CSX Corp (CSX) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CSX Corporation third-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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, October 28, 2004.

I would now like to turn the conference over to David Baggs, Assistant Vice President of Capital Markets. Please go ahead, sir.

Thank you very much and welcome to CSX's third-quarter conference call.

Before we get started this morning, I just want to make a quick reminder for everyone that the presentation and other statements made by the Company during the course of this presentation may contain forward-looking statements. Those forward-looking statements are subject a number of risks and uncertainties and the actual performance could differ materially from those forward-looking statements.

With that, it's my pleasure to turn things over to Michael Ward, CSX's Chairman and Chief Executive Officer.

Thank you, David. Good morning. Thank you for joining us this morning at CSX's third-quarter earnings conference call. With me today are three members of our senior leadership team, Tony Ingram, our Chief Operating Officer, Clarence Gooden, our Chief Commercial Officer, and Oscar Munoz, our Chief Financial Officer.

By now, I'm sure you have had a chance to review the flash documents and the press release that we issued earlier this morning. As you saw in those documents, we have a lot of moving parts this quarter, including the effects of the Conrail spin-off. But with that behind us, CSX's financial reporting will be simpler and easier to understand, going forward.

Oscar will take you through all the specifics of our financials in greater detail later in this presentation, but I'd like to take a minute to highlight a few of the numbers from the quarter. Our core Surface Transportation unit reported operating income of $247 million versus an operating loss of $16 million a year ago. Adjusting for charges, Surface Transportation operating income would have been $250 million for this quarter, versus 223 million in the same quarter last year. That represents an adjusted 12 percent increase and the third consecutive quarter in which CSX delivered consistent, continuous improvement in its core earnings.

Operating revenue for our Surface Transportation businesses was up $115 million, or 6 percent, versus the third quarter of 2003. This represents the tenth consecutive quarter that CSX has demonstrated revenue growth, reflecting the continued strength in the economy and the importance of rail transportation.

While this revenue and income growth was due in large part due to the continued success that Clarence and his team are having in value pricing and yield management, these efforts, along with the network redesign, are our key to CSX's revenue growth strategy and central to restoring CSX's earnings performance. The prevailing economic conditions, with demand for transportation services exceeding supply across all modes of transportation, provides a pricing environment that should continue to benefit our shareholders.

In terms of volume, while CSX saw some modest growth early in the quarter, our service challenges did not allow CSX to keep pace with the overall economic growth. Then, the six severe storm systems rolled across our network in August and September caused a lot of severe disruptions to our service and thus our volumes for the quarter essentially ended up flat versus last year. Clarence will go into more detail about our topline results in his presentation.

While I'm encouraged about the progress the Company is making toward consistent, continuous improvement in operating income, it is certainly not where CSX needs to be operationally or financially. An important element in the restoration of our service is the One Plan, which Tony will update you on shortly. It was rolled over about half of CSX's rail network in June and July, and we began working through the adjustments that are necessary to refine that plan and we saw some early positive results. In August, we rolled out the One Plan over the second half of the network. At about that same time, several major storms began to hit the Southeast and delayed this implementation. As a result, we didn't enjoy all the benefits we had hoped for entering the fall peak. Tony, though, and his team did a remarkable job it restoring our network after these multiple storms, and I applaud their dedication and their results they delivered for us. Now, they're going to bring that same intensity to improving our network fluidity by implementing and refining the One Plan.

Going forward, CSX's service and costs will improve and as we improve, we will capture additional business from the trucks, new business from the growing industrial economy and then we will support our revenue growth strategy.

With that, I would like to turn over to Tony Ingram, our Chief Operating Officer, to talk more specifically about our operations. Tony?

Thank you, Michael, and good morning.

As we discussed in the previous two quarters, my primary area of focus is safety and train operations, primarily on-time performance. These two areas are critical to improving CSX performance and the service we provide to our customers. To succeed, we are raising our standards and changing the way employees approached their job each day. I believe positive change is taking hold. I continue to spend quite a bit of time in the field with labor leaders and our employees across our network, and I see a growing commitment to safety and on-time train performance. We are going to make working safely a condition of employment at CSX. I also see signs of increased discipline in our operations and a commitment to running the plan. Employees are working together with a single purpose, originating trains on-time and moving them to destinations on-time.

Let's look at our first slide. Let's look at some of our safety and operating measurements for the quarter. As you can see, both of our personal injuries and our train accident rates show improvements year-over-year. I am pleased with this improvement, which is a direct result of our renewed dedication to safety and train-accident-prevention processes. We have a long way to go. We are making some progress.

Turning to the operating measurements, on-time origination and other key measurements, we didn't do as good year-over-year, reflecting the challenges we face in restoring our network. However, I am pleased with the fact that almost all areas showed some improvement versus the second quarter of this year, which represents another positive trend. For example, on-time origination improved from a 39 percent in the second quarter up to 50 percent in the third quarter. I contribute this up improvement to (sic) the collective focus of the entire operating team, a concentrated effort to clean up the terminals during July when the volumes were light, and the rollout of our first phase of our One Plan. None of these measurements are where I would like to have them to be but we are seeing positive signs of improvements and our efforts are continuing.

Moving onto the second slide, as we discussed, the One Plan is a critical initiative for CSX and I would like to take a few minutes to give you an update on where we stand today. Simply stated, our goal is to implement an operating plan that is, first, efficient, minimized car miles and terminal handlings; second, balance with respect to our critical resources, which include locomotives and crews; and finally, the plan must be executable with contingencies built in to allow for recoverability when we are faced with service challenges; but more important, produce the consistent, continuous improvement in our service that our customer expects.

