CSX Corp (CSX) 2003 Q3 法說會逐字稿

Good morning, I think we're ready to get started. I'm Peter Mills with CSX, and I welcome you today to our third-quarter earnings presentation and call. First thing I need to remind you of is that our presentations today may include forward-looking statements and that results may differ from those statements in the future. I would refer you to the note in the presentation handout that you have, as well as the disclaimer here on the screen. And with that, here's our Chairman, Michael Ward.

Thank you, Peter. Good morning and welcome to CSX's third-quarter earnings release. With me here today I have Oscar Munoz, who is our Chief Financial Officer, and Michael Giftos who is our Chief Commercial Officer. As you can tell, we had a difficult and disappointing third quarter in our core operations, with year-over-year increases in expenses eclipsing our year-over-year gain in revenues. And I'd like to discuss that in some detail shortly, but first I'd like to note two items up front that I'm sure you saw in our press release. One, this quarter did include an after-tax expense of $145 million, reflecting a change in CSX's estimate of occupational and personal injury liabilities. Given the heightened interest in the asbestos issue, we thought it was prudent to undertake a review of our overall methodology and consistent with recent trends by companies with asbestos exposure, including other railroads, CSX decided to accrue for incurred but not reported asbestos and other occupational claims.

What that really means is that the company is going to accrue on future expected claims, and we use the seven-year horizon for that, in addition to those that are already filed. These estimates were reviewed by third- party experts and will continue to be so in the future. In addition, we took an after-tax charge of $67 million in the quarter to account for the expected settlement of disputes in connection with the 1999 sale of CSX's international container shipping company. We don't expect either of these to have material impacts on our cash flow targets, and Oscar will discuss these in some high-level detail -- greater detail later. So combined, these two items resulted in a net loss of 48 cents per share for the quarter. Excluding these items our EPS would have been 51 cents on net earnings of 109 million.

What I'd like to do now, though, is turn to the results of our Surface Transportation which is a combination as you know of our CSX transportation and CSX intermodal. For the quarter our revenues were up $37 million, 10 percent versus 2002, which is good solid results. Unfortunately, though, our expenses were up $51 million or 3 percent versus the prior year. The result of that was our operating income came in at $213 million which was $14 million and 6 percent below last year. I'm very unhappy with that performance. Our expenses were way too high in the quarter, and while we did have some external factors during the quarter that impacted us to some extent, fuel prices, blackouts, hurricanes, we didn't deliver on the things that we can control, the controllable items. The overall lack of network fluidity and discipline drove increased costs in our employee cost, equipment rents, fuel-related service cost, so really running a poor, poor railroad did cost us some money. As you are aware, this did cause me to make some tough but necessary decisions at the end of the quarter. And I want to once again assume leadership responsibility for the operations. I will discuss the operating side of our business in detail in a few minutes.

On the revenue that, we are pleased with our revenue growth efforts, they continued to produce solid results in the quarter with a 2 percent year-over-year increase. WE saw growth in all of our merchandise markets which were up 5 percent, and this growth really reinforces the long-term importance and vitality of our industry. The coal, automotive and intermodal businesses are basically flat on a year-over-year basis, but as Mike Giftos will discuss our modal conversions and our yield improvement initiatives remain vibrant.

As our operations return to higher levels of efficiency, and resulting lower-cost structure we will deliver more of this revenue to the bottom line. So what I like to do at this point is switch hats, put on my operating hat and talk a little about where we are heading on the operating side. As you are aware, and I'm very aware, our service and the resulting cost structures have not been what they should be or need be this year. You can see our three years service trends in the packet of information that we give out, and its pretty obvious if you looked this is not been our best year for service. When we started the year we were pretty hard hit with the winter, and that really caused us to get into a tactical mode, a lot of tactical decisions had to be made and that was the appropriate and necessary thing to do at the time. However, we never got out of that tactical mode. We really lost our discipline, we lost our focus on executing to our plan and it’s really hurt us on our service, on our efficiency and on our cost. That lack of discipline and lack of focus continued into the third-quarter and resulted in the disappointing results Oscar will detail for you soon.

You may recall at the second-quarter earnings release, we told you we had done some benchmarking of the CN and the MS and what their operating structure was, because clearly they are two of the better performing service entities within our industry. And what we found when we did the benchmarking is that they had very clear goals and responsibility within the operating department. They had a group responsible for service planning, and that was their responsibility. They had a second group that was really the resource providers, our operations center that provides the locomotives, the crews, the track time and they held the field responsible for execution of the plan. This is the right structure for us and we have put that in place at CSX.

The key though, what we have to do is drive execution. As we think about execution, the way we are going to attack this is with a three phase approach, the first phase is to improve our service, get back to the high levels of performance that we've had in the recent past. As we do that, that will also improve our efficiency and our cost structure. And we are going to use a lot of the same techniques I used in our last service recovery in the year 2000. A sort of back to the basics approach. I sat down with our operating leaders in mid-September and we defined a limited number of key measures to focus on. That's really helpful to our managers in the field; there is many, many things you can measure on a railroad having some key measures, this is important, this is what we want you to focus on helps them focus and helps them deliver improvement, and drive improvement. So we defined those measures and then we set short-term improvement goals on those. Thirty-day improvement goals that once we achieved those we've set some new goals and gradually incrementally move ourselves back to where we were before. I'm very confident this will work for us, and we will do this phase 1 very well. We've done it before, and the results so far in the fourth quarter are encouraging. And I'll show you those shortly.

However, this won't be an overnight recovery. As you are well aware big networks take time to turn around. But as we do improve our efficiency will increase and our costs will decrease. The second phase is really sustaining that improvement. Obviously we didn't do this well the last time. We will do it well this time. How are we going to sustain it? It is really going to be a mindset change, a different way to manage our operations bringing you discipline, focus and a process orientation toward it. It will be managing trends with leading indicators versus reacting to daily events. It will be establishing standard best practice processes and it will be about setting upper and lower control limits on key processes to force corrective action in a timely manner and clearer accountability.

