CSX Corp (CSX) 2002 Q4 法說會逐字稿

Good morning. For those of you listening in on our web cast, we have a few members of our leadership team here as well. We have Paul Goodwin, who's our Vice Chairman and CFO, Mike Giftos, who's our Chief Commercial Officer, I think you know these two fellows. We also have with us Al Crown (ph), Al is our Head of Operations. Al is certainly not new to CSX, I think he's been here 35 or 36 years here, but he is new to our earnings release team, so you'll get to meet Al today.

We certainly have had a couple of exciting months here at CSX, as you know, John's has been nominated at for Secretary of the Treasury and we're very proud that John has been nominated. I this it's quite a commendation on him and our company. John is a superb candidate and I have every confidence that he will be nominated and confirmed. Given his qualifications, the broad, bipartisan support that is out there we're very confident that he is going to be nominated out there. My understanding is they did vote him out of the finance committee and they're attempting to bring it to the full Senate for confirmation. We'll see how that plays out today.

As you know, John has made a number of contributions to CSX over the years. He's moved us from a multimodal transportation company to a more rail based company, helped focus us on the core, provided lots of leadership both within the company and within the industry, changing the landscape of American railroads. We wish John well. He did ask me to pass along to you his appreciation for the notes and words of encouragement some of you have sent to him.

One comment I would like to make as an aside on that, as you know, certainly his nomination has brought a lot of scrutiny to CSX and the one story that hasn't been reported is anything to do with our accounting processes, our reporting processes, and I think that's a commendation on our company, the cleanness with which we deal with both our regulations and accounting practices, so I think with all of the scrutiny that's been given to this, you'll notice there has been no question of any issue around that, so once again it gets back to the conservative and appropriate way to deal with those issues.

Well it has been an exciting time for John, it's also been exciting times for our company. As you know we've gotten back on track. We had the aberrant 3rd Quarter, which I know was disappointment to many you but we're back on track now, eight of nine quarters we've had year-over-year improvement and I think you've seen some of the numbers, we'll be giving you more detail on it, but I think given the conditions in the marketplace on the 4th Quarter, I think these are pretty outstanding results.

Expenses, basically flat year-over-year, and that's in spite of the inflation in both health and welfare and wages. The revenues are up about $31 million in spite of a weak coal market and most of that dropping to the bottom line. And we attribute most of that pickup in revenue to the success of our model where we're pushing service that allows us to get both modal conversions and pricing increases and Mike will detail that for you. But it proves to us if we put a better service out there, we can generate additional revenues.

On the expense side, we have some initiatives, Al will describe some of those to you. We've got to drive better labor productivity, better asset utilization, and just overall better overall execution of our service product, and we will do that.

So without further adieu, I'm going to turn to Paul Goodwin to lead you through the numbers.

Thanks, Mike. Thank you all for coming. It's good to be up here in New York in my hometown, and you'll be pleased to know I'm going to do my civic duty tonight and root for the New York Rangers at Madison Square Garden.

John Kenneth Galbraith once said there are two types of economic forecasters, those who don't know, and those who don't know they don't know, and that's what this is all about. In our presentation we may make some statements about the future and those are necessarily based on assumptions and if some assumptions change it may throw us into Galbraith 's second category. You are responsible for staying on top of developments and updating those pictures of the future.

Looking back just a little bit at the 4th Quarter, this chart details our financial results and as Mike said we're very pleased about results for the quarter which were logged in a less than robust environment. The footnote points out that the $60 million charge last year for our New Orleans provision is omitted from these statements so that we can have more of an apples to apples comparison.

As you can see, earnings per share is up some 30% year-over-year. Other income and interest expense were positive and about offset the additional tax bite on the higher earnings allowing most of that $37 million in operating income improvement to drop to the bottom line. Revenues were up some $51 million, surface transportation accounted for some 60% of that, and the expense increase all occurred at our Marine Services units.

Turning to surface transportation, operating income was up some $35 million. Revenues, as Mike said were up $31 million and those were driven by Intermodal, Automotive, and Merchandise. Coal revenues were down, and other revenue, or supplemental revenue, was also down. Mike Giftos is going to take you through the markets and explain what's going on in our traffic base.

The other or supplemental income category was off $10 million from the prior year. Last quarter, I pointed out that that category is made up of a lot of receivable items, a number of payable switching items, and has been running unfavorable, but the 4th Quarter variance has narrowed from the 3rd Quarter, and as we get some write-offs from this category behind us we expect favorable comparisons period over period next year.

Looking to expenses, they are roughly flat. And I know that you all like to understand any unusual items in the expense base. There are ups and downs as we go through the year. This quarter we had about $11 million of favorable, if you will, unusual items. We had a $17 million property tax adjustment, a little more than half of that applied to prior years, and the remainder applied to earlier quarters in this year. That $17 million was partly offset by some one-time expenses in the labor category, mostly associated with some separations.

The net of $11 million is roughly comparable to the insurance recovery last year that Mike told you about. These are ups and downs that frequently run through operating expense, nothing really unusual, but once you remove those two items, the year to year changes pretty much reflect the productivity, inflation, and business activity at the company.

