CSX Corp (CSX) 2003 Q4 法說會逐字稿

Welcome to the CSX fourth-quarter earnings release conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Tuesday, January 27, 2004. I would now like to turn the conference over to Mr. Peter Mills, Investor Relations. Please go ahead sir.

Good morning, and welcome to CSX's fourth-quarter 2003 earnings call. Just a reminder that our presentation and the comments that we will make today include forward-looking statements. These statements are subject risks and uncertainties, and actual results could differ materially. I direct you to the full text of our forward-looking statement disclosure, which is included in our presentation material on the web site. With that, it's my pleasure to introduce to you CSX Chairman and Chief Executive Officer, Michael Ward.

Good morning, welcome to CSX's fourth-quarter earnings release call and thanks for joining us this morning. Today I am joined by Oscar Munoz, Mike Giftos and Clarence Gooden. As you probably know, this is Mike's last earnings release call as our Chief Commercial Officer. In November, Mike announced that he was going to be retiring at the end of March, after a 30-year career at CSX. Mike served us in a number of key positions including our Chief Legal Officer and for the last four years as our Chief Commercial Officer. And under his leadership there, in the sales and marketing, we produced revenue growth in a real tough economic environment through a focus on value pricing and modal conversion. Mike, we are going to build on the great foundation you have laid for us and we do appreciate your many contributions and wish you and Mary all the best in your retirement.

Clarence Gooden is going to be assuming Mike's responsibility. Over the last four years, Clarence has led all three of our major groups, our coal group, our intermodal group and our merchandise group. He joined CSX in 1970 and has held a number of senior positions in both operations and commercial. I'm fully confident that Clarence is going to build on our successes in attracting new business, getting trucks off the highway and generating pricing and yield improvements.

Now, I would like to turn quickly to the economy and overall economic outlook. Looking forward, it appears we have made -- finally beginning our long-awaited help (ph) from the recovery of the economy. We saw signs of recovery in the fourth quarter. Our carloads were up about 5.4 percent; our revenue was up about 4.5 percent, with growth in all of our market. This positive momentum continues into the first quarter. As you are all probably aware, most economists are predicting growth for 2004 over 4 percent. So encouraging signs. There are, obviously, some concerns on the continued high fuel prices and our largely unhedged position. And there's uncertainty of some key international hotspots.

While those issues are largely outside of our control, I am pleased that as an industry, we are really poised to capture the benefits of the growing economy. Our alliances with both our Class 1 railroads and shoreline partners really help us improve our service and create new products that allows us to capture new business by providing value to our customers. About 50 percent of our traffic moves in interline service, so this industry focus on safe, reliable rail transportation is really a key to success for us. As our service improves and we adapt to customer needs, we can capture business from the trucks and from the barges and we will be able to value price for the improved product we are creating in the marketplace. We certainly expect to have a great opportunity in our Intermodal unit, both cooperating with and competing with a trucking industry that's facing a number of new challenges that Clarence will discuss -- the new hours of service law, the capacity constraints and the higher cost and higher rates that will be in the marketplace for trucking this year.

Finally from a broader public-policy perspective, I was encouraged by President Bush's call on the state of union address for Congress to complete work on the national energy bill. This bill is sorely needed to promote the increased use of clean, efficient fuel sources like coal, which we certainly welcome and to eliminate the diesel fuel tax that's paid only by barges and railroads and costs our rail industry about $170 million year. In addition, I hope that Congress will once again take up class action reform bill and that we will see similar tort reform in the states. Every U.S. business is paying a tax from the tort system that allows frivolous lawsuits to continue. And really we do need to change this.

At this point, I would like to get off my soapbox and turn to our fourth quarter results. While we will work on these issues in Washington, really our daily aggressive focus is on improving the performance of our railroad. By now, you have seen our fourth-quarter results. They are really reflective of our overall 2003 performance. We have strong revenue growth, unfortunately eclipsed by higher costs, and a service product that continues requires continuous improvement. For the fourth quarter, our net income was $123 million; that included a net restructuring charge of about $12 million pre-tax or 4 cents a share, resulting from the organizational effectiveness initiative that we announced in November. This initiative is streamlining our organization from the top down; it's pushing decision-making and accountability closer to the customers and the work. This will really help us become much more nimble and responsive, as well as lowering our cost structure. The bright spot for the fourth quarter was our revenue in Surface Transportation. As I mentioned earlier, it was up 4.5 on a year-over-year basis, and this came on the highest fourth-quarter carload volumes in our history. For the year, consolidated revenue was $7.79 billion, with a year-over-year reduction reflecting the sale of CSX Lines in the first quarter. EPS, adjusted for charges discussed in prior quarters, was $1.94, down 11 percent versus 2002. For Surface Transportation, revenue was up 4 percent to $7.4 billion with adjusted operating income at just over 900 million. In 2003, we did strengthen our balance sheet, by meeting our free cash flow goals and reducing our debt levels. In addition, as Oscar will describe for you, we exceeded our staffing reduction goals, which we outlined to you in November a year ago.

One final thing we were pleased with late last year, the STV and the IRS did (ph) CSXT and asked approval to proceed with the Conrail spinoff transaction. Through this proposed transaction, which we previously discussed with you, CSXT and NS will gain direct ownership of the assets and properties allocated to us in the 1997 Conrail transaction. The regulatory approvals from the STB and the IRS mean that the transaction has cleared two significant hurdles. We hope to close this transaction during 2004.

As I mentioned earlier, in the fourth quarter, higher expenses overshadowed our gains in revenues. We're clearly not satisfied with these results. The cost drivers for the quarter continued to relate to our operational challenges. Of particular note is my disappointment about our 2003 safety performance. Our personal injury and derailment numbers were simply too high on a quarter-over-quarter and a year-over-year basis. In addition, during the fourth quarter, we had a higher than normal number of serious injuries, an issue we are aggressively committed to fixing at every level in the Company. Despite this past performance, we have set the stage for improvement going forward. We are continuing our three-phase approach for achieving operational excellence. As expected and as I discussed with you in October, we will remain in Phase 1, which is stabilizing the operations, through the end of the first quarter of this year. We are going to continue to use a methodical, process-based approach to improve our service and improve our profitability. During the fourth quarter, we did see some stabilization and slight improvement in some areas. While we are not where we need to be, and where we will be, the improvement is continuous and it is steady. It is worthy of note that this stabilization and slight improvement incurred (ph) with record carload volumes. And most importantly, we met the expectations of our customers during this strong peak. We did not slip on our focus to improve operations.

I would like to look for a moment at three key areas which you measure and track as indicators of our progress -- velocity, cars online and dwell. Our average velocity in the third quarter of this year was 21.0. We improved that to 21.4 during the fourth quarter in the face of the record volumes. We are pretty pleased with that improvement in velocity and, it's something we can build on. And there's obviously a lot of improvement we need to make on that. But we did improve in the face of those strong volumes. Quarter-to-date this year, we are at 29.1 mph. But as you are well aware, we are facing some pretty tough operating conditions currently.

Cars online, in the fourth quarter, our cars online were 230,864, up about one-half of one percent versus the third quarter, and that's with volumes up 4.5 percent. So we did a commendable job of absorbing and moving the higher volumes in the fourth quarter. Quarter to date, cars online are averaging a little bit over 227,000 per day. So we are making some improvement there.