Phase III is really taking service to the next level. And what we will do there is use a lot of root cause analysis to define what are our causes of service failures, where are the places that we have cost inefficiencies and put in long-term process improvement to fix those. So if I had to look at that what would be my rough timing around this? I think phase I as I said it won't be overnight, but I would say toward the end of the fourth quarter or sometime in the first quarter, it will be likely we would see the kind of performance we've had in the past. As we do improve that obviously our cost will begin to improve as well. Phase II, will be enjoying the better cost from accomplishing phase I and I envision we can have that completed sometime midyear. And then finally Phase III we would engage mid to late '04. So we will get them stabilized in phase I prior historical levels, get the benefits of that, then start moving toward changing the mindset of how we operate and then taking it to higher levels.

What I would like to do now is briefly discuss the key eight measures that we did define it in the operating team. I put them into some buckets, obviously accountability is the foundation to success and we will have clear roles and responsibilities around each of these. Four of the measures really relate to our network fluidity and our cost structure. You are very familiar with many of these the velocity, dwell, recrews and cars online. Two of the measures really relate primarily to our service to our customers. One time origination of the trains, one time arrival of the trains. And two relate to safety, one of our core values, personal injuries and derailments. What I like to do now is show you a where we are on three of the measures that you watch pretty closely, the first one is velocity. As you know this displays our year 2003 trend. As you can see it's a downward trend throughout the year. On a year-over-year basis our velocity is down about 6.6 percent. If we look at the fourth quarter to date, we do see some early signs of improvement. You will note that it has been trending up about 2 percent so far in this quarter so good early signs of progress. The last seven days on velocity we've averaged 21.9 mph -- to put that in some perspective, last year in the fourth quarter we averaged 22.4 mph. So we are still running in that last 7 day period about half a mile slower than last year but closing the gap and there's more to do.

If we look at recrews, obviously recrews is a costly item for us. Year-to-date we are up about 131 percent through the third quarter as you can see a strong upward trend line. For the last seven days we've been averaging 41 per day, comparatively against last year in the fourth quarter we averaged 30 per day. So while we are making some improvement in the fourth quarter today, and you can see the trend line heading down about 18 percent improvement, quarter to date, we are still running above last year's level.

And then finally, if we look at system dwell, for the year we are slightly up about 8/10 of a percent, up being more time in the yard is not favorable. So far if we look at this quarter -- I'll call it a very slight improvement, maybe about 4/10 better, I more or less call this basically flat and I think the does tend to lag a little bit some of the other key measurements. On a 7 day basis we are running at 25.1, versus the fourth quarter of last year we were at 24.2. So while we are making some progress, and there's early encouraging signs, this has only been a few weeks into the quarter, there's a lot more to do. But I believe we are on the right path to get our service back and our costs right.

I like to move just one final thing on the operations side, move a little bit from the macro to the micro. You may recall in our second-quarter earnings release we noted some issues on our Atlanta division. It's one of our most complex and most challenging divisions and you may recall part of what we did there is we bought some new leadership into that, we brought Mike Peterson from our Western region who was one of our best regional vice presidents in both safety, service and cost. In addition we brought Jimmy Newell (ph) in to run the Atlanta division, a seasoned pro. To me as an example if we bring the right people into the right process, the kind of results we can achieve. So I would like to give you a little glimpse of what we've done on those same through measures in Atlanta. The second quarter, third quarter and fourth quarter to date, in the second quarter we were running at 14.9 mph improving to 16 in the third quarter and 18.6 so far in the fourth, about a 25 percent improvement. On dwell, improved from 30.1 hours down to 27.2 about a 10 percent improvement and recrews have basically been halved over that period. So clearly bringing right process right people helps us improve our operations. While not displayed, one of our challenges this year has been on our safety side. And better operations do promote better safety. And during that same period, second-quarter versus third-quarter, the personal injuries went down 32 percent and the train accidents went down 29 percent. So as we run a better more efficient more fluid network we also get improvements there.

Finally, in summary on operations, I think the accountability and the discipline have increased. We have some encouraging signs fourth quarter to date but they are still at unacceptable levels and our costs are still too high. WE are going to take some time to turn around these big networks, but acknowledging that shouldn't be confused with my impatience. And I have the impatience to restore the service, to improve our costs and I will take decisive action when required to achieve the results. So with that I like to turn it over to Oscar to give you our financial report.

Thanks, Michael. Good morning. Most of you have seen the numbers for a couple of days now at least on a high level. We determined that it was prudent to release some of that information as some of the special charges became documented and known to us. It will generally be our direction to do that for any items of that kind of magnitude. I know one day at 8 is not the optimal time for that and so we are working on that timing aspect of it. But generally it’s initial on clarity, transparency and sort of speed to market if you will. In addition, we do have some investors who are holders of our convertible bond that are due for a decision next week and it was very important for us to make sure that they had ample time to review information that was obvious to the management team. So that is the reason behind that and hope you will bear with us.

If we could let's turn to the numbers. You will have to be incredibly flexible, we have a lot of people on the phone today and I will try to keep you all in mind. I do have a few charts that need us to walk from reported results including all of the different items and then taken us down to eventually the Surface Transportation which I believe is the area most people are most interested in. So here are the results as reported; as Michael said you can see the three charges created reported loss of 103 million or 48 cents negative per share.

Let me talk about the charges real quick; I think Michael did a pretty good job, but the actuarial issue is a change in accounting estimate and we booked a charge of 232 million to reflect that impact of claims to be received over the next years. Very simply put and we have had a lot of questions with this, the former method which in essence was reserving for claims as they were filed against CSX, is an absolutely appropriate measure as you heard from other railroads and a lot of different people do it. For the reasons Michael mentioned earlier we've made a determination, management decision to do that. So that we now employ these third party professionals or experts to evaluate our reserves. Now these claims that we are talking about is mostly asbestos-related but there are other occupational issues carpel tunnel and such that are included in that and also personal injury as you can see. And again as Michael also mentioned we do not have any material cash impact now or into the future or either on our P&L.

