CSX Corp (CSX) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CSX Corporation first quarter 2004 earnings conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded, today, Wednesday, April 28, 2004. I would like now to turn the conference over to Mr. David Baggs, Assistant Vice President of Capital Markets. Please go ahead, sir.

Thank you, Daniel. And good morning, everyone. Welcome to CSX's first quarter earnings presentation. Before we get started, I need to remind everyone that of course during the course of our presentation there are several forward- looking statements, and in connection with that, it's important to keep in mind that results could differ materially from these forward-looking statements. With that, it's my pleasure to turn things over to Michael Ward, the company's Chairman and Chief Executive Officer.

Thank you, David. Good morning and thank you for joining us at CSX's first quarter earnings release. This morning I am joined by Oscar Munoz our Chief Financial Officer, Clarence Gooden, our Chief Commercial Officer, and Tony Ingram, our Chief Operating Officer. As you know, Tony joined us last month, after a 30 year career with The Norfolk Southern. Tony is widely respected within the rail industry. And brings to us a solid experience in safety, in service and in operating efficiency.

With the addition of Tony, our team is really rounded out. Our senior management team is now where we need it to be. Now we have a really good mixture of rail veterans and outside industry perspective. And together, we are committed to insuring the necessary discipline and accountability to achieve our improvement goals. I also want to thank our colleagues at the Norfolk Southern for their role in allowing Tony to join our company.

When I told David [Gruder] of my interest in Tony, both he and Steve [Tobias] were very gracious professionals and I appreciated that. Now turning to our results. I think you had the opportunity to see our press release and our flash. For the first quarter we reported net earnings of $30 million or 14 cents per share, compared to 99 million or 46 cents a share a year ago.

This year's results include an after tax of $37 million or 17 cents a share, related to the company's management restructuring initiative. And you will remember that last year's first quarter included a favorable cumulative effect of a 2003 accounting change of $57 million or 26 cents a share. Excluding these items, our first quarter 2004 net earnings are $67 million or 31 cents per share compared to $42 million or 20 cents a share a year ago. That's a 55% increase in our EPS on a year over year basis.

On the same basis of excluding those items, our surface transportation units, operating income increased by 21% and our operating ratio improved by 1.5 points. An element in our improvement was the completion of our management restructuring, which we announced in November of last year. Earlier today we announced the final management reduction, and I am pleased to report that we hit our target.

We reduced our management staffing by approximately 900 people. This was a difficult process, involving many valued employees who have made terrific contributions to our company over the years. However, it was a necessary step to create the structure required for long-term success. As we move forward on our turnaround, we have four primary goals.

First, generate profitable revenue growth through attracting new customers through our modal conversion programs and by capturing the full value of our service through our value pricing initiative. Second, running trains safely, reliably and efficiently for our customers. Third, we are going to increase our free cash flow and strengthen our balance sheet.

Fourth, we are going to create shareholder value through consistent, continuous improvement on a quarter over quarter basis. Now, turning to our revenue growth in the first quarter, we continued to have good success on the top line. Our service transportation revenue was up almost 4.5%, which was a record first quarter for our service transportation units.

And I believe this is more than just the results of the economic recovery. Clarence Gooden and his team deserve a lot of credit for generating growth across nearly all of our markets, including a 9% increase in coal volumes and a 10% increase in coal revenues. In addition, I am pleased with the success we are having on our value pricing efforts, a key component of our revenue growth strategy.

Now, I would like to turn toward our operations. We obviously must significantly improve our service. You have seen our measures. We are not where we need to be. I am not satisfied with our numbers, with our performance, or with our progress.

We must must reverse these trends to realize the leverage of our system. As I said over the last few quarters, our operations won't turn overnight. However, do not be mistaken in thinking that CSX is patiently waiting for results. We are aggressively putting in place initiatives necessary to improve both our service and our productivity.

We will drive improvement this year through both our short-term efforts, which are in place now, as well as the long-term benefits of our network redesign that is currently under way. You may remember that last quarter we talked about our plan to use outside expertise to assist in our operating improvement efforts.

Since then, we have retained the team from MultiModal to help redesign our operating plan to an initiaitve we are calling the CSX 1 Plan. MultiModal, as you know, has worked with a number of companies in our industry. The Canadian National, The Canadian Pacific, The Norfolk Southern, and helped them generate both better service and improved cost structure.

Tony will discuss this more shortly. But as we roll this out this summer, we will begin to see the value of this industry tested effort in our service, in our operating efficiency, and in our financial results. Through this one one planned initiative, and the leadership and expertise which Tony brings to our company, we plan to deliver on our operating improvement goals and return to and exceed the operating levels we have achieved in the past. As a result, we will provide the service that our customers expect and deserve.

We will compete more effectively in the marketplace. We will generate better productivity, better efficiency and better profitability. We demonstrated over the past eight quarters that we can generate strong revenue growth, through well executed sales and marketing plans.

Going forward, we continue to plan to continue to do that and to take advantage of our strengthening economy. At the same time, we must push more of that revenue to the bottom line and generate the shareholder value creation you expect.

We will do that through discipline and accountability about our action plans that we have outlined with the team now in place to drive the results. Now, I would like to turn over the microphone to our newest member of our team, Tony Ingram, to talk about operations. Tony.