In the third quarter, we rolled out the One Plan across our network. We did this in three stages and actually accelerated the final stage, but as the plan changed (indiscernible) prior to the fall peak. This was no easy task and actually accelerated our improvements. This required a tremendous amount of efforts in our employees, and I am pleased with the level of energy and commitment they demonstrated. Now that the plan is in place, we're focused on execution. Once we consistently execute the plan, as designed, we will look for opportunities to fine-tune the plan to improve the service and efficiencies.

Looking at the third slide, which will illustrate the progress we've made in our train velocity as we rolled out the One Plan, plan changes were rolled out across the CSX network in three geographic stages, which is depicted on the four different colors on the velocity graph. As you can see, we started at the end of the second quarter and continued through the third quarter. The results during the period were very promising. System train velocity improved in the weeks following each of the stages. Ultimately, the series of severe storms, as you can see we experienced, were also depicted on the graph and had a very adverse impact on our network fluidity. But we seemed to come back each time we had the storms. As you can see, Hurricane Ivan, which made landfall on the Gulf Coast and moved up through our entire system, was the most destructive to our train operations. Despite this setback, I believe the progress we've made prior to the storms enhanced our recoverability of the network and helped mitigate the impact during these times.

Going forward, our goals will remain unchanged. We will maintain the momentum achieved in safety and build on it. We're certainly not satisfied with our personal injuries and train-accident rate; they are entirely too high but we are moving in the right direction. Our human-caused train accident represents the large opportunity for improvements. We are actually addressing these issues with enhanced training accountability and have seen some positive improvements.

Phase I of the One Plan has been rolled out. We will now execute and fine-tune the plan to deliver the anticipated benefit. We are making progress and still expect to see a meaningful improvement for the end of the first quarter of 2005. We also added critical resources, including locomotives and T&E employees in anticipation of the strong fall peak which we're seeing. At the same time, we continue to plan for the future. Work is underway on Phase II of the One Plan, which will be implemented during 2005.

In summary, the facts remain that our operation continues to be somewhat challenged. The network is not running to its potential, and our resulting cost structure is way too high and service levels need to improve. We are moving in the right direction, focusing on turning the operation performance around, providing better service for our customer and establishing a more efficient and productive railroad network.

Now, at this time, I would like to turn over to my commercial partner, Clarence Gooden.

Thank you, Tony, and good morning.

During the third quarter of 2004, we continued to see a strengthening economy. The instituted supply management index of manufacturing activity came in at 59 for July, the fifteenth consecutive month of expansion. You will recall that numbers above 50 signal expansion.

Leading economists have forecasted industrial production growth for the third quarter at 3.1 percent. While this is not the growth seen in the first two quarters of 2003, it continues to support economic recovery. In line with this economic news, three of our four business units experienced year-over-year revenue growth. The freight market continues to provide a strong environment for revenue growth.

Now, let's look at results on our slide number ten. During the third quarter, revenues exceeded prior year by $115 million. This represented a 6.3 percent increase compared to the third quarter of 2003. The third quarter of 2004 was the tenth consecutive quarter of year-over-year revenue improvement.

Turning to the next slide, let's look at the volume and, more importantly, look at the yield. You will recall, when I first spoke with you in January of this year, I told you that, the fourth quarter of 2003, we did not see the revenue yield to which CSX was accustomed. In addition to committing to aggressively pursue yield improvement, I also mentioned several positive factors, including the economy, productivity issues with the truckers and ongoing service improvements. In the third quarter of 2004, we continued to see revenue yield improvement, and we're building momentum for the future. Revenue per car grew 6.6 percent, driven by our continued focus on yield and our fuel-surcharge program. The fuel-surcharge program has been beneficial in helping to offset the rising fuel oil prices.

Overall volume growth during the third quarter was flat. While we saw a modest volume growth early in the quarter, it lagged the performance of the economy. Hurricanes further weakened volume growth as the quarter grew to a close. Primary volume drivers in the quarter included strength in coal, which more than offset weakness in automotive, as well as service-related losses and constraints that negatively impacted volumes across all markets. As service delivery improves, we will grow the volume. Until then, we are engaged in yield-management to see that assets are put to the best use serving our customers.

Now, let's turn to the next slide and review the strong quarter that we had in coal. Coal revenue of $438 million exceeded the prior year by $40 million, or 10.1 percent. Volume exceeded the prior year by 15,000 carloads, or 3.7 percent. This was driven by significant volume and revenue gains in export, metallurgical, northern utility and industrial markets.

Utility inventories remain low. By our estimation, utility inventories are 23 percent below normal in the North and 29 percent below normal in the South. Demand is expected to remains strong with the economy increasing demand for power and with the utilities looking to rebuild inventories. Pricing and strong escalators contributed to gains as revenue per car was favorable by 6.2 percent with all lines of business favorable year-over-year.

Let's turn to the next slide now and discuss our automotive business. Automotive revenue of $185 million declined 8 million, or 4.1 percent, versus the third quarter of 2003. This was driven by a volume decline of roughly 8,000 units, or 6.7 percent. Revenue per car improved 2.7 percent on continued yield-management success. North American light vehicle production declined 69,000 units, or roughly 1.8 percent, year-over-year.

Today, the inventory levels remain high -- 63 days for most manufacturers, 69 days for the Big Three. While we had some modal conversion successes impacting the third-quarter results at automotive, they've been more than offset by losses due to service and reduced production at CSX transportation-served plants.

Let's turn to the next slide and discuss our intermodal. Intermodal revenues of 322 million increased $9 million, or 2.9 percent, versus the third quarter of 2003. Intermodal revenues have grown year-over-year for nine of the last ten quarters. International revenues grew 6.7 percent on 6.3 percent volume growth. Continued growth in imports more than offset the losses in the off-core traffic.