This is an approach that not only more companies are using but I know where I come from and all the industries I have been to, this is a very accepted norm with regards to that. There is no nefarious reason for us doing this; we have had questions with regards to are you expecting any large claims in the future? In fact, our history on claims is not only decreasing so the frequency is down, but also the cost per claim has been declining through some good work from our legal team. There is no reason other than management's decision to move forward on a more comparable and certainly a measure of less volatility if you will with regards to this issue.

The next issue is I guess for about four years we've been working through to resolve the dispute stemming from the sale of our Sea-Land properties back in 1999. So we are happy to report that major progress and putting this issue behind us. Most significant of those issues are included here on this sheet, the working capital, the container terminal contract as well as some outstanding claim issues. One of these settlements is conditional; we expect that to be resolved shortly maybe in the first part of the year. Again, this will not constitute a major or material cash impact to the Corporation. The charge is 108 million, the largest component for us is a $70 million receivable and if anybody is looking for that on balance sheet, it's not on receivables, it is other current assets, so if you're looking for its former home it won't be where you normally would think it would be.

So those are the two issues behind that; just to quickly sum, occupational charge 232, arbitration 108, you can do the math 340. Our normal tax rate of 212, for an approximate specific impact on a per share basis of 99 cents. So, let me walk you through this slide adjusts our reported financials to exclude the impact of the charges we just reviewed. The first column reflects the results as reported, the second column removes those charges the ones I just summarized, or the 99 cents there, and the third column as we move forward in this presentation will focus on this third column which shows that we earned 51 cents per share and highlighting on the presentation so you know that from this point forward the special charges are absent with obviously a few issues with regard to tax. But nevertheless this is what we will be talking about just to get a sense of where north is with regard to our normal results.

Comparison of our consolidated '02 results to the adjusted Q3 column carried forward from the prior slide which I show highlighted there. Let me talk about this then. On the operating income line, I'm going to talk about that at length in the next chart, so let's exclude the topline portion of this for now, and let's concentrate on the issues below the line, because there are a few moving parts. First, with regards to the other income variance of -7, a couple of combination of issues. The most prominent is some significant realty sales that we had last year that were not repeated in equal magnitude this year, having a pretty significant impact. That negative was offset by we had an accounts receivable financing arrangement, and some of the associated discount expense with that we're not cycling, so that offset that cost to create roughly that number.

The next line, interest expense, pretty self-explanatory with regards to the favorable interest rate environment that we've been experiencing, so that explains that number. And in the last one with taxes, clearly all of the issues that we booked this quarter impacted that. I think probably the best thing to look at; the first is 18 million variance is a combination of just two basic things. One is clearly less operating income, and then number two, we did have an event in two of our Southern states, Alabama specifically, some legislative issues that resulted in our ability to adjust some of our income tax rates for a tune of about 6 million. So those were the two -- the one major event that occurred.

But generally, for all of you doing the calculations, I think just to boil it down for your future look, I'd use around 35 percent for the fourth quarter, and I think that can boil all the questions down to that. I think that would be simple enough. And so you've got the net earnings there of -18, and then you've got a 9-cent variance with regards to earnings per share. Those below the line items that we just talked net to about a plus 2 percent -- I'm sorry, plus two earnings per share cents on there.

Now let's talk about the consolidated operating income component. Surface Transportation 213 versus 227 a year ago or -14; we will obviously spend a lot of time on that. The second, international terminals, the quick story there is tough, tough operating environment from a topline perspective, but they've had some great productive capability and have offset some of those revenue shortfalls with expense, creating a slight positive in operating income over prior year.

Other reflects the sale of our domestic shipping business a while back and the 22 million variance is roughly that operating income that we are cycling year-over-year. So if you equated this back to the 9 cents earnings per share that we saw in the previous page, the 22 reflects obviously roughly 7 cents and with the surface trends number accounting for probably 4. Now let's go to be Surface Transportation detail.

You see for '03 adjusted for all of the issues revenue of 1.8, expenses of 1.6, for an operating 213 or an operating ratio of 88 3 (ph) versus prior year the topline continues to be a bright spot for us with a growth of roughly 2 percent. As usual Mike Giftos will talk you through the details behind that but I do want to say that there is a growing amount of optimism within the industry with regards to our topline capabilities. There are several factors that Mike will talk about that I think are very positive for us. And of course as Michael Ward said the issue for us is how do we get our operating costs in line. As you can see from the chart the year-over-year basis their expense grew by 3 percent affecting our operating ratio by a full point, so clearly our focus needs to be with regards to the productive use of our assets.

Let me talk about the expenses a little bit more detail so the year-over-year change as listed at the top, total expenses grew by 3 percent or 51 million, the components are listed below. Let me talk about each one of these because we've been very busy with a lot of different issues within the company and so there is a lot of moving parts within each of these areas. Most are highlighted in the flash we give you but I think it is important for me to walk through that. So let's take labor and benefits for instance. A 2 percent increase only 2 million dollar which on the surface looks not overly bad given our recent results. Let me tell you what's involved in those numbers -- if you're taking notes I will try to talk as slowly as I can.

First, on any given on apples-to-apples basis year-over-year the inflationary impact costs of our labor and benefits is roughly 20 million dollars. Just north of that. We have reduced headcount year over year to the tune of approximately financial impact 20 million dollars as well. So again all things being equal, we have an inflationary increase, we have done some headcount staff reduction to offset it, so normally we'd be in a good stage. But again as Michael mentioned, our business has not been running as fluid as you would like. So also in the quarter we incurred approximately north of $20 million and sort of lack of fluidity, the recrews, overtime, all those different issues that you get into when you run a business you run the network as we have. So it is a negative -22 million. So one of the things one additional thing we did in the quarter is we issued a note just a few weeks ago to our management team informing everyone that given the year we were having that we would not be paying out a bonus this year. And so you have an accrual reversal if you will for expected payout that will not happen; again we thought that was the prudent thing to do given the year that we were having. And it was not so much to counteract any of this; it was just a separate management decision.

