CSX Corp (CSX) 2003 Q1 法說會逐字稿

Good morning, and welcome to the CSX first quarter earnings conference call. All participants will be able to listen only until the question and answer portion of the call. This conference is being recorded for instant replay purposes. If there are any objections, you may disconnect at this time. I would now like to introduce your host for today's call, Mr. Michael Ward, Chairman and CEO of CSX corporation. Sir, you may begin when ready.

Good morning. This is Michael Ward and I appreciate you joining us by conference call today to review CSX Corporation's first quarter earnings. I'm joined today by Paul Goodwin, our Vice chairman and chief financial officer, and Mike Giftos, our Chief Commercial Officer. Our Chief Operating Officer, Al Crown, would normally be with us, but he's in Washington, D.C. today to accept a very special reward on behalf of the company. Al is with Bob Toms, one of our general foremen in the mechanical area and is based in Indianapolis, Indiana. Bob is this year's winner of the John H. Chafee (ph) Environmental Excellence Award given by the Association of American Railroads. I'm proud to say that this is the second year in a row that a CSX employee has won this distinguished honor. Bob won for outstanding environmental stewardship and leadership in CSX's HAZMAT sentinel program. Bob is one of thousands of terrific CSX employees across our company going above and beyond to serve customers, to grow the business and grow our productivity.

Similarly, I'm proud of the fact that CSX employees are contributing to the security of our nation and are serving inactivated Guard and Reserve units across the globe. CSX has more than 80 employees who have been called up on active duty. Many of them are in Iraq and Kuwait and our prayers and thoughts are with them and their families. If gives me great pleasure that Ronald young Jr., one of the seven POW's recently rescued in Iraq, is the son of one of our conductors, Ron Young, Sr. We're extremely happy for the Youngs. Another fine example in our minds is Scott Barcalow (ph), a locomotive engineer recovering in Walter Reid Hospital from injuries he suffered in Afghanistan. Our country is truly fortunate to have so many brave young men and women, and our company is proud of our employees who serve.

As we turn to the business side, let me make a couple of observations. In the quarter, we completed the conveyance of CSX Lines through the Carlisle group, receiving cash and securities commensurate with the fine company and the quality of this company. With respect to the economy, we're seeing glimmers of light to give us hope that a recovery is coming. When Mike Giftos goes through the numberings, you'll see excellent improvement in many of our commodities, but the strength and endurance of these improvements remains to be seen. The numbers we'll discuss gives us cautious optimism that we're about to turn the corner. Although a number of the key economic indicators continue to be below what we had anticipated, industrial production and GDP in particular. There are other wild cards out there - fuel costs, the situation in the Middle East, and now the outbreak of disease in Asia.

So today, we're going to stick with what we know. I believe that all of you have had a chance to review the numbers, and Paul will take you through a more detailed look in a minute. You'll see we earned less this year than last year in operating income. This is largely due to the severe weather experienced this winter, and the dramatic increase in the cost of fuel. Service transportation operating income was $169 million, down from 194 million in the first quarter of 2002. Before the effect of accounting changes, EPS this quarter were 20 cents per share, compared to 32 cents per share last year. You'll recall it's a 2002 results included a significant real estate transaction worth 11 cents per share. So excluding this one-time gain, EPS was basically flat year over year, despite the weather impacts and the fuel price escalation.

On the brighter side of the equation, we're really encouraged that our revenues are showing a good deal of strength even in a sluggish economy. In fact, our revenues of 1,833,000,000 were the highest first quarter ever for CSX's Surface Transportation unit. This reflects the success of modal conversion efforts, moving freight from the highway to our railroad, and our ability to increase yields by pricing our services consistent with the value we are providing. Most of our merchandise categories are up. The Intermodal is showing a lot of strength. The automotive group is holding its own and coal is coming back. Mike will get into many of the details on these numbers. There are good things to build on here, and coupled with some of the reports we have received from other rail roads, I believe they're solid industry evidence that our industry as a whole and certainly CSX is delivering a value proposition that is appealing to many of our customers.

Let me mention one example that we're really proud of. Earlier this month, CSX was named supplier of the year by General Motors. General Motors has 3700 suppliers worldwide, and to be named among the elite 70 is quite an honor to us. We're proud of it, and it shows that when you provide safe, reliable service, your customers will notice it and reward you for it. With respect to our first quarter safety and service performance, all of you have the information in the packets on the web. In most of the categories, you'll see the effect of the severe winter weather. We had a 1 percent increase in injuries over last year, and a 15 percent deterioration in accidents, both of which are well below our targets. Only two of our 18 service measures, cars online and local originations, were improved over the first quarter of last year. In the past month, however, our key measures are improving, but they're still not up to the second quarter of 2002 levels.

However, nothing has changed in our priorities. Safety and service are preeminent. As the winter weather subsides, we're now returning to a level of performance that we have committed to and that our customers expect and deserve. In addition, Al Crown and his team are continuing to keep the operating folks focused on their safety objectives, recognizing that our objective is zero accidents and zero injuries, and we have good processes in place to move toward that goal. Just as the winter weather took a toll on our key measures and our performance objectives, it also hurt us on the cost equation. In the quarter, we were buffeted by fuel costs that were $50 million higher than last year due to price alone, and weather-related costs that were in the neighborhood of $25 million higher. Paul will talk in more detail about the factors that drove these winter-related costs.

We believe that the effects of the winter are largely behind us, and we're hope hopeful that with the progress our nation has made in Iraq, fuel prices will abate. I'd note here that we are examining the advisability of hedging a portion of our fuel in the future at this time. As I have said, our measures are beginning to move again in the right direction, and that will help us on the cost. But bad weather or not, we know there are cost structure remains too high and must be addressed. Our business model is predicated on two levers - growing the revenue and controlling the cost. We believe we are on the right track with the revenue, and we have a number of initiatives in place to ensure that the cost side of our model keeps pace.

