CSX Corp (CSX) 2004 Q4 法說會逐字稿

Welcome to the fourth quarter and year-end 2004 results for CSX Corporation. During the presentation, all participants will be in a listen-only mode.

Well, good morning everyone. If everyone will take their seats, we'll go ahead and get started here this morning.

While you're being checked in, a few people are coming in here at the last minute and we've got people taking their seats, let me remind you this morning that CSX's presentation does contain forward-looking statements and it is important to understand that the forward-looking statements and the affects of those forward-looking statements may differ materially from actual results.

And with that, let me turn things over this morning to CSX's Chairman and Chief Executive Officer and President, Michael Ward.

Thank you, David. Good morning. Thank you for joining us this morning at CSX Corporation's fourth quarter earnings release.

Today I have with me Tony Ingram, our Chief Operating Officer, who will discuss our rail operations, Clarence Gooden, who is our Chief Commercial Officer and will talk about the top-line results, and Oscar Munoz our Chief Financial Officer who will review our financial results for both the fourth quarter and the full year.

After the presentations, we'll then take questions from those of you in attendance with us today.

Before we start our formal presentation though, I would like to highlight a few of CSX's fourth quarter results. Reporting operating income for our core surface transportation businesses was $315 million for the fourth quarter of 2004. That's an increase of $76 million or 32% improvement from last year's $239 million.

Some adjustments to both years though is appropriate to really get better comparability between those two years. Oscar will detail that for you later in the presentation, but after we make those adjustments on a comparable basis, our service transportation operating income improved by 23%.

We're encouraged by those results, and I'll note that this is the fourth consecutive quarter in which CSX delivered -- I can't say it -- but we delivered it! [ Laughter ] We delivered consistent continuous improvement in our core earnings.

Turning for a minute to the top-line, surface transportation operating income was up $276 million or 15 %, versus the fourth quarter of 2003. Adjusting for the effect of our 53rd week, the revenue was up $159 million. That's an 8 % year-over-year increase in our revenues and the 11th consecutive quarter in which CSX has delivered solid revenue growth.

This continuous growth in revenue and income is due to the ongoing success that our sales and marketing team has been having in their value pricing, yield management initiatives, and the fuel surcharge program.

As we experienced in the fourth quarter, we expect that 2005 will also provide a favorable pricing environment as demand for transportation services continues to exceed supply. This favorable environment will help the company to meet both its financial and its investment needs, which will allow us to produce more and improved services for our customer.

That said, though, in addition to achieving our volume and our pricing gains, we know that the long--the company's long-term success is dependent on demonstrating the ability to provide reliable service to our customers. As Tony will discuss, CSX's operating performance in the fourth quarter showed improvement. It's not where we want it to be yet, but it is improving.

While the company's only had a few months with our operating plan in place, the network is showing signs of improved fluidity, and we remain very optimistic that the one plan and the opportunity it holds for the company is going to deliver great result for our shareholders going forward.

As our service continues on its path of consistent continuous improvement, our volumes will strengthen and our productivity, asset utilization and our cost structure will all improve.

As you know, CSX agreed to sell its world terminal businesses to the Dubai Ports International, which will create one of the world's largest terminal operating companies. We expect to close that World Terminal's transaction later in the first quarter. But importantly for CSX and its shareholders, this transaction will allow the company to even further sharpen its focus on its core service transportation businesses.

CSX is entering 2005 with a solid foundation in place. Continued strength and demand should allow us to have another year with favorable pricing environment. The focus on improving operations will help us both create capacity and to improve our cost profile.

The management of CSX and the men and women on the front lines working every day, day in, day out, to move trains both safely and on time, are excited about what the future hold for CSX. They're proud of their successes in 2004 and they have a renewed sense of leadership, discipline and focus on execution. And they're committed to achieving the company's goals for 2005.

So with that, I would like to introduce our Chief Operating Officer, Tony Ingram. Tony.

Thanks Michael and good morning to all. For those who have listened to the previous calls and heard my comments, you won't hear anything new today. We'll keep a consistent message. This is because our focus has not changed.

We remain committed to continuous improvements in three key areas: safety, service, and productivity. We must reduce the frequency of accidents either being personal injuries and also train accidents. Service we have to improve the reliability of our service and improve our-- how the customer sees us. Productivity--we must improve the efficiency and lower our cost structure to realize the full earning potential of this company.