Thank you Michael and good morning. It is a pleasure to be here at CSX today. Although I joined CSX in March, I am certainly not a stranger to the CSX or many of my new colleagues. Over the last several years, I have worked with many of them, and I am somewhat familiar with the CSX network.

We have a great franchise here at CSX with a strong customer base. We have dedicated, hard working employees. However, it is clear that we are not performing to our potentials. We must raise the bar and improve our operating performance. In my short time here, I have visited many major terminals across our network.

I spent time getting to know the people, listening to the employees and the labor leaders. During these visits, we set out our expectations to improve our service. In the short term, we will focus on two things, safety and train originations. First we're going to turn around the safety program. It is absolutely critical that employees work safe and return home every day safe.

I am working hands on to make our existing safety program work better and assure that we all accept responsibility for our own safety and that of our fellow workers. Second, we are going to drive up the origination. Getting trains out on time sounds simple, but getting this right will drive the rest of our business.

Longer term, I am very excited about what Michael mentioned, the MultiModal program. These folks at MultiModal are great professionals and I have had experience with them in the past. Also they have improved perforamance in other carriers as well as the Norfolk Southern. The one plan will rebuild our operating plan for merchandise and automotive traffic from the bottom up.

The results will be fewer handling, requiring switching at major terminals and reduce cycle time. The one plan would do a lot of things, but we will focus on only two at this time. Improved service for our customers and reduce our costs in our operations.

Phase 1 will be a new plan for a lot of road trains that transport shipments from our hub yards, the processing yards, to other locations. It will be rolled out in early July and completed by September before the start of the fall peak. This is a very aggressive schedule, and we must execute with great discipline.

The second phase of the one plan will be to tie the yard operations to the local delivering network. Implementation for Phase 2 will begin begin somewhere near the first quarter of 2005. Planning and design is already under way.

We will make progress with our current operating performance in the second quarter by placing more discipline to our operating procedures. And the one plan will give us momentum in the third quarter. However, it will probably not be until the first quarter til I expect to see the full value of our first plan. We are not waiting on the one plan to solve all our problems.

We have got to step up to the challenge now. We will be aggressive in improving our safety and train performance. And with the help of every CSX employee, we will deliver. I am excited about being part of this team at CSX. I look forward to sharing with you the progress of our efforts as we move forward.

Now, at this time, I would like to introduce to you Clarence Gooden, our Chief Commecial Officer.

Good morning, and thank you,Tony. We continued to see the strong economic growth in the first quarter at 4.8% that we saw in both the third and fourth quarters. In fact, January's industrial production surged at 8/10 of 1% and was the second largest increase in nearly four- years. As you can see on our first slide, our first quarter revenue exceeded the prior year's by $82 million, a 4.5% increase.

This is our 8th consecutive quarter of year over year improvement, and represents a quarterly record of $1.915 billion. Our revenue increased across all of our markets except the auto market. And with continued emphasis on our fuel fuel surcharge program we have been able to offset unfavorable mix changes.

Moving forward, we continue to go after our higher-priced targets. Finally this figure includes $13 million of revenue due to consolidation of a subsidiary that shows up in the load and revenue on the other line. Now, let's look at some of our markets. Our coal revenue of $422 million exceeded the prior year by $39 million.

That was a 10.2% growth in revenue coming on a 9.1% growth in volume. Export coal continued to show strength due to the high European and Asian market demands. The fundamentals for coal remain strong. Inventories remain lower than the target levels.

Natural gas price levels are averaging $5.65 per million BTU. Our production in increasing in central Appalachia. We expect coal to remain strong this year. Certainly not in the 10% growth range that we have had in the first quarter but certainly stronger than last year.

Our automotive revenue of 202 million declined 2.9% versus 2003 on a volume decline of 4.6%, while production in general in the U.S. was flat, volume weaknesses were driven by down times at several CSX served plants. The improved yield resulted from haul extensions, freight and mixed impact. Our intermodal revenue of $612 million grew 2.6% on a volume increase or 4.4%.

This sector is our most service sensitive, where we are directly competing against truck. And while the revenue and the volume are not where we expect them to be, it's clearly an area that we expect to improve as Tony's plan to improve service takes hold. Our [truck] brokerage continues to show steady growth. Transloading out on the West Coast continues to impact the domestic volumes favorably, a decline in the average revenue per unit in our international line of business was the result of a loss of a piece of business that was off of our core railroad that was lost to the underlying rail carrier.

Our merchandise revenue of $958 million increased 3.9% on a volume increase of 3.4%. This is the 8th consecutive record quarter of revenue growth and merchandise. You will recall that we had significant military moves in the first quarter of 2003. And if you net those moves out on a year over year comparison, our rate per car would have been 1.1% instead of .5%.

All of our merchandise markets grew in revenue. Let's look at those markets individually. At our phosphate and fertilizer business, both the volume and the revenue were favorable to 2003. The volume was up 2.6% with the revenue up 2.3%.

The yield was impacted by mix changes due to the shorter haul phosphate rock moving to the ports. Our metals market continues to grow with 6.8% volume growth and 8.2 revenue growth driven by both domestic demand as well as Chinese demand. Scrap metal, sheet steel and the plate markets were the key drivers. Construction demand continues to drive the growth in building products.