We've reinstituted our PIT or our performance improvement teams, a program many of you remember from the 1990's. The newly named PIT plus effort if intensely focused on examining all aspects of our business and benchmarking best practices both in the industry and at other leading companies. Many of you recall that the PIT program was successful in identifying significant areas for cost savings and important productivity gains for us in the 1990's. We've tagged our new program PIT Plus because we're adding Six Sigma methodology to the effort to make it all the more effective. Fred Favorite, our Senior Vice President for Finance, is leading the PIT Plus and Six Sigma efforts and is doing a great job in helping us drive costs down and increase our productivity.

We're also examining and comparing our staffing requirements versus other railroads. As we have reported to you previously, we expect our staffing levels to be about 900 employees below 2002 by the end of the year. Everything is on the table except for anything that affects safety or service. As most of you know, we have a number of initiatives underway to enhance our productivity. Last year we installed remote control devices on 123 locomotives at 48 separate locations involving 250 crew assignments. This year, we'll install devices at another 190 locations - 190 locomotives at 63 new locations, and in an additional 300 crew assignments. By the end of 2003, 2800 employees will have been trained in the use of remote control technology, which will help improve both our safety and our productivity.

We are also continuing the installation of our auxiliary power units, or APU's, a technology invented by CSX. We installed 785 units last year and will install 600 units this year. By the end of 2006, we'll have APU's on most of our locomotive fleet, generating savings of 25 to 35 million gallons of fuel annually. Our use of technology is also expanding to the piloting or our event reporting devices in Louisville, Indianapolis, Atlanta and Richmond. With these devices, we'll increase the efficiency, the accuracy, the completeness and timeliness of the data we have available for customers and for ourselves.

Employees will use these on-board reporting devices just as a FedEx driver has a device to record deliveries and individual packages. So will CSX employees have a device to record of work with our customers. We will use that day to measure our success against meeting the commitments we've made to the customers. The piloted use of this device will last through June. In July, we will begin a system-wide implementation, one division each, lasting approximately one month. We expect to complete the rollout of 1,000 devices by the end of June 2004.

Finally, let me spend a minute and pay a tribute to Paul. After 38 years of tremendous service and leadership, Paul will be retiring in the next few weeks. All of you have come to know Paul for his knowledge, his intelligence and his integrity. Paul has played a huge role in our growth and our success, and we will miss him greatly, just as we envy him for his new found freedom. Many of you saw the announcement we issued last week. We're delighted that on May 5th, Oscar Munoz (ph) will be joining CSX corporation as our Executive Vice President and Chief Financial Officer.

He's got some big shoes to fill, but we think he will be a great addition to our team. Oscar joins us from AT&T, where he was the Chief Financial Officer and Vice President of AT&T consumer services, a $10 billion business unit. He also held senior positions at U.S. West and Coca-Cola. We look forward to having Oscar onboard, and all of you having the opportunity of meeting and working with him as we take CSX to the next level. One of Oscar's main tasks will be helping us to ratchet down our operating ratio. So with that, Paul, would you take us through the numbers, please?

Sure, Mike. Thank you very much for the kind words. I'm going to miss you all in the analyst community. If you'll turn to the first chart, the disclaimer, if you will, I've been asked to emphasize the disclaimer and I thought I might paraphrase it but note that it fair paraphrases itself, so I'll attempt to clarify to illustrate with a forward-looking statement of my own. I'm looking forward to retirement. I've got enough business activity coming up to stay connected, but my principal expectation is to lower my handicap and be able to play golf even with Fred Alliason (ph). Now that expectation depends on several things. It requires that my friends stop insisting we play from the back tees (ph). It will probably call for a high technology putter, but most of all, it depends on how many Mulligans Fred Alliason (ph) gives me. The point is that things in the future are uncertain. Now it will be my responsibility for wagers with Fred, but it's your responsibility for any conclusions that you draw from forward-looking statements made today.

Turning to the charts, the first one contains the consolidated results for the quarter. Mike highlighted the bottom line where before the cumulative effect of accounting, we earned 20 cents a share compared to 32 cents last year, down 12 cents per share. You'll note from the chart that operating income and other income were both down, and I'll touch on some details there in just a second. We had a partial offset in interest expense and taxes. About 80 percent of the $11 million improvement in interest expense is the result of floating rate debt. The other 20 percent reflects the fact that we financed some 600 million last year at lower rates than maturing debt.

The next chart titled "operating and other income" gives a little bit of a flavor for those declines. At Surface Transportation, we were down some 25 million, and we'll share some details on that in a moment. International terminals had operating income improvement of 4 million. 1 million of that occurred in Hong Kong. Another million reflects overhead cost takedown, and 2 million represents stronger business in world terminal's joint ventures, which they operate and participate in on a non-controlling basis. In the Other category, the roughly $14 million increase in expenses is the one-time effect of the retirement of our former Chairman.

Looking into the Other income category, you'll see the real estate line declined some 31 million. That's almost entirely the reflection of the western Pocahontas mineral sale last year which was not replaced by a similar transaction this year. Other income improved, half of that reflects the write-off last year of our interest in a real estate joint venture and the remainder represents miscellaneous non-recurring adjustments. I might point out that the 10 million expense in the Other income category is more representative of a first quarter performance for that line item.