In our domestic intermodal sector, gains in our truck brokerage business were more than offset by weaknesses in our transcontinental domestic sector. Domestic revenues declined 5.6 percent on a volume decline of 9.1 percent, as a 3.9 percent improvement in revenue per unit helped offset the volume declines. Finally, service challenges continue to impact traffic loss and growth potential in this highly sensitive service segment of our business and, with our all-network simplification initiative, also affected the volumes. Our One Plan implementation, which Tony has earlier discussed, and our recent network simplification initiative will continue to improve the service in this area.

Now, let's turn to the next slide and talk about our merchandise. Merchandise revenue of $971 million increased $54 million, or 5.9 percent, versus the third quarter of 2003. Third quarter 2004 was the tenth consecutive quarter of revenue growth in merchandise. Revenue growth was achieved in all but one of the merchandise markets. This revenue growth was largely driven by a strong focus on price and our fuel-surcharge program, which led to a 6.8 percent improvement in revenue per car, which I will discuss in greater detail in one moment.

Now, while we've experienced revenue growth, overall merchandise volume has declined 6,000 carloads, largely due to the service-related impacts in addition to weaknesses in some markets. Strong demand continued across all commodity lines in our metals market. Steel production and mill utilization have reached their highest level since June. Metals led all the merchandise units in the quarter with a 20.6 percent revenue growth on 11.8 percent volume growth. Chemicals also continued to experience strong market demand across most commodities. Overall, chemical industry shipments were up more than 6 percent in the third quarter. Core alkali and plastics led the way in the revenue growth.

Phosphate revenue was slightly favorable in the third quarter on 6.1 percent less volume. However, revenue and volume, when negatively impacted by service disruptions, which caused fertilizer production curtailments and rail operations disruptions in Florida (sic). Strong crop production in the Southeast, lack of soybean availability, targeted wheat price increases and service levels have negatively impacted volume in our agricultural markets. Despite the volume decline, revenue has increased on the strength of feed demand, ethanol growth and increases in price. Finally, volume and revenue weaknesses in our emerging market unit was primarily driven by declines in industrial waste, auto shredder residue and military shipments.

Now, let's turn to the next slide and look at our successes in improving merchandise yield across our markets. Merchandise revenue per car improved between 4.9 percent and 8.3 percent in all but one major market. In our emerging markets unit, revenue per car improved in most lines of businesses, yet mix changes, due to year-over-year weaknesses in military traffic, led to an unfavorable overall yield. As I mentioned earlier, revenue yield continues to be a key focus in terms of both bringing more to the bottom line and ensuring that our assets are being put to the highest and best use. We see the strong revenue yield momentum, going forward.

Now let's take a look at our forward markets. First, we have unfavorable one market, our automotive market. The inventories remain high, even with the aggressive incentives that the auto manufacturers are putting into place. Production is forecasted to be flat, year-over-year, and service related losses are having some impact. We expect to be flat in three markets, our phosphate and fertilizer business, although we have strong export phosphate demand in quarter four; we also have a tight jumbo covered Hopper supply that will limit our upside potential.

Agricultural products, which have a record crop production, could give CSX the opportunity to increase revenues relative to last year. Food and consumer have strong demand and it is expected to continue to be strong due to tightening truck capacity. However, the food and consumer traffic volumes will need service consistency in order to grow.

We expect to be favorable in six markets. Coal, for example, would continue to (indiscernible) expected in our coal market, especially in the export, river and both the Northern and the Southern utility markets. Production and service levels will be critical.

Chemicals -- despite the high natural gas in crude oil prices, chemical production is expected to grow 5 to 7 percent for the year, the strongest year since 1997. In our emerging markets unit, military in Petamenta (ph), waste, lime, fly ash, segment, salt and aggregates all will be in a strong demand, driving the growth in the fourth quarter.

Metal demand remains high and mills are reporting full order books. Growth will continue to be achieved via pricing and volume gains. China continues to introduce some uncertainty into this market.

In our forest products, lumber and panel products are expected to remain unseasonably strong due to continued demand in the housing and construction markets. Paper demand is expected to be mixed, as strong printing paper markets are offset by declines in newsprint and wood pulp.

In our intermodal market, we expect a strong economy and the continued service improvements we've seen, fueled by prices and tight truck capacity, should offset the impacts that we've had in the past from service losses and from our network simplification.

In closing, the revenue yield improvement continues. The yield outlook is favorable and the momentum is strong. Volume growth is not where we want it to be, but we expect, as our service improves, we can in fact grow our volume.

Now, let me introduce our CFO, Oscar Munoz.

Thank you, Clarence.

If you could turn to slide 19, this quarter's financial results continue to reflect two fundamental themes in our business, strength in our topline but challenges in our operations.

As you can see in the far-right column, at CSX, consolidated revenue grew by 98 million. The increase was driven by Surface Transportation, partially offset by lower revenues at our rural terminals unit. Consolidated operating expense was 264 million lower than last year. (indiscernible) you recall that in the third quarter of last year, we took several charges relating to occupational claims, the settling of arbitration disputes, and our restructuring program, the details of which are outlined in our flash documents.

The increase in other income was largely driven by a net after-tax gain of 16 million from the Conrail spin-off transaction, which I will discuss a bit later. This gain is partially offset by lower year-over-year income from real estate sales, resort operations, as well as lower interest income.

Income taxes were unfavorable 137 million due to the effect of the charges we took last year as well as higher Surface Transportation operating income this year. Overall, CSX reported consolidated net earnings of 123 million for the quarter, resulting in earnings per share of 57 cents versus a loss of 48 cents last year.