You will see that our forest and industrial line of business grew in volume by 1.4%, and our revenue grew by 5.1%. General economic strength, as well as strength in paper exports also contributed to favorable volume and revenue. Our ag and food volume was essentially flat with revenue growing at 2.4%.

While we had gains in wheat and feed grain and in feed grain ingredients and flour, they were offset by weaknesses in our grain exports, alcoholic beverages, sweeteners and soybeans. Our chemical market grew 1.5 in volume, and 2.4% in revenue. Although most of the lines of business within chemicals were up, sulfuric acid was up about 9% and [chloralkalai] was up about 4%.

And finally in our emerging markets unit we had solid double-digit growth in aggregates and cement, fly ash and in automotive shredder residue. Please recall now that our military traffic was down reflecting the mix change that has impacted our yield.

Looking forward on the next slide, our automotive market we expect will be unfavorable on a year over year basis. Although light vehicle production in the United States is expected to shift to the second half of 2004, the inventories remain high even though the incentives are at record levels. Our phosphate and fertilizer shipments will improve as the spring season begins. Yet we expect that with the rising prices in phosphates and in fertilizer to the farmers, it will be flat on a year over year basis.

We've mentioned earlier coal, the fundamentals in coal are all very good. Our export coal is up. The utility stockpiles in the south again are not at the target levels, so we expect moving forward, coal to be a very strong market. Our agriculture and food market, we expect a very strong forward-looking market, particularly as we expand into the ethanol products into the New York market.

Our chemical business and general consensus is, we will continue to be up for the remainder part of the year. And we expect our emerging market units as well as our metal unit to continue to either the high single-digit or near double-digit growth that they have been enjoying. The forest and industrial is a strong market, and as long as the economic conditions for the housing markets remain where they are, we expect that the construction material will continue to grow.

Our intermodal business is -- grew quite nicely, quarter over quarter, and our international lines of business. However, in our domestic lines of business, we weren't able to get the growth we should be getting. As I mentioned to you earlier, that was service impacted, and we expect that as Tony improves our intermodal network, we will certainly get our fair share of the truckload freight traffic growth in this country.

So, in closing, we remain optimistic, the coal fundamentals as I've said are good, the economy is recovering, service improvements will support our growth and create capacity. And the pricing environment is very favorable and our focus in pricing has never been as strong as it is now. So allow me to hand off to Oscar Munoz, our Chief Financial Officer.

Thank you, Clarence. As I am sure many of you have seen, our earnings our flash this morning, our reported consolidated earnings are 14 cents a share. There are a number of moving parts this quarter, this quarter as year over year comparison, and while the details are all in the flash, let me hit a few of the highlights here on the first slide.

The decrease on our top line was due to the sale of CSX lines last year, which had about 130 million in both revenue and expense during the quarter. Also included in this year's result is a $59 million charge related to our management restructuring program. This quarter, we are also consolidating short line railroad subsidiary called Four Rivers Transportation, due to a change in GAAP requirements.

Now, this increased our revenues by 14 million, our expenses by 10. So 4 at the operating income level but no impact on EPS, since it's just a reclass from below the line up into the regular P&L. In addition, CSX's change in operating income was impacted by Lower World Terminal's income, due to the loss of a customer that we talked about previously.

Now, this loss was offset by expenses incurred last year for the retirement of our former chairman. Now, if we move down to P&L, the explanation of the change in our other income and interest expenses is a bit of a geography issue as well. Both lines were impacted by the discontinuance of our AR sales program.

This raised interest expense, but reduced other expense. The balance of the change in that was in those two line items is primarily due to higher real estate sales last year versus this year. And as well of course the impact of the Four Rivers reclass that we did above the line this year. Overall, reported net earnings for the quarter were 30 million.

This yielded reported EPS of 14 cents as Michael talked about, compared to a 46 cents share last year, which I remind you as well had a 26 cents due to FAS 143 benefit embedded in there. So let me further clarify some of these moving parts on the next line. Now, the table on the top shows a nonGAAP reconciliation of the impact of our restructuring charge on our results.

This charge was 59 million, consisting of 53 million for the service transportation part of the program that we have been speaking about, and 6 million for management reductions at our World Terminals business. Without these charges, consolidated operating income is 220 million, up 43 million from last year.

Now, if you turn to the chart on the bottom of the page, you can see the restructuring charges impact on EPS, which was 17 cents a share. Now, in addition, as I talked about before, our 2003 reported EPS includes a 26 cents a share of higher income due to the adoption of FAS 143. The net impact of these two items is in EPS, excluding restructuring, and FAS 143 of 31 cents a share in the first quarter of '04 versus 20 cents last year.

Now the year over year increase of 11 cents a share is directly attributable to the revenue-based growth in surface transportation which we will talk about the rest of the presentation. Slide 17 shows management view the business, which excludes the impact of the $53 million restructuring charge we incurred in the quarter.

Now, on this basis, our surface transportation unit produced year over year, or year over year earnings of 21%. Now, as Clarence discussed, revenue grew by 82 million, we saw record revenue in nearly all segments of the business and driven by strong volume growth of over 4% year over year.