Turning to the next chart and taking a look at Surface Transportation, our revenue performance, as Mike said, was quite good. Mike Giftos is going to take you through the detail and what's going on there, but just to summarize, at the railroad unit, volume was roughly flat as gains in merchandise traffic were offset by declines in coal. Nevertheless, revenue improved some $45 million. At Intermodal, loadings were up some 9 percent and revenue gained some $40 million, making up a 5 percent or $85 million improvement you see on the chart. We'll go into a little finer breakdown of the expenses in a minute, but you'll note that several categories had double-digit increases in spending.

Fuel was up some $54 million, reflecting a price of $1.05 per gallon compared to 72 cents last year. And NS&L (ph) material supplies and Other was up roughly half reflecting the increases Mike noted in the injury area, personal injuries, and the Other was heavily influenced by the weather. In the inland transportation category, you see $11 million - which reflects purchase transportation by our intermodal group in light of that 9 percent increase in volume.

Turning to the next chart, we've broken down those expenses according to cause. Fuel price, as you can see, had a $50 million impact of some $13 million of surcharges, reduced the net effect to some $37 million. Weather was the big issue in the first quarter, and as you can see, we estimated cost us some $25 million. Labor infringe was up 7 million. half of that impact resulted from train size and train delay as impacted by the weather. We ran shorter trains and had some 2,000 additional train starts as a consequence, and train delay in getting trains to destination with the weather conditions as they were, causing an additional 1400 relief crews. The other half of that increase reflects maintenance of weigh labor. Our people were involved in snow removal, repair of signals, pole lines, those kinds of things.

Material supplies and Other - the weather caused outside services and utility expenses to spike up. Outside services were involved principally in derailments, where we experienced a number of broken rails as a result of the temperatures, and in snow removal. Utilities were up because of heating requirements, switch heaters in the field and equipment and vehicle fuel. The effect on expenses, once fuel and weather are put on the side, was some $35 million increase, allowing some $37 million of that 72 million of additional revenue to come to the bottom line. Excluding the injury component which spiked in this part of that $14 million MS&O number, some 70 percent of those dollars were brought to the operating income line.

The next chart looks forward just a bit, and we feel very good about where things are heading. Service, as Mike mentioned, is moving in the right direction. The indicators are all pointed positively, and that's got a three-pronged effect on our business. It increases customer satisfaction, which is a key to an increased volumes, good service, predictable service reduces costs and we expect to feel the effects of that going forward, and it also assists our marketers and salespeople in the pricing area, in our pricing programs remain very vigorous. Productivity initiatives are intensifying. We are looking at the labor side of the house, and are working on plans to exceed our targeted 900-persontakeout. Mike mentioned the PIT Plus effort, which is analyzing all processes, and we expect to have a big aid in not only labor component, miscellaneous expense component but a significant pickup in asset utilization.

Our capital budget, we shared with you at the beginning of the year, we expect to keep that at lean levels. We've talked in terms of a billion to a billion one as a level we expect to maintain going forward. We're working pretty hard inside that constrained capital level to increase the mix of high return projects and help our profitability going forward. All in all, we've had a tough quarter, but we still expect cash flow for the year to come in at the $300 million level that I mentioned at last quarter's meeting. Turning to the final chart, you'll see a bar graph, and we had an influx of cash because of the CSX Lines transaction, which Mike mentioned. We received $300 million in value overall, 240 million of that was cash proceeds, and we netted some $214 million. The $26 million differential was - reflects roughly half of that reflects fees and costs associated with the transaction. The other half represents cash balances to cover liabilities which had been accrued during the year and had to be settled in March. These numbers are disclosed and discussed in the flash and in our 10-Q.

Going forward, our continuing involvement with CSX Lines calls for an unusual, to some of you, accounting treatment. We will be amortizing the $127 million gain over the remaining 12 years of our lease involvement with lines, and that produces roughly a $10 million operating effect going forward. That's a non-cash effect, but it does coincide with the timing, although not the exact amount of the earnings that we'll be receiving on our continuing security interest in lines. All in all, the dilutive effect is about 1 cent per quarter or about 4 cents a year as a result of the lines transaction, but we think it's the right strategic move, and helps us focus on the principal business.

The bar graph that you see reflects the first quarter improvement. We closed the quarter with a 55 percent debt ratio, and that compares to 63 percent you see at the peak. We also closed the first quarter with a four times EBITDA to interest coverage, which is up from some 2.7 times coverage at the trough (ph). Cash flow for the first quarter on an operating - continuing operations basis was break-even. Actual free cash flow is $115 million, including our share, our 42 percent share of Conrail's cash generation, and that reflects the 214 million from lines, less roughly $60 million associated with our chairman's retirement, and $40 million pay out for taxes, which had been deferred with the (inaudible). So all in all, we're feeling financially healthier and we're looking forward to a stronger latter part of the year. With that, I'll turn it over to Mike Giftos to take you through the revenue side of the house.

Well, thank you, Paul, and again, good morning. In the face of a very harsh winter, a very difficult operating environment, exceptionally high fuel prices, we are very pleased to see that a number of our modal conversion initiatives have gained some substantial traction in the first quarter, and we were able to enjoy a nice year over year pickup in railroad revenues on a year-over-year basis. Revenues were up in virtually all markets with the exception of coal, up 4.9 percent year over year, or $85 million. That does include, I should point out, $13 million from our fuel surcharge program, and it does also include a very nice pickup in traffic associated with marshalling our forces in the Middle East, some $17 million of military revenue on a year-over-year basis.

But nonetheless, all markets enjoyed nice revenue improvements. Additionally, as you can see from page 12, the slide on page 12, we achieved this 4.9 percent revenue growth with a 2.9 percent carload growth, again, enjoying nice yield pickup. This reflects a number of factors. Our continued focus on price improvement, and we also, of course, receive some significant help in the fuel surcharge and some favorable mixes that I'll talk about in a few moments.