Moving to the next slide, we show a non-GAAP reconciliation (indiscernible) EPS, which highlights the effect of both the charges and the Conrail gain. In the 2003 column, the restructuring charge of 3 cents and the occupational and arbitration charges of 99 cents lowered earnings per share by $1.02.

Now moving to 2004 column, the restructuring charge of 1 cent and the Conrail gain and 8 cents combined to increase this quarter's EPS by 7 cents. Adjusting for these items, EPS would have been 50 cents for the third quarter, compared to 54 cents on the same basis last year.

Now let me walk you through the drivers of this 4 cent variance on the next slide. Let's start on the left-hand side of the chart with last year's adjusted EPS of 54 cents. Stepping to the right, we see that Surface Transportation operating income -- (technical difficulty) -- improved 8 cents from last year. However, we had three items that reduced EPS year-over-year by a combined 12 cents. These items were lower world terminals income, up (inaudible) 4 cents, lower combined other income and interest expense for 5 cents, and higher income taxes of 3 cents, driven by a favorable 2003 state income tax item. This resulted in the 50 cent 2004 adjusted EPS number.

Now, let's go to slide 22, where I would like to give you an overview of the ongoing effects of the Conrail transaction. Since closing this transaction, we now directly own CSX's portion of the Conrail assets, which previously were leased from Conrail. As a result, several line items on both our P&L and balance sheet have been affected. The details of the impacts can be seen in our flash document. However, let me highlight the major impacts for you now.

Conrail ramps fees and services were favorable to expense by 21 million while building and equipment rents and appreciation were unfavorable by a combined 16 million. This improved operating income by 5 million, reflecting the lease -- (technical difficulty) -- economics of CSX now having direct ownership of the New York Central assets. In addition, interest expense increased by 2 million, as 42 percent of Conrail's unsecured debt was exchanged for CSX debt as part of the spin-off. Now, because the Conrail transaction closed in late August, these amounts generally represent a one-month impact on our results.

On the next slide, I've identified the relevant lines of our balance sheet that were affected by the Conrail spin-off. In the middle column, you'll see that the primary accounts affected were property, our investment in Conrail, and deferred taxes. What is a very complicated transaction can be boiled down to three main items. Our Conrail investment was reduced by 4.1 billion, as CSX now assumes direct ownership of those New York Central assets. And as a result, property increases by 6 billion and the related book versus tax depreciation increases deferred taxes by $2.1 billion.

Move to the next slide, 24 -- this shows management's view of Surface Transportation results. Now, on this basis, Surface Transportation operating income would have been 250 million for the quarter, or an increase of $27 million, or 12 percent from last year. Now, let me point out that these results include the impacts of the recent storms. Based on our run-rate at the time, we estimate the storms adversely affected revenue in the range of 15 to 25 million. Further, we saw about 5 million in additional operating expense relating to the cleanup from these storms. I would also like to point out that some storm damage was so severe it required capital investment of approximately 20 million to restore that service.

Now, since Clarence discussed the details of revenue, let me shed some further light on our $88 million expense increase this quarter by looking to the next slide to do that. Looking at the first bar on the left side of the chart, you see an unfavorable variance of 39 million in incentive compensation. As you may recall from our last call, this is largely driven by the fact that we reversed the first three quarters worth of accrued management bonus in the third quarter of last year.

The next item, fuel price, continues to be challenge for the entire transportation sector. The -32 million impact reflects the recent spike in oil prices, which are only partially offset by our hedge position. As you may recall, we were hedged at 25 percent for the third quarter at an average price of 87 cents. Now, you should know that we have temporarily suspended new derivative contracts but remain committed to reducing operating volatility from fuel price. We are 40 percent hedged in the fourth quarter at an average price of 91 cents and we will be about 50 percent hedged in 2005 at an average price of 93 cents.

Now, if we can get back to the chart, the next bar shows a general inflation increase of 22 million relating to the increase in employee salaries, health and worker benefits, and rising material costs. Continuing to move across the chart, we saw operating costs increase by 21 million, reflecting continued challenges in our network operations as well as the storm impact I mentioned earlier. In addition, we saw 9 million of higher expenses related to Four Rivers Transportation, which we're now consolidating due to a change in GAAP requirements. The next two bars show the favorable impacts of our management restructuring program and the reduction in our non T&E contract workforce. Lastly, on the far right, you see the effect of the Conrail spin-off on our operating expenses.

Now, if we could stay on this page and looking ahead to the fourth quarter, we will continue to cycle through some of these same expense items. In addition, please remember that the impact of the 53rd week is anticipated to be unfavorable, as the extra week in Q4 is a holiday week and has traditionally lower volumes against a relatively constant fixed cost base.

Now, if you can go to the next slide and looking forward, let me finish up my fourth-quarter update with an EPS forecast for the quarter. Not including an anticipated 2 cent EPS reduction relating to an adoption of a new convertible bond accounting pronouncement, we would expect our earnings to approach current consensus estimate of 65 cents in the fourth quarter. Let me say that again; not including this convertible bond accounting impact, we would expect our earnings to approach current consensus estimate.

Moving to free cash flow, we're still very much on track to deliver the 250 to 300 million we committed at the beginning of the year and our capital spending a still expected to come in at about the $1 billion that we mentioned. Above all, with our core Surface Transportation earnings improving for the third consecutive quarter, we remain intently focused on delivering consistent and continuous improvement on our business.

Now, I'd like to turn it back to Michael for some closing remarks.

Thank you, Oscar.

Well, as you have heard us discuss today, we expect the revenue initiatives will remain strong as the economy remains strong. Executing the One Plan is going to become a real priority focus for us, and the organization that we put in place earlier this year through our management restructuring program will continue to deliver consistent, continuous improvement.