Expenses grew by 3% largely due to volume in inflation, and continued train, operations, challenges. Now I will address the specific issues in the labor and fringe line, DMS&O line and the fuel line on subsequent slides, but first let me clear the other expense areas that are on this chart. Conrail fees and Inland Transportation were relatively flat year over year.

Building and equipment rents and a couple moving things, but lower totatl expenses of 2 million, but driven by 6 million in recoveries and settlement partially offset by 4 million with mixed volume and utilization issues. Depreciation expense of 160 million was up 7 million, largely due to increases in our depreciable base.

You can expect to see that same absolute number, the 160, in each of the remaining quarters. While under the operating income line for the quarter was 204, this represents an increase of 35 million or 21% from last year. Our improved results led to a decrease in our operating ratio of 1.5 points year over year. Now, if you turn to the next chart, I can focus on some of our key expense areas.

Let's start first with labor and fringe which increased 18 million from last year. Increases were due to several factors, we had 5 million in volume, 13 million of annual inflation on our wages and salaries, now 4 million of higher expense due to the Four Rivers consolidation. You will see this throughout our expense areas. And a $10 million increase in pension and incentive compensation costs relative to last year.

Now, during the course of this year, you can expect to see this incentive compensation variance on a year over year basis. Given some of the thing that we undertook last year. Now, provided we achieve our planned consistent continuous improvement on our bottom line, you will expect to see some some variances there.

Now, on the right side of the chart, and partially offsetting these increases were 14 million lower expenses due to reduced workforce year over year. Turning to the next chart, and then let's talk about material supply and other MS&L, this increased 27 year over year.

The primary drivers of the change were volume related of 3 million, inflation of 7, and that is due to mostly to a third party contract that we are in the process of working through. And 5 million of expense from consolidating our Four Rivers subsidiary. And 6 million in higher general operating expenses. And that's where some of the challenge train operations impacted us.

Now, we are also cycling through a favorable impact to our property and sales taxes area. Where we saw last year lower expenses due to a settlement of a prior year tax matter. Now, the net result of this is 6 million, relative to last year, and, in the second quarter, we will have a similar item in the same line, just so you can look forward to that.

Now, let's talk about fuel. Fuel seems to be a fairly important subject for obvious reasons, so let me spend more than the usual time time on it. While we had a favorable variance of 4 million year over year, it is a combination of factors. We had 7 million favorable due to lower average fuel price of about 4.5 cents year over year.

Now, additionally, fuel expense was favorably impacted by about 8 million of recoveries associated with four end line fuel settlements. These two items were partially offset by higher fuel expenses of 8 million, due to our volume, and 3 million in unfavorable fuel efficiency resulting again from our challenged operating performance.

Now, the hedging program that we have, let me give you a bit of an update, and there's a lot of numbers here. But we were about 5.5% hedged for first quarter, at an all-in price, this is taxes, delivery and everything, of 91 cents a gallon. For the next three quarters, we are currently hedged at 13%, 25% and 39% respectively.

The average price per gallon for those quarters is between 87 and 91 cents. So I am looking at this from a full-year perspective, our hedged position should average about 21% within that price per gallon range, so hopefully that helps you in your future planning. Now, if I could turn to the next slide, I want to updage you, Michael talked about our management restructuring program, we have completed our last layer of redesign with announcements made earlier today here in Jacksonville.

It has been an incredibly challenging activity for the company to undertake, and we are very satisfied in the way which our employees have been able to work through this process and align the company for future success. The facts behind it, total management reduction,approximately 900 positions. As you will recall it was in the middle of the 800 to 1,000 range we began to talk about last fall.

As I mentioned, surface transportation incurred a 53 million charge this quarter related to the program. You can also expect to see about 5 to10 million in additional charges in the second quarter to reflect the cost of today's completion of the program.

The ongoing direct financial benefits of this program are an annual savings in the order of 90 million, which we can expect to get about 3/4 of that during this next year. Now, the real long-term benefits to our shareowners of the increased accountability across the organization, which we are seeing in lots of different areas. As well as the enhanced communication, and speed of decision making, that is beginning to show itself here at CSX.

So to summarize on the last slide, CSX had challenged operations in the first quarter. But we had made a critical first step in the right direction of bringing some of that revenue growth to the bottom line. As Tony mentioned, we will continue to focus on the basic fundamentals of our business, in the short line, while we engage in the longer term prospects of how we improve train operations. And of course Clarence and all of us have been discussing how we will continue to profitably roll our revenue to offset that inflation and volume.

The combination of these two items, along with our continued financial discipline, will allow CSX to deliver on its commitments of free cash, capitalize spending and, of course, the management restructuring program which we have just completed. We are on track to deliver the 250 to 300 in free cash, with the improved quality of our core earnings and we expect to meet our capital spending of about $1 billion which included an aceleration of 130 million for locomotive purchases.

So with that, let me turn it over to Michael for his closing remarks.

Thank you, Oscar. The first quarter markets a step for us as we work to get back on the path of consistent, continuous improvement. Our revenue growth plan is working well and will continue to generate solid benefits for our company. I am pleased we handled the increased volumes in the first quarter, but our challenge is still on the cost side.