Let's look at our individual commodities sectors, first starting with coal. As we've seen for the past several quarters, coal remained somewhat challenged in the first quarter. It was down $15 million on a year-over-year basis, some 3.5 percent on car load declines of almost 5 percent. We saw some declines in revenues and volumes in a number of commodity sectors, in the export area and some year over year coal contracts that we lost, did recycle in the first quarter but we did not have those same revenues this quarter that we had a year ago. Some of our industrial sectors were down year over year, but we did see some strengthening in our utility sectors as we moved through the quarter and with the weather conditions that I'll talk about more in a moment and the high natural gas prices and the lower stockpiles, we're optimistic that the coal story that we saw in the first quarter will be reversing itself as we move through the year and the year over year comparisons will be much more favorable in this market.

Turning now to the next slide, our automotive traffic in the first quarter, the revenue was up 4 percent on a 1.6 percent increase in carloads, and we showed some nice yield improvement there as well. The revenue and yield improvements were due largely to line haul ex-tenses and some modest modal conversions as we capitalized on some spot market opportunities. Vehicle production in the first quarter was up modestly, but we're currently seeing some buildup in field inventories, and we've seen the effects or concerned about the long-term effects of incentives, and this market remains an area of some concern.

Moving to our merchandise market, the merchandise group enjoyed a very, very nice first quarter. Revenue was up some $54 million, 6.2 percent on 3.4 percent gain in volume, some very nice yield pickup in a number of areas. Virtually all commodity groups with the exception of our phosphate and fertilizer business showed nice year over year improvements, and you will recall that last year, the phosphate and fertilizer business had a tremendous year in the comparisons, frankly, will be challenging all year, but even in the face of those comparisons, the difference in revenue on a year-over-year basis was relatively small. The stellar performers were our metals group up 12.2 percent in revenue as we saw strong demand for some export steel, scrap market remains strong and our modal conversion initiatives remains robust.

The chemical volume and revenue in the first quarter was up. Revenue was up some $13 million, 5.5 percent carload growth of 2.2 percent. In the beginning of the quarter, we saw some significant increases in our plastic revenues, as that largely reflected inventory adjustment from low inventory levels that came into the beginning of the year. We also enjoyed some significant additional revenue from the movement of weather-related LPG gas, coupled with a new marketing initiative at our transwell (ph) facilities that allowed us to extend the reach of our LPG product and non-rail-served markets. Finally, the real star performer in that group was our emerging market unit. That was up $24 million on 8.6 percent carload growth. But here again, the single big contributor that we won't see going forward to the same extent was our military traffic. That accounted for some 17 million of that $24 million worth of revenue growth. But the other commodity groups in that area, the aggregates all performed quite nicely and are continuing to perform nicely.

We sawed continued effects of our pricing initiative, the contracts that we renewed in the quarter averaged an increase of 3 percent. You will note in the flash that we have slightly realigned our commodities. The minerals group, which was quite small, as minerals have been declining, largely reflecting the displacement of domestic minerals with imports, we now include that in our forest and industrial products area. The former group that we classified as food and consumer, we've included that now in our forest and industrial products. The consumer portion of that is in the forest and industrial products group. Those are commodities such as appliances, and the food segment of food and consumer is included with our agricultural grouping. All groupings have been restated last year so the year over year comparisons reflect the appropriate changes.

Finally our Intermodal business had a terrific quarter this last quarter. Revenue was up some 15 percent on 9.5 percent growth in volume. This reflects a number of things. We're seeing some significant strength in the CSX trucking initiative. Many of you recall how we talked to you about how we are now using low board at the Internet to capture loads and moving those directly to market. That business comes with two things. It comes with a responsibility to deliver the trucking component at each end of that move, and the revenue we receive reflects the trucking revenue as well, so that additional revenue is largely used to offset trucking costs. The growth in that business helps account for the significant improvement in the yield.

Our international business was up quite nicely as well. That was up 2.7 percent in total revenue on a 6 percent gain in volume. In operating income for the Intermodal group was up30 percent on a year-over-year basis. I will note that the increase of 30 percent isn't as much as we would have expected, but the harsh weather condition that Mike and Paul referred to, in fact, at the Intermodal area as well, and we expect going forward that we will bring a significantly larger percent of that revenue to the bottom line.

As we move to our next slide, it's been our custom to give you a view of how we see our markets going forward, and we remain cautiously optimistic. As I indicated earlier, the auto commodity group, we placed in the unfavorable area going forward. Production forecasts have been reduced recently, and we expect that to have a negative year over year impact on us at least in the next quarter and maybe a little longer than that. Phosphate and fertilizer business is strong but it's bumping up against some very strong year over year comparisons as 2002 was a banner year, and we're going to be challenged to meet those same revenue levels that we achieved last year.

In the chemical area, we placed the chemical revenue, which is a significant piece of revenue for CSX, in the flat category. We're seeing that high feed stocks that resulted in lower production levels. The good news is that we think inventories are very, very lean and as feed stock prices come down with declines in crude oil prices, the need to replenish those inventories will occur, and if we get some additional help from the economy, this could quickly move over to the favorable category. Our agricultural and food segment, we expect to be essentially flat going forward. We have some strength in our feed grains, but we also have some weakness because of some business we lost in the sweetener (ph) area due to a receiver shipping sources from a different company.