While I'm pleased with the focus and energy of the organization, in particular, the resiliency demonstrated in dealing with the external challenges this quarter, we are not where we want to be either operationally or financially. However, we are taking the right steps and the steps that are necessary to improve both our service and our costs, which will allow us to better capitalize on both pricing and volume opportunities, going forward.

So with that, we would like to open up for your questions. I would ask, for the convenience of everybody on the line, if you would please identify yourself and your company affiliation before you ask your question.

(OPERATOR INSTRUCTIONS). Our first question comes from Thomas Wadewitz of Bear Stearns.

Yes, good morning, everybody. Let's see. I've got a couple of different questions. I guess one to start with for Clarence -- clearly, you have been focused on price for a while and it seems like you've got a bit more traction in terms of the way shows up in the yield growth in the third quarter. I'm wondering if you can give us a few further thoughts on why we saw that so much more in the third quarter versus the yield growth that we saw in the first and second quarters of this year. Is that due to the contract expirations which you repriced or a lot on fuel surcharge or what's the real driver on that?

Tom, there's a couple of -- three drivers on that. One, you're seeing some impacts of pricing actions that were taken in the first and second quarters that are starting to show up in the third quarter, so that's one impact. The second impact certainly was the fuel surcharge that had increased during that period of time -- is currently at about 8.8 percent and earlier in the year, it was somewhere around in the 4.8 percent type numbers, so that has helped. The third thing is, is capacity has remained tight. The transportation business, both truck and rail and barge for that matter, all year long so we've been able to take the prices fairly aggressively up here coming into the quarter.

Okay. You sounded pretty optimistic in your other comments in terms of that continuing. Is it fair to think, if fuel prices don't fall a lot, that we would see yield growth rates that are similar, or perhaps even a bit higher, you know, fourth quarter and next year?

That's a good question. You're going to continue to see price increases next year and the effect of price increase next year because of the carry-over effect from this year. Since we have priced -- or have been able to get more price in the second half of the year than we were able to get in the first half -- just because of the influence of a lot of events coming together -- I think you'll see strong price yield improvements in 2005.

Okay. Then I've got one I guess for Tony or for Michael, whoever wants to field it. If you look at the impact of the hurricanes on how effective the One Plan was in the quarter and the impact on velocity and so forth, was that really a big setback -- the weather issues -- or was it isolated enough, being in Florida and the Southeast, that it didn't have a big impact on One Plan? Then perhaps just your sense of confidence in terms of really seeing the traction in the end of first quarter on the further improvement in One Plan in velocity and expense.

Let me first make reference to you there on your slide. I think it's number 7. You can see where we implemented the different stages, and you've seen each time that, once we implemented it, it sort of pulled back a little bit on our velocity and we measured it by velocity. Then you can see where we -- after a week or so, we got traction and we started to increase. We moved up and each time that we implemented different areas, we had a little setback but we are gaining back and then the storm did impact us.

In looking at that graph, our biggest impacts came from Gaston and Ivan. Those were the ones that really set us back from our numbers quite a bit and you can see that we were able to recover pretty quickly back from that. I think the One Plan, keeping in mind the One Plan has been rolled out in sort of an undefined order, we're now fine-tuning it. This is the model that's rolled out and so this is how to do it. Then we've got to come back and fine-tune it and make it adjust to our system of capacity.

So, we are quite pleased with the results that we saw in that. I know it's sort of a couple of setbacks on the velocity, but some of that is caused by the installation and some of it was caused by the storms that we've had down in the Florida area and on up through our system.

The other thing I'd like to add to that, Tony, if you look at it, as we rolled out the One Plan, we got hit with these six storms over that seven-week period, but we're still operating at a higher level now in the middle of the fall peak than we were before we started rolling out the One Plan. So I think it really increased our resilience. So to me, that's an encouraging sign that we will get the kind of benefits out of the One Plan that we thought we would -- because historically, when we got slammed by storms, the recovery period would be much longer than we've seen here. So a lot of work to do yet refining it, but I'm very encouraged by what we've seen so far.

This is Oscar. If I could add one further point, one of the things you mentioned was the limitation or the hurricanes only impacting the Florida region. As Tony mentioned in his written remarks, Ivan in particular went through the middle of our network and then came back. We had severe impacts across a network all the way up into Richmond, through our coalfield and then came back, so it was not, unfortunately, isolated just in the Florida area.

Okay, great. You seem to have a lot of momentum with that and so that's great. Any thoughts on OR next year? Can you get to 85 or below 85 type OR?

I wish I could tell you but I don't think Oscar would let me!

I would tell you that Michael won't let me! We are not ready for that. We are in the process of our 2005 planning, as you can well imagine. We are highly anticipating rolling these numbers out and getting some traction past this storm activity to see what we could really project and get a nice baseline but we're looking hope -- (technical difficulty).

Thank you for the time.

James Valentine of Morgan Stanley.

good job on pricing, guys! If I could switch to coal, it looks like CSX, at least from some of the trade journals, it looks like CSX's price and bids for utilities that are interested in importing coal -- and that would be a bit unusual other than a few isolated plants that have done it over the years in your territory. Can you give us some thoughts on how the fact that the eastern railroads have been successfully been taking up coal rates at a pretty good clip here, that we might wind seeing things turned either (ph) way if we start bringing in too much import coal?

Well, Jim, this is Clarence Gooden. We have about two or three projects that are on the table right now, as you know, that are involving import coal. A simple fact of the matter is, is the marketplace is going to determine how that import coal is treated and where it goes to inland points. Our anticipation or expectation is that we can get close to contribution in different -- in handling some of this coal to the inland points from the ports.