The other items in materials and supplies and other, which has a large variance, are principally related to safety. Not only are the number of injuries down in the railroad, the unit cost has declined, and loss and damage expense is also favorable. The remainder of the favorable effect in this category is in a number of spending areas, items like relocation, payments to outsiders for a variety of services were down, contributing to the favorable number that you see.

Conrail fees improved some $11 million, partly the result of our equity interest in Conrail and partly the result of cost efficiencies in the terminal switching operations, which we reimburse them for.

Inland transportation showed a significant variance. That reflects purchase services by our Intermodal unit both on the western networks of other railroads and for trucking services in and out of our terminals.

Depreciation was up. That largely reflects the timing of capital expenditures throughout the year and a few write-offs and small adjustments to the depreciation base.

So all in all operating income improved $35 million for the quarter, and operating ratio improved some 1.7 points.

We show you this quarterly retrospective just to see sequentially how the railroad, surface transportation group is doing. You'll notice on the top line the loadings in the 4th Quarter of this past year, we're just getting back to the same level that we experienced in the first quarter of 2001, some eight quarters ago. Nevertheless, operating income is up some $100 million, and the operating ratio, as you can see, is at the 84.5 percentage level.

Turning to Marine Services, our world terminal business had operating income which was $3 million higher this year. Continuing operations were basically flat. Revenues were down slightly, and cost offsets were found to deal with that weakness. The $3 million pickup reflects gain on a sale of a partial interest in a development project that we're engaged in, and that is somewhat higher gain than a small business that we divested ourselves of last year. On a continuing basis, operating activities were about flat.

CSX Lines showed a slight decline this quarter. We estimate that roughly $7 million of operating income decline is attributable to the west coast strike. Operations were disrupted there. Absent those disruptions we think the pickup in the Puerto Rico trade would have improved earnings slightly at CSX Lines for the quarter. You have seen, I believe, our announcement about the sale of this business. We've conveyed a controlling interest in CSX Lines to a group headed by Carlisle, and the proceeds from that transaction on a gross basis are $300 million, $240 million in cash now and $60 million representing securities in the continuing business. That transaction we calculate will be dilutive to the tune of about 3 or 4 cents a share.

Turning to the consolidated results for the entire year, you can see that earnings were up nicely year-over-year, up some 64 cents, from $1.55. That represents a pickup of $137 million. Before tax, the improvement of some $215 million was partly experienced in the other income and interest line where other income improved as a result of reality activity in the absence of some write-offs that you will recall were necessary in the prior year, mainly associated with our ACL disposition.

Interest expense improved some $73 million as lower cost financing has replaced some 7% debt that matured earlier last year. In addition, the roughly other half of that pickup in interest expense comes from variablizing about $1 billion in notional values of borrowings through interest rate swaps.

But the main story of course, is in the operating income line where we improved some $110 million. The improvement is split, as you can see, between gains on both the revenue and the expense line.

The cash flow picture, which is something that we pay a lot of attention to, is shown here. And this format differs slightly. This is the way we think about cash. It differs slightly from the GAAP statement that you have in your Flash Report, and I'll just take you through it and try to reconcile the one or two items of difference.

Operating activities produced an improvement of some $300 million. The pretax items that you saw in the previous chart accounted for roughly 70% of that, the pretax earnings pickup. The remainder resulted from the absence of a tax audit settlement which had occurred in 2001, roughly half offset by the payment to settle the New Orleans situation. That $85 million was paid out in the year 2002.

Our working capital is influenced by the fact that we have sold our receivables, if you will, use our receivables to collateralize a loan. We bought back some of those receivables, in other words, reduced the financing, and the funds to do that were provided by pickups elsewhere in working capital, principally in faster collections in the receivable area. So on our management basis we think of these two numbers, the $300 million and the $49 million, as being driven from operations of the business, so we reclassify what we think is basically a financing or a borrowing.

Capital expenditures, you can see, were $1.08 billion. Other investing reflects some lease buyouts that we entered into this year in the absence of collectable on an old investment that came in last year. Dividends are down, and we on this last line include in our cash flow the buildup of cash, 42% of the buildup in cash at Conrail.

So all-in, we generated almost $200 million of free cash flow in 2002, and that is at the higher end of the range I shared with you at the beginning of the year, some $100-200 million.

One big item in the cash flow area is, of course, our capital, and you can see here our capital expenditures were quite high, as we were doing the Conrail integration for two years we brought those down to pretty lean levels and this year and next we will be spending roughly in the normalized area of $1-1.1 billion. Next year's capital at surface transportation will be a $1.016 billion, that's our capital plan roughly in line with the amounts that we spent this year.

We expect that our business plan and this level of investment will produce north of $300 million in free cash flow next year, and we think that number will move higher in the out years.