In the favorable area, we think our coal volumes are well positioned, our coal market is well positioned to enjoy very favorable attractive comparisons year over year as we move forward. Gas prices as many of you may have noted, if you saw the "Wall Street Journal" article today, a very high at about $5.50 in Mcf. The spot price of coal is trending up. Electricity generation in the first quarter in the east was up some 7.5 percent. Stockpiles are low. So we're beginning to see a coming together of the various factors that make us quite encouraged about our year over year prospects in coal as we move forward. We're optimistic that our Intermodal volume strength will continue, perhaps not at the same level that we enjoyed in the first quarter as we enjoyed some of the effects of the West Coast strike in the first quarter, but nonetheless, we expect strong Intermodal growth moving forward as our load board trucking initiative continues to gain additional traction.

The metals business will remain strong. The demand for scrap continues, and we expect to continue to see more modal conversions, and that should remain positive going forward. Our emerging market unit, while we won't enjoy the same level of military traffic we had in the first quarter, we nonetheless expect strength in our aggregate business, which is included in there, as well as the strength we've enjoyed in moving waste products. And our forest and industrial products group is showing some nice strength, and we expect that to continue to be strong moving forward with strength in our paper markets and improving strength in our building products areas.

So in conclusion, what we know, we're optimistic about. We know that we can continue to focus on yield and enjoy yield strength, we know that we can take trucks off the highway, we've demonstrated that, we're confident we'll continue to do that, and we're optimistic that some of the challenges we've seen for the past several quarters in coal are reversing themselves and the coal future looks brighter. And we're actually hopeful to those things that we can't control, the things that we can't control, of course, are the direction of the economy.

We're encouraged by some of the latest reports we've seen where consumer sentiment is improving, and the declining cost of crude oil will certainly help consumers and help strengthen our economy, and the geopolitical environment that's plagued all of us with uncertainty hopefully will stabilize and we'll begin to get the type of economic rebound that really helps a railroad's operating income as we start to enjoy more volume on our fixed cost network. So we remain cautiously optimistic that we can continue to enjoy revenue growth as we move forward. And I look forward to answering any of your questions.

Thank you, Mike. That ends our formal presentation. Once again, we're very pleased with the kind of revenue growth that we've experienced in the quarter, especially in light of the difficult operating circumstances we've found ourselves in. Our expenses were up significantly, but we also know that a majority of those were temporary. The winter weather and the fuel spike that we experienced during the quarter. We feel we're once again on the right track operationally, no pun intended, and we are like most of our brethren in the industry, cautiously optimistic about the macroeconomic environment in the near future. Based on the best intelligence we can gather from our customers, our economy is still very fragile, so there's a lot of uncertainty about where it's heading. So with that, I would like to open up for questions. I would ask that before you ask your question, would you please state your name and identify your affiliation.

Thank you. If would you like to ask a question at this time, please press "*1" on your touch-tone phone. You will be announced prior to asking your question. Once again, if you'd like to ask a question, please press "*1". Our first question comes from Gary Yablon.

Hi. Gary Yablon, First Boston. How are you gentlemen?

Great, Gary. Thanks.

Mike, can you talk a little bit about fluidity of the system? It seems like while revenues are good, you're not bringing as much down to the bottom line as you'd like to, and the system isn't running as efficiently as you'd like it to. Why is that happening? It can't just all be weather. There must be some other things that you need to do, want to do, so on and so forth. Could you get into a little bit more detail about that?

Sure. I'd be glad to, Gary. And I think it is largely weather. If you think about this winter, it was a very unusual one. For the first two weeks of the year actually the weather was very cooperative and we were hitting some of our best service measures ever. And then we went to about a three-month period where - and we call it the winter of Thursdays. About every Thursday, we were hit with an ice storm, a snowstorm, floods, petulance, and what happened, Gary, is we went through that process. Thursday, Friday and Saturday are actually our three heaviest days on the railroad, so we were getting hit with these storms while the railroad was the most heavy, and what happened is we started to try to recover from that disability. We were starting to get our traction back Tuesday, Wednesday and got hit again, and each week, it deteriorated a little bit more because you had less ability to recover.

The weather really did not break, as you may recall, till early April. And since then, we've been working to rebuild that fluidity, and it's really been some process of working through that several three-month period of gradual deterioration. It's been in about the last 10 days we've actually started to see the numbers turn. The velocity is heading up, the dwells (ph) is heading down, cars on line are heading down, so all the numbers over the last 10 days have started to move back where we expect them to be. They aren't quite yet at the level we experienced in the second quarter of last year. I think it's just about the big complicated network, you don't turn it overnight. Our expectation is that over the next week or two as we continue to see favorable weather, continue to get back into a rhythm, we'll start hitting the kind of numbers we had in the second quarter of last year, which clearly helps our cost profile and also puts us back on the path to support our modal and price conversions. So it's he really just taken us a little longer to rebound from that severe winter than we would have liked, Gary.

And could you give us a sense kind of directionally how you see that impacting the operating ratio, and let's assume the fuel prices, I don't know, mid 20's, WTI kind of stay where they are.

Well, right now, Gary, on fuel, today we're paying about 91 cents a gallon versus 78 last year.

Right.

As you know, when oil prices come down, that doesn't necessarily immediately translate into the prices we pay going down. There's a lag in there. But we are encouraged we're seeing that head down, but it's still going to be an issue for us to some extent in the second quarter. But I think we'll start to see - we still did not have the fluidity we wanted, which obviously impacted us somewhat on the cost side. We think as we go through May and June, we'll start to see the improvements. If we look at - you know, generally we don't give earnings guidance, but last year we made about 63cents a share in the second quarter, you'll recall, and we did have about an $11 million net favorable contract settlement impact in that quarter, so clean earnings, we were probably about 60 cents a share last year.