Okay, so the contribution that you would get (indiscernible) a new move for utility for import coal won't have lower contribution or will unlikely have lower contribution than the hauling (inaudible) domestic move?

That's our whole expectation, yes.

Okay, good. The second question, I guess maybe for Oscar, is that, after you lap (ph) your restructuring, you know, getting rid of a lot of the white-collar employees, what can you do next? Because it seems like that helped you tremendously offset wage and benefit inflation per employee that we see throughout the industry. I'm just trying to figure out what the next step could be in the second half of '05.

Yes, there are several items. I think predominantly the focus that we have is the continuation of our commercial initiatives around not only the yield management but obviously volume. The big emphasis, from a corporate perspective, is our strategic efforts around operations -- One Plan Phase II and the continued culture and the continued discipline around running a very tight network I think is the biggest things that we are focused now that we have a management team lean and mean and structured to focus on the important things. So that's where – (technical difficulty) -- focus our management team as rightly as it should be.

From a broader corporate perspective, we continue to focus on safety, which is clearly an issue and our broader cost of risk components, as well as some other interesting initiatives that we will talk about as we are ready to -- in the next couple of quarters.

When we think about headcount by the end of next year, assuming that you get volume growth, as Clarence was talking about, as the economy hopefully continues to grow, do you think it would be flat, up, down?

I think, certainly from a management, white-collar as you mentioned, that I think we would relatively -- we'd stay relatively flat around that. I think we've got our team put in place and we don't anticipate any more of those type of efforts, given the hard and long work our team put together to go after that.

From a T&E perspective, we are increasing our crew hiring to make sure that we keep up with the demand, but there are some other areas within the contract where a person might adjust (ph). So I think, at the end of the day, I would expect to see flat to slightly potentially up in our contract work for driving that.

Okay, great. Thanks, guys. I appreciate it.

Ken Hoexter of Merrill Lynch.

Good morning. Can you just clarify, Clarence, on the breakdown of pure pricing versus fuel surcharge on that 6.5 percent yields growth?

Ken, I wish I could. That is sort of like competitive information that we - as you know, quarter after quarter, we keep in-house. But you know, both were very strong.

Okay. Tony, you said that the storms delayed the rollout of the One Plan a little bit on some of the benefits. Can you kind of just delve into that a little bit more on what you meant by that?

Well, the issue with the putting the One Plan into place at the time, we would have been working to fine-tune the train plan for each terminal, so as we were trying to fight to recover from the congestion and the outage in Florida, bear in mind, with that, it's about four or five weeks in Florida, with the backup of traffic still trying to get to Florida. We have a lot of other issues that we had to deal with other than just trying to get the One Plan designed correctly. So it slowed us down a little bit and the last three weeks, without much interruption, we've been making pretty good headway with it.

Great. Just keep going on that for a second because it looks like velocity was up a little bit this week but volume is still a little weak on a relative basis, year-over-year. What kind of tweaks are you -- (technical difficulty)? Can you specify any of the kind of literal tweaks that you are working on that can show some improvements?

What we do, we have to go back and make sure that the train plan -- and I will just for instance you -- if we have an train that needs to leave Chattanooga at 4 A.M. and the cars are all there at 2 A.M., we will go back and tweak it to leave at 2 A.M. That will help balance the crew, help balance our locomotives. Now, that's what we mean by redefining the One Plan. If the cars are available then you get them out quicker; that reduces your dwell time. In some cases, you may have to change your One Plan, because of the locomotive plan, to better utilize your locomotives. So we will be constantly changing and fine-tuning the plan as we go forward. That will give us -- each little change will give us incremental improvements as we go forward.

Yes because you'd get a lot of work there to make sure that the field understood that plan and committed that they could execute it. When you actually make it happen, you find some things that you can further refine and you hit the reality of doing it day-in and day-out. Right Tony?

That's right. And bear in mind, this model doesn't feed capacity; it feeds your network on sort of a straight line and it flows your traffic across your network and then you have to go in and sort of tweak it, as you put it in.

Very helpful. The last question, I guess Michael, are you comfortable giving any update on the sale of world terminals?

Well, that's obviously a question that comes up quite a bit, as you know, Ken. We've had a long-held position, which I think you know, that if somebody thinks that an asset we have is more valuable in their hands than ours, we are always willing to consider those things. But that being said, we think it's a very valuable franchise. We continue to review both our long-term performance and improvement strategies, and we're looking at some strategic alternatives as well. We really do believe the assets we have there, especially Hong Kong, one of the most productive terminals in the world, is a desirable long-term asset. So, I think that's about all I could say at this point about that, Ken.

Okay, so there's not fixed bids that are ready to be decided within days? It's not something that's on the plate that soon?

I think I've said all I can say about this.

Scott Flower of Smith Barney.

Good morning, gentlemen. Just a couple of things -- one would be, refresh me where you are in the contract non T&E employee reductions, how much more do we have to go? Where are we in that process? Just refresh me again. When did that start?

It's been an ongoing issue related to a lot of IT improvements. We've rolled out some handhelds out in the field, reducing the paperwork, so it's back room, back office type of work. It's been ongoing for the course of the year. We have several initiatives around that point and so I think it's an ongoing process, an efficiency process rather than any specific program that's going to have an end and start to it.

Can you identify the headcount that have been associated with the improvements to date?

I can't, not because I won't; I just don't have that specific number right in front of me.

So is this in the low hundreds, would you say, just rough-cut?

Yes. (indiscernible) my head but just I don't want say it out loud just because I don't know but yes, it would be in that course.

