turn] ... overall impact of our merchandise revenue per car tended to understate the overall yield improvement we enjoyed in our business. With this slide, we look at the remainder of our merchandise business excluding that very attractive growth we enjoyed in the fertilizer business we enjoyed in the second quarter. And as you can see from the green bars, you will see a 1.6% yield improvement in the second quarter which is basically in line with what we are doing in most quarters over the past few years.

Our pricing program and merchandise remains vibrant. And as you can see from the contracts which were up for renewal in the second quarter, we were able to achieve an average price increase of about 3.5%. In the second quarter, we generated about $24 million of additional revenue from price in the merchandise sector that coupled with the $29 million that I shared with you in the first quarter has us well on the road to achieving our price increase goals and out merchandising sector this year.

Now I am going to turn with some trepidation to one of favourite slide and that's looking forward in this period of uncertainty and how we see our commodity groups performing in the coming months. We are clearly optimistic as you can see. We only have one commodity group where we think will be to how it performed in the next several months versus last year and that is out minerals business. And again we will continue to see some foreign sources of ores supplanting some of the domestic moves.

Our food and consumer business is a growth opportunity for us and will continue to grow with out Carona beer and some of the rice products that we shared with you and other growth opportunities in that market.

There is a very substantial portion of our food and consumer business which includes fresh orange juice. That market is down; it tends to dominate that market, and the growth in the other sectors are unlikely to overcome the weakness in the orange juice business. So that's why we have the food and consumer group in the flat category.

Paper and forest products, strong demand for pulp, board and building products will continue with perhaps some overall weakness in the fibre side offsetting it and we are perhaps being overly cautious putting this in the flat area but I am relatively comfortable with that.

The metals business is flat going forward but again if the inventories build up to levels where they favour rail economics, and we pick up the outbound products, this well could move into the favourable category.

The agriculture products that we move today, again we still expect to see some weakness in the feed grains, which are a very big portion of that market with the pork and poultry prices being depressed as they are. And finally there is coal. I have it in the flat category. A few weeks ago, when we met, I told you that we though it could be any where from a couple of percentage points down to a couple of percentage points up in the second half of the year largely depending upon the weather. Well, the weather has been co-operating quite nicely. And in the month of May in the eastern half of the United States, electricity generation was up 3.2%, in the month of June it was up 2.8% and in the month of July it is up a very robust to the first two weeks of the year 10.4%. The result of that increased electricity generation is that the stock piles that have been plaguing us in this market sector following the very benign winter has stated to be worked down to more manageable levels. We estimate the average about 60 days now slightly above most of the utilities would like.

With continued warm weather, it may well be that coal revenue number may well move into the paper book category along with the others that you see there. Our auto traffic, we expect it to continue to be strong as domestic production is projected to be at $16.5 million level. Our inter-modal business is strong with our load-board initiatives, the terrific service Al Crown the operating team are providing to us will allow us to grow that business and we are optimistic we will see very nice gains in that sector.

The chemicals business we expect to be strong year over year. Again this overall strength is largely dependent upon the industrial economy performs, but plastics are continuing to move nicely. Our phosphate and fertiliser business continues to be strong as we enjoy health exports to China. And our emerging market unit we expect to have strong growth moving forward compared to prior period largely because of the aggregate business we are able to capture there and the increased movement of waste and auto shredder residue.

So for CSX we feel pretty good. Clearly we are going to stay the course. We are going to continue to focus on yield improvement. We are going to continue to focus on modal conversion and take advantage of the terrific service we are offering our customers today. Clearly the unknown is the economy. This is a period of a lot of uncertainty, but we've seen some nice signs that the economy is picking up, and if it continues to do so, we expect to have nice revenue gains in the coming quarters. Thank you very much. And I'll look forward to your questions.

Thanks Mike. With that, its time to go to the questions. Scott you had your hand first up there. We will get you a mic. Jim [Sheral] is bringing you a mic. Jim.

[indiscernible due to off-mic comments]... relative to what you saw last year and then first quarter its down about 15-20% in terms of a rate of change. Is that commiserate with what you expect going forward that you see a gradually sloping curve there.

I wouldn't be concerned about any particularly quarter change of a few percentage points. The 3.5 percentage points largely reflects the quality and type of traffic that we had the opportunity to re-price in the second quarter and the competitive alternatives that we were facing. And that will always be the case as we look at any commodity that is up for re-pricing, if the alternative are close to us, obviously the price increase we will be able to achieve will be less.

But as we move forward, we are comfortable that we will continue to enjoy price increases in that 3.5-4% range over all the quarters for the traffic that we are re-pricing. In terms of the ConRail business, I don't have an exact number on that, I am sorry I can't give you that today. A lot of the business was bundled with CSX business so absolutely stripping out the ConRail portion of that is difficult. Most of that was with larger chemical customers; now we are working with a single contract and it's hard to say what part of the ConRail business will be re-priced separately. But it will present a re-pricing opportunity for us clearly.