When we look at this second quarter, we've got the fuel prices still an issue, and we'll remain to see what happens in the next two months. The economy looks encouraging but still uncertain. You were pushing a lot of these productivity initiatives. All said and done, I'd say we will probably - would expect to do a little bit better than that clean 60 cents we had last year. I don't have in the top of my head what that does on operating ratio, but that's probably where we'd expect to come in on an EPS basis.

Gary Yablon Ok. All right. Thank you.

Our next question comes from Scott Flower.

Good morning. Scott Flower, Smith Barney CitiGroup. I was wondering if I could touch base with Mike Giftos on yield. I wanted to get a better sense on a couple of things. How much - as we look at the revenue per card, I know this is difficult because it will vary by different sub-segment, but how much of the improvement in the revenue per carload do you think is due to some of the favorable mix that is you talked about? Obviously there's some length of haul and spot pickups in automotive and you mentioned a couple other areas, and I'm trying to get a sense if I look at the different buckets of what goes in the revenue per carload, what were the different factors that attributed to the gain?

That's a good question, Scott. Clearly, we started out with the fuel surcharge revenue, all of which impacts our revenue per car, all of which is, I think, temporary as the fuel price does descend through the thresholds of our surcharge. We also note that military traffic came in at very attractive yields and impacted some of our merchandise revenue per car numbers, and I think the over 50 percent yield improvement is attributable to mix changes and fuel surcharge. I expect our overall yield improvement program related to price to be right in line with what I have previously said to you and others in the past. Not as strong as last year on the pricing front, but still very attractive in the 110 to $120 million range.

... Intermodal, did you more or less say the improvement in revenue per carload was primarily due to the change in mix relative to the - that in and a of itself is the reason why you are working to - Intermodal - were there other factors that also ...

Scott, this is Mike. We seem to have had a very difficult time picking up your question because of the communication is very fuzzy, so if you could please repeat that, I'll ask our technician to see if they can do something to help clarify the quality of the reception.

Our next question comes from Jim Valentine.

Great. Thanks. In terms of cost per employee, it went up only 2.8 percent, which is great, and it's a little better than some of your peers have reported, and I'm trying to understand if there's anything unusual in there. First thing that comes to mind is, my guess is you probably didn't hit your operating targets for the quarter given the weather and what not. Is there possibly a reversal, not a reversal but just a much lower accrual rate for incentive comp that will start to step up as we go through the year or is that a clean apples to apples numbers and we can keep using that kind of inflation rate nor for the rest of the year?

This is Paul, Jim. I think there are a number of factors in there, probably more than half of that reflects health and welfare increases, and the rest wage increases and some overtime and whatnot. But as we've looked through that, we expect that rate to be approximately applicable for the remaining quarters of the year.

That would be great. Great. The second question is, in terms of the PIT teams, Mike and Paul, you guys obviously back 10 years ago when you were implementing PIT programs. As I recall, it used to take about, oh, six, maybe 12 months between from the time you really sat down with your team until you started extracting meaningful savings, and I'm trying to figure out first if that seems like a realistic time frame going forward, and if so, when are we going to be on a call when, Mike, you're highlighting that this particular PIT team pulled 5 million out here and10 million out there? Is that possibly as early as July or are we probably looking 2004?

I think you probably hit it right with the beginning of your comment. Your memory is very good, Jim. That PIT program, what the process is, is you'd look at each specific area, you do benchmarking, you do best practices. Then you identify your targets, develop the action plans around it, and as you may recall, what we did in that program many times is identified gaps that may take you two or three years rather than just a one-year how do you tighten the belt, so you're quite right, when we start the process to when you probably start seeing us report it, talking about it, it's probably a six-month kind of process.

And if you think about it, what we're trying to do is establish that pipeline that we lost during the Conrail transaction. We were so focused on doing the Conrail transaction the pipeline of productivity improvement dried up some. What we're doing if you think about it is rebuilding that pipeline. This year we're putting in the - and last year the APU's, the remote controls, the event reporting, all of which will have some favorable impact in the second half of 2003 as well as into 2004, because many of those are implemented over a year period. The PIT programs will probably start hitting their stride and their vibrancy, I think, in 2004.

Ok. Good. And last question is the head count reduction of 900 people, it sounded like you're possibly opening the door here for that number to be a little bit higher. Trying to understand, you know, magnitude, we talked maybe it's 1,000 or are we talking about maybe it's double that number?

Well, before I respond to that, one comment I did want to make. Scott, you may not have heard us, but when you asked your question, I think you were on a cell, it was breaking up a little and we really didn't hear that question clearly. If you'd get back on the line, we'd be happy to entertain your question and answer it. Jim, to your particular question on head count, our target is still to be 900 below where it was at the end of last year. You'll note we pretty much achieved that here in the first quarter. Obviously we get a ramp-up in the second and third quarter when the track maintenance programs increase. Our current target is still the 900, but we're in a process right now of some of that staffing benchmarking we're doing with the other rail roads may produce some increment above that 900. We're not far enough along in that work to give you a specific number around that.

Ok. Great. And finally, I just want to wish all the best to Paul. Have a great retirement.

Thanks, Jim. I will.

Our next question comes from Dan Hemme.

Good morning. Dan Hemme, Prudential Securities. Maybe just a reminder, can you tell us the cost on a per-unit-basis for a remote control unit and an APU?

I don't know. That's a good question. Why don't we do this, Dan, we'll get somebody to scramble it up real quick. Off the top of our head, we don't know that. We'll have an answer for you within five minutes and we'll come back in and tell you that.

Fair enough. And then Mike, maybe staying with you, other rails reported that the first quarter kind of ended soft from an economic standpoint. Can you - is that consistent with your perspective or any comments on what you've seen thus far this quarter?