So again if you take the four numbers I just mentioned we are still kind of at even versus prior year if you will. The remainder impact and which is reflected here is largely the severance costs for the folks that we changed over in the last couple of months. So that is an approximately 10, 11 million dollar charge and that's what's reflected here. So lots of puts and takes, lot of good movement in some areas with regards to productivity and the continued inefficiency that we are trying to counteract, but I think it is important you understand all of these moving parts rather than just have this number. So that is labor and fringe.

The second line is much cleaner, it is what it is, it reflects a good deal of our inefficiency this is a cost of running our business and therefore impactful. In addition, our cost of safety and accidents is included in this line which impacted us year-over-year. And again that's really be story behind that. The next four items are roughly equal to last year so not on surface much to talk about. But I will anyway. Conrail is up and that's just really an increased activity in that area that we share together. So more volume driven if you will and not overly concerned that needs to be adjusted. With regards to the next line of building and equipment rents, while positive 3 percent versus last year, we did we are cycling what I believe to be a 10 or 11 million dollar cost last year, so a bit stated differently we are cycling a number that's probably higher than it should have been. So I'd move that number slightly negative if I was doing that math.

And then inland transportation which is our purchased rail and our trucking and components, a lot of volume driven issues, we've had some trade-offs between different sectors in our business and so that number is again more of a volume issue than anything. Depreciation, we finished our life study and took a couple of adjustments there. We also had some asset reclass work that we have been doing on our balance sheet, nothing major but it did some effect on depreciation. I think if you take it from a full year perspective we are probably going to be in the 24 to 25 full incremental year-over-year depreciation expense. I think we are 17 year-to-date so you can expect in the next quarter normal depreciation if you will now that we are finished with all these studies.

And last but certainly not least, and something you hear about from everyone, fuel, huge increase of 21 percent. The good news is that the majority of that increase is offset by the fuel surcharge and of course our hedging program is in full swing. In fact up to, I think for '04, roughly 11 percent of '04 we already got under long term contracts so the hedging program is well in play and we will look forward to updating you with regard to that.

So, you know expenses again as Michael said, continues to be our issue in the areas that we are going to focus on. As we look forward, and just to borrow Michael's chart, that he used, the quarter was disappointing. The improvements in the fluidity of the network have not yet materialized fully. And the inefficiencies of the costs that affect our network really since the start of the year with the weather issues kind of continues so are trying to put that behind us. We took some actions in the third quarter and offset by some other issues but it will take some time. And although we are seeing these recent improvements in the metrics, it would be premature to assume that it will have a drastic financial drastic improvement in the financial measures of us. It takes a while to work through these things. So there is the old vision of crawl, walk and then run. This phase I is really getting after some of the basic things, we have great issues in our productivity pipeline, we call it but we can't introduce them yet either to you or to the organization until we get on a solid footing. And I think that's the collective wisdom and decision of the senior management team that we've gone around back and forth on this and that is how we are focusing on this.

The chart from my perspective within the finance with regards to the things that we are doing is clearly in phase I is just getting accountability, the measures in the performance metrics, all linked to the bottom line in essence. We have a lot of logistical operational measures that we use in this business and how do we link them eventually to the finance world I think is an important thing and an educational process for all of us, so that's kind of the phase I. Phase II is again that Michael said once we get it working the right way do we know what we've done and how do we sustain it and then move it on to Phase III of the levels of performance. We've got a lot of work to do and clearly have fallen short of our operating income goals. However, we aren't completely off base, we will deliver on the short-term commitments that we've made to you. The free cash flow will continue into 300 million range, we've taken several bits of action on different areas to assure that we get to that number.

With regards to the all in debt ratio is at 55 and improving year-over-year. And we still continue we are on a long-term target of 50 so I mean that is a big issue for us. And of course the staffing reduction of 900 that we previously mentioned is nearly complete we are nearly there. And working towards more decisions with regards to that area. So as we move forward, we continue to develop these detailed action plans that we will share over probably the next quarter or two. Lots of different involvements that we have working and we're excited about but just not quite ready to unveil. And a key to improving our performance long-term is getting this network fluidly as Michael has said. So in addition to the fluidity our top line is something that we continue to have a lot of great optimism for. So with that, we will welcome Mike Giftos to stand to talk a little bit about that.

Good morning, thank you, Oscar. As both Michael and Oscar have indicated we did enjoy our sixth consecutive quarter where we've had year-over-year revenue growth. Our revenue was up some $37 million at 2 percent. For the year we are up a little better than that, about 3 percent, $175 million. And we are reasonably pleased with that and considering the challenges we've had. In this past quarter we had essentially three markets that were flat, our coal, intermodal and auto businesses were essentially flat, we will talk more about those in a second. I would say that if it wasn't for the hurricane, the blackout, the virus that hit us in the last part of the quarter, we probably would have had modest year-over-year improvements in each of those areas as well. The merchandise sector as a whole though was up nicely, its sixth competitive quarter we enjoyed year-over-year revenue growth.

Looking at our second slide one that you're familiar with, one that I've used for the past 14 quarters, we again see that our revenue outperformed our car loads. This is a trend that we are quite proud of at CSX, our revenues are up as I have said 2 percent on a 1/2 percent gain in car loads and revenue per car improved a nice 1.5 percent. We all know there are lots of factors that go into this; we all know that we have to look at the details and if you look at page 6 of your flash you can see this aggregation of this and the specific commodities you will again see that we enjoyed nice yield pick up in many, many of our commodities sectors. This positive yield we all know is a function of several factors mix is one of them, our fuel surcharge is one of them but also importantly our continued focus on price is an important contributor there.