As we get into next year we are encouraged by revenue levels here in the first quarter. Traffic seems to be strong, but we're also dealing with some challenges on the expense side. Those challenges add up to some $50 million, and a number of you have questioned the two areas which comprise it. One is any P&L effect from the departure of our Chairman. And, secondly, the impact of fuel prices on our operations which, as you know, at CSX are not hedged. The fuel impact is roughly two-thirds of that amount, and our management is working vigorously to offset that expense bulge.

Just looking forward at our leverage levels, we've talked to you about applying cash, first priority, to debt pay-down, and with the CSX Lines transaction and the cash generation that we see, we think leveraged levels will be down at the 54% level, roughly where we were as we entered the Conrail transaction.

One other item that's gotten a lot of prominence lately in the investment community is the effect of the equity markets and interest rate levels on pension plans. This chart gives you just a snapshot of the effects that we see. Our pension returns, our equity returns in our portfolio, have been relatively good. Everything these last couple of years is relative because this last year S&P was down some 22%. Our equity was down some 13%. On a three-year basis, S&P was actually off 14%, and we just beat break-even, 1.7%. As you can see those returns are not near where pension plans have assumed that their returns will be. On a ten-year basis, S&P was up some 9.3%. The earlier part of that decade offsetting those recent returns in our portfolio improved some 11.5%, so we've suffered very significant declines, but they have been a bit better than the general market.

What that has led to from a funding perspective is a pension plan which on the PBC basis, the Pension Benefit Guarantee Corporation is slightly just over $100 million over-funded, using the slightly different calculus that [ARISA] uses, the pension plan is slightly more than a $100 million under-funded, so we're in that rough parity area. That's a decline from our over-funded status after we imported the significant amount of assets from Conrail, but we think we're in pretty good shape.

At any rate, we will be changing our pension assumptions both for earnings and interest rate discount level, as you see here on the chart, and that will have an effect on our financials this year, and the expense impact should rise to the $21 million level, and funding requirements should rise from $12 to roughly $17 million level. So the impact is unfavorable, but the magnitudes are very manageable. With that, I will await any questions and turn things over to Mike Giftos.

Thank you, Paul. It's good to be back in New York with all of you and talk about our business, how we did last quarter and a little bit of forward-looking about how we see the markets performing this year.

As you can see, from this slide, overall our revenue improved in the 4th Quarter $31 million, a little less than 2%, to $1,815,000. What we saw in the 4th Quarter was a continuation of a trend that since we had seen since the first quarter of this year, reflected on this slide. As you can see from the red line a slide I've shown you in the past, the red line reflects our non-coal revenues. The non-coal revenues grew $68 million in the 4th Quarter of this year, about 5%, performing quite respectably but our over all coal performance was down and the net result was revenue growth of the $31 million referred to in the prior slide. We continue our focus on yield with our price increase program. Our revenue increase, our total revenue increased $31 million of about 1.7% was achieved even though over all carloads in the 4th Quarter were essentially flat down two tenths of a percent reflecting overall yield improvement of 1.9%, a combination of I said of both our price increase program as well as some attractive mix that we'll talk about more in a few minutes.

Let's look at our coal business which has challenged us throughout this year. You are all familiar with these numbers, our coal revenues for the quarter were down $37 million, 8.4%. Volume declined 7.4%. And we actually had some yield deterioration of 0.9%. This was a trend we saw throughout the year as we entered 2002 with a very mild winter, exceptionally high stockpiles and we worked those stockpiles down throughout the year. Our late business was down 43%, or $17 million. Our Southern utility business in the 4th Quarter was down 8%, that represents about a third of our total revenue. And our export business in the 4th Quarter was down 26%. We did have a nice pickup in business on our river coal market growing almost 30%. It's the combination of the growth in the river coal market which moves at an average revenue per car of about $400, much below the average revenue per car in the overall coal business of over $900 and the decline in the utility south business, it's that combination of mix that led to the over all decline in yields.

Our price increase program in coal remained very strong through the year, we averaged high single-digit increases in coal, and we're optimistic that we'll be able to continue that next year. We're clearly encouraged by the cold weather we see today, and we expect that this year coal won't present the sort of negative drag and offset our overall revenues the way it had this past year.

In our other markets we enjoyed attractive growth in the 4th Quarter. Looking first at the auto business. The auto producers continued attractive sales incentives. Our revenue grew 7.9% on 4.6% carload growth with attractive yield improvement. Most of that yield improvement is attributable to additional length of haul and favorable mix.

Turning to our overall Intermodal business, we had a terrific 4th Quarter with our Intermodal business, revenues are up some 8.4% on 5.1% carload growth.

Our international business was actually down for the quarter, down 2.7%, $3 million. That reflects the effects of the West Coast strike which we believe cost us between $9-10 million for the quarter. On the other hand, our domestic business grew a very attractive 17.9%, over $30 million. This reflects real enthusiasm with a lowered board trucking initiative that I shared with many of you last summer as we found this new attractive channel of sale really helping us to take trucks off the highway and grow our Intermodal business. We're optimistic about those Intermodal levels and that they're sustainable going forward.