I guess in terms of the hurricane impacts, has all the capital work been done to restore parts of the network, particularly in the Panhandle, that were lost due to Ivan? Is that primarily finished? Obviously I know that Tony has talked about continuing to fine-tune the restoration of the network but has the capital work been done in terms of restoration of the lines that you think (indiscernible) pivotal?

Yes, Scott, that's all been done and I think actually I'd like to brag on our guys a little bit. When Ivan went through there, we lost basically six miles of railroad along Escandia Bay there. The rail was there; the ties weren't; the roadbed wasn't, and as you know, power was out everywhere in that part of the country. Our guys were able to get in there and completely restore that key route between New Orleans and Jacksonville in eight working days, which I think is an incredible feat to get it back that quickly. So they've responded well.

In answer to your direct question, the capital monies Oscar referenced, the $20 million of capital, that has been spent. The system is basically in good shape now.

Just a couple of other quick ones -- has the -- and I know that Tony had mentioned -- and maybe this is for him -- that obviously you are fine-tuning with the last several weeks of no hurricanes, that you have been able to work more on One Plan. Has this at all affected your timing on Phase II? I know you say, in early '05. But is Phase II about the timing you would expect it or because you're still massaging Phase I, have you maybe perhaps kept some contingency timing on when you want to start Phase II?

Scott, we've got people working on both the fine-tuning of the first portion of the One Plan and also we've got people that's working in developing Phase the II. So, as we continue to go forward here, we are having our design people to look at and improve the train performance that we've laid out so far in the One Plan. In the Phase II, we've still got people looking at the terminals and looking at local and serving yards and improving that. So, we are on target with how we plan with the Phase II.

Okay. Then just one for Clarence -- and I know that, for competitive reasons, you don't want to break out the percentages on the pricing, but could you help us in letting us know -- is your coverage, in terms of getting different mechanisms of fuel surcharge -- at what level? In other words, are you where you want to be? Is that number moving up in terms of the coverage across your book business? I'm just trying to get a sense of how complete is your coverage across contracts. Is that still ongoing? Can you give us some sense there?

Yes. About 50 percent of our contracts are covered by the fuel surcharge per se. Another 20 percent of our revenue is covered by the RCAF unadjusted rate escalators. The remaining part of the business, Scott, most of it is on one-year contracts, so that when we quote the rate on each year, we are covering for what the current fuel costs are.

so those were quoted early in the year. Are they then what you would be perceived on a fuel basis below where you would like them (sic)?

Well, I didn't expect fuel to be at $55 barrel, if that's your question.

But those don't have necessarily any escalators in them?

That is correct.

Okay. Last quick question and I don't know whether you'll give us some peek at the future but -- CapEx up, down, flat any ideas, Oscar or Mike?

Yes. First off, I did get a number, Scott, on the headcount for that clerical back shop (ph). It's approaching 300 million -- 300 people, sorry (LAUGHTER).

Those would be expensive people at 300 million!

Yes, it is. As I said earlier, I think we're in the process of our 2005 planning. I think the interesting part that we're dealing with in this next planning process is, as Tony has arrived and had gotten a good handle on what we need in our network and where we can be specific and focus our capital spend, I think the convergence of that plus a lot of our analytical financial work will allow us to spend our money in the right places. So we are excited about that possibility. But again, we're going to our Board here later in the year, but I would not see any drastic change from the run-rate we've had over the last couple of years of roughly 1 billion.

Jordan Alliger of Deutsche Bank.

Good morning. I think you alluded to some of this but can you maybe give a sense -- if you look at the yield up 6.6 percent -- sort of the break out price mix, fuel surcharge component of that?

You are right; we answered that earlier. We're not going to say. It's part of our competitive information, but I would tell you that both the price increases as well as the fuel surcharge were both very robust.

Sort of the second thing along those lines, how does the contracts (sic) coming up for bid look as we go out over the next several quarters? Is it a preponderance coming up? Normal amount? Any sense for that?

It's about a normal amount of what we saw this year in 2004, will be up for renewal in 2005. I would like to point out that, in the coal part of our business, which as you know carries a fairly higher revenue base, that there will be about 33 percent less dollars of revenue that come up for bid in 2005 than came up for rebid in 2004. Most of that -- not all of it, but most of it is out in the fourth quarter, if that helps you.

Next year, out in the fourth quarter?

Yes.

Gregory Burns with J.P. Morgan.

Good morning. A couple of questions for Clarence I guess just to clarify. On the decline in the domestic intermodal, was that done on purpose, related to some of your initiatives, or was that service or what drove the decline in the (indiscernible)?

There were two factors. One was in the network simplification part of our business, which on an annualized basis was somewhere in the neighborhood of 50,000 loads and somewhere in the neighborhood of 36 to $40 million in revenues. That was one factor.

The second factor that was in it was service-related and our ability to get boxes out to the West Coast and then in turn and get them loaded and turned back to the East Coast, so it was a combination of both.

Okay. Just on this issue, where do you guys stand in terms of capacity? Obviously, as fluidity improves, you'; probably have more capacity, but do you guys have capacity to handle additional volumes in this business line?

Yes, I think we do, Jordan, not just in intermodal but in all of our market segments. As we see the -- in service improvement, obviously that has a number of impacts. One is it improves the products we are providing to our customers; it frees up locomotives and cars to allow us to grow and also lowers our cost structure, Gregory. So overall I think you'll get the multiplying effect there. So we don't see any big capacity constraints. I think it's more just executing the One Plan (inaudible) effect to create that capacity for us.

Great. Michael, I have just a question on (indiscernible) commentary in the release about flooding. Are those minds -- to the extent it was meaningful, are those minds fully operational now? So should we sort of see a pick-up in the coal volumes or is it not really material?