Jill. I think you're on.

Thanks John. I have to questions for Michael Ward. Quickly, labour cost probably was up much less than the other rails have seen. You gave us a description of kind of what was going on there. But this executive compensation being mark to market was that the significant difference against the other rails. Could you explain that?

Maybe [Caroline Sizemore] is at the back there.

Carol, how much was that mark to market on the supplemental?

About 10 million.

So do you think those costs of labour [indiscernible] numbers will continue for the second half of the year or would that sort of a one time thing?

The mark to market is just what the basket of equities are at the end of the quarter. So that's whatever the markets are doing and you can't predict that Jill. The other piece of it, the overtime we are cutting out the 30-60 impact, we are starting to see because you know the new employees come in at 75% and the fact that we did have another issue that while it showed 1700 heads in the quarter to quarter mid-quarter comparison, it was actually about 2000 on an average for the quarter. So that probably made the number not look a little larger but be a little larger in this quarter. I think, as we go forward, obviously we are doing second half comps where we were already taking head down last year, so probably won't be quite as strong in the third and fourth. But we do anticipate about another 500 headcount reduction from where we are in the second by the fourth quarter.

One of the follow ups for Michael. This is a bigger question but we are at a crazy time right now where it looks like volumes are picking up yet people are already talking about a double dip recession, we had durable good down significantly today and my question to you today is that, you did a great job last year when the economy softened, and having contingency plans on where cost can come out if the economy did not follow through. I know this is crazy but we feel like we are going to get an upturn. But in the back of your mind, is there some contingency plan that if this economy does not follow through, the cost story kicks in again.

I think the cost story is kicking in pretty well right now, Jill, but obviously we have some contingency plans. We think that it is a low probability and so we are not spending a lot of time on that. If we see it starting to turn, we will firm those plans up. But, yes, we will do additional actions to try to minimise the impact on us, because we do take seriously and try to deliver the results we set out to do. Yes there would be things we could kick in. Probably as little less flexibility as last year, because as you know, as you keep running more and more efficiently, it is a little harder to find pockets where you could dry things out. But yes we would kick in some contingency plans if we did get into a double dip.

Jim Valentine.

Two questions. First, I was wondering Mike if you could address [Ourcaft] in the impact it has played in the second quarter or at least in the second quarter at least if you could give us a feel for all your rail revenue what portion has been somehow by Ourcaft.

It has a very minimal impact in the second quarter Jim, but I don't have that exact number and I don't know if somebody here does.

Would you get through the quarter, 20% or so?

No it is less than a quarter.

Do you or Caroline have the answer?

Jim, my perception is in the 15-20% range. But we could find that.

Still, [Outcaft] went down. I was just trying to figure that would be flat if you changed your numbers in terms have made them higher. I just don't know how much higher. The second question is two questions to John. Can you talk about marine services in the context of railroad as being the majority of the company here longer term? And then if you could briefly talk about Rodger Nober as the nomination for FTB and how you think that may impact the railroad industry or potentially accelerate or decelerate potential industry consolidation.

On marine service, it's become a much smaller part of the whole business as you can tell from those numbers. And is no longer really core to us, as it has been in the past. Our core business is the railroad and that is where we want to focus most of our energies and our efforts and our attention and on the other hand those as the numbers indicate are our well functioning businesses that have real good prospects.

And so on the question, where are we going with those businesses we think they are good businesses and we think they will continue to do well with CSX with good management teams and good outlooks. On the other hand, I am going to give you the standard old answer, Jim, that if they are more valuable to someone else rather then us, then someone else ought to own them rather than us. And I think that philosophy at CSX is well known and it may well result that the marine services businesses are at some point owned by somebody else other than CSX. But it would only be in the event that we looked at our own holding indifference point and said that the value we got would be higher than the value inside CSX - and it's a pretty high value.

On Roger, I was pleased to see Roger Nober, who is the Bus Administration nominee for the STB. I think he is going to be a very good nominee. The information coming out of the White House in connection with his nomination indicated that he would be designate subsequently as the chairman. This has long been anticipated. Roger Nober is somebody who is well known on the Hill. He served as senior staffer on The House Transportation and Infrastructure Committee, and is currently in the Department of Transportation in a senior position. He has a good background, is very knowledgeable on the issues, well educated - Harvard Law degree. I think he is going to be a good appointee and I trust the Senate will move quickly. I see no reason why they should not move quickly. So far there has been no indication that this is going to be coupled, as had been the talk formerly. So I think it should move quickly and we will have a good strong nominee there and an effective chairman eventually for the agency.