Turning to our merchandise business, which represents as many of you know, about half of our total revenue, the merchandise revenues were up $38 million, quarter over quarter, 4.5%, on essentially flat volumes enjoying very attractive yield improvement of 4.8%. The yield improvement was a combination of two factors, our focus on price but also some very, very attractive mix.

Pointing to just a few of the commodities areas in there, our metals business grew 8.8% in the quarter as we continued to see the effects of both domestic tariffs. The mills are operating at high levels of capacity, flat rolled steel accumulated and volume sufficient to be attractive for rail transport to end users.

Our chemical business was up a very attractive 7.6% on carload growth of 2.5%. Again we saw the effects of our price increase program. Plastics business was strong, and some favorable mix helped contribute to the overall yield improvement.

I'll venture into a look at the future. I don't know which of the two definitions of John Kenneth Galbraith, I fall into, Paul, I'll leave that up to you to decide. We're optimistic about what is happening. On the short term we're challenged by coal for a couple of reasons, and this may surprise some of you, in view of the cold weather we've had.

But for the first quarter of this year we're facing certain losses of businesses, that we had last year. Last year we moved tonnage into our local electric utility in Jacksonville, JEA, that's been switched to Columbian Coal. We have about $28 million of business that we have to overcome. And we're optimistic we might overcome it, but we're cautious, and we have coal placed in the unfavorable category for the short term. As we move through the year we expect with the cold weather and stockpiles at or near target levels that coal will clearly move first to the flat and then to the favorable category throughout the year.

In the remainder of our business sectors, the automotive business, we're encouraged by what we've seen. Year-over-year volumes [reached]production levels, we expect it to climb slightly. However, with the extended length of haul and the favorable mix we think our overall revenues appear in the flat category.

The agriculture business, we're facing year-over-year comparisons that are not too terribly difficult, and we expect that we'll continue to see some softness in the pork and poultry producing business sector of ours as we continue to see some rationalization there, but overall we expect that revenue to be in the flat category.

The paper and forest products business, the lumber and construction materials portion of that, was very strong last year. On the other hand, the paper portion of it was weak. We think we'll see strengthening in the paper and maybe some modest deterioration in the building products sector, and we have that market sector in the flat category as well.

Our phosphate and fertilizer business last year enjoyed a terrific year, the [bone] value was operating at high levels of capacity, the year-over-year comparisons will be somewhat challenging but from what we have seen with the active summer fill program we expect our phosphate and fertilizer business to be flat.

Turning to the favorable category, the Intermodal business is very strong again reflecting strength in container shipment as well as continued strength in our new channel of sale through our [load] board activity. We expect the type of growth levels that we saw in the 4th Quarter to continue throughout this year.

Our Chemicals business is currently quite strong, reflecting a number of factors. Some anticipation of some price increases is allowing us to enjoy some stronger volumes than we might otherwise have expected this year and there is some inventory replenishment, but we're encouraged by chemical volumes that we're currently seeing.

We expect our Metals traffic to remain strong throughout the year and our emerging markets reflect a lot of current strength because in that category we include military shipments.

In our Food and Consumer business is enjoying handsome modal conversions from our Express Lane product and other products and we expect that to continue throughout the year.

So as we enter 2003 we're cautiously optimistic. We know that service continues to improve and our customers are seeing that. A number of our own surveys are showing the positive results for our improved operations, and a number of the external surveys that many of you have shared with us reflect those same trends. We're enthusiastic about our modal conversion opportunities, with our Intermodal sector and our Merchandise sector. Last year, overall, we increased, we took about 450,000 trucks off the highway, in our Coal, Intermodal and Merchandise sectors. We're targeting over 500,000 this year.

And, of course, we'll continue that focus on yield improvement, as our service continues to improve, the value proposition we offer our customers is better, and we believe we're going to be able to continue to enjoy price increases. Clearly, in this economy, pricing is a little more challenging than it has been the prior two years. Hopefully, as the economy picks up, that will be a more attractive pricing environment, but even so we're optimistic that there will be price increases in 2003 as well. So now I'd like to turn the program over to Al Crown, our Chief Transportation Officer.

Well, good morning. It's good to be here with you.

I thought I'd start out talking about staffing. We used attrition in 2004 -- see how fast we have to get ahead -- in the last two years to take out about 3,050 of our staff and we expect to target another 900 for this year. Our revenue per employee continues to go the right way. You can see that we have flattened out a little bit on gross ton miles for employee and that's largely because of coal. 2003 we're going to leverage the technology and process improvements we have been making over the last year.

We use our [vet] reporting, it rolls out starting March. It will take us a year to roll it out across the railroad. Our conductors will be able to input directly from the trains the data concerning what's going on with their customer's cars. This will reduce our staff and get us ready for shipment management, which I will talk about a little bit later. We start our automated crew calling system. That allows a computer to call the crews, and our remaining staff will be used to better service our crew needs.

On remote controls, we exceeded our goal of 100 remote controls gone this year by putting 123 in. That was affected by 240 crews. This year we've got 190 targeted.