No, they are all operational now. We did have a little bit of flooding in the coal fields, as Oscar alluded to. That's all been cleaned up as well, so I don't see any inhibitors there and as Clarence alluded to, the demand is very strong with the inventory levels where they are and the natural gas prices where they are.

Great. One last question -- I guess, Oscar, do you have the pretax component of the charge on Conrail?

After-tax, it's about, for the full year, about 12 cents a share.

Right. I mean, should we just apply a normal -- just I'm trying to back it out of the other line I guess. Do you have -- (multiple speakers)?

(Multiple Speakers) -- there was only one month in the current quarter.

I will follow-up with you on that.

Yes, I'm sorry.

Jennifer Ritter of Lehman Brothers.

Good morning. I just wanted to talk about the One Plan. I thought that, last quarter, when you held your call, you had suggested that we would start to see some real improvements in your metrics by the end of the fourth quarter from this plan. Now, you're talking about the first quarter of 2005. Am I splitting hairs or is the impact from the hurricane just taking longer to dig yourself out of that whole?

No, I think, when we reported last time, Jennifer, we indicated to you that we would probably get through rolling out in the third quarter and fine-tune the fourth quarter. As a result, we actually rolled the Phase I out quicker, and we should be rolling out -- and as the volume subsides after our peak, then we should be able to do much more fine tuning and development.

What we've talked about really in 2005 was that you also had the Phase II rolling out and that you would not probably see the full benefit of the One Plan until we got on into 2005 and give us a chance to work through the plan to adjust it and fine-tune it as our volume goes up and down.

As I recall last time, Tony, you said we see some benefits of it in the fourth quarter but then you hit some stability as we went through the fall peak and then improved more in the first quarter I think is what -- (multiple speakers).

That's right.

Okay, great. It this the first time -- this is the first time I can remember you giving some sort of guidance for the following period. I guess that's indicative of the fact that your network is more predictable from this new plan?

There's a lot of factors that go into the conversation, as you can well guess, Jennifer, primarily is, you know, we continue to have a lot of what we call moving parts in our numbers and we want to be as transparent as we can to our investors. Rather than go through a lot of that (indiscernible) gain, I think it's important to get a sense of that. But yes, clearly, embedded in that decision is a level of comfort that our operational team and our commercial team and our respective employee base is getting focused on the right things. Now, I don't -- I wouldn't suggest that we're going to do this every quarter but I think it was important for this as we go into year-end.

John Larkin of Legg Mason.

Hello, gentlemen. Not to beat pricing over the head here but it was very impressive during the quarter. I was thinking that, with the One Plan implementation underway, that perhaps you were feeling more aggressive because probably the last thing in the world you needed while implementing that plan was an influx of traffic. So was there any method to your madness in terms of controlling the volume, so to speak, in order to give Tony a better shot of rolling out the One Plan efficiently?

No, sir. We were trying to get the prices just as high -- (technical difficulty) -- our customers are trying to get the prices just as low as they can. So it's strictly driven by what we can get in the marketplace.

Let's shift over to intermodal a little bit. I think, Clarence, you had mentioned that the international piece had grown nicely, up 6.7 percent, but almost all of that was volume. Why is it that the international steamship companies are so tough to deal with on price?

I think there's a couple of reasons. Number one is we have fairly long-term contracts, as you know, John, in place for most of that international traffic. So, we haven't really had the opportunities to reprice it in the manners that we should.

I think, secondly, going forward in the future, you will see the international prices have a lot more aggressive stance in it, because it's going to be difficult to move those volumes over the highway, and we think we offer a value-added service that's very effective for the steamship lines. Having said that, I think you'll see a lot of price increases.

Now, it's going to be interesting to see what that average revenue looks like though, going forward, because, as you probably are aware, there's a 20 percent growth on the East Coast with the all-water service through the Panama Canal there for the Asian trade. So, that may impact, to some extent, the average revenue per car because of the mix change.

Just one follow-through on the international piece -- could you give us some rough flavor as to how those contracts roll off over the next couple of years?

John, I don't have that in front of me right now broken out by international.

Karen Lamark of Merrill Lynch.

I understand the hurricane hurt volumes but to the extent it seems at least you have been fairly aggressive on price, I wonder how you think about balancing price increases and demand elasticity. How do you determine when you might be pushing too hard to the detriment of volumes and capacity utilization?

Karen, I wish I had a model that I tell you that I use that we scientifically com up with and all. The truth of the matter is we don't. We pushed the -- to your point -- the elasticity or the inelasticity of it as high as we can. You know, a certain amount of it is science. You look at what is going and what truck rates are doing, and we have several tools that we can use to do that. We know, from our load board, our critical capacity, our truck brokerage, if you will, what current rates are in the marketplace. We look at what the alternative forms of transportation are; we look at what the alternative sourcing points are; we look at what our car availability is for those particular types of commodities. Then we go into negotiations. As I said earlier, it's literally as simple as we're trying to get prices up and customers are trying to get prices down.

Clarence, as we looked at this quarter and even this year, the demand is so high out there, for a lot of the customers, the price isn't the issue as much as the ability to move the product.

That is correct.

So I don't really think, Karen, that pricing has hurt our volumes as much as the hurricanes and the fact that we're not running the system the way would like to. Because even with these higher prices, most of our customers would like to move more business on us than we're able to handle at this point in time. So that, I think, could become an issue at some time but I do not think it's an issue at this point with the tremendous demand out there. As you know, the Transportation Services Index published by the Department of Transportation for the last 14 years is at a 14 year high and there's a lack of railcars across the United States as well as a lack of trucks. So I think you're right conceptually. I don't think that, at this point in time, that's what's in operation.

Thanks for your thoughts.

I'd like to thank everybody for their participation today. 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.