Although 2004 was a challenging year in many respects, we're making progress and did gain some momentum in the fourth quarter.

Let's talk about velocity. This slide shows quarterly train velocity through 2004. You have seen these facts before. They provide a good overview of CSX operating performance for the full-year and the the fourth quarter.

The first half of the year was challenging, with performance declining in most measurements, particularly as volume increased in the spring. In the second half of the year, in the face of many storms and the installation of the one plan, we reversed the negative trends of the first half of the year and showed some positive improvements.

Most of our key measurements--service measurements--followed a similar trend. Look at on-time originations. The slide shows quarterly on-time originations for last year. As you can see, most improvements in this matrix came in the second half of the year, following the one plan. Although we did not reach the levels I would like to have seen, I am pleased that our network recovered quickly after adverse weather conditions that we faced in third quarter and continued a favorable trend through fourth quarter.

Look at our cars-on-line. Here are the quarterly numbers for cars-on-line, which also show signs of improvements, as we continue fine-tuning the one plan and further improve service and efficiencies, we'll continue to see positive trends in this area and across our other service matrices.

Let's look at some of the other service matrices. I'm pleased to report that one of my first goals was to improve the safety and train accident rates. We did in the fourth quarter versus fourth quarter of 2003. The frequency of the personal injuries declined almost 12%--declined 12% in 2004, and our rate of train accidents declined 4% during the fourth quarter. This is the direct results of our commitment to safety and train-accidents prevention, and the leadership of our employees.

The remaining matrices did not reach to where we would like to see them. They were at levels of 2003. We have a lot of room for improvement; we understand that we should stay focused, which we will, and to demonstrate consistent continuous improvement.

What will take us through the following year will be safety, service, and productivity looking forward. We will maintain the momentum in safety and continue to improve in this critical area. We will implement a number of enhancements to our existing processes, both in injury and train accident prevention.

We'll explain-- expand and improve our employees' training for both existing employees and new employees, as well as our supervisors. This is well-established by our new training facility in Atlanta.

With all of these efforts, we are further enhancing our relationship with labor.

With respect to service, our consistency must improve. First, we have taken action to ensure that resources are in place required to execute our operating plan. We continue to invest in key resources, including infrastructure, locomotives, rolling stock, and more important, our people.

And in anticipation of continued attrition in our T&E ranks, we have increased and began our training strongly in 2004. This will continue in 2005. In fact traditionally where we do not hire many people in the fourth quarter, we hired strongly there in the fourth quarter of 2004 so the employees will be ready for 2005.

And, of course, critical to the company's success in 2005, there's a continuous execution of the one plan. With the structure in place, the focus has turned to fine-tuning the plan, making adjustments when necessary to get the maximum benefit.

I talked to you earlier-- on earlier calls-- about the Phase II. This will be completed in the second quarter of 2005. The part of CSX service is critical link that connects the customer to our local yards.

Ultimately, the key to improving service is the disciplined execution of our train operating plan. And as we have said, improved operation not only impacts service, but also has an affect on our productivity. A high level of planned execution will generate productivity gains across our key resources, including locomotives, the freight cars and the employees.

In addition, we will launch special initiatives targeting resource utilization and processes. Each initiative has specific targets, work plans and assigned accountability. We have got the right organization in place. We've got clear definitions of role, responsibilities and accountability. Our employees are more focused than ever to achieve the right results the right way.

And with leadership, discipline and focus on execution, it will carry the day through 2005. Now, I would like to introduce our Chief Commercial Officer, Clarence Gooden.

Thank you, Tony and good morning. It's a pleasure to speak to you today and report on our fourth quarter commercial results.

During the fourth quarter of 2004, we continued to see a very strong economy. The Institute of Supply Management Index of Manufacturing Activity came in at 58.6 % for December. That was the 19th consecutive month of expansion, leading economists to forecast the industrial production growth for the fourth quarter at 3.9 %, and in line with that economic news, 3 of our 4 business units experienced year-over-year revenue growth.

Now let us review some of the revenue results. During the fourth quarter, revenues exceeded the prior year by $276 million on a 53-week basis, representing a 14.6% increase compared to the 4th quarter of 2003. As can you see, $117 million in the revenues were associated with the 53rd week. So, on a 52-week basis, revenues of $2,055,000,000, exceeded the prior year by $159 million, representing an 8.4% increase in the revenue.