And in our process improvements, Fred Favorite (ph) and his team have really been making good headway in getting revenue and taking out cost with the [six Sigma] process and good example of that is in our AMTRAK lines. We had a tough 3rd Quarter with AMTRAK and one of our black belts named Mike Smith in our operations center decided we needed to make the incentive pay from AMTRAK, and that project got us $3 million in the last quarter, and this month we'll get another million from that.

Our 'better is cheaper' model continues to improve our service and reduce our cost. You can see year-over-year, we continue to make good improvement in our service metrics. Truly the 4th Quarter didn't go the way the rest of them did. The reason for that is largely because we right-sized our train plan getting ready for shipment management and as you take the cars on line down, you need less trains. Well, by the time it settled out, our measurements started going the wrong way. In addition we worked with other railroads and our customers to extend beyond the normal Thanksgiving holiday curtailments, and also we took advantage of the middle of the week Christmas holiday to extend those holiday curtailments. It hurt our measurements some but it helped our bottom line a lot.

I thought I would show you a little bit about what cars on line means in terms of productivity. This is the carloads per car on line, you can see as the cars on line goes down, we get more carloads per car. That means about 18,000 cars that are still parked waiting for the additional business that Mike and his team are going to bring in. In addition, as you take the empties out, get them off your line or park them then you can move loads which makes you more money so we continue to see our carloads per locomotive go up and our expenses go down.

Shipping management is our future. We went out and benchmarked several of the railroads. We liked our model, CN has a very good model for this, BN has a really good model for this. And it really focuses on carload performance versus train performance. You have to be at the place that you can make that move. We weren't at that place two years ago. CSX now has a disciplined railroad, and we're ready to make that move into carload performance. And with the variability that we expect to take out of the process this year, we'll reduce costs, and we'll give our customers better service.

One of our core values is making safety is way of life at CSX. Our safety leadership process has helped us reduce 38% of the injuries over the last two years. We're going to teach all 24,000 of our craft employees the same process this year that our management now knows, and we expect another very good year in 2003. Even though our 4th Quarter wasn't at the levels we expected, year-over-year we continue to get good improvement with 43% of our derailments being reduced in the last two years and we have another very aggressive year this year.

In summary, this is what our team is going to spend their time on this year - We're going to aggressively attack costs and improve our productivity. We'll leverage our 'better is cheaper' model using shipment management to give better service and drive out costs, and we're going to further improve safety.

Michael?

Well, thank you, Al. That ends our formal present presentation. As you know, I think it was a good quarter for us, and I think we're on a good trajectory here as we go forward into 2003.

So with that I would like to open it up for questioning and answer. I would ask before you ask your question would you please state your name and identify your affiliation, please.

Hi. It's Tom Wadewitz with Bear Stearns. I've got two questions for Mike Giftos and then one for Paul as well. I guess I can start with Mike. If you can give us a sense of what the split in your yield mix is, if you want to talk about specific categories or overall. Just how much was favorable mix and how much was pricing, just a rough sense on that?

Yeah, Tom, that's a good question. It does depend on the market, obviously. In the Intermodal area I think I've been pretty clear in the past that we don't look at that as largely a price increase opportunity. Yield improvement there is really a function of the international volume being down, and the domestic volume being up so much that domestic has a higher revenue per car. If we exclude that and look at the remainder of our business, I think it's about 40% price and 60% mix, would be a rough gauge for that.

Okay. And, thank you. And then one on the coal side. I think the coal producers had a nice favorable ruling last night, the Judge Haiden (ph) valley fill (ph) decision was reversed, I was wondering if you could qualify how that might affect your operations in the near term, if there are any mines that you expect to come back on line and then what the impact would be.

That was a terrific decision. We haven't had a chance to fully read that decision. But what I understand is United States Court of Appeals for the fourth circuit has reversed Judge Haiden's decision which as many of you know had the effect of retarding, or restricting the development of certain central Appalachian coal production including that which is what we call surface mining as distinguished from deep mining that had valley fill requirements.

The consequence of that is a little bit hard to predict. We expect that it will allow a little bit more production in the central Ap area to come online and that will certainly be attractive for us. We don't have significant current production problems, but there are some mines, particularly on CSX, that can start up again if this decision is as clear as we hope it is.

Okay. And then just one for Paul. You mentioned on the fuel side, 50 million impact, I guess 33 million about negative impact from higher fuel prices. Can you give us a few numbers behind that? Is that assuming that crew prices come back down in second half, and is that largely an impact in first half? Just a few numbers behind that.

That's a first quarter number, and it reflects the fact that the fuel price is above a dollar now compared to 72 or 73 cents last year. Now we look at the market prices on the NYMEX, the forward pricing, and basically use that to quantify where fuel prices might come out so it's based on their projection or the market projection, if you will.

But then that gives you no benefit from the fuel surcharge revenue. That's just a pure expense item type of--

No, the expense item is higher than that, and that would be a net impact.

Okay. Thank you.