Let's look at the three markets that were essentially flat for us. Coal, our coal business our revenue was down 3 million dollars, a little less than 400 million dollars of at revenue generated a quarter. Down slightly less than 1 percent on a 2.2 percent decline in car loads. Utility business, as you know I believe about 75 percent of that revenue, the utility business was essentially flat in the quarter. Our steel related revenue sectors our metallurgical coal, our Coke and our iron ores were all down in the quarter that is essentially what counted the year-over-year decline. Our export story was quite interesting, our export volumes are up 15 percent, our revenue was flat. That's a function of some new pieces of business we got in an interesting export environment today. We moved some DNO calls to the Baltimore port. This is relatively short haul business it moved at revenue per car that's about half of the traditional export coal revenue, it was up some 521 percent year-over-year. And that's what's accounting for the mixed revenue per car exchange. We also enjoyed some movement of our Alabama coals to the Port of New Orleans; we took that traffic off the highway and from trucks. It moved there to revenue per car rate well below the traditional export coal rates and that also contributed to the deterioration revenue per car but it was attractive business by itself. The fundamentals in the coal business are interesting today; we know that spot prices of gas are very, very high, gas prices today are around $4 to 5 a million BTU in the shoulder (ph) season. We know that our utilities stockpiles are slightly below target levels, we know that there's an interesting probably short-term export opportunity because of the demand for vessel capacity going into the China steel market that's tending to take some of the Columbia coals into Europe. But we also know that the Central Appalachian produces a challenge and the spot price of coal is up to 35 to $37 a ton. What does all this mean? Well we know that since 50 percent of the electricity east of the Mississippi River is generated by coal and we are going to move coal to meet this demand and I do think where it comes from is a long-term challenge and opportunity to CSX. We are confident we are going to be moving it, we are confident it continues to present a pricing and attractive revenue opportunity for us.

Let's look at our auto sector. Again a relatively flat market for the quarter, revenues down 10 (ph) million dollars or about 1 percent on a 3 percent decline in car loads. As you all know we move light vehicles that are produced, light vehicle production year-over-year was down about 200,000 units and that is essentially what accounts for the year-over-year change in revenue. Field inventories are slightly higher than they were a year ago; we continue to see our manufacturers incenting buyers. How long that will continue is anybody's guess, it is still very attractive business for us. The revenue per car chain is a function of a couple of things, we enjoyed some longer halls and from our major customer, one of our major customers and we had a couple of very modest price increases from some of our smaller customers.

Finally, our other third-market sector that was essentially flat year-over-year, that's our intermodal business, this has been as we all know a major growth sector. The intermodal revenues for the quarter were essentially flat, car loads were down slightly. And what has been going on in the intermodal sector. Well we all know that last year the comparisons were quite challenging, last year in the third quarter we had a lot of pre-shipping and this year's comparisons against last year's comparisons are essentially why the revenues and volumes were flat. Additionally, the pre-shipping as you know is because of the anticipated West Coast strike. As a result of the West Coast strike we saw some business that was previously coming into the West Coast that is now moving into the East Coast ports.

Finally we have seen the effects of some transloading of the international business and domestic containers affecting our volumes and revenues. If we look at a little more deeply into the intermodal two sectors the domestic and international business lines, we have two very, very different stories. The international business is down about 9.8 percent, some $13 million, and that is entirely because of the phenomenon I just described. Largely the pre-shipping last year gave us accelerated revenues so it made our year-over-year comparisons difficult.

We also have seen a relatively modest fall peak so far this year in the third quarter and the transloading phenomena tended to move some of the international business into the domestic sector. So international down about 9.8 percent, and on the other hand the domestic revenue is up a corresponding amount or 9.6 percent. As its enjoyed the revenue that was moving in international line item moving over to the domestic sector we have also enjoyed some nice revenue pick up from our new 53 foot container program that we've introduced with the Union Pacific.

In addition we have caused the low board initiative that we shared with you, our trucking initiative continues to grow quite nicely and contributing to the domestic line item as well. So our international business, our intermodal business was flat for the quarter. For the year its up a healthy 6.6 percent, and as I think many as you follow the public available data know the fourth quarter is starting out quite strongly as its enjoying the favorable comparisons because of last year's West Coast strike. Intermodal will continue to be an attractive driver of our revenue growth.

Let's turn to our merchandise sector. Our merchandise sector had a very healthy 5.3 percent improvement in revenues for the quarter on a car load growth of about 3.5 percent. It's sixth consecutive quarter of year-over-year revenue growth. Revenue growth in virtually all of our commodity lines, let me highlight just a couple of them for you. Our emerging markets unit the EMU unit, another terrific quarter up $19 million, at 17.9 percent. That is a number of specific commodity items in there that are continuing to do quite nicely. Our aggregates business as we continue to encourage the location of aggregate facilities on our railroad was up 10 percent. Our waste business another market that we've been working on to develop at CSX that will by the end of this year be a $100 million line of business that virtually did not exist a few years ago, up over 57 percent since 2000. And that business itself was up 36 percent in the quarter.

And again a modest increase in year-over-year revenue would be because of the military deployment in the Middle East, the revenue from our military line item which is included in EMU group was up 4 million dollars. Our forest and industrial products line items are up attractively some 5 percent, that's because as you know the strong construction industry that we've enjoyed participating in this year, as well as some inventory replenishment in our paper business as well. And our chemical sector enjoyed 4 percent revenue growth in the third quarter this year up to $249 million, again a lot of plastics inventory replenishment that we enjoyed in the latter part of the quarter. The other sectors did reasonably well and you can see the detail in the flash report.