The 4th quarter of 2004 was the 11th consecutive quarter of year-over-year revenue improvement and it represents a record quarter for surface transportation revenues excluding the 53rd week and the fuel surcharge.

Revenue growth was, again, driven by continued emphasis on the yield, a strong fuel surcharge program, and strong demands in most markets.

As for our yield and volume change, please be aware that going forward all of the comparisons will be on a 52-week basis.

In the fourth quarter of 2004 on a 52-week basis, we continued to achieve revenue yield improvement as well as build future momentum. Revenue per car grew 7.9%, driven by our continued focus on yield and our fuel surcharge program. This environment continues to be favorable for increasing price with record transportation levels, trucking capacity constraint, and the growing economy.

The fuel surcharge program is crucial in helping to offset the rising fuel oil prices. Overall, our fuel surcharge represents roughly 1/3 of our revenue-per-car increase with price and mix each representing 1/3 as well. You should be aware that our revenue per car and all of our major markets are at revenue levels.

Also, our overall volume was just up slightly-- about a half a percent, primarily as a result of the strength in coal helping to offset the weakness in automotive and the continued year-over-year impact due to the network simplification from earlier in 2004 that has impacted our intermodal business. As we saw, late in the fourth quarter we expect to see the volume growth as service delivery continues to improve going forward.

Now let's look at some key markets. Our coal revenue of $455 million exceeded the prior year by $52 million or 12.9%. Again, this represented a quarterly record in our coal revenues. Pricing and strong escalators contributed to gains as the rate per car was favorable by 9.8%, with all lines of business favorable on a year-over-year bases.

The volumes exceeded the prior year slightly by about 12,000 car loads or 2.8%, and the fundamentals in coal, as we've spoken with you before, remain strong. Strong global demand for metallurgical coal, China's continued coal consumption levels, and favorable vessel rates continue to fuel strong demand.

Significant volume and revenue gains were achieved in our export, utility north and industrial markets.

And although the weather conditions were neutral to 2003, electrical generation in the east was favorable by 2.1% in the 4th quarter on a year-over-year basis. Utility inventories were further depleted in the 4th quarter, about 20% below target in the north and about 25% below target in the south, as transportation capacity could not keep up with the increased demand. Both these regions are below last year's level.

Now going forward in 2005 as our year-over-year comparisons begin to reflect 2004's aggressive pricing action, you can expect favorable improvement in the rate-per- car in terms of absolute dollars, but the percentages on a year-over-year basis will not be quite as high.

Let's look at our automotive unit. Automotive revenue of $218 million declined $10 million or 4.4%, versus the 4th quarter of 2003. This was driven by a volume decline of roughly 9,000 units or 6.5%.

At the same time, the revenue per car improved 2.3% on the yield management successes.

As for several key market indicators, North American light vehicle production increased 128,000 units or roughly 3% year-over-year, yet the downtime at CSX- served plants was more than four times that of the 4th quarter of 2003. Additionally, reduced production at CSX T-served plants are still impacting the year-over-year comparisons.

Inventory levels remain high-- 66 days for most manufacturers, 78 days for the Big Three, and aggressive incentives continue, especially with the Big Three..

Finally, the recent one-plan implementation has resulted in service improvements in our automotive network.

Now, let's look at our Intermodal network. Intermodal revenues of $352 million increased $24 million or 7.3% versus the 4th quarter of 2003. Again, this represents a quarterly record revenue for Intermodal. Intermodal revenues at CSX have grown year-over-year for 10 of the last 11 quarters. Strong demand continues to be fueled by a growing economy, increased international trade and truck capacity constraints. International revenues grew 13% on 11.4% volume growth. Continued growth in imports more than offset losses in the core traffic.

Domestic revenue declined 2.8% on a 10.5% decline in volume, largely due to the network simplification that we had earlier in 2004, and some weakness in our transcontinental business. Yet on a positive note, domestic revenue per unit increased 8.7%. The one-plan implementation that Tony's discussed earlier and the recent network simplification initiative in Intermodal continue to improve our service in this area.

As in the other business units, our yield management efforts and strong fuel surcharge program continue to drive growth as Intermodal overall revenue-per-unit increased 6.8%.

I was really pleased with the operating income produced by the Intermodal company in the 4th quarter. This resulted from a combination of the network simplification initiative, pricing to the market demand, including reducing volume incentives, and a focus on terminal effectiveness and efficiencies-- as well as controlling the equipment costs. This bodes well for 2005.