We are not pushing enough of our top line growth to the bottom line. But as we look at where we are, we have action plans in place to improve the operations. We have terrific new operations leadership with the addition of Tony Ingram. And we have a management team that's committed to delivering discipline, accountability and results to the newly restructured organization.

And that's how we will deliver the free cash flow that Oscar talked about and drive shareholder value. Now, I would like to open the mike to entertain your questions. I would ask if you could please identify yourself and your affiliation for the benefit of those on the call. Daniel, we're ready for questions at this point.

Thank you. Ladies and gentlemen, if you would like to register for a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered, and you would like to withdraw your registration, please press the 1 followed by the 3. And, if you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. Our first question comes from the line of Tom from Bear Stearns. Please go ahead.

Yes, good morning, everybody.

Good morning, Tom.

Let's see, I have got, I guess two questions I want to focus on. One, I think for Michael or Tony. When you look at the issue right now, and the opportunity for improvement, clearly you spent some time on MultiModal and I think that will obviously big a big focus and helpful. Setting that aside, what is the sense in terms of the need for improvement? Is it a culture issue that will take some time? Is it an operating plan type of issue? And maybe Tony, if you can give us an initial read on that and also a sense of time on how long you think it will take to have an impact on that side.

Yes, first, let me answer the question this way. I have traveled the network over, I have talked to a lot of people, and obviously, that we are not performing where we need to be. Our train performance must be improved on. I have talked to the people, the culture here is to run the trains on time. Our people are starting to get that done. And I think we can improve that with just a bit of leadership and directions as we go forward.

As you stated earlier, Tony I guess we expected to see some sequential improvement in the second and third quarters, but really start seeing the vibrancy in beginning of the fourth and really hitting stride in the first, is that correct?

Yes. We will have our -- beginning to roll out the one plan in July. And we probably won't see it until the fourth or beginning of the first quarter to really see a benefit of good train performance as a result of the plan. But in the meantime, we are going to put back more emphasize on operating a program that we existing have and get our train performance back where it needs to be.

So do you think the bigger opportunity then is in terms of the discipline of running the the plan? Or is it just getting the right plan in place?

I think it's both. I think a strong part of it is getting the discipline to the system of operating on time. And then the plan will come after it to reinforce that plan

Okay all right . And then a question for Clarence or maybe this is Clarence or Tony. In terms of capacity, availability we have seen from some of the other railroads issues on the capacity side. And I think assuming you do have capacity to run the network better. We should see some of the growth come to the bottom line. Are there any capacity constraints of concern in the network that you might need to address? Or do you feel there is pretty significant excess capacity?

Well, this is Clarence Gooden. First, as we start to operate the railroad better, a faster velocity will create capacity, if you will. It will create locomotives, it will cars if you will, certain car types, and some of our markets, our metals markets would be one. We are challenged with the capacity for just a sheer car standpoint to move some of the amounts of scrap metal and some of the amounts of finished product that is being produced.

But in a lot of our other lines of business, we simply don't have the capacity issues. For example, Tom, in our intermodal business, we could handle a lot more growth in our intermodal business and will as our service improves, particularly in the truckload sector.

Okay. So you don't see a track capacity issue, per se,as we might see from some of the western guys or from Canadian Pacific perhaps?

No.

Okay, great. Thank you for the time.

Thank you.

Our next question comes from the line of Scott Flower from Smith Barney. Please go ahead .

Yeah, good morning gentlemen.

Hi Scott.

Just, I guess a couple of questions, one, and this would be for Tony, and I'm not trying to this is good this is bad. But I'm just wondering obviously coming from NS, and your long career there and coming over to obviously CSX, which has been your long-time competitor. Do you see any differences in the culture that will change how you may have to manage, obviously these are companies that operate in largely the same geographic terrain? But I am wondering as you look the the organizations, are there things that you see that are different. That will mean you'll have to manage differently or know? Or will you just work on changing the culture at CSX.? I am just trying to get a sense of how you see the differences between the two organizations.

Scott, you would be surprised how many times I have got that question around here. Let me see if I can address it for you. You know, the best way to describe the Norfolk Southern operation is they have been doing the same thing over and over for a long long period of time. And the culture is do the same thing, improve as you go forward.

Here at CSX, as you probably mentioned there, we had some changes in the chief operating job over the years, and we have probably changed different philosophies as we have moved forward. We will try to bring some stability to that, stick to one plan and bring some discipline to it.

In discussion with all of our people, their first they want good leadership, they want direction. They are just like any other people that wants to do a good job, and give them good positive reinforcement and go forward. I think some of the leadership skills that I have developed over the years will assist me here in going forward at CSX.

Great. And then just a couple of other questions. Two would be on the marketing side for Clarence. You mention on the coal side, seeing some greater supply coming out. I am just wondering if you can give me some greater details, if you will to that. I guess my understanding is that availability really has been more of the problem in Appalachia and some of that has to do with geography and the mine scenes, and etc. I am just wondering what are you seeing in terms of the expansion that availability has been an issue? And then, also, what amount of fuel surcharge revenues are you actually collecting? And how are you doing in terms of trying to improve that relative to offsetting fuel?

The first question, Scott, we have one of our major coal producers that is investing $7 million of additional mining equipment in their mine operations up in central Appalachia. And most of that will be in place here in the first half of the year. Secondly, we have another one of our major coal producers that is reopening a mine that they had closed some years ago.