So as we move forward, into the fourth quarter and into the future, we always take a stab at how we see our businesses and how we see them performing and we are reasonably optimistic as you can see from this chart. The auto sector is probably going to trend on the unfavorable side, slightly so. We are wondering how long consumers will continue to purchase automobiles at these very, very high levels and that essentially is what drives our auto sector revenue. Chemicals and ag products, we think are essentially going to be flat as we move forward. Chemical feedstocks are still quite high. It's hard to tell exactly whether we will continue this inventory replenishment reflects strong fundamental underlying demand, or whether it's more inventory replenishment. We are looking for feedstocks to get lower before we get quite a bit more encouraged in the chemical sector.

On the favorable column we have several of our commodity sectors, the coal fundamentals are strong. The cola fundamentals are strong. Inventories are low, the spot price for coal is high, we know that our domestic utilities need the coal. Where it is going to come from remains a bit of a challenge as production levels are challenged because we simply haven't seen the reinvestment in the Central Appalachian coalfields because of environmental challenges and historic low prices. But the coal comes from someplace and we know that year-over-year comparisons are relatively easy in the fourth quarter and we expect as we move forward our coal revenues will be attractive.

Our emerging market units is going to continue to perform well for all the reasons it performed well for the past several quarters. Our metals business, we expect to continue to do quite well. A lot of the scrap metal that is on the eastern part of the United States is moving into the China market. As a result we are enjoying some longer haul moves to some of our typical scrap receivers. Our modal conversion initiatives in the finished steel area continue, and we expect that business to perform favorably as we move forward.

The forest and industrial sectors we think are going to do reasonably well moving forward, again because of the strength in the construction industry. That should be quite attractive there. The phosphate business, our fertilizer business, we expect the domestic application this year will be reasonably strong and that sector should do quite well. And, of course, the intermodal business is one of our key growth engines. And with the attractive year-over-year comparisons coupled with the fundamental comparison of railroad and trucking economics, we see that sector growing quite well as well.

So finally, in conclusion, we remain optimistic. Our railroad is improving, the service levels are improving, and I have terrific confidence in our operating team, our operating partners, that we are going to get that service level back up to where it was a year ago. And that's the foundation upon which all of our modal conversion initiatives, our repricing initiative is based. We also remained guardedly optimistic about the economy. We all know that we've been waiting for a second-half recovery for the past several years. There are some who think we're in one. We remain cautious about that. We are watching some signs, but the direction of the economy can clearly affect us. I've already shared with you my thoughts on the fundamentals of our coal business. That should provide a nice year-over-year pickup in revenue as we move forward.

Of course, we will at CSX continue our focus on yield improvement, a critical strategic initiative of ours, one that we've been talking about for the past several quarters and one that we look forward to talking about for the foreseeable future. In that regard, I think, and you all know this, that the trucking economics, the trucking challenges that are being faced today with driver shortage issues, with new work rest rule requirements that will go into effect for truckers beginning in the first of the year, with the high cost of insurance that the trucking industry has faced, that the comparative economics for railroad and trucking are trending favorably for our industry.

The result of that will be multi-folded. I think that we will see the intermodal sector benefit from that. We already see companies like J.B Hunt; their intermodal revenues today have better margins than their truckload revenues. Their intermodal business is larger than their trucking revenue sector. That's going to be benefit us. Those trucking competitors are also our trucking partners. It also will give us additional opportunities as our service improves to continue our focus on yield improvement. I think with the improved service, the strength of the economy, the comparative railroad trucking economics, that we can begin to again think about the type of yield improvement that we were enjoying a few years ago where the pricing environment will be even stronger for railroads as we move forward, and I'm looking forward to that as well.

So thank you very much. I look forward to answering your questions, and we look forward to continuing to grow the revenues at CSX.

So, as you can see, we have some good continued growth in our revenues and actually an optimistic outlook going toward, and I think that will continue. We're going to bring the proper focus to our service side, which I think will help us with our cost base in that, as well as some of the other ideas that Oscar mentioned that we will be rolling out here in the next quarter or two, we will get that second piece right. Because, as I've said before, to really create high shareholder wealth, we have to pull both levers. We have to grow the revenue and we have to have the productivity. I think we've been doing well on the growing of revenue side.

We're intently focused now on the productivity side, and we will get this thing turned. So with that, I would like to open it for questions. I would ask before you ask your question if you would identify yourself and your affiliation for those that are on the conference call, please. Scott?

Scott Flower, Smith Barney Citigroup. Just a couple of questions, one was operational. A couple things, has 3060 had any impact on you and the operations in terms of seeing attrition on the crew side in the wrong places and having newbies coming on and having training classes? Has that contributed at all? And also, has that at all affected your implementation of remote control applications in the yards?

Scott, we were either very smart or very lucky, and probably a combination of both. But as we went into this year, we tried to project where we would see the 3060 attrition and put in hiring plans to allow us not to have crew issues. Fortunately, our projections are pretty close to what actually happened. So we're really not seeing crew issues impact us. The only place we've had a modest impact on the crew side is in some of our former L&N properties where we thought we were going to have a labor agreement to change some of the manning there that would have saved us roughly 80 or 90 jobs. Unfortunately, when that went out for vote, it was turned down, but we are managing to live through that. But overall on our system, I think we're in good shape on crews and it's not hurting either the operations or our RCL implementation.

One other operational question, and then I had one for Mike Giftos. Obviously, you explained in detail what has happened with some of the operations. That happened in an environment where you really didn't have that much volume growth. What I'm wondering is, as you're making steps to rectify things, if the economy strengthens is that potentially a problem? Do you have maybe the good news on the revenue side, but it makes your challenge on getting where you want to get to operationally perhaps a little bit more tricky?

Actually, Scott, you notice some of the improvements we're making here so far in the fourth quarter; we are in the middle of our fall peak right now. The grain is running strong; coal that's out there we’re moving. We're seeing in the merchandise markets good demand, so we are actually at a high level of demand at this point. And the fact that we're able to turn some of these key measures while we're in that, to me, is actually very encouraging. Because probably this past month and the next couple of months will be our highest demand period. So even within that, we're able to, by bringing the proper focus, turn and improve the operations.