Looking now at our merchandise markets, merchandise revenue of $1 billion, $10 million increased $82 million or 8.8% vs. the 4th quarter of 2003. The fourth quarter of 2004 was the 11th consecutive quarter of revenue growth in merchandise and it too represents a quarterly revenue record.

While the volume increased very slightly by 3,000 carloads or less than 1/2%, the merchandise yield improved 8.4%, driven by strong focus on price and our fuel surcharge program.

Let's look at some of the individual markets in our merchandise business. Merchandise revenue yield was favorable as can you see with this slide in all of our markets. Our forest products revenue of $173 million grew 13.1% over 2003 on a 1.8% carload decline. And the revenue per car growth of 15.1%.

Pricing actions and active fleet management drove the yield management successes.

The metals revenue of $129 million led all merchandise markets with 17.3% revenue growth over 2003 on 2.3% carload growth and a strong 14.6% increase in the revenue per car.

Steel production and mill utilization rates remain at high levels, driven by the continued strength in the steel demand. The food and consumer revenue of $99 million grew 11.2% on a 9.5% increase in the revenue per car and a slight 1.6% volume growth.

Post-hurricane rebuilding drove the building products gains in this sector.

Agricultural products revenue of $129 million was flat year-over-year, as the revenue per car growth of 8% offset a 7.4% volume weakness.

Emerging markets revenue of $131 million grew 12.9% over 2003-- on a 6.7% carload growth, and a 5.8% increase in our revenue per car. Volume growth was driven by strength in military shipments, northern aggregates and municipal solid waste.

Lime shipments also increased due to new distribution terminals serving off-rail markets.

The chemical revenue of $266 million increased 7.3% on a 5.7% revenue-per-car growth and a 1.5% volume growth. Strong end-user customer demand and a rebound in the U.S. chemical exports have helped to drive these results.

Finally, our phosphate and fertilizer revenues of $83 million were flat versus 2003.

Looking forward within our markets, our outlook continues to be favorable as strong demand is expected in most markets, particularly in our agricultural products, our coal, metals, chemicals and the intermodal business. Volume growth is improving along with the service. We'll continue to focus on the agressive yield management in all markets. Our yield environment is very strong and our momentum is very strong.

Again, it was a pleasure to speak with you today. Please allow me to introduce my colleague, CSX's Chief Financial Officer, Oscar Munoz .

Good morning. I can't help think about a year ago--the same snowstorm I think-- we had to cancel our trip out here because of it, but very different set of numbers.

11 straight quarters of top-line growth, 4 straight quarters of continuous improvement in our bottom line--and as we look at the 4th quarter specifically here in a few minutes, we're starting to bring more of that top-line, again below, to the operating income. So, again, what a difference a year makes.

We'll talk about the 4th quarter here real quick, and a little bit about the full year. So if I could have the next chart, please-- a lot of numbers on this chart.

The headline probably has the most critical issue for us, so $0.20 per share over the quarter for continuing operations. You see that number of $0.20 sort of in the middle to the right on the chart. Driving that $0.20 increase is roughly the $80 million of consolidated operating income up at the top.

Other income, interest expense and income taxes were relatively-- there is nothing--no big story there. The increase in income tax is obviously driven by the increase in earnings.

As you look at the $0.71 EPS from continuing ops, a couple of things to note: One, it does include a $0.02 dilution for the convertible bond accounting that we talked about last quarter, both in the current year and in prior year. You will see that every quarter so can you probably estimate $0.08 for the full-year. Just a bit of a forward look with regards to that. Let me briefly discuss the continued-- discontinued options. As Michael mentioned, we did announce in late December the disposition of our World Terminals Unit. Because of that, that triggers all sorts of things.

One, an accounting--you've got to account for this stuff--the discontinued ops, is one piece. But it also triggered some income tax liability from foreign earnings that we have held outside the country. So what you see, this particular quarter, is a relatively large charge bringing our $0.71 continuing ops EPS down to the $0.30. You will not see that drastic a drop in the subsequent quarters from just the normal World Terminals operation movement. But again, we will see that over the course of this year.

Okay, let's go back up to the operating income variance of $80 million growth and let's kind of dig down into that. Keep your eye on the $80 million because it will shrink a little bit here as we go. Next chart.