I think that's a fair characterization, the word "soft" leaves some room for interpretation, but clearly we're seeing some current softness in our chemicals business. I think that reflects a number of factors, as I indicated, most importantly, high feed stock costs, but inventories are lean and I think inventories will have to be replenished. The question is, will there be real growth there, and that will depend upon a stronger economy. We're seeing some softness in our domestic automobile production as field inventories are higher. But we're seeing some real strength in some of the market sectors that we it do well in irrespective of the direction of the economy.

Clearly our coal business is performing quite nicely now in the face of fairly weak comparisons last year, but also that confluence of events with high gas prices, low stockpiles, favorable weather conditions in the coal market was quite attractive, and our Intermodal business is continuing to perform very nicely, and I think there, you have a variety of factors coming together that help rail roads generally. You have very high trucking costs, you have new environmental regulations that are affecting the trucking environment more substantially than railroads, you have driver problems, so we're continuing to pick up modal conversions, truck conversions to our Intermodal area at rates that are quite attractive. So we've got some real pluses. There's some softness in a couple of areas that concern us, but we're cautiously optimistic that overall, we'll see revenue improvement in a variety of categories that should help us going forward.

Ok. And then quickly, Mike, also I guess can I take your comments on coal to mean that you don't view competitive action by barge traffic from South American imports to be increasing? Is it a moot point now, the same as it has been, or where do you stand?

Well, we talked about that last quarter. We clearly had a piece of business that was displaced by South American Coal that will not recycle for almost a year, and we talked about some of the structural changes that have affected our coal volumes. I don't see significant additional areas where we'll be negatively impacted. We're seeing domestic production, frankly, is somewhat down in the first quarter, almost 12 percent from a year ago, and we're actually taking some of the imported coal and moving it - expect to move some of it to some of our utilities who have exceptionally low stockpiles. So I don't see significant additional displacement as we move forward in the foreseeable future from imported coal, South American or otherwise.

Great. Thanks very much.

Our next question comes from Scott Flower.

Yeah. Believe it or not, I'm not on a cell phone. But no, the second question I had related specifically to Intermodal yields. What I want is just a clarification from Mike. Was the total amount of the increase in revenue per car due to the - I just wanted to make sure I had it right, the ...

We'll go to our next question.

Scott, this is Mike Giftos. I don't know if you can hear me, but you may not be on a cell phone but whatever phone you are on isn't connecting well with us. I did pick up the gist of your question, and you're asking about the nature of the intermodal yield improvement. The single biggest contributor to that yield improvement, Scott, was the CSX trucking initiative where we're initially obtaining significantly higher per unit move, but a significant portion of that has to go towards covering the truck-related costs. Having said that, I've in the past discussed the Intermodal market as one where I didn't see significant pricing opportunity. We're seeing some strength there now that's a very pleasant surprise. We recently announced that our eastbound containers will be moving at $100 per container increase starting on June 1st, and that represents almost a 7 percent increase in that market sector.

We did enjoy some modest increases in our contracts, and frankly I think we're seeing an environment where the comparative truck-railroad cost structure can give us some pricing strength that we hadn't previously seen when we've been discussing this market in the past. The overall major contributor to that yield improvement in the first quarter was largely the trucking - the revenue that we're picking up in the CSX trucking initiative.

And before we take our next question, Dan, in answer to your question, to apply the remote control Technology to a locomotive is about $80,000, and an APU costs approximately $25,000. So with that, we'll take our next question, please.

Your next question comes from Jennifer Ritter.

Good morning. Jennifer Ritter from Lehman Brothers. Just wanted a couple housekeeping questions taken care of. Your tax rate looked lower this quarter. Is that something we should think about as being sustainable in the next few quarters?

Well, I think you can think of our marginal tax rate as being 37 percent. That's been pretty consistent in the recent past and going forward. What happens is, in a earnings period like the first quarter, which is seasonally low, we have a higher proportion of earnings coming from foreign sources through world terminals, and we also have the Conrail equity. Both of those factors arithmetically produce a lower tax rate. But marginally, we're in the same place we've been for the past couple of years, 37 percent.

Great. And the gallons of fuel that you've used this quarter fell something like 4 percent. Is that something we should expect to continue? I assume it's because of your APU's installed and that sort of thing.

The APU's are clearly helping us with fuel consumption. Each one we install helps us save on an annual basis 10 to 11,000 gallons. Jennifer, I don't know about the run rate there. Paul?

Consumption is actually up compared to the same quarter last year. We would be down compared to fourth quarter because of the seasonal effect of traffic levels. So I'm a little confused since our figures indicate we're up some 3 percent from last year's first quarter.

Right. Ok. I'll check my numbers. And then just a clarification on the hedging, you guys said that you were thinking about looking into it but we should probably assume that you're not hedged for the rest of the year?

At this point, we are not hedged at all for the remainder of the year, Jennifer. What we're doing is actually going out, doing some benchmarking of the other rail roads, other major fuel users to look at would there be a hedging program that made sense to us. We've been evaluating that for about a month and a half now, and we'll probably soon make a recommendation to our board that we may engage in some hedging, but I think your expectation for the remainder this year that we'll be unhedged is a correct one.

Great. Thanks for your time.

Our next question comes from Tom Wadewitz.

Good morning, everybody.

Good morning, Tom.

Couple questions. I think they're mostly for Mike Giftos, but maybe Michael for you as well on the coal side. As we look at overall revenue, Mike, do you think it's going to be up year over year in second quarter, is there an acceleration here in the year over year or not because there are a lot of different moving parts on what's positive and negative.