Thank you, Gary Yablon of First Boston. First going back to Mike Giftos if I could. Mike, could you talk a little bit about the export coal market. Your competitor in the east talked with us yesterday about being a little more optimistic for the first time in a long time about export coal and then I've just got a couple others.

Well it's not hard to be a little more optimistic than we have been in the recent past, that's been such a difficult market for us. I think that there is a little bit of encouragement for a number of reasons. We're seeing the Chinese consume more of their coal, producing more steel and consuming more of the coal from that region, which may result in U.S. coals being more in demand in the European market.

I hesitate to get too overly optimistic about that. There's a number of factors that affect it, including the strength of the U.S. dollar and a variety of factors, Gary, but I think overall that the directional trend is slightly positive, and, perhaps, we can enjoy a pickup in our export business this year.

Okay. Just staying with you, Mike, if I could, in terms of pricing, as you look through '03, what kind of things would you say are benchmarks, maybe milestones is too heavy a word, but what kind of things should we look for to really understand what you are able to do on the pricing front? Or, I mean, i.e., last year there was a GM contract, are there some things that we might just want to watch for?

There's nothing of that magnitude, Gary. I think what I would continue to look for is our quarterly yield improvement, that's a pretty good barometer with the large numbers. Clearly, mix can impact that and I will attempt to explain and delineate the effects of mix versus price. The market is a little more difficult pricing this year. I think largely because of the economy. I think our service product will continue to allow us to get price and we're looking for slightly in excess of $100 million of price in 2003.

And just one for Paul. There are a lot of puts and takes to labor costs for this year between wage, health and welfare, some of the pension issues. Paul, could you just sort of line some of these things up, 30/60 -- issues and so forth? Could you just kind of line that up for us a little bit, so we can get a better sense of how to project labor costs for '03?

Well, we're currently finalizing some of the labor agreements, and there will be some yet-to-be-determined wage effect. The health and welfare inflation rate is in double digits. That's a problem for us, and that's something that we're working hard to find ways to offset. Because of our workforce being so heavily unionized, that encompasses pension for that portion of the workforce, and the pension for the non-contract people that we had on the chart that we shared with you earlier. That's up, I think, some $17 or $18 million.

Obviously, working in the other direction are the productivity numbers that Al shared with you, and I think they're in the improvement area that Fred Favorite is working on. There's a whole bundle of process and charges which also are the target of efficiency improvement. So there are a lot of rifle shots going to a lot of different areas of the labor expense line, and I can't really quantify all those here for you.

Thank you.

Hi, Ken Hoexter from Merrill Lynch. Congrats to returning to some of the strong cost controls after last quarter's numbers.

Just a couple questions. Mike, if you can talk about whether you have built in any -- on the positive/negative kind of outlooks on some of the results, is there a war premium built into some of your expectations there early on or can you talk about what products you could then see the greatest impact to?

Mike, just following on Gary's question, I think it was the PCU that signed the arbitration agreement or that the arbitration ruling was yesterday. Can you talk about timing of the status on some of the remaining kind of wage-sharing, benefit-sharing agreements that are pending?

And then just a quick follow-up on the Coal. Our coal analyst was talking about some droughts perhaps impacting some of the river coal, I guess. Can you talk about if that's another benefit that could be coming down on the coal side early on.

Well, the last question first, if we may. On the coal side, the river levels are low, as many of you know, and we've had a few spot opportunities working with western carriers to move some [upper] river basin coal to eastern utilities on a spot basis. But more important than that, on the longer term basis, we're working with one of the western railroads very actively to move PRB coal and Colorado coal into some of the eastern utilities that are water-served and that's a very encouraging market for us, which we think will continue irrespective of water levels.

Your first question asked me if there's a war premium built into my forward-looking slide. The answer to that is, no. Other than our military cargo, which is up quite nicely, it's a relatively small portion of our business, but it is obviously up with the current situation that we're all familiar with. The most important thing about the geopolitical situation we're facing is that it ends and ends quickly and we get a restoration of consumer confidence and decline in the cost of crude oil and some strength in the overall economy. We don't have any assumptions around that built into it. Our assessment of the markets is based on what we see today kind of going forward, obviously subject to change depending upon how those events unfold.

In the labor front, as you know, we went to binding arbitration with a TCU, and as the case most of the times when you go with a binding arbitration, both parties are somewhat unhappy when you get through with the process at the end and that was the case as well in this particular circumstance. On the encouraging part for us is on the health and welfare issue, which as you know has been the big hangup in this round of negotiations. There was both planned redesign and cost sharing was part of the arbitration decision. It was very encouraging to us. As you know, we had a cost sharing agreement with BMWE. Now we have one with this TCU arbitration. They are fairly similar in their order of magnitude of benefits in getting our employees sharing with us on these escalating costs. So we think that will be helpful in breaking loose the remainder of the other unions because health and welfare has been the big hangup. We now I think are setting a pattern of how this round may go.