You see the $80 million at the bottom of this chart. As you break it out and as the headline says, I think with the disposition of World Terminals, you are going to see our consolidation of CSX being more and more the core surface transportation business.

We'll have less of this two or three charts before we get to the real numbers. Nevertheless, you see that the $80 million is really $76 million from a core business perspective and the $4 million is just a couple of small items that are not significant but are included in our documents that we distributed. So the $80 million becomes $76 million on this form on surface transportation, and the next chart takes that $76 million at the top there and then breaks it down even further to make it comparable kind of year-over-year.

The change you you see in the middle from '04 to '03, is we took the restructuring charge. Again at this time last year we were in the middle of our reorganization and we had taken the first major charge against our earnings for that.

For 2004, we have the wonderful 53rd accounting week. Let me just remind everyone what that is. In our calendar year versus our fiscal calendar, we have every few years, a 53rd week.

We anticipated that that week would be more dilutive, slightly negative earnings, because of generally lighter volumes at the end of the year and with our relatively high fixed-cost base, that it was probably going to create something in the $10 million to $15 million impact. The surprising and good news is that because of the demand, because of our fluidity in our network, and a host of the other things, we're able to generate positive numbers in that 53rd week of $7 million.

You heard Clarence speak of $117 million in revenue-- we had roughly $110 million in expenses, thereby creating a nominal impact on the P&L.

Again, we're adjusting that out again to make apples-to-apples comparison on a year-over-year basis. So therefore you see the $57 million that is the true core earnings gain year-over-year.

Next chart.

That represents 23% increase as Michael said. Very busy chart. I won't spend much time on it. The revenue up to 8.4% at the top of the P&L is what Clarence talked to you about. A terrific job by Clarence and his team across most of those markets as you saw.

The operating expenses again, the detail behind each and every one of this is in our flash report. Rather than do the accounting walk-through on these--on the next chart, I will talk about the major drivers and how we look at the business in aggregate views.

So 8% up in revenue, 6% in expenses for that $57 million, 23% in operating income growth, and 180 basis points of improvement in the operating ratio.

Again, that consistent continuous improvement that we're talking about, and so now let's go to the next chart if we could, and talk about expenses and the major drivers thereof.

I'll combine both the fourth quarter and take a little forward look too, with regards to how we see these expenses in '05. The first bar there is fuel, as you know. That's an issue across our entire sector and it has been a continuous issue in our expenses year-over-year. There you see the net impact after our hedge for the quarter.

The second column is volume and inflation. Again, it's just something that every business faces. That's the way we separate that out because those are the areas we have to get at with productivity.

Operations is-- running of operations on a year-over-year basis, we actually spent a little bit more money in there. That has been an issue across full-year. That's what we call it-- it's train crews, capacity utilization, car hire, and so on and so forth. That's the continued expenses across all those different expense buckets.

Management reductions. That's the positive impact of our management restructuring over the course of the year. It is offset slightly by the increased hiring Tony spoke to you about. Again, from a management perspective, e did do those cuts earlier in the year and have the benefit financially. But, of course, we have been very active in our transportation hiring-- in particular in training-- and so that's the benefit there. "Other" is a mishmash of other things. We're consolidating a subsidiary called Fort Rivers is in there. We're accruing a bonus this year as opposed to one we didn't in '03. And so you see the impact of that.

As you look as these expenses and we look forward into '05, let me talk a little bit about-- let's start with fuel. Our fuel price is probably in the same range that everyone expects, somewhere in the mid-40s. We have stopped our hedging program as we announced last quarter, kind of mid through 3rd quarter. It just doesn't make any financial sense at this point in time from our analysis and perspective. But over the course of '05, we'll be roughly 50% hedged at roughly $0.90.

Again, just updating your records for that just so you have that, so we'll continue to have some protection over the course of '05, and we'll keep you posted with regards to whether we reinitiate that particular derivative program for us. Volume and inflation is an issue we'll face full-year, it's roughly $100 million-$120 million for us every year.

Clearly where we're really focused with the one plan and all the fluidity and operational metrics that you see, and Tony is as big a partner and as big a driver of these number as anyone. He understands that this is the bar that really has to move the other way. It has to begin to offset that volume and inflation. And so at the end the day, obviously, increasing our service to our customers and getting the metrics right, we also have to make some money at it -- and, therefore, that process will continue.