Well, Tom, if you look at the - at my prior slide where I described I what I think about the market, I have the overwhelming majority of our revenue in the favorable category. And I expect that as we move into the second quarter, particularly with what we're seeing in coal, that our revenue year over year in the second quarter will be up.

So even with some you softness in autos and chemicals, you maybe see some acceleration where your year over year revenue was in first quarter?

Acceleration from first quarter? I guess I misunderstood your question. Year over year, I expect - year over year in second quarter, I expect a nice pickup in revenue as compared with the first quarter, I'm hard-pressed to expect our overall revenue growth to be much better than the first quarter. That would be quite a challenge with the military revenue we enjoyed and the fuel surcharge revenue that we enjoyed. But taking those factors out, I think I feel pretty good about it.

Ok. Good. And if I can drill down a little bit more on the coal side, I know it's an elusive number, but can you give us any kind of a sense, you know, your best sense of where these stockpiles are, are they in the territory you serve? Do you feel like they're kind of at target given where we should be?

Your question broke up a little bit, but I think the essence of it was how do we assess the current state of stockpiles, and I think you used the word "elusive" to describe that. It's a very difficult calculus. What we do know are stockpiles are down. We do know that our utilities were consuming significant inventory in the first quarter, and I know they're well below where they were, and we're seeing that in loadings going forward today. I don't have an exact number, but they're well below where they were last year.

Ok. Good. And then just one last one on the coal side. It sounds like the outlook is good. Are industrial and export coal and - coal, are those going to be negative or is there - offset some of the improvement in the utility side ...

Can you repeat that question? We can't really hear you.

I think he said the industrial and the export is down. Well, that continues to be down and offset some of the strength in utilities. Is that what you asked, Tom?

Yeah, that's right. Just a little further color on the export and industrial side.

Tom, on the export side, I think you may recall a couple of quarters ago, I mentioned that we enjoyed some attractive steam coal that we - contract that we had picked up that we did not renew last year. That contract recycled in the first quarter as did some of the export coal to another European country in the metallurgical area that we did not renew this year, so that's recycled as well. I expect the year over year comparisons in the export area as we move forward to be more neutral and much, much less negative, anyway, and depending upon a number of factors, but essentially we won't see the negative comparisons going forward in the export area.

On the industrial side, what you're seeing there reflects some loss of business in some industrial accounts for reasons that I have stated at prior meetings. Some of them simply reflect the closing of certain businesses that use some of our industrial coal and some of the others reflect the competitive environment that we're in. So the industrial sector going forward will tend to continue to be negative. The net effect, though, the utility coal growth that I expect going forward, assuming we have any kind of a reasonable summer, should more than offset those declines.

Thank you. Our next question comes from Stefanie Koch.

Good morning. Stefanie Koch from Merrill Lynch. I have a question. Do you have a sense for the number of carloads that were taken off the highway either for the quarter or on an annualized basis based on the conversions?

Yes. Yes, Stephanie. What we do when we calculate this number is we use a conversion factor, so if we had a rail car that's taking traffic previously moving from the highway, it's essentially equal to three trucks. That's the conversion number we use. We estimate that we took almost 140,000 trucks off the highway in the first quarter. About 50,000 of those were in the Intermodal area, reflecting the significant pickup in Intermodal traffic, and merchandise enjoyed a significant pickup as well. And the other two commodity areas were far more modest, but the merchandise in the Intermodal areas contributed largely to the 140,000 trucks we took off the highway, representing about $50 million of our revenue.

50 million of revenue in the first quarter?

Yes.

Ok. Thanks. And last question. Your interest expense seems to be trending down. Is this the level we should expect it to be at for the rest of the year?

Well, we've got about a 25 percent floating rate component. If rates stay where they are, the answer would be yes. But depending on what they do, interest levels will fluctuate somewhat.

What's the all-in rate on your debt right now?

Probably in the 6 percent area, but I'm guessing. It used to be seven. We've lowered it substantially. I'd say in the 6 percent area.

Great. Thanks so much. And Paul, enjoy your retirement. Congratulations.

Thanks very much.

Thank you. Our next question comes from Reno Beyonce (ph).

Yes, good afternoon. Salomon Smith Barney. Couple of questions. The first one related to working capital. There seems to be a pretty significant adverse swing in this quarter in working capital. Is there anything that we should be aware of?

I can't think of anything internally. We're actually improving our collection rate, but just the weather and the slowdown of the railroad may ...

I mean, working capital was a use of cash $88 million a year ago and 198 million this quarter.

It probably reflects the payment we made out to our former chairman's retirement benefit. That was some $60 million.

Ok. The other question I have, I think during the presentation, you mentioned that in the quarter, you generated $150 million of free cash flow. I was wondering whether that $150 million is consistent with the $300 million target for the year, and also to be totally honest, I have a little bit of a problem from the reported number to reconcile the $150 million this quarter. Can you help me out a little bit understanding what number have you in mind?

Well, yeah, we think we're still on target to 300. I don't see any problems there. But what you're missing in the cash flow statement that you get in the flash is the Conrail portion. Con rail generated some substantial cash flow. Norfolk Southern and ourselves pay them rental, which is way in excess of their needs, and the buildup of that cash is, in effect, cash that CSX and Norfolk Southern are entitled to, so our 42 percent of Conrail's cash is $61 million, and that's the missing piece in your arithmetic, I'm sure.

Ok. So for this quarter, $61 million?

Right.

And how much is that part of the $300 million for the whole year? The Conrail cash flow?

That would be on the order of 100, 120 million.

Ok. Thank you very much.

Our next question comes in Scott Vitorvitali (ph).

Thank you. My question has been answered.

Thank you. Any further questions?

I have no further questions at this time.

Thank you for joining us today. We appreciate it very much.