On the wage side, it was probably a little higher than we had hoped for. I think it's -- obviously, it's something we can live with, but we may have not gotten everything we would have liked to have seen on the wage side, but we think it's something that we can live with. So overall, typical arbitrated decision, but I think very importantly for our industry some health and welfare sharing which I think in the future will lead to even more planned redesign which will be good for both us and our employees.

Question for Mike, this is Jason Saddle (ph) from Avondale Partners. You mentioned you were pretty positive on the chemical shipments here in the first quarter, looks like there is some pre-shipping going on. Can you give us some color for why you are positive for the remainder of the year with chemicals?

I'm a little more guarded on the remainder of the year, largely depending how the economy performs after we resolve the situation in the Middle East. Chemical volumes were down last year, so I think our comparisons can be attractive, but there's a lot of uncertainty out there in that over all business but today we're enjoying a combination of inventory replenishment and some pre-shipping in advance of the anticipated cost increases.

Okay. Explain getting the coal real quick. The export coal you said was weak in the 4th Quarter. Gary did mention that your competitor had a better outlook. Your competitor also had a pretty good increase in export coal in the 4th Quarter. Why the disparity here?

Our export coal in the 4th Quarter was down about 26%. It largely reflected the loss of two accounts that we didn't have last year, one was a piece of business that went to an Italian electric utility. That represented about $7 million of revenue. That was business that we captured in 2001 during the tight coal market and that coal is now being sourced from South Africa, so it was a change in sourcing.

We also lost another piece of business to Norfolk Southern so that revenue went from us to them, so it had sort of a double-compounding effect. For the full year I think their export business was down about 20% and ours was down about 27%, and I think the differences are within the range of better -- I can generally attribute to the market conditions.

All right. Mike, can you also refresh our memory on military revenues, is about 1% or slightly under 1% for you guys, total revenues?

It's in that range, yes.

Thank you.

Good morning, Jennifer Ridder (ph) from Lehman Brothers. Would you give us a little more detail on the coal business that will have been lost in Q1? Is that from sourcing or did you lose that to a competitor? And should we expect that to follow through for the rest of the year, or is it just a Q1 impact?

There will be some effect throughout the entire year, although in the first quarter it's more substantial. Some of that lost business will recycle as we move through the year. The first quarter effective lost business is about $28 million. When we reach the 4th Quarter it's about $13. And it's a combination of factors. It's in the case of Jacksonville Electric Utilities, it's Columbian Coal displacing domestic coal. In the case of some of our export business, as I said we lost that contract, the electric utility sourcing from South Africa. There has been some business we lost to our very capable competitor Norfolk Southern but the over all effects of the change will dissipate as we move through the year and I think they will be more than offset by additional consumption by utilities which spent an awful lot of last year living off inventories that had accumulated,. So we're optimistic with the cool weather we had that inventories are much nearer target levels, although there are some utilities that are taking their targets down, but coal, as we move through the year, should move into the favorable category.

Scott Lauer (ph) with Salomon Smith Barney. Just following off of that Mike, understanding what you just said, is that then getting to the point where you've lost between export and NS and Jacksonville about $75 to 100 million of business has moved away from you.

On the low end of that, yes.

Okay. And the other question I had relative to marketing was, you mentioned the number of truckload conversions you are targeting. Could you help us with two things?

One is what revenue did that represent in 2002? You gave us sort of truckloads off the highway.

And secondly, what specific areas in the commodity mix do you see as being most promising as you look at '03? You've mentioned your successes in past in metals I'm just wondering are there incremental commodity groups that you're adding to that portfolio of conversions.

Well it's in all areas. In the coal area, in the 4th Quarter and the 3rd Quarter we picked up almost 10,000 loads of coal that we're moving to the river, and a load of coal in a car is the equivalent of about three trucks so that itself represented on annualized basis about 120,000 truckloads of business.

In the Intermodal area with our new load board trucking initiative there's about 120,000 truckloads of business that we took off the highway in a variety of commodities.

In the Merchandise business, which is about half of our business, the metals business enjoyed modal conversions. The chemical business has targeted modal conversions. The food and consumer area has targeted modal conversions. We are looking everywhere we can, and with the improved quality of our service and the value that we offer and the continuous improvement in our service and reliability, we're looking at every single pound of freight that we can get off highway.

Did you have a revenue number roughly this year of what you think conversions brought you?

On a gross basis, it's almost 200 million dollars.

Thank you.

John Barnes, Deutsche Banc Securities. Mike Ward, two questions on the legislative front.

The first, John McCain's airline dispute resolution act that's coming to the Senate floor looks to have some potential positive pro-management changes to the railway labor act. Especially, in terms of not allowing strikes after a cooling off period and subjecting both sides to binding arbitration. Can you discuss, one, just your over all thoughts on that act?

And then, secondly, if that act were to pick up some momentum in the first half of the year, do you think it has the potential of accelerating the agreements that you have outstanding with the rest of the unions?