We will be cycling our management reductions. You probably won't see that benefit on a quarter-over-quarter basis. I think that will be generally flat. People always ask us "What are your head-count calls?" We will generally stay for the most part flat. From a management perspective, we have taken the very tough move, we've put the right people in place and they're spending a great deal of time in training, from a managerial perspective, so we don't see or anticipate any moves with regard to management head count.

We will continue to see increases in hiring across our T&E ranks. But, of course, we also have a pretty significant level of attrition. So net-net, if you look at all those moving parts, we would probably stay roughly at the numbers we're ending that are on your documents over the course of the year. Obviously moving with the ebbs and flows of the seasonality of ur business. No big story next year.

And then, as always we try to reduce the proverbial "other" categories, but there will always be something that's on there. We'll report on every quarter as we move forward.

So, that's our expense story for the quarter and a little bit into next year. Next chart.

Let's move to--this is a full-year look. I won't spend a whole lot of time on it. This is our reported earnings all in-- restructuring charges, things from year-over-year, which show the $0.99 increase in EPS from continuing operations, $0.41 without it.

Again, it's important that you see the overall consolidated CSX picture, but what we have done on the next chart is really break it down, once again apples-to-apples: What is surface transportation, or our core business? What has it really done in the course of 2004? Can I have that chart?

So, as we look through this, 17% on as comparable basis as we can get it, and, you know, you look back at this chart and you look back again a year ago and we faced a very challenging 2003, losing roughly $100 million-- and in the middle of a management restructuring at the start of the year-- in the middle of redesigning our network operations-- and as well later in the year faced a lot of tough challenges with storms-- and then, of course, fuel was an impact across the year.

If you took that sort of headwind that we had, as you look at that $155 million and that operating ratio improvement-- as we the management team look at that-- you know, there's many ways you can say. First and foremost, we don't think it's enough; and there no one in Jacksonville doing the proverbial "super bowl shuffle" with regards to the numbers. It is something though, that from our management team and what we have been able to do in a short time is get the momentum back, and again get the focus on where we're headed.

So, "Pleased", Michael would say with regards to these numbers, but still some ways to go with regards to bottom line. So that's the year.

And additional good news, probably, is -- next chart, please. We usually talk about core free cash flow. We anticipated $250 million to $300 million over the course of 2004. I'm happy to report that we actually delivered in the $443 million range. Now, as always, to be fair and to be comparable, let me normalize that $443 million a little bit as to what you should use from a base perspective as we project out into '05.

Included in the $443 million was some equity from one of our previous conveyances, some early money that we were supposed to get over a course of time, received it up front at good rates for us, so that helped our cash picture.

Another help to our cash picture is, as we have discussed, what we call our network rationalization program-- and as we lease and sell short lines, parts of our network to short lines, we have received some up-front cash on that, which has also helped our cash picture. So if I look at this chart and I look--how I would look at $443 million, I would normalize it at $300 million plus a little bit from a base perspective. And as we look forward into '05 from a capitol spending perspective, we will spend $1 billion $50 million, and we'll spend it in the basic same categories that we're spending it this year. No great changes, investing in the business across all angles as well as investment for the future. And so our capitol spending should remain roughly the same, a little bit of increase.

And then as you will look at what we will go into '05 with, we're probably thinking about $450 million plus, as far as core free cash flow. Keep in mind that that number-- the 2005 number-- will have a couple of components. In '04, we have some tax timing differences, so we'll have some tax payments in '05 that there weren't in '04-- and there were a couple of other issues with working capitol and such.

So it's hard to do a strict comparison between the normalized $300 million and the $450 million-plus that I'm telling you about. But that's roughly the order of magnitude from the core free cash flow perspective.

This, it is also important to note, does not include either in '03 or -- I mean either in '04 or projection of '05-- any proceeds from our World Terminals transaction.

So, this is the business generating this cash, and always the question that comes up--"What are you going to do with all of this money?" We're being thoughtful and considerate of all the various constituencies with regards to our cash proceeds, and we're studying all the different things. First we've got to close one transaction and we've got to generate the cash. But, as we get closer to that, we'll keep you posted with regards to what we do with that.

So, good story on cash flow as well. And with that, let me just really quickly talk about how we view looking forward. The foundation for CSX is in place. We have taken a difficult year with management, with the new leadership that you see in front of you today from a year ago, and with the strategies and the directions and the focus that we have on specific things like the one plan, like our top-line growth.