Up in, up in the Huntington area, and that mine has a lot of capacity and a lot of capabilities. So those are two specifics that we have that's coming on.

Do you have a sense of what tonnage capacity that actually adds?

I will have to get back with you on that, because I don't know off the top of my head.

Okay.

On the fuel surcharge, about 50% of our revenue is covered by the fuel surcharge. About 20% of our revenue base is covered by the RCAFU, and the remaining 30% then is priced on a spot basis which we hope that we are, you know, getting that price at the level that it recovers the additional fuel costs that we are incurring. As contracts are renewed, they are covered by the fuel surcharge.

And does the surcharge on those contracts that have it fully cover fuel? In other words, are you comfortable that you are getting full coverage for where fuel is relative to your surcharge? Or is there a timing mechanism or otherwise that there isn't one for one coverage?

We are probably not recapturing the total price of the fuel as it goes up. I wish we were, but we are not. But we are better than than we were.

Okay, and then just one last last quick question for Oscar and I will let someone else have at it. You mentioned on the head count program that's largely done and that for the year and we should sort of anticipate perhaps the first few quarters the 90 million in savings. If I interpreting your slide right on labor cost you saved about 14 million in first quarter, which I'm assuming was related to this program. Wouldn't you run a little bit better by 75%? If assume you get most of the savings in second quarter and then you know a run rate of 22.5 in third and fourth? Or am I misinterpreting some of the different parts here?

Yes, and we can walk you through the exact mechanics. It's timing around those issue, I mean the 90 is an annualized basis. And we think we're going to get three quarters of it in this year. But most of the benefit, is not in- that first quarter number is driven primarily by year over year changes. The restructuring program isn't as impacted as our results for the quarter as you would think. So we can you through the numbers there later. But, you know, the three quarters is what we are looking for, for the next the three quarters.

Thank you.

Our next question comes from the line of James Valentine from Morgan Stanley. Please go ahead.

Thank you. Good morning, guys.

Good morning, Jim.

Good morning, Jim.

Great job in hiring Tony. I know NS management was very sad to see him leave. And Tony, if I can throw a question your way. You know the $64,000 question as you probably picked up is when are we going to see some margin improvement through better operations? I guess the first thing I'm trying to clarify,is in your experience at Norfolk Southern, can you give us a feel from how long it took when you brought in, whether it's bringing in MultiModal or bringing in just the philosophy that you are going to to change the design, until we actually started seeing benefits? And then I guess I think we are starting seeing benefits here in the most recent quarter. How far back did you start to really lay out all this to get to to where NS is now?

Well, there are two questions there Jim. First question is that I think I have indicated we are on a pretty aggressive schedule here, because we have some other things, that we want to get the operation up and running, improved as quick as possible. We will start laying this out in the mid, mid year second quarter, July. And it's probably going to be toward the end of the year, by the time we all get it where we need it. And probably be seeing some improvements in the first quarter. The good solid improvements, even though we will have some improvements before then.

We should have it completely implemented by the time of the end of the year. And that's the first phase, and that's really where you get your biggest bang for your buck on the MultiModal. After that, then we will look into further, maybe some yard reductions or other where we can reduce costs to it.

So it sounds like is that the real short-term tactical improvements might occur here in the second, third, fourth quarters. But to see the big step up in margin improvement, it's really a 2005 event, is that a fair statement?

Yes. I think that's -- your assessment's correct there.

Okay and then along the lines of this restructuring or the change in philosophy, how much of this is going to require I.T. systems, whether we are talking hardware, software, I don't know, versus changes in either priorities or incentives that you have for forefront line managers?

Well, we don't have anything on the books yet that would require an I.T. investment to improve this process on the one plan. We have those systems in place to date.

It's more about simplify, the flocking plan, the train plan and make it more executable less circuitous, less handlings. Right, Tony?

Yes, it's just redesigning the train schedule that you have out there to date to reduce the number of handlings.

Okay. Good, good, thank you. And if I would just ask one other question. I am not sure who wants to handle this. But Norfolk Southern clearly has seen a big spike in their coal pricing rates, revenue per car load because of a change in accrual for two cases. I know you only had one case, against the Duke case. And it was a smaller amount of tons than them. So we wouldn't expect the same magnitude. But just wondering if there is anything in the corridor or anything we should be waiting for going forward in terms of how you are handling the fact that the STB ruled in favor of you, here in I guess, in the fourth quarter?

Jim, this is Clarence. We still haven't gotten the final, final ruling from the STB. But we did properly reserve for that. And when the ruling comes in here in the second quarter, we will obviously reverse those reserves and bring them down to the bottom line. We think that the STB rulings themselves are very favorable for us in our coal pricing.

Absolutely, . So when Norfolk Southern said they didn't know when the ruling would come out because there was no deadline, you just mentioned it will be a second quarter event. Is there you're getting indications that we will get closure here in the next two months?

I believe we will.

Great.

That's a best guess. You've got a new commission there, and we're not quite sure, Jim, how quickly they will move on that. And would like to add though. You are quite right, that the tonnages we had under these cases were much less than Norfolk Southern. And they had two cases versus our one. But, Clarence, I think we are fairly comfortable, as the contract renewals are coming up, in all of our coal movements, we are seeing some attractive increases on the repricing of those, is that correct?