John, I'm intimately familiar with that legislation but I don't think that has a dramatic impact on us, because normally we do manage to solve our issues with our labor unions before it gets to that position, to where they would actually take action. We've found over the past, as you know, this round has been going on for actually two and a half years. We both formally find a way to keep this working and not get into a strike risk situation. And I really do believe now that we have two of our major unions, with the health and welfare resolved -- and I forgot to mention earlier, you may recall in our UTU agreement we did also have a separate negotiation with UTU which is ongoing on the health and welfare issue, and then we're making good progress in that negotiation as well. I think we're going to get the momentum behind health and welfare to get all of these agreements concluded, so I don't think it's going to have a real significant impact, John. Just the health and welfare starting to fall will bring these to closure.

Okay. Secondly, the agreed-upon funding, especially from the House, for AMTRAK looks to be significantly lower than what the head of AMTRAK is looking for, and he's talking about a significant revision in the service provided, focusing on high density corridors.

Can you just elaborate a little bit how that might affect you, especially in the near term if you take some of that traffic off of your system.

Well, David Gunn, as you know has brought some very good discipline to AMTRAK he's re focused them on the passenger business and the mail business got them out of the express mail business. He's de-layered the organization, he's bringing good accounting to it and I think he's been a very positive force for bringing AMTRAK to a much better state and a more understandable condition. I think it's David's position and one I agree with that it's a fiction that AMTRAK can make money is just that. And that we need to recognize that as a nation, and what he is pressing is you need to give me sufficient funding, I think $1.2 billion is his request for this year. One house said, 1.2 is okay and another's one is 750. This is just my speculation, he'll bring that to the brink. If that's the case, my speculation would be that the legislature would find a way to give him the funding he needs to stay alive while they're continuing to evaluate AMTRAK.

Should they go obviously they would take up some of the long distance routes. Obviously the northeast corridor would be one of their key corridors, and they could keep that, and AMTRAK uses us quite a bit. If they remove some of those longer distance routes that would obviously free up some capacity for us. But I don't really envision that's where it would end up.

This is Ken Schnabel (ph) at Concherton (ph) Equity Fund. Supposing that the media is all wet on the common expected fuel price decline after the mid east war. What would you do if demand for fuel actually increases after the war and supply doesn't increase anywhere else in the world and fuel prices actually become quite strong and stay quite strong?

Well, I guess two things we do is we'd do a gigantic gulp for one thing because as you know we're entirely unhedged for this year. We do have a fuel surcharge program in place, $28 a barrel, West Texas intermediate, a 2% surcharge kicks in, when it gets to 33, a 4% surcharge kicks in. It has to stay at those levels for 30 business days. So if it got to that level we would kick in our second level of surcharge. Then we would have to do what we could to mitigate the impacts of that because squarely we're unhedged, we're on the open market and we'd just have to bear what the open market brought to us.

You know, Mike, one thing on this fuel situation, I think that's pretty accurate, on what it does over the next several quarters on our expense base, but with Mike Giftos battling out this truck conversion issue in the market marketplace, high fuel prices affect the truckers a lot more than they affect us. You know, they're usually 6, 7% of our cost base, maybe moved up to 8 or 9% with these kinds of increases. But at some point those fuel price increases are very good news for us vis-à-vis the trucks in this gray area where we have this battle going on for intermediate haul transportation.

Roy Blanchard (ph), Blanchard Company. Mike, I want to go back to the price question, if we could. We've talked about the increase in merchandise revenues, 40% price, 60% mix. Let's take for a moment the concept of say, a same store, same commodity, same car type, same basic OD pairs.

What do you see as your ability to raise prices on a same-store basis, and what is it going to take to increase prices and make them stick, in a same-store environment?

Well, if I understand your question correctly, we're obviously facing continuous market pressures, and there is a limit on what we can do. We typically are below the trucking alternative, and that's part of the value proposition we offer. But as our service improves as it has been and will continue to improve, depending upon the particular commodity, we're targeting on our contracts this year and on our merchandise sector, an average price increase in the 3.5-4% range.

Well, we are in the service industry, and without quality service you're not going to be able to get price and you're not going to be able to keep the business.

Well with that I'd like to thank you for attendance today and look forward to see you in the future.

Michael, one more question.

Oh, I'm sorry, one more question.

Jim Ryan with UBS Warburg. And I wanted to ask you about the impacts to CSX of the WS separation. John, you know, John leaving, what's going to impact, you know, to the company? Obviously, you guys are a team that have been together for a long time, but, have you gone back and said, hey, you know, it's going to cost us X because John -- John's going to get it confirmed. I mean I'm here to tell you John is going to get it confirmed.

No, I think Paul alluded to that earlier as one of the challenges we he in the first quarter, about a $15 million hurdle, about two-thirds of that related to John. I think on the larger perspective the real issue is what the Board has done as far as succession planning. We've been in the process here for a couple of years of preparing for succession. This is really an acceleration of what we had planned to do, I think as far as our continuity within our company and our management and of staying on our path of improving service, getting the modal conversions, the price and controlling cost, I think we're going to be on a solid path so the issue with John I don't think is a big one, one that we knew was going to be happening this year anyway. It's just a timing difference.

That's great. Congratulations.

Thank you. Thank you very much.