On dwell, of the three measures I am discussing today, that's the one we made the least progress on. In the third quarter, we averaged 25.4 hours. In October and November, we slightly improved to 25.3. But in December, we saw the seasonal jump to the holidays -- due to the holidays. And in the fourth quarter, we averaged 26.6. Quarter-to-date, we are 25.8. So obviously we have a lot more work to do in this area.

If we look forward, we are not where we want to be. We have arrested the decline; we did slightly improved. That's an important first step. As I have said before, these big systems don't turn quickly. But this is only a first step. As we move into phases two and three in the second, third and fourth quarter of this year, we will not only improve our service, we are going to increase our productivity. Our organizational effective initiative will be completed by the end of the first quarter; that will lessen our cost; it will improve our nimbleness, our speed of decision-making and our accountability. As we enter phase two of our operations improvement program, we want to gauge (ph) not only our excellent internal resources, but we are going to bring some external expertise, some fresh eyes, as others in the industry have done, to help us evaluate and optimize our operating plan. We're still in discussions with various entities. But we will make a decision soon on whom our partner will be, helping us to reevaluate and optimize our operating plan. We believe this will help to accelerate our improvement process and increase our returns on the nice revenue gains we have been experiencing over the last seven quarters. With that, I will turn it over to Oscar to discuss our financials.

Let me walk you through a few pages from a consolidated perspective and then drill down into the operations of Surface Transportation as we normally do.

Page 6 is probably where you should be starting with me and what I have. And this is our fourth-quarter consolidated as reported. As I have highlighted with a red circle, year-over-year comparability is difficult due to the conveyance of CSX Lines earlier in the year. So the 107 reported unfavorable revenue is the issue behind that. Our fourth quarter '02 revenue for CSX Lines was 189 million, which is making that issue. So on a reported basis, the 57 EPS. But again, we have got some prior-year issues that need to be worked out.

Moving to the next page, as I announced in November, with regard to the organizational effectiveness initiative, that we would be taking approximately a 60 to $80 million charge for the cost of this program. The net 12 that you see there is likely smaller than you expected. And let me talk to you about the reason behind that. The actual initiative charge is 34 million, which is in our accounting world, what we come up with as probably roughly half of the eventual charge, the other half coming in the first quarter. This $34 million charge is offset by a probably 12-year-old productivity charge that we took when we reduced our consest (ph) from three to two back in '91, '92. And it's been at a level that has been reduced over the course of time. We did some work over the course of the quarter, and determined that some of that reserve was no longer needed, due to a couple of different issues. And again, all of those details are in our flash and disclosures. But I think the important thing to note is that 34 is netted of another number for previous. And then the 34 will (ph) continue into the fourth quarter and probably a slightly a larger number for first quarter.

Moving to Page 8, excluding those charges, getting to consolidated results, on a normalized basis, consolidated operating income was about 44 million unfavorable to prior year. The majority of that is Surface Transportation. But let me talk to you about a couple other areas in operating income that were affected. World terminals was 7 million unfavorable, partly due to a $5 million gain that was recorded prior that we did not cycle. But their operations for the full year were approximately 2 million unfavorable on operating income. So a largely flat year-over-year for our World Terminals business. The remaining operating income variance is due to the absence of CSX Lines, as I have talked about before. Other income is favorable by 27. We have had some real property sales, and we've discontinued an AR securitization program that also helped that particular line. Interest expense was relatively flat, partly -- the interest reduction is partly reflected in other income with the AR securitization. So net-net adjusted fourth-quarter EPS is 61 cents, and obviously, lower than last year to the operating income issues that we faced, and I will talk about on the coming slide.

This is in our core Surface Transportation operating income. It was 251 million for the quarter, excluding those restructuring charges that we talked about before. So let's work from the top of this page. It's a bit of a busy chart. But again, consistent with previous, I think seven quarters now, we are continuing to deliver year-over-year revenue growth. And again Clarence will talk to you about the details for that. So you see the 4 percent, it's actually about 4.4 or 5 percent, so slightly higher than 4. So while we're pleased with this growth in revenue, we continue to be disappointed in our expenses. We have stabilized to mariasinin (ph). As I have come to know in my short three quarters with this industry, little things grow to be big things very quickly. So I thought I would, especially for this quarter, would call out some of the information regarding the 111 million that is there. And you see that on the bottom portion of your slide. I think it is important to just talk about the issues that affect us, and how we sometimes have to explain some of these to be more exact on what is the progress that we are making.

The first three items on the left side, 19 million of the expense group is higher volumes. As you have heard me say before, the expenses will rise with volume, and that's the association that we see there. We work on that as often as we possibly can. But again, that is reflective of the volume increase. Twenty-five is the year-over-year inflationary cost of our labor and materials. We have a terrific purchasing organization and work through a lot of those processes. But just like everyone else, we do have to cycle those costs. And then of course, the infamous higher fuel price. About an 8 cent increase year-over-year, excluding the effects of volume and efficiency. So the price impact of the quarter was that. As we have said, we are beginning to hedge, and clearly our fuel surcharge comes into play for these items. So we are working on those issues.

If I could get you on the right side of this, two highlighted items. I've highlighted them just because Michael mentioned something earlier in his presentation. And unfortunately, our injury rate in the quarter was nearly double our expectations. We had a few particularly serious injuries and cases causing an overall increase of this 20 million. Sort of a large one-time item that we were not expecting of our particular internal run rates. Also cycling as the next line item, an $11 million year-over-year property tax credit that we, I believe, spoke about last year at this time in the Q4 '02 earnings. So some expenses that we -- some accruals that we have reversed that we're having to cycle. So to the tune of $30 million between those two areas.

Lastly, our general business costs, I've split out in two different areas. Our operations, which is the network fluidity and all its related expense structure, was 39, almost 40 million worse. And that's the area that our phase program and our initiatives are working towards first and foremost. I separated the management bonuses. We have been very open with our disclosure on this. We're not earning the kind of money we need to do. And therefore, unfortunately we have not accrued for a management bonus this year. That is a favorable expense item. And it's important to note that separately, so it doesn't diffuse our real impact, which is the 39 million in operations. And so the net result of all of this is a 30 million decrease in operating income, and again, partly due to some of those injury-related and prior-year issues.

Looking at this in a different way, (indiscernible) traditional way I think we look at it, labor and fringe at the top was essentially flat with higher expenses due to inflation. And then our network fluidity offset by the headcount reductions that we have been working on, and of course, the bonus -- lack of a bonus accrual. MS&O expenses were the big issue. And again, about half of that number was in the broad category we call cost of risk. And it includes that 19 million of unusual issues that we have in the quarter, plus expenses related to higher personal injury frequency rates and derailment and such. Of course, we've got some property tax credits from prior year, and then all the volume and inflation is in there, as well. But that's the big issue in the quarter. Conrail rents were 9 million higher. Again we are cycling a tax refund settlement from last year, which accounts for about 7 of that. And of course, we had higher volumes in that shared area, which cost us a tad bit more in volume relationship. As we go through the issues that we are working with Conrail between us and another railroad, you'll see some different classifications of these costs into the future. Again, we will bring you up to speed as we do that.

Building and equipment rent, higher, 14 million, increased volume. And some of our asset utilization and velocity issues are making a part of that cost. Inland transportation, which is our foreign line haul, particularly our Intermodal business as well as trucking, was relatively flat. That's another change that I think as we look forward, we are thinking of re-classing those foreign line haul costs up into the revenue line to be, again, consistent with other railroads.