Two quick yield questions for Mike Giftos. When you look at the average yield, and I know it's difficult, how much of the revenue per car was mix versus what you would view as price? And then the question related to that, if I look at intermodal when you talked about the trucking industry dynamics, is that a mix effect by revenue per car is not up that much? But I would expect that you would be able to on a value basis be able to share in some of the gains and the pricing of the truckload market. So I'm just trying to get a sense of overall how much is mix versus price in the aggregate, and it may vary by market? Secondly, why perhaps revenue per car is not more?

Good questions, Scott. As we talked before about this, it's tough to answer in the aggregate. What we do know is that mix has a significant effect. We could see that in the export coal arena where our volume is up 15 percent but revenue is flat. So our revenue per car had to virtually overcome all of that significant mix effects in there. The way I look at it, Scott, is I measure our contract changes every single quarter.

What we do know in the third quarter, our merchandise contracts, we had about $250 million worth of business that came up for repricing that quarter, and we averaged a 3.2 percent increase on those. We had a small amount of coal business that came up for repricing in the third quarter, and there we had a little over a 5 percent increase. Modest price changes in the intermodal sector. I think moving forward, because of the truck rail dynamics, I'm optimistic that we can begin to improve the margins on that business through some pricing.

So, overall, it's been a tough environment on the pricing front for the last several quarters, frankly, with our service challenges, the weak economy, and the high fuel surcharges that our customers have been exposed to. That has made pricing overall a challenge. We are still on track to achieve our pricing goals. What we're not particularly optimistic about is the service improvements that we are seeing today. But I know our operating team is going to deliver with that competitive environment that we just talked about, that the pricing environment is going to get stronger, and we intend to take advantage of that.

Thomas Wadewitz from Bear Stearns. I have a question for you, Mike, then one for either Mike or Oscar. In terms of drilling down more on the service impact and what you are trying to do on the growth side, one of the compelling reasons to convert truck business to the rail was the last couple years the rail was running a lot better. So the converse, do you actually lose some service-sensitive business given the issues? Or you've given us from truckload conversion numbers in the past; have you actually seen an impact or have your customers been pretty immune to what they do in the short-term in terms of whether they go truck or rail?

Well, I'm always amazed, Tom, at the resiliency of our customer base and pleased with them. But there's been no question that with the service challenges we've had, our modal conversion initiatives have been challenged a bit. There is no question that our service sensitive sectors, that it has had an impact, and you all I think would expected that. On the other hand, some of our other opportunities are proceeding well at the pace that -- well above the pace I would have expected.

In the emerging markets unit, we're finding one of our waste partners is continuing to invest capital on our railroad and transloading trash, municipal solid waste facilities; that business is growing. We continue to take advantage of the difficult economy that some of our industrial customers have in moving their product. It was moving by truck in rail, so they can enjoy lower logistics costs. So the environment has continued to help us somewhat, but there is no question that the overall pace of modal conversion slowed a bit as we move through this year.

The one thing I would add to that, Tom, is 6.6 percent decline year-over-year in velocity, that is probably more of a cost issue from our productivity perspective than it is a huge issue for a lot of our customers. So a few of them, it may make a difference on, but for the majority I don't think they've seen dramatic differences. It may slow down a little bit the new attractions, but I think on the existing customers we have converted, I think the impact has not been overly dramatic. It's been more on our cost base and the cost of running an efficient operation.

Do you have those specific numbers, maybe truckload conversions in second quarter and then truckload conversions in third quarter?

Actually, I do have those. In the merchandise area, we converted 65,000 truckloads in the second quarter and 62,400 in the third quarter in the merchandise area. Coal, that's taking that coal traffic off the river and off of barges. In the second quarter it was at 28,530. The way I do those conversions, folks, I think you know, is we look at the revenue and we use three trucks for a railroad car, and that's how we calculate that. In the third quarter, the coal conversions were 24,000, so slightly below. For the whole second quarter including auto and intermodal, we had in the second quarter about 141,000 trucks; in the third quarter it was 128,000 trucks. So you can see some slight downward trend there. Still pretty pleased with that.

One question for Oscar. I think you have had some time now at the company and you've been looking at some of these programs. You said earlier you were reluctant to give us too much detail. But I'm wondering if you can give us any kind of a directional sense, where the biggest opportunity is? Is there a big opportunity in non-union employees for reduction; is it on the headcount side where we should expect some acceleration; or is outside of the headcount side where you really see the cost opportunities? Whatever you can give us on that side, kind of broad-brush.

Clearly, if we could share more, we would. And then by being so specific as to where is one of the sensitivities. So I'd answer it this way. We have lots of opportunity in lots of different areas, inclusive of all the ones that you've mentioned. I'd add to that with regards to our efficiency and capital spending, productivity in a lot of different areas, and so the opportunities to manage our business in a more integrated fashion, to use better tools. And so, yes, it's the normal productive issues with regards to staffing, is clearly one of the areas that we look at, but it's broader than that. It's almost a cultural revolution of sorts in the way we get after some of this stuff. So it's fairly broad, and again until we get to that point, we'd just hold off on that.

One simple point on that. Headcount reduction about 2.5 percent year-over-year in third quarter. Should we model that going up, do you think, next year year-over-year reduction, or kind of the same or what is your sense?

Again, we are in the process of doing so many things in building our long-term plans that I would really prefer to have all of that worked out and so that we can lay very specific guidelines. It's a bit too early to give you that kind of guidance.

Okay, thanks.

Jennifer Ritter from Lehman Brothers. Two questions. First, Oscar, are you hedged for fuel at all in Q4?

No, we have future contracts, with our normal forward buying that we do, but our actual hedging program begins in I think February of '04, the first strip we buy.

What is the average price that you're hedged at for '04?

I had that question last night. I don't have that answer. If I did, I don't know if I'd tell you. To be honest, I don't have it.

The other rails give that.