That is correct. And, Jim, as a matter of information to you, about 50% of the coal contracts that are up for renewal are up for renewal in the first half of this year. There's very few that will be up for renewal in our third quarter. And then we will have another group that will be up in the fourth quarter for renewal. And so our opportunities, going forward, are going to be predominantly here in the first half, not much in the third quarter and then picks back up again in the fourth quarter.

What portion of your overall coal franchises will will that be?

It will be less than 10% this year and about 15% next year.

Okay, great. Okay, great. Thanks so much, guys, appreciate it.

We have a line from Ken [Hecthner] from Merrill Lynch.

Hi, good morning. I just want to ask a follow-up on the coal rate case question there. Should we see then pricing, the 1%, I guess if you say half was up in the first half, does that 1% coal average revenue per car load reflect some of the increased rate? Or I just want to understand when you say you have taken a reserve but not flown it through so that none of that increase from the rate case has flown through. But some of the renegotiations have, is that correct?

Well, the 1% that you saw in the first quarter, recall, was pricing that was done in essentially the third and fourth quarters of last year. And I don't have the numbers in front of me right now for what percent of those contracts renewed in the third and fourth quarter. But I can tell you in the first quarter of this year, we got some very substantial rate increases in the contracts that we renegotiated. And then the second quarter, we planned to continue that trend.

And you did did have some mix impacts in the first quarter, didn't you Clarene? Some of that truck competitive business that you have been taking?

We did. We have mixed impacts there and we will have mixed impacts on a fairly large piece of business that we have taken from truck to rail in the second quarter.

And Ken, just to clarify on the Duke, we did accrue moneys or reserve moneys, really, not accrual but reserve moneys when that Duke case was pending. That reserve is still out there and we don't think it's appropriate to touch that until we do get that final ruling whenever the STB rules on it. On an ongoing basis, they were charging the rates that the STB said were the fair rates and ones necessary for us to achieve our cost of capital.

This is Oscar, Ken. And we are not reserving against those current billings.

So those current high rates are flowing through?

That's correct.

Current market rates.

Great. And, then, just a follow-on question again, on Jim's question on the systems or processes. Is this, I just want to clarify, is this something, you do need additional systems in place? IT systems that you have to improve service?

No.

Or is this something that is just more implementing the processes that you have got?

Implementing the processes Ken. We do not need new technology investments to implement it.

Very helpful thanks.

Our next question comes from the line of Dan Hemme with Prudential Equity Group. Please go ahead.

Hi, good morning.

Good morning, Dan.

Let me reask Jim's question in a different way. This is regarding the restructuring plan and the CSX 1 plan. I guess I understand the timetable, but, Michael, can you talk to maybe what your internal targets might be for operating ratio? Can we see them trend better than 85 over the course of the next several years?

I would say over the next several years, better than 85 certainly or comfortable with it. As to the timing of it though it gets a little bit difficult Dan. As Tony said, it will take a little while for this to really hit its stride, and the second piece of that is how successful we are, we expect good success on the revenue and pricing side of the equation.

So I think we are going to have both of those working in concert. Better pricing, growing business, as well as some better operating efficiencies as we go forward. And I think as we alluded to before, we think that we'll really get that vibrancy on the operating side. While we will make incremental improvements throughout this year, we'll really start hitting stride primarily in the firsth quarter of next year.

I guess with ragard to the timetable, have you set specific margin or operating ratio targets to that timetable yet, at least internally?

Dan, this is Oscar.

Yes.

Couple of different ways. One, let me clarify the strategy that we have outlined, at least Michael and I publicly. While we all understand, rightfully or not, that the turn around of a big freight logistics company is not an overnight one. And we're being realistic about that. What we have implemented with the commercial team is a revenue and price goal that overcomes the volume and inflationary issues that impact a business like ours. Fully understanding that the operational part will be slower than than most other things that we do.

So the top line will grow profitably. And that will sort of provide air cover while Tony gets his basic work done around the culture and the discipline but also as this MultiModal plan comes in. Our internal goals and targets and metrics have all been aligned to meet that time line, and of course as you know, we don't give future guidance.

We are not going to share it, but certainly 85% operating ratio is not- that would not be a goal we are striving to end at. Certainly it is on the path towards where we would like to be. And so I guess at best we can put it at this point.

Okay. Fair enough. That's very helpful. Thanks very much.

Our next question comes from the line of Joel [Nalinger] from [Alizer]. Please go ahead, sir.

Good morning.

Good morning, Joel.

Just a couple of things, one, can you talk other than the CSX 1 plan , you know, I know you had mentioned safety. Are there other things sort of tactically in the near term to sort of get from this point to the Phase 1 implementation that you know Tony you were able to go in and dig out right now? That would be the first question. And secondly, over the last few months, are you start to see some improvement, in some of the internal metrics that you are tracking as you move past, what was a tough first quarter?

Yes, one thing, one thing that we are doing to improve without the one plan, it's best to get our trains out o time, our originations. If you get your trains on time, more likely, you going to get in on time and that's going to reduce a lot of your costs about dead heading, and crew and locomotives not being in the terminal ready for the next the train.