Depreciation was favorable by 11 million. Our asset life study for track and equipment came in and we had a big significant issue. I will talk about depreciation for the full year later on in the presentation. And this life study that's been going on, pretty much over the course of the year, is finally over. And we think we can get back to some normalized depreciation rates.

Fuel expense, 16 million total; 11 of it was price. The remainder, volume related and some efficiency. And then of course, all this affects our operating ratio by 2.3 points negatively year-over-year.

That, in essence, is our quarter. A quick summary on that is 30 million. A couple of unusual items that I think mask the little progress we are making and the issues I think is important to note is our teams are working incredibly hard toward these areas. And again, continued to focus on that.

Let me move to 2003 full year. I want to do this for a couple of reasons. We have had so many moving parts. And so I want to make sure that everyone is comfortable with and understands, all the various issues as we start into '04.

Page 12 is the reported numbers, and very similar to the first page I talked about. It has largely got everything in there, including the conveyance of CSX Lines and the circled line reflects that 605 million of CSX Line revenue that is no longer in here. But on addition, down below, the cumulative effect, we had a couple accounting issues, FAS 142 and 143, that are causing some variances. And again, all of this information is in the flash detail that you can read . Through but it's important to note the different methods of presenting that we are having to go through because of those various issues.

Let's quickly move on to Page, 13 and this is just a quick recap, with the number of normalizing items we have had over '03. You should be pretty familiar with the first two items. We talked about them last quarter. The casualty charge for asbestos and occupational and personal injury issues -- the charge we took last quarter, and the arbitration settlement for issues and disputes related to the sale of our international container shipping business for the 108 million there. Then, here is kind of a recap of the restructuring charges. Third quarter, although we did not take a charge specifically, we charged it to operating expense -- we are re-classing that. So third quarter what about 10 million. I talked to you about the 34 netted with the 22. So net-net, for '03 we have approximately 362 million of normalizing items or slightly over $1.05, $1.06 of EPS impact.

As you move to Page 14, that yellow column just adjusts for that. And if you go to the third of adjusted 2.03 (ph), that's really the number that I want to spend just a little bit more talking about -- is CSX's corporate results for the full year. Operating income that's circled is 139 million unfavorable. A good portion of that, you'll see as obviously Surface Transportation. World Terminals is essentially flat versus '02. The remaining unfavorability is the CSX Lines, and also some expenses that we are cycling with regards to the retirement of our prior chairman. But again, the bulk item there clearly is Surface Transportation.

As you go down underneath that other income is a Plus 16. We had several issues. Our accounts receivable program, realty and resorts activity was offsetting each other. But net-net, a positive 16 there to create our earnings, of $1.94 on an adjusted basis, excluding those charges.

Page 16, finally for the full year, this is what I know you all mostly -- 15, I apologize. My eyesight is actually going. Page 15 is the full-year view of our Surface Transportation operating income. We grew 256 million or 4 percent in '03 on the revenue line. And again, merchandise intermodal delivered the highest growth rates. Automotive at the end of the day, revenues grew a bit. And coal was essentially flat year-over-year. But again, Clarence can walk you through that with much more crispness then I can. But the big issue is clearly the fact that the revenue is eclipsed by those rising expenses growing at about six percent. And our operating income of 902 million was well short of the amount we produced in the prior year. And of course, see the 180 basis point change in operating ratio. So I've highlighted the three point eye (ph) because I think it's important for all of us to understand what drove that and the areas we are focusing on. And again, Michael made some mention of those issues earlier.

So if you look at the line items over the course of the year and the traditional way we look at it, this is our full-year operating expenses. While our net labor and fringe, the top line on the flash, shows an increase of 31 million, we believe it's better represented without the management bonus component. So we have broken that out just so you understand. The gross labor and fringe, or the 76, was driven by inflation and other employee and pension costs, and then offset by lower employee headcount. So net-net, if I look at that number and the size of our workforce and the inflationary increases, we in essence held our own. Clearly, we need to be more productive. But we held our own with regards to that. And I think we are on a good path there. The bonus reversal, we will have to cycle, as we did not accrue this year, we have a full expectation that our results will improve in the coming years. And we indeed will be accruing for management bonus. And again, those are costs that we have to cycle and make up with our productivity.

The next line item is MS&O. I am going to discuss that on the next slide in a little bit of detail, given its relative side. But let me keep moving. Conrail, 20 million. Again, kind of volume issue by and large with some one-time items that we are cycling. Building and equipment rent are not a huge increase. Some good efficiency issues. But we did have some rebates and pricing issues that helped us. But again, not a significant number as some of the others. Transportation (indiscernible) transportation, again, is higher business volumes that we have had in Intermodal. But let's spend a few minutes on depreciation, since that number, net-net over the course of the year, is probably a good 18, 19 million short of what we normally do. So it increased 6 million due to two main items. We had a 23 million recurring depreciation rate, which is our normal run rate, offset by the impact of changes in accounting treatment on crossties of FAS 143. Then of course, the net impact of the life study for the full year. And so the combination of those three items netted the full year impact to 6. But I think roughly, for Surface Transportation excluding Conrail, you can expect to run a 20 to 23 million year-over-year. But again, we will give more guidance as the potential Conrail situation unwinds itself.

Lastly, fuel prices remain high through '03, as everyone knows. The actual cost for us was, as you see, 117. About 102 was the fuel price increase. And then of course, volume-related issues over the course of that. Our hedging program is well in place. We will be approximately 19 percent hedged during the -- after the first quarter. And roughly about a quarter of our consumption will be hedged by the end of the year. So I think as Michael said, not fully hedged this year, we're working toward it. And again, like everyone else, trying to offset that cost in various ways. And again, we can talk about our fuel surcharge later with Clarence.

Let me (indiscernible) as I promised. Let me break down the 139 million of MS&O, because it's a large number and it reflects several different issues. The first one is kind of an amalgamation of costs that we are terming cost of risk. And it's a collection of costs that, in essence, are from higher injury and accident rates that we have discussed. We had that mass filing on asbestos that we talked you through in two quarter '03, which was about 16 or 17 million. We've input the cost of a special freight (inaudible) safety program, which is very important to us, and of course, higher insurance and other related items for that. But if you can blend both the cost of risk and derailments, that is a significant, significant expenditure for us. And while we will continue to invest heavily in the safety of all railroad and our employees, we did have a horrible year, with regards to that, and again, a big focus of our programs within the railroad. The remaining 39 million is really the more operations volume inflationary kind of costs that we see. So clearly, our pit initiatives and our progress -- productivity initiatives -- are working towards those numbers.

Let's move on to -- despite the lackluster performance on an operating income basis, we did set up some targets for you through the course of early last year. And I am happy to report that on all three of these, we did hit our numbers. Starting with free cash, we had a target of approximately 300. You see that we increased, significantly, almost 90 percent to 362 million. And again, given a lot of our debt structure and issues, that's a very, very important metric for us that we continue to target. All-in debt ratio, very similar situation, targeted 55 from a 57 or so number last year; made it to 54. So again achievement. As Michael mentioned earlier, our staffing reductions of about 900, we did over-deliver there quite a bit. To note, in the staffing reduction number, the 1,318 decline, I think the way I would like at this for you all to model this is, there is approximately 200 people that I would adjust out of that, because we have made some reporting methodology changes and the way we treat some T&E (ph) employees that are in furloughed status. In essence, we have been counting in different ways, and they have had no economic impact. And so, we want to report -- the numbers that you'll see in our flash are the 1318 reduction. But there is probably a good 200 that I wouldn't count in any economic modeling. Again, if you need more detail on this, give us a call, and we will walk you through it. That's an important part to know.