You know what, we're just getting -- I don't have the answer.

Just getting started, that makes sense. Just thinking about kind of -- it sounds a little bit like a new plan and then a little bit not like a new plan in terms of really streamlining the railroad, getting operations in order, that sort of thing. Mike, we've talked before about how you've done several quarters in a row of solid results and then you have a little bit of a faltering, and it feels like this is another quarter of faltering. What makes us comfortable, what makes you comfortable that this is going to go for the next ten quarters of solid improving results?

Unfortunately, Jennifer, there are no words I can say to make you comfortable about that. I think delivering that is what will make you comfortable about that. If you think about the phases we've laid out, we're going to bring a high focus to once we do turn it in Phase I to ensuring that we have that sustainability. Looking at upper and lower control limits on key processes, looking forward on trends improving process, I think will give us the sustainability over time. But the only way I can convince you of that is actually to do that. I wish there were some magic words I could say, but we just have to deliver.

We'll wait for Q4, right?

Yes.

Thanks.

Gary Yablon, First Boston. Mike, could you talk a little bit about terminal capacity in the system; how does that feel?

Actually, Gary, our terminals are running pretty well. We struggled a little bit as we came through the hurricane, because obviously that was disruptive to our system. But I would say our terminals have been in good shape for the last two to three weeks. We see good fluidity through them. The dwell hasn't moved down quite as quickly as some of the other measures, but that's normally a lagging result. But at this time, we're feeling pretty comfortable. Most of the terminals have good fluidity and that's really not so much an issue for us.

A couple more if I could. In terms of 2004, how should we look at 2004? Is it a rebuilding year? What are management's goals? We've been rebuilding for a while here. What should we expect from '04? Along with that, can you talk a little bit to, what is your goal with regards to how long you want to hold onto that title of chief operating officer, and just talk to that a little bit.

The question on 2004, Gary, I think that actually we would be much better equipped to talk with you about that in our fourth-quarter earnings release. As you know, this time of the year is when we are building our annual plan. We're in the middle of that process now, and I think really to try to detail it at this point would probably be a little premature. I don't see it as another rebuilding. I think we will get our service up, as I said, sometime late fourth or in the first quarter. I think we'll continue to see the good revenue growth. So I expect when we get done with our planning, we will have a reasonably solid year. But I think we will be better able to address that in the fourth.

Your other question relating to how long I'll keep two hats, at this point, I don't know. I know this is not the long-term solution, but I also know it's the right short-term solution to bring the proper focus to get our service to support Mike's efforts in the pricing modal and to get our cost structure where it needs to be. I really -- I'll tell you the same thing I told the board which is, give me three to six months and I'll determine where we're going from there. Again, not the long-term answer, but certainly the answer that's right for now.

Just one more if I could. This might be for both you and Oscar. Financial goals, bogeys to get bonuses and whatnot, how might that change, Oscar? This is probably the first time you get a chance to really get your hands into that process. When we see the proxy next spring or so, will we see what kind of specifics; what measures do you think are really going to get it going here?

We are in the process of having the multiple -- many debates on multiple points of view with regards to both long-term and short-term compensation with regards to that. Clearly, our principles, if you will, are first and foremost management. The vast management that we have in our organization has to have a line of sight into what the measure is. It can't be some sophisticated technical metric than the one has any clue to. So how you take, for instance, a ROIC, which would be a terrific measure for this corporation, how you bring that down to the operational person.

So I've had some good experience with that back at Coca-Cola with the EBA and breaking those components down into very usable, workable pieces for the line operations and then moving up that. I think rather than talk about all the different measures from free cash to ROIC to operating ratio to just plain old budgets and such, it's a combination of different issues. I would like to introduce things more in an integrated fashion, so as we talk about volume, we're talking about margin and bottom-line contribution at the same time. So that is one angle on that.

I guess the other issue with regards to compensation is it is important that we set goals that people can achieve and that we do compensate folks for the hard work that they are doing, and at the same time reward our shareowners. So that's the other balance that we're trading off with regard to that. So, again, a lot of debates, a lot of conversation. We are very, very focused on ensuring that our external metrics, in a way you all view them, will be in line with how we compensate our folks.

That might ask people for a significant increase in the next year or two, because the base this year is so low. Can you that balance? Some folks on the field might look at some of those bogeys and say, wow, that's asking a whole lot. I just wonder how doable that is?

It's not an easy task, and clearly there's not going to be any free money given, but at the same time we will have to balance different issues with regard to our people and their motivation. We've got to capture people's hearts and minds around us, and reward them to some point while not disappointing our shareowners.

Thank you.

Dan Hemme, Prudential Securities. Mike, I guess I want clarification to understand timing. Is it fair to assume that what benchmarking you did in looking at other railroads is now in place from an operational change standpoint?

Yes, it was more of the structure side, Dan. They were very clean and clear on a good separation of clear roles and responsibility around the group that did the planning, the group that provided the resources in the field, and executing. Yes, that is in place now. I think we did put that in place late second quarter, so I think it's starting now to get some of its vibrance. And the real issue is how do we make sure that we're delivering and executing within that.

The second question is, you talked about Jimmy Newell. I think I've got the name right. Are there enough Jimmy Newells out there; is the bench deep enough to get the type of results that you saw in Atlanta across the broader enterprise?

I believe so. I mean, we have a lot of Jimmy Newells out there in the sense of seasoned professionals that have been at this for many, many years and know how to make things work, and I think the real key for us as the last time we did a service recovery is providing good focus and discipline around what is it we want to drive, so there are a number of Jimmy Newells out there, fortunately, for us.

If I could add a little something to that, probably something we're focused on as well to a degree is ensuring that the Jimmy Newells and that vast experience and knowledge also transcends to the next generation of folks. So more a bit of a science associated with the knowledge of the industry, how do we translate it to something that's passable to the next person. So kind of introducing some of that as well.

With that, I thank you for your attendance today.