What does it mean for mergers? I think the mergers will come at some point in three-to-five years off. It is going to take us time to consolidate the gains from the past mergers and to restore the confidence in the investment community, and restore the confidence in shippers.

But at some point we would have largely exhausted the benefits of the current mergers; we would have largely exhausted the service improvements that can be made through the multitude of cooperative intra-industry co-ordinations and joint ventures that are going now, and we would have hit diminishing returns on taking out cost within the regional rails. And probably an investment banker from one of your companies will come to us and say, "You know, there are lot of opportunities here." But that is in my view: probably three-to-five years off in the future and by then I think the political climate will be different and the regulatory environment could well be different. Yes sir.

Tom Waterwhich from Barrester...

Hey I didn't see you back there. Light in my eye. Welcome.

Thank you. Two questions. The first one is for Michael on the expense side. I think it is a pretty good reduction in headcount. And maybe a little bit of a slow down but still pretty good kind of 4% range I guess in this quarter reduction year by year. If you look out to and you have a more normal GDP, a more normal coal environment, where does that number go to? IS that like a 1-2% just on going subtraction in headcount or can you sustain greater 3-4% headcount reduction?

To be honest, I haven't looked at it for next year. It depends where the growth comes. If it comes from the merchandise and the inter-metal, that's not really headcount intensive because we still have capacity on our existing trains. When the coal comes back, as you know that does require crews for every one of those trains. I think you are aware that we are implementing remote control technology in the yards, switching operations which will give us the ability to mitigate some of the impact of that. So I can't give you an exact number but I think we can continue to drive the headcount down as we go forward next year.

OK then. For Michael Giftos, a question on the revenue side. Looking at the half there, a couple of things, kind of incremental things that get some of the US Geocapacity is getting restarted. Some LTV facilities and I am not sure whether there are going to be any on your line but if you could address that and also export coal is that some of the contract that has been firmed out now. Is that going to help? Are there other incremental things in the second half aside from the economy that are going to give you a boost?

Let's talk about the export of coal for a second. When that the export coal contract season is over, we expect our coal revenues from the coal business to be essentially be similar to what we achieved last year - flat on lower volumes. We were successful in implementing a 4% increase in our export coal tariff. We are also successful largely in capturing the benefit of that increase in our business. So the export business will be ok about like what it was last year, no significant up side there.

On the metal side, the metal side I had in the flat category. LTV restarting, additional capacity can help us. It could well be if the inventories are going to accumulate a little bit on the inbound side, we could have a pleasant surprise.

Are there specific plants that are restarting on your lines or just increased utilization?

I think it is increased utilisation of existing facilitates which basically are running close to capacity.

Who is next here? Yeh.

Mike, you talked a little bit about the modal conversions that you want from the rivers. Can you talk to us about the over all picture and give us more flavour about modal conversions in the second quarter? Is that one on?

In the coal business, as I have shared with some of you, we have had some favourable developments there starting with our terrific service we are able to move our assets more quickly and supplement it by some stricter enforcement of truck weight loss. We are finding that the opportunity to move business as we previously moved truck to river is playing on very nicely to railroad economics. So we're enthusiastic that the 8000 car-loads that we moved last quarter of modal conversions of truck business will continue in the second half of the year and grow.

OK. And, I guess for Michael, I know we touched on this in the past about looking at the network and that you have a team looking at possible line sales. Can you give us an update as to where you are on that?

Yes. Where we are on that is that we are really not intensively pursuing it at this time. I think our focus is on how we can really drive the service better. How do we grow the business? How do we price it right? We do have a small team which has started to examine that. I do not think we will have anything where we are really thinking about resizing the network any time in the near term. And one of the reasons is that we don't really know the true earning power of the centre yet, till we see what this better service can do as far as growing business. Until we know where that is, we are going to be hesitant to shed any lines that maybe contribute when we find new ways to grow the business. So we have a small team thinking about it, but it is not one of our primary focuses.

Tony?

Thanks John. Two quick ones for Michael Giftos. Just a follow up on Jasons question. You talked about modal conversions in terms of total numbers. You talked about coal and on the trip you talked about more. Can you update us on the second quarter on what you did on non-coal issues and just quickly what's up with OJ?

Yeh, that's a good question. I thinks it's largely due to the economy, people saw a weakening economy, they moved away from some of the premium orange juice brands and we hope to see that recovering.

So it has nothing to do with what you are doing?

No. Modal conversations. Last year, we converted an excess of 350,000 trucks from the highway. We will exceed that this year. We will do quite bit better than that this year, largely dependent on the economy but we are optimistic that all of our service here be it the modal business or the load board initiative it is going to continue to grow nicely and our merchandise sectors have just scores of opportunities. Exact timing of them is a little but unpredictable but we are confident that the merchandise, the coal, will produce nice gains.