So our main focus in our terminals right now is departing our trains on time. Which we think will reduce a lot of our, our cost. Then after that, the one plan will kick in and we will go forward. The safety side is huge. Safety, in my opinion, is largely an attitude, sometimes, and people that's motivated and works in a good, a good environment that's safe will be more productive. So we are also addressing that for our employees also and provide a safer place for them to work for, work in .

And then --

I'm sorry, Joel, you are cutting out. Would you try again, please?

Moderator, can you switch us to the next person?

Of course. Our next question comes from the line of Jennifer Ritter. Please go ahead.

Hi, just wanted to think through some of the one-time benefits you got on costs. I am trying to put my hands on it right now, it was with the fuel, the $8 million recovery on fuel, and the $6 million recovery on building equipment rent. If I want to look at your quarter on sort of a run rate basis, I should strip those out, or were there other onetimish negative that netted those out?

Yes. David was reaching out to a lot of you to walk through that, you know, earlier in the quarter, we had a couple of negative issues, and there's a host of them in the $3 and $4 million range, prior year issues, I think he can talk about them. We had significant injury settlement on top of that that created a bit of an anchor for us.

These things that you just mentioned the, fuel line settlement and a few of these credits kind of came late in the quarter. You know, unfortunately since I have been here, we seem to have a lot of bad luck blowing our way. It was nice to have a couple of recoveries again legitimate normal issues that we wanted to highlight for you. But from the standpoint of the full quarter, and as the good guys and the bad guys, if you can use that terminology, our assets offset, and we feel very confident and comfortable with the state of results as we have spoken about them.

Okay. Great. And then your tax rate seems kind of low. A apologize if you hit on it and I missed it.

What you have to do, and again David can walk you through the math. Conrail's earnings are taxed before they come down, so it creates this optic on our flash information. You have to adjust out to that. When you do that, you get closer to our 37% rate that we normally work with.

Okay, great, thanks.

Ladies and gentlemen, as a reminder, if you would like to register for a question, please press the 1 followed by the 4. And our next question comes from the line of Greg Burns from JP Morgan. Please go ahead.

Greg.

One for Tony on the relationship between the service improvements and, you know, pricing that we, or yields that we could expect to see on some of the other product lines. In other words, should we expect, assuming you guys see the sequential operational improvements that you are looking for, I think you said the second quarter to third quarter and fourth quarter, should we expect to see pricing begin to firm up more than it has so far so that, you know, pricing should move up in line with service?

Yes. Let me, let me let Clarence address that. I am thinking he has the commercials out there.

Well, Greg, I think you will see, particularly on our intermodal side of our business, that we will be able to grow that business substantially, as the service improves. We will be able to grow it in the truckload sector with private equipment which generally speaking carries higher rates than some of our traditional domestic business, has carried us. We are going to continue to push the price leverage just as strong as we can in every market position that we can push it in.

And, and just specific, on the intermodal, I know there's a mix change, but was pure pricing, was that also down? Was it flat? You probably mentioned it. I missed it.

No, it was a change, mainly in our international line of business, where we have what we call off core business, moving in the west, doesn't move on our railroad. And it changed from us to being moved by the underlying rail carrier. That business generally tends to carry a higher rate per unit.

But on an apples to apples basis, pricing on intermodal was flat?

Pricing on intermodal was slightly down versus volume increases. It was up on the domestic side and down on the international side.

Got you, got you. And one other final question, just on the mechanics of the fuel surcharge. It sounds like there's a lag, and I am just curious whether that would be one quarter, two quarter, two or three months. And then, I guess being the optimist, if fuel were to drop, perhaps, in the back half, would you then perhaps get an earnings pickup if you had that lag effect? Can you just help me out there?

There's about a two month lag in the fuel surcharge to your point. So if the fuel did what you describe in the last half of the year, there would be a two-month pickup during that period of time.

And the archive has the same lag as well?

Maybe a little bit longer.

Maybe a little longer.

I just just want to remind you, this is Oscar, that from most projections the third and fourth quarter are expected to increase. That's what everyone is basically saying forward. So great question and great thought but hopefully more realistic later on.

Sure, thanks a lot guys.

Daniel one more question, if possible.

Our last question comes from the line of [Christine Kubaky] from AG Edwards. Please go ahead.

This is Donald Broughton. I am hoping you would give us some color, you refer to the mix shift in intermodal accounting for the revenue per car being down despite by the strong volume, and you attributed it to exports. Can you talk to us about what exactly is driving that weakness?

Well, it wasn't attributable to exports. What happens in our western network, is that we haul international, third party international containers on our stack trains that we interchange to the Union Pacific, for example. And we are the carrier of the bill of lading. And what has happened there is that, when those contracts came up for renewal, they renewed directly with the western carrier as opposed to, as opposed to renewing with us. So, we, in effect, lost the business from our portfolio, and that particular, pieces of business, carries a considerably higher rate, you know, per unit, because you are traveling 2,000 miles as opposed to 500 miles in the east.

Appreciate the explanation.

Thank you. Thank you, thank you all for your attention and joining us today. This is CSX signing off.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation, and now, if you would please disconnect your line. Thank you