As we look forward into next year, bear with me as I walk you through a couple of issues that are probably either new or not as clear to everyone. Let me start with the first bullet, something we call the 53rd week. We operate our accounting calendar on a financial 4-4-5 basis rather than a traditional Gregorian calendar. Last time, we had a 53rd week. So if you think of the leap year concept, this is how it affects us every few years. Last time we had this was in 1999. So the extra week that we will have this year will be reported in Q4, so not until the end of the year. And now here is the hard part -- because that week's volume and revenue contribution is less on average, like 40 percent less than most of our normal average weeks, and unfortunately, our fixed cost structure doesn't become that variable, it actually is a dilutive or negative impact to operating income, of approximately 15 and potentially up to $20 million. So that is just something for you all to note that that this year, we will have this 53rd week issue. And it does have that kind of unorthodox impact because of the week that it falls into. So that is that one.

I think I talked about the restructuring costs that will continue into 2004. Our total charges for the initiative or on organizational effectiveness is still anticipated in the 60 to 80. We have done the 34 this month. So you can expect the difference of more than largely all in the first quarter.

The next bullet, on network rationalization, I think we have talked about, giving you a little more of more detail on this. We do have a two-year program that involves the sale or lease of non-strategic, non-core lines for us. We anticipate activity of two to three times of what we have done this year, which is about 400 miles that we disclosed in '03. So we are looking at double, if not triple, that over the course of this next year -- and then continue to look at the outer years as we determine the economic viability of that process. But again, the goal here is to improve network efficiency by getting locomotives back to the network, clearly avoiding unnecessary capital and any redundant resources.

The second to last, Conrail spin activity, there is a lot of work around that. We expect to complete that sometime midyear of '04. It should be highly transparent. We will have some reclassifications on the income statement. But we don't anticipate any material impacts on our income statement from a financial perspective, just reclassifications. And so again, more of that issue will come as we get closer to it.

Last but not least, I need to give you a bit of word on World Terminals. As you may have read a couple of days ago, we have had some issues out in our World Terminals business. We have lost a major customer. There is terrific work being done; it's a great and viable business. But until we replace that customer and until we do a couple of other issues that our new management team is focused on, we do anticipate, for '04 at this point in time, probably as large as a 30 to $35 million operating income reduction from the 69 or 70 that they reported in operating income in '03. So I think that's an important word to note. And again, more details on that as we move forward.

So let me talk now to Page 21, about capital and what we're doing this year. In '04, our capital expenditures are being reduced to 875 from about 990 in '03. Just reflecting, our continued -- not so much spending controls but efficiency and productivity on those issues. As we finalize our capital plan, we did look at the issue on locomotives with regard to the bonus depreciation and the new EPA requirements, and deemed it appropriate to accelerate some '05 capital spending into this year in order to take advantage of some of those issues. So while we did have a good amount of locomotives in our base operating capital, we will accelerate some of these things and again borrow from the '05 period. I think it's important to note, with the 875 reduction, is that it has been a terrific process around understanding where we get the most value of other (ph) capital to spend, and at the same time recognizing both the safety and customer service aspects of our business cannot be mitigated in any way. So we have invested in our core infrastructure as much as we have before. And where we have taken reductions on some areas that we just did not see as much productive return in the short term. So over a two-year basis, I would think that we would roughly -- our run rate would come down from the roughly billion to roughly 900, is kind of what we are looking to do with regards to capital.

To finish up my portion, as we look forward in '04, let me give you the same key targets that we did, that the company did last year. Capital expenditures again, just slightly over one billion, including the '05 locomotive acceleration. And again, if you look at '05, a reduction that will happen in capital then. Free cash, net 250 to 300, but obviously approaching closer to 400, given the ability to include those locomotives in this year. So again, free cash has got a couple of stories. One, the strength and quality of the numbers that we are expecting in '04 is -- frankly they are more from the operations area. We won't have a big conveyance that we (inaudible) CSX Lines to do that. And our real property team, as great a job as they have done, are going to be hard pressed to deliver those kind of results. So our free cash generation -- our expectation is that it will come from operations, which is I think an important issue.

Last but not least, we will continue our headcount reduction targets. Again as we get efficient and more productive, these are the areas -- clearly the organizational effectiveness drives a portion of that. But we have several other initiatives as we normally do that will drive those costs and those headcounts out of our business. So with that, I would like to turn it over to Clarence, our Chief Commercial Officer elect.

Good morning and thank you, Oscar. I appreciate that appreciate that. First I would like to begin by saying it is an honor to be taking over the commercial leadership at CSX Transportation for Mike Giftos. Most of you on this call have known Mike Giftos for sometime. And if you recall, he took over the commercial leadership at CSX just after the post Conrail integration. I think it's important to note that Mike has delivered four key factors to CSX during his tenure as a Chief Commercial officer. The first was his uncompromising commitment to revenue yield improvement. The second was his ease of doing business initiatives. The third was the new business development programs that he put in place at CSX. And forth was his leadership role that he has taken in creating industry alliances in the rail industry. So, especially following up on what Michael said earlier, on the half of the commercial group here at CSX, Mike, we wish you and Mary the very best in retirement.

Now let's turn to our results in the fourth quarter. We expect the gross domestic product in the fourth quarter will come in at about 3.4 percent. That's following our very strong third quarter GDP of 8.2 percent. Industrial production in November reached 0.9 percent, which was the largest in four years, and in December, was 0.1 percent. So what we saw virtually across all of our lines of businesses were growth.

Let's look at what some of the revenue was on slide number 24. Our fourth-quarter revenues were up $81 million. As Oscar mentioned earlier, that is a 4.4 percent year-over-year increase. It's our seventh consecutive quarter of year-over-year increases. It represents a quarterly record of 1.896 billion. So we are clearly seeing economic improvement and our marketing efforts are starting to pay off.

We can go to the next slide and look at some volume comparisons. This chart clearly shows the economic recovery is underway. What it's comparing is the volume growth in the first three quarters against the fourth quarter. So as you can see, our automotive business had declined in the first three quarters year-over-year at 2.7 percent, yet grew 1.5 percent in the fourth quarter. Our coal, coke and iron ore business had declined 1.6 percent in the first three quarters of the year and grew 2.7 percent in the fourth quarter. Our Intermodal business, which had grown at 4.5 percent in the first nine months of the year, grew at 7.5 percent in the fourth quarter. And our merchandise business, which had grown at 2.7 percent in the first three quarters, grew at 6.3 percent in the fourth quarter.

So let's go to the next slide and look at some specific markets. Our automotive business had a good quarter. We had some modest price increases on several pieces of business. We had some new business that was moving at a slightly higher revenue per car. And we had lanthapoll (ph) extensions (ph) that improved our revenue yield. So in spite of a year-over-year decline in North American light vehicle production of 20,000 units, we achieved revenue of 228 million or 4.1 percent revenue growth on a 1.5 percent volume growth.