[Can Hexter] :I have a question for the Michaels. First for Mr.Giftos: the inventory levels at the utility, you said was about 60 days right now. Is that the normal levels?

It that's sort of an average. Normal average would be closer to 50. So we are slightly above where we would like to be. But that's well below where we have been earlier.

Ok then, Mr. Ward, you also said that fertilizer, I believe you were looking at positively, but agriculture you were looking at in the neutral column. Is there a correlation fertilizer leading into the agricultural business.

A good piece of piece of our fertiliser business is the export of fertilizer to China. It has been growing very nicely, and expect that to continue. And the Ag business. The Ag business could be a pleasant surprise. A lot of it could depend on the crop. Last year we had a very strong South Eastern crop. When we have a strong South Eastern crop, it makes trucking to come of our feed mills very attractive and competitive option. This year with the unfortunate drought conditions, unfortunate for the South East farmers but fortunate for us we may find sourcing in the Michigan area and the other parts of the food grain area that may favour us.

[Can Hexter]: And, Mr.Ward, the ration: you talked about the velocity and such being down sequentially year on year, because of seasonality. How about in the third quarter as we foresee having warm weather and conditional maintenance going on?

I think we will see all the numbers there. So far this quarter we have seen our numbers specially these few that were impacted by the maintenance season that was stating to pick back up. I think we will see that all the key measures will continue to improve in the third quarter and I think we are starting to get our velocity back as some of the maintenance work done. As some of the maintenance work as you get it done you free up the slower orders and you have smoother running railroads. So we think it was last year and this year as well a second quarter phenomenon. We expect to move up on all the measure in the third quarter.

Gordon.

Yeh. Just a 2 quick questions for Mr.Furlong Baldwin. You know, looking at that price increase slide on those renewals, can you maybe highlight some of the areas where some of those merchandise categories, where most of the improvement may come from, looking out? And second, just an update: what, if anything, are you doing on the surcharge [indiscernible]?

I'll talk about the surcharge. We have a fuel surcharge program on both our railroad group and our inter-modal group. The surcharge on the railroad depends upon the price of West Texas Intermediate crude oil being at $28 a barrel for 30 consecutive business days, in which case the surcharge kicks in for every time the price goes up another $5. We haven't achieved that level. It has been around $26 a barrel and so, as of today, we have no fuel surcharge in place on the rail side. The program hasn't been triggered yet.

On the inter-modal side, the fuel surcharge is in place because it is based upon the price of truck diesel fuel. And that did trigger a modest increase in our inter-modal fuel surcharge.

We did not hedge any of our fuel this year. What we do is actually advance purchases of our fuel. You may recall that we advanced purchased about 50% of our fuel for this year at an average price of 78 cents. At this point, we are looking forward a little bit at 2003 and may do some advance purchases in the first 5 months of the year if we can find prices that we think are attractive. We still have a little bit of concern about the Middle East situation. So we have a target price so that we can buy some in advance, if we find it attractive we may go out in the first half of the year and buy some probably less than 50%.

On your pricing question, we look at the value proposition, obviously in all of our commodity areas. And as our service continues to improve, the value proposition that we offer our customers likewise continues to improve and we engage in appropriate negotiations to capture a fair share of that. There are certain commodity areas that had significant decreases during the ConRail transition time and there are other areas where, over the course of time, we have not necessarily captured all the pricing advantages that I feel were available to us. And we have discussed those in the past and they will provide us with larger pricing opportunities. The coal business is one we have been very aggressive in and we will continue to be aggressive there in the bounds of reason. The other commodity areas all depend on the market condition and the value proposition we offer and will evaluate them on an appropriate case-by-case basis.

Chris.

Chris Robertson for First Boston. One is a definitional question and the other is on capex. The first, your free cash flow definition of 200 million, is that after definition?

Yes that is after dividends and before [indiscernible].

And the more in depth question on capex: as you go beyond year next year, do you see that you can take maybe 50-100 basis points out of your spend for rental inter-modal as a percentage of revenue? Is that the kind of goal that you look at or maybe just talk a little but in general about capex?

I think in capex, if you look back over the years, we have been pretty productive with our capital. We probable have the lowest ratio over a long term of capital expenditures to revenue of anyone in the industry. That's because we spend a lot of time looking at our sunken investments and trying to ratchet it up productivity before making any kind of replacement investments. But in the last couple of years we have been pretty economical with out capital spending.

I think at the railroad it had been 950 million this year. More normalised long-term number is probably $100 million north of that, so reducing the capital expenditure level especially as the revenues increase is probably not very likely. Having said that, I think we will continue and Michael can pitch in here and we can focus on capital intensity as a priority and on a relative basis I think you will be pleased with the ratio of capital expenditure for the level of business.

Any other questions? Well, seeing no hands in the air, we thank you for joining us and we will of course be available for private discussion and follow up on any questions you gave us already.