On the next slide, our total revenues were up slightly. The $403 million on a 2.7 percent volume growth -- it was significantly impacted by mix issues. And while the volume was up, we had difficulty meeting the consumer demand due to both producer and service issues. The overall yield weakness was a result of two factors -- mix changes and southern utilities, where growth occurred in shorter-haul coal plants, and year-over-year volume increases that triggered incentive refunds. So overall, a little disappointing. But here's what we do know about coal. We had cold weather. The coal stockpiles are reasonably low by historical standards. We have high natural gas prices; export demand is up slightly; electrical generation east of the Mississippi River is up 0.2 percent year-over-year. And the spot price of coal, yesterday, was $44.50, up from $38 three months ago.

Turning to the next slide, our Intermodal revenues were up significantly. We had a nice fourth quarter with revenue up 6 percent or $19 million for a total of 328 million. While our domestic revenue grew faster than our volume, which you can see in our flash report, our lower revenue per car international business grew faster than the domestic business. Therefore, our revenue per car was negatively impacted. There were at least two other factors that was also influencing the international line of business, one is the West Coast trans (ph) loadings, and two are the all water diversions to the East Coast, which either result in business being trucked from the ports to destination or shorter haul on CSX.

Turning to Slide 29, we had excellent growth in our merchandise markets. Six percent growth in our revenue and our carloads, for total of $928 million. In our merchandise line of business, that was our seventh consecutive quarter of positive year-over-year growth in a recovering economy.

Now let's look at some of the individual markets and merchandise on the next slide. As you can see, our phosphate and fertilizer business grew 3.6 percent in volume on a 5.1 percent increase in our revenue. We were certainly impacted by longer hauls to the interior markets from our Upon (ph) Valley (ph) region. Our metals business grew at 11.4 percent in volume on 11.1 percent revenue. Most of the growth occurred in short-haul markets where we had significant modal conversion out of our steel plants. The forest and industrial business grew at 4.9 percent on a revenue of 4.7 percent improvement. Again, it was short-haul modal conversions up and down our eastern seaboard. Our agricultural and food grew at 8.2 percent in volume on a 1.2 percent growth in revenue. Our chemicals business, reflecting the overall improvement in the economy, grew at 2.3 percent in volume on a 3.3 percent increase in chemicals. Our emerging markets unit grew at a stellar rate of 18.8 percent in volume on 19.6 percent in revenue, driven principally by three factors -- heavy movements of southern aggregates, heavy movements in municipal solid waste, and cement plants too, in fact, locating on CSX, that let us grow faster than the industry average.

Now before we go forward, I want to pause and look at our yield performance for the year and for the fourth quarter on the next slide. We are not seeing the type of revenue yield in the fourth quarter that we are accustomed to seeing at CSX. Why is that? First, the mix changes in coal and Intermodal that I referred to earlier. We have also seen at CSX over the last two quarters difficulty pricing in the economic conditions and coupled with the service issues, and in the face of a very aggressive fuel surcharge. So what's different, where are we going? The economic environment is improving. As Michael told you earlier, the service is improving. There are productivity issues that are surrounding the trucking industry with the new hours of service law. And you have my commitment that we will aggressively pursue yield improvement.

Turning to Slide 32 and looking forward, this is my first time at doing this crystal ball. So I guess when we are back here in April, we will be able to check and see how this is -- how well I scored. Our coal market, we think, is favorable going forward. As I mentioned to you earlier, we have cold weather. We have high natural gas prices. The stockpiles are low by historical standards. So all of the trendlines and all of the metrics that we look at in our coal business are very, very favorable. Our emerging markets unit is also very memorable. Again, the growth is in municipal solid waste. We've also seen growth in our lime markets. We've seen continued growth in our aggregates markets, particularly here in the South, where we are still able to pave during the winter months. Our metals because is extremely strong. Most of our metals fleet today -- carload fleet -- is underload and is moving. Forest and industrial products, we continue to see growth in modal conversions, almost across the board. Our chemicals business is also showing growth, as you can tell from our CS (ph) 54 carloadings in the first quarter. And we can expect Intermodal to continue its nice year-over-year growth.

What we see is flat has been our ag and food products. We saw particular weakness in our soybean movements on CSX as a result of the short crop this past year. And our phosphate and fertilizer, although had its third year in a row of record performance, it will be flat on a year-over-year comparative basis. Frankly, in the automotive industry, although Large (ph) is predicting somewhere between 16.3 and 16.5 million North American light vehicle production for the year, we have had some automotive plants closed on CSX for the first period of the year, January. So we are not quite sure yet whether that will be unfavorable or flat.

On Slide 33, we remain very optimistic. Our coal fundamentals are strong; the economic signs look positive. Our service is improving. Combine this with the productivity in the trucking industry, and we think that the opportunity for revenue yield improvement looks good. Let me turn it back to Michael.

Thank you, Clarence. You saw from Clarence's slide, we do expect good growth in several of our key commodities, especially as our operations improve. The expectation for every member of the CSX team is to find ways to leverage this growth, driving more of that revenue to the bottom line, something we did not do in 2003.

As we move into 2004, we will focus on using a few important tools to generate better results. We have already talked about our organizational effectiveness initiatives and the value of the management restructuring that is now underway. As we remove management layers, we will be streamlining communication, establishing clearer accountability and ownership and setting tighter priorities. I am confident this initiative is working and you'll see long-term value of it as we move forward.

On the operating side, we are focusing not only on the fundamentals of running a good railroad, but also on what adjustments we may need to make to our operating plan because of changing traffic mix and transportation economics. We will be partnering with some fresh eyes now to help us address that issue along with our capable internal resources and adjust our network to insure the most efficient operation possible. It is a little difficult to quantify the results of these initiatives today or to tell you exactly when we will see them reflected in the numbers. As I told you before, these don't turn on a dime. The more important issue is addressing the challenges we face and quickly making changes necessary to drive stronger performance, which is exactly where we are today. As you know, traditionally, we do not give guidance for the quarter or for the year? And I am not going to break that tradition today. However, you know by now the philosophy of CSX, that is to get the right elements in place, make the investments necessary to provide value for shareholders without sacrificing the long-term for the short term. So with that, I would like to open a line to questions please.

(OPERATOR INSTRUCTIONS). Thomas Wadewitz, Bear Stearns.

I've got two different questions here for you. One, I know it's tough to precisely forecast when you are going to see the improvement in the operations and not a lot of visibility there. But can you give us a sense -- are there any key events or key actions that you see that you are taking that you think will really have a big impact? Do you think within the first half of this year, we will really see the operations start to turn around significantly?

I think we will see that in the first half as you mentioned. We've made some modest progress, I would call it, in the fourth quarter, with the record peak we had. So far this year, we are seeing some pretty good results. We are pretty challenged right now with the whether you all are experiencing. But we are encouraged that we are starting to see the proper focus -- the proper turn on this thing. And I think certainly within the first half, we will see that. There is no key initiative that's driving it, just focusing on the few key measures, stabilizing and making sure that we're focused on those key measures. It's really a more of a back to basics approach rather than any single magic silver bullet.

In terms of seeing the revenue -- some positive leverage and seeing some of the strong revenue growth translate into even greater earnings growth, do you think that it's possible to see that in first or second quarter? Or should we be fairly cautious on expectations for the positive leverage as well?

Great question, and clearly one we ask ourselves every time. One of the things that this initiative -- this organizational effectiveness initiative -- has done is really created an environment where we get to look hard at some of these issues. And I would say that one of them in particular I would say is contra (ph) for contribution for the revenue that we're generating. Starting with Mike's leadership on the pricing and n now continuing with Clarence's leadership, even expanding more broadly to contribution targets with our sales organization, it's clearly a path that we are working through. We have some very clear goals with regards to the contractual arrangements we make with our customers, and things that the sales team is pushing mightily. The effect of that, as most things, as contracts are forward contracts, the actual effect of for instance, a price increase, takes a bit of time. I am told there is a curve of about six months or so. But again, Clarence can articulate that better than I can. The ongoing work that we are doing and the efficiency productivity, that will help our short-term financials. And then I think as we focus more on the tool that we develop under contribution and the pricing initiatives that the organization has, I think you will be able to see that. And I think, that, you'll see more in the second half of the year -- begin to see it rather than in the next three or four months.

Gary Yablon, CSFB.

Mike, the first question is for you as it relates to the chief operating officer, if I remember correct, you had talked about wanting to put someone permanently in that seat. It had been something like six months post you having filled that slot temporarily. Could you give us an update on what your thinking is there?

Where we are at this point -- we are going through this organizational effectiveness initiative, which we -- as we have looked at this, the first couple layers of the organization, basically our vice president and assistant vice president levels, we've reduced about a third of that headcount or the staffing related to that. One of the things we have done is reorganize that operating department to have a focus under Mike Cantrell for all of our maintenance activities, from cars, locomotives and track. Al Blumenfeld is heading up our service design activities, which will be the operating plans, as well as crew planning and calling, and the locomotive planning and distribution. And Jim Fallon is going to be focused on driving the execution on a day-to-day business of the transportation function. We just established and set up here, about three weeks ago, we are manning the next layer of it here within the next couple of weeks. So what I would anticipate, I want to give that a little run and see how we do with that. I think that's going to be a very effective organization. I think it will start driving our results where it needs to go. And I really do want to give it some time to see how well we do with that organization before I investigate having a COO at this point.

So you might not necessarily go that route?

We will see how this reorganization -- organizational effectiveness initiative -- place out before we make that decision.

Another couple, if I could. In terms of management incentives and how senior people get paid and whatnot, how is this separated out between operating profit within Surface Transportation, between earnings and whatnot? What I am trying to get at is, you've got a pretty good hit coming on World Terminals that many of us probably did not know about. How is management aligned with that? Or how is that split out?

Your question is specifically to World Terminals or our overall competition structure?

Overall comp to the earnings line vis-a-vis the operating profit line, because the shareholder is going to get hit on the operating line, and I want to understand to what extent does management get hit as well?

From a broad perspective, our executive -- our senior leadership team, we've created some different incentives. There are short-term bonuses that are obviously for Surface Transportation people, focus on Surface Transportation operating income. And of course World Terminals management has that component for themselves. From a broad perspective over a longer period of time, our long-term incentive is based on sort of a modified free cash line that is cash from operations. So from a shareowner perspective, it's meant to generate free cash, if from operations as opposed to just realty sales and all of that. And then of course, operating ratio comes into it.

With regard to the specific hit, if you will, with regard to World Terminals, that is something the it's not today tied into say Michael or I in the current structure, for no reason other than it's an asset that is far away from us. And again, we are exploring all the different strategic alternatives around that, and didn't deem that to be an issue. The concerns we have had over this year, which just surfaced out of World Terminals are kind of a different issue. So long answer to a short question. world Terminals is not part of Michael and my's compensation program, but again, it's usually a pretty small piece of it.

Okay. Maybe you'll help us clarify that in the next few months because it seems to be out of line with the big earnings. Michael, let me ask you one more if I could jump back -- do you see -- and maybe this is for Clarence -- the operating ratio is now several hundred basis points worse than the competition in the marketplace. Do you see yourselves being at any kind of a disadvantage on the marketing front as regards to that?

Gary, so far, we have not experienced any adverse conditions in the marketplace as a result of that. Certainly long term, it's an issue. But in the near term, we have not had any issues.

Any sense, Clarence, as to how long before that would make you a little bit more concerned, is it quarters, is it years or any? Give us any color on that.

I would hope it is years out. I don't know how many years plural, it is. But certainly with the economy expanding and the issue around trucks and all that we spoke about earlier, I think 2004 is going to be a good year, a good opportunity for us.

Actually one of the issues Gary, is we have been very careful to protect the service we are providing to the customers. We know that it's critical to the revenue we have done generating and will continue to generate. So some of the cost disabilities you may seem is when we are having some of these operational issues, we will go the extra mile to make sure we are protecting the customer. Because if we lose that confidence, re-establishing it is very difficult. So I think at this point, we are not seeing any real lack of confidence in the customer side. It's actually hurting us more on what we are dropping to the bottom-line as we protect the customers.

Before you leave or I guess you could stay on, I want to give a quit update or I want to clarify the point on competition. The top eight people in the Corporation do have incentives tied to earnings and share price of the Corporation. So in essence, in fact the World Terminal issues would be part of that. So I just have that clarification. I want to make sure you got that. Okay?

Very helpful, thank you.

James Valentine, Morgan Stanley.

The questions that we had were, number one, Michael, in your comments regarding the fresh eyes, the outside look in to your operations you seem to be hinting at it, you seem to be suggesting that you're looking at a change to your operating methodologies. Possibly, several years ago, Norfolk Southern adopted the schedule methodology. Are you hinting that's possibly going down the same route?

I think what we're going to do is examine that entire operating plan. As you may recall, when we acquired our portion of Conrail, at that time, we completely re-looked at what our operating plan was and not only did we have a different entity with Conrail acquisition. That was four years ago. Over time, traffic patterns changed, and we thought it was time to bring in, only internally, but externally, let's take a fresh look at that entire operating plan and see whether there are some ways we can have better efficiency out of our . Operations so yes, we will be -- if you will, doing a fresh look sort of clean sheet, let's look at what we have. And let's see, given today's environment, whether our operating plan is the most efficient one we have. Obviously, that will not be an overnight process. You have to work through a lot of detailed things in a complicated network such as ours. But we will be engaging in the beginning of that shortly. We are in the process of talking to various potential partners in that process and we will be making selections sometime soon.

If I could add to that, also, as we work through our network rationalization initiative and the changing economy and the changing mix in our business unit, all of that from a strategic process, feeds into the design of our operating plan. So there's a good deal of work being done on that. And again to Michael's earlier comment, it's not something you turn around overnight. The more important thing that I have heard the team now work through is that's very open to the conversation of how we best design our network, to both service our customers and obviously, to service our shareowners.

Would it be fair to think of this in the context of, over the next three to six to nine months, stopping or halting the problems on the service side, getting the ship righted, sustaining those changes, maybe a couple hundred basis points of cost fallout if the system as things improve. But that next step, the next level to get to the 80 O.R., that would be the vehicle that would get you there, is a change in network design, etc.?

I think of the overall framework, that's about the correct -- I don't know if I would want to talk about the particular O.R. points within that. But the conceptual framework you're speaking of is correct.

Should we be concerned that there might be a link between the dramatically lower headcount numbers and the spike in accidents, safety costs here recently?

Not really, because if you look at it, we have had that issue throughout the year, unfortunately. If you look at our performances on the P.I. side, obviously we are 11 percent for the year, but 23 percent in the fourth quarter. I don't think that really relates to the organizational effectiveness. The fourth quarter, that really only touched the very top of the organization, Senior Vice Presidents. So I don't think that would have an impact in the field. If you look at the accidents, we were 31 percent unfavorable for the year, 19 percent in the fourth quarter, actually a slight improvement although still very unacceptable results. So I don't think that that is an issue. I think probably more the issue is the fact that the railroad is not running as well as it needs to be. And normally what we find is as you have a smoother running operation, your safety performance also improves. So I would attribute it much more to some of the operational difficulties, not to any particular reorganization efforts or the headcount.

Last question for Clarence, you touched on the revenue per unit declining in the quarter -- I think it was down 0.9 percent -- after some nice gains in the first three quarters of the year. You kind of attribute it to economy, to the service levels softening, I believe one other issue. Can you give us a sense for the -- you said you expected it to turn around in '04. As far as a sense of timing, should we look for that to just not be as bad in say the first and second quarters? Or would it be reasonable to actually expect an increase? Will that turn sharply in the first half of the year?

I think you can expect it to moderate and turn around in the first half of the year. You'll see a significant improvement by the second half of the year, point number one. Point number two is that if we get an explosive growth, for example in Intermodal, that carries a traditionally slightly lower revenue per car than some of our other lines of businesses, then you will continue to see that type of number due to the mix changes there. I guess the third factor is remember that a reason that you saw that yield change in the fourth quarter was coal was a significant driver in moving those numbers down. And that was a very profitable business for us. But it was short-haul coal business that didn't carry the types of revenue per car than some of the longer haul business did into the Florida markets.

Scott Flower, Smith Barney.

I've got three questions. I've got three questions. The first two are for Clarence. Clarence, in terms of, we have heard the rails all talk about being aggressive on Intermodal, specifically with the hours of service issue. The question I have is that in speaking with all the other truckload carriers the issue that seems to be presented by hours of service is -- tends to be for more shorter-haul fright. I am trying to get a sense for how the rails can benefit from that, given that in the past, Intermodal under 500 miles hasn't been in an area where the rails have been effectively competing.

On CSX, our average length of haul for Intermodal business is about 723 miles, so we are right almost bumping into that 500 mile lane (ph), would be my first point. Secondly is, if you look at what a lot of the trucklines are doing now, they are actually raising to assessorial charges there for waiting times, for multiple stops and drop-offs. Although we do multiples stops and drop-offs in our motor carrier operation, it's not the principal or the preponderance of that business. So to be honest with you, I think we are going to have to see -- have a little time here to see what the true impact is going to be. Wal-Mart for example has forecasted a 6 to 7 percent decline in their truckers' productivity. Whether or not that actually occurs and given the fact that the DoT has said that they will have light enforcement of the rules and regulations, as they make a transition, it's just probably too soon to tell what the impact is going to be or how significant it's going to be.

Secondly, in terms of the coal stockpiles, you were kind enough to indicate that coal stockpiles are low by historical standards. If we go back about a year or so ago, what was happening with all the utilities -- were intentionally lowing stockpiles to below historical levels to conserve cash and just carry a lower inventory. I am just trying to get a sense for -- are coal stockpiles even lower than that level? Or are they essentially at the new "normal level" and we need this cold weather to continue before the stockpiles get drawn down a little bit further?

They are down slightly from what the new levels were, and they vary by utility. Each utility has their own target days of coal available in the stockpiles. What our data is indicating to us is that they are down two to three days below the targeted levels, which would be the new target levels you referred to.

My last question is for Oscar. Oscar, if I look at the CAPEX, I understand the pull forward for locomotives in 2004. But if I look at the underlying CAPEX, I believe the number is 875 million for versus 991 a year ago. I am just trying to get a sense for -- I don't know that that much has changed operationally. And I am just trying to get a sense for, are you in essence spending too little in 2004 whereas we might see an increase in CAPEX going forward in 2005 and 2006? Or has something structurally changed that would enable you to lower your core CAPEX by about 120, million year-over-year?

There are a couple of answers to that. I think it's a hybrid of all of those items. I think we looked hard at the efficiency and productivity of the spend we were doing. An example would be the cost of installing X in our railroad was a certain cost, and we looked at that hard and could we be more productive and efficient with that. So doing the same for less is probably a big chunk of some of that. The second chunk came out of sort of ongoing projects terms are categorized under productivity, that it was difficult to build a consistent and clear business case that reflected those economic results in some future periods, being, okay I can see building this, but what are we really going to get and what is it really that we are going to get. And I think pending some IT strategic and platform reviews that we are in the middle of, did not want to move forward and spend money where those were not linked to the strategy of the Company. As we talked about earlier with regards to looking at the design of our network and looking at the miles we run and how we structure ourselves to better serve our customers, I think it's important to make sure that that strategy falls into place below the line in some of the spending we do on these issues. It probably came out of both those areas, the big chunk. And in some cases, we just got a little tougher on some of the areas that we had to. So again, I will reiterate the (indiscernible) that it did not in any way shape or form, from a core infrastructure, reduce in any significant way, other than a bit of efficiency and productivity. Okay?

Okay, thank you.

Ken Hoexter, Merrill Lynch.

Two quick questions, on the World Terminals, does the loss of the major customer increase or decrease your desire to unload the unit? And then secondly, on the materials and supply line, which was kind of surprisingly high, can you talk about trends going forward for that? I am sorry if you mentioned it earlier, Oscar, I might have missed it. But I want to understand just because that had such an impact on the quarter on the material supplies and other.

I will address World Terminals and let Oscar do the MSO. Obviously, we have had a long term theme that there is an asset that people value higher than we do; we are always willing to have those discussions with them. I think as we look at it, obviously one of our key challenges, the customer represents about half the terminal business is Hong Kong. One of our key charges here in the short term is to re-fill that terminal with other . Business so I think that's going to be our focal point at this time. We do have a number of great development projects going on there, which I think create value in Korea and Dominican Republic. So I think at this time, I think it's a matter of mending if you will from the loss of the Hodgen (ph) business. I don't think it's changed our view at all, if we had somebody came in with a very attractive offer, we would be willing to consider it. I think at this point, we are very focused on how do we increase the profitability and repair the damage done by the loss of that customer.

Ken, can you repeat the second part of your question?

Just on the materials supply and other line, it was significantly higher than we had anticipated fourth quarter. I think you might have mentioned some of the issues as to why earlier on. I was just wondering, is this something that snaps back down into place? Or is this kind of a sustainable new level that you have to work around?

You have two components; one, general inflationary increases and cost of running (inaudible) business continue to plague us, and those are the issues we are working on. Those are not necessarily -- we don't want them to continue but, we will work through that here in the next few months. The thing that we are very hopeful will not continue are the singular items that I mentioned around adverse and unusual incidents, injuries and related items that happened, which was, as I mentioned, almost 20 million in the quarter, and almost 100 million for the full year if you include derailment. Those are the areas that we are certainly focused on, and we will not see that trend continuation.

Jennifer Ritter, Lehman Brothers.

I apologize if I missed this on the call. But I wanted to get a feel for how the headcount reductions from your announced separation plan are coming along, in terms of how many you have cut so far and where they are coming from. Secondly, if you could give us a sense of timing around when you expect Conrail to officially be spun off?

On the organizational effectiveness staffing reduction, as you may recall, that's a layer by later process where we start at the top of the organization and move our way down. We have worked through all the Senior Vice Presidents. We are in the process of looking at the Vice Presidents and Assistant Vice Presidents. And we will be announcing those changes within the next couple of weeks. At that executive level, we've reduced about a third of the staffing at that level of the organization. We will then move to the remainder of the organization here in the remainder of the first quarter. So the total number of people, obviously, is less, because there's less people at these higher levels of the organization. But we are on track to the 800,000 that we had specified for the program, and should be done toward the end of the first quarter. On the Conrail spin, there are a number of steps yet that need to be done even though we have the two regulatory approvals. We do need to get the consent of the debt holders; and there's some valuation processes that need to occur. Our expectation will be sometime in the middle of the year.

One part of the question was, where are those cuts coming fro -- I am not sure if you meant levels or functions. It is generally a cross-functional alignment, and again, because of the senior levels, predominantly here in our Jacksonville headquarters offices; and again, pretty much across the board with regard to all the functional work environment here.

Gregory Burns, J. P. Morgan.

A couple quick questions, first I guess on the subject of price, do you feel that it's possible that some of the service issues may be impacting your ability on that front? If so, what would be the impact? And also, just in general how do you feel about the pricing outlook, looking out in '04, relative to this year just completed?

On the first question -- is on the service, it's always difficult to get price increases if your service product is not what you always want it to be. However, having said that, we haven't really run into any significant issues there, so I would say that there has not been that much impact on it. As I have told you earlier going forward here in 2004, it looks to us that the pricing environment and the opportunities for revenue yield improvements are excellent, given the fact that -- I hope with this economic wind we are seeing now to our back, it stays there -- assuming that it does, number one. Number two, given the fact that the economy is expanding at the rates that it is expanding out and then our industrial sector coming back, I think that's favorable. Number three is affecting the truck productivity issues that we talked about, that appears to be in our favor. So it just seems to me that if the economy does not go south on us, or if it slows up on us, we can have somewhere around a 3 percent revenue growth. If it got real strong with us and stayed with us like I hope it does, it would be somewhere around a 4.5 to 5. I am going to push this revenue yield just about as strong as you have seen anybody push.

That is good to hear. I want to clarify one question that came up or one answer I should say, on the extra stub week the I guess you said would be dilutive. I think the number I heard was 15 to 20 million. I'm wondering if that is the pretax or after-tax number?

Pretax.

John Barnes, Deutsche Bank.

Very quickly, Mike, as you have gone through this -- each of these layers and I guess starting with the SVP layer, I guess now you are down into the meat with the VP and EVP level. Can you give us an idea -- is there anything you have found as you have gone along that has surprised you, weaknesses you did not know you have, strengths you did not know you had? And as you go through this process, as you get deeper into the organization, are you modifying the plan as you go along? Could the headcount reduction actually swell? Could it be a little bit smaller, just because you're fearful of intellectual drain if you cut too deeply?

I think what we are finding so far John, is one, these are tough decisions. When you are reducing a third of that level, there are some good people that unfortunately have to leave the Company. And those are tough decisions that we are spending a lot of time to make sure we make them well and minimize some of those impacts to individuals. But what we're finding so far is that once we announce the given layer, that the people within that are feeling very energized. They are accepting the new responsibilities and like the fact that the structure allows them in effect to have more authority to drive things because there's less layers to fight through. They have more ability to control the organization. So far for the organization, things that have been named, I think it's been energizing for those people. For the ones we have not yet named, to be honest, there is some concern on their part. Gee, am I going to have a job when this is over with? And that's a very natural human tendency. And I think that probably sucks a little of their energy because they are concerned if they are going to have their job or not. But we are going to move through this fairly quickly. And what I am finding so far is that people do want to improve what we're doing. The one interesting thing is while everybody is concerned about their job, there has been a lot of comments made to me and others of the senior team that this is the right thing to be doing. We do need to do this, and I hope that I am one of the ones that remains. But if I am not, I am okay with it because it is the right thing to do for the Company. And I have actually been very pleased that that has been a lot of the attitude of the organization toward this. I think what we are going to find is once we get through this, we are going to get an energizing and a .

Focusing and the other thing we're finding is there were, as you could imagine, some overlap, some shadow organizations. And we're finding that what we are able to do is that by focusing activities, that we think we can get some better efficiency and better effectiveness out of aligning the activities and trusting one another to deliver, rather than everybody having in effect some of their own shadow organizations within the process. So far, so good. I think we are feeling pretty good about what's going on. I was wondering if you had anything you want to add to that.

I think it is very difficult and it's been hard on all the people involved and clearly, hard on the people that are awaiting decisions. But I think the greatest impact I have seen so far is the way -- there is a terminology. Michael is level one or layer one, and clearly Clarence and I are layer two. Then the layer three people we announce, vice presidents by and large, are now designing their layer four organization and staffing accordingly. In the midst of doing that, and as Michael mentioned, these shadow organizations and these processes that over time, have just sort of dissipated across the Corporation, rather than in an end-to-end fashion within a collective authority and responsibility of an individual or function, as we are finding those, traditionally in any company you face a lot of emotional issues, a lot of my area, my environment, not yours. And the list of those issues when we started this was big, and I mean really big, to the point that we were really concerned. But this layer three has taken it upon themselves to resolve those issues. And by the time it came to the senior leadership team, that long list had been reduced to basically five or six major items, and had worked it through together. I think that for me, at least in the short time that I have been here, is a fundamental shift in how we are working. And I think it's partly a function of this initiative. So I am pretty excited.

With regard to your intellect intellectual drain perspective, I think as we look around, we are finding incredible loads of talent in different levels of the organization. There are many people that have been waiting in the ranks that are not (ph) being promoted. There are people shifting in organizations from point A to point B and just making us a stronger company. So clearly we will not go down that path of cutting to the bone. We are very aware of the external benchmarks with other railroads to make sure as we get down lower in the organization, that we don't effect customer or service oriented sort of issues. So we are mindful of those areas as we go. Will we moderate our plan, our budget of that number? I don't think so. I think we have taken a lot of that into account before hand. We will keep you posted.

I'm sorry if I missed this earlier, but can you just comment briefly on what your crew hiring plans for the year are?

No. We will get back to you, John, and tell you what that is.

But that plan is ongoing?

Yes. You know (indiscernible) and as I think we mentioned before, there was some lot and some science there. But I think we did a fairly good job last year of predicting where our attrition would be and matching that up with hiring. I know we do have a hiring plan this year that allows us to withstand the attrition. We don't expect we'll have some of issues that have been around the issue this year, with an inadequate crew base. So we are actively hiring now. And Peter will get back to you with the exact number of what our hiring plan is, John.

Very good, thank you so much for your time.

(OPERATOR INSTRUCTIONS). Sal Vitale, Fulcrum.

I have a question actually regarding the 52 percent declined in revenue per carload in the coal segment. Can you give us some color on how much of that decline is a attributable to mix changes as opposed to core pricing, and how much of it is attributable to the refunds that you mentioned?

About 50 percent of it was involved in the refunds and about 50 percent of it was involved in the mix changes. There are no real moves that you had a price decrease on, (inaudible) in that period, right?

That's correct, there were none.

There are no further questions at this time. I will turn the conference call back to you. Please continue with your presentation or closing remarks.

Thank you. I appreciate you all joining us today and appreciate your time and attention. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.