So our strategy has taken hold. Some in stronger cases than other, with revenue versus the one-plan. But again, as Tony said, that's where our focus is. The results financially are improving. Not where we need to be. Not, even close. We see the metrics, we see the comparisons, so we know where we stand. But again, as we have talked about consistently, we have got our head down and focused on those very issues.

And more importantly, our balance sheet is strengthening. Again, there is a lot of room with a lot of our constituents, with regards to the things that we can do. We don't have that pressure and it allows us to sort of stay focused on what we call our CCI or Consistent Continuous Improvement. I know you guys hear us say this all the time, but it's the best way for use us to get focused on all the work that we need to do. The little bit--a little bit at a time and it generates the kind of improving results that you're seeing from CSX.

With that, I would like to turn it back over to my boss, Michael Ward.

Thank you Oscar. As you can see, 2004 was a pretty exciting, eventful year for CSX and we did a lot of things to put the company on a different path. Went through some tough times, but I think we made some improvement. As Oscar says, there is a lot more room for improvement from there.

But as I step back, I think 2004 was pretty much a foundational year for CSX. It's really positioned us to be able to participate in the dynamic and changing transportation marketplace. And I believe that there are changes occurring in this marketplace that really creates some tremendous opportunities for rail transportation, and opportunities to increase its share of the global logistics marketplace.

I will like to talk just a little bit about that. In the near-term, as you know, we have some great fundamentals. Last year, the Transportation Services Index, which as you know is published by the Department of Transportation, was at a 14-year high throughout the whole year of 2004.

I believe we're going to continue to see those same kinds of trends in 2005. I think the demand for our services at CSX, for the entire rail industry, and for the trucking industry will be very strong and will continue to be so throughout the course of 2005.

But, if I look out over a longer-term, the opportunities for CSX and the rail opportunities for the industry as a whole are really pretty exciting. The highways as you know, we're getting more and more congested and there is really limited ability to expand that highway system. In addition, the highways are in need of repair and enhancement. And I think having a vital rail system is really going to be critical to helping the country meet its transportation needs.

If we look at the trucking industry-- as you know, the trucking industry is both our customers and our competitors. But they're facing some real challenges at this point. The new hours-of-service law is really hurting their productivity. They're faced with soaring costs for both fuel and insurance. They're facing driver shortages as less and less people are really seeking that life of an over-the-road trucker, and we're finding that even some of the major trucking companies are re-examining their business motto at this time, and they're evolving it toward one where they do the local drays, let the railroads and the intermodal companies do the over-the-road haul.

So, when I step back and look at all of that, and as a result of these factors, I really think the railroad industry is coming into its own. And as we improve our service, as we improve our effective capacity as an industry, the conditions are really ripe for a new rail Renaissance. And what we have been working to do is position CSX so we can can fully participate in that rail Renaissance. Because I do believe it is coming.

If we step back, our core strategies are sound and they remain unchanged. We are going to continue to grow the revenue through both carload growth and pricing it to the value we put in the marketplace, and we're going to continue to improve our cost profile. And we're going to do both of those through service excellence.

We're going to build on the foundation we laid in 2004 and we're going to take CSX to the next level of performance. We have the right management and team in place here. I think listening to our team today, you can see the dedication, the leadership, discipline and focus on execution is evident.

The pricing and the yield management efforts, as well as targeted growth, are there for us to take. The operations are continuing to improve, and as Tony and his team refine the one plan, roll out phase two, I think you will be very pleased with what you see there. And all of this is going to be focused on our consistent , continuous, improvement in both service to our customers and returns to our shareholders. So with that, what I would like to do is open up for any questions you may have for our team.

With that, I think we get our first question from Ken Hexter. Ken.

As you're just talking about your '05 outlook, as you think about--I know you aren't going to use specific targets--but as you think about revenue growth--how do you you look at the mix between volumes and pricings--should it be half and half, should it be more tilted toward pricing because of the environment-- how do you you look at that?

Why don't you answerer that question, please.

Well, Ken, we told you that, you know, our mix is split about a third in price, about a third in the mix and about a third in the fuel surcharge that is in there. So on a year-over-year basis, the fuel prices stay the way that they are, the percentage number won't increase as much as it's increased this year.

On the price side of the house, we think there is still a very vibrant pricing market out there available for us, so we'll be pushing on that price lever very, very strong.

What do you see on the volume side out there?

As our velocity improves, and you saw that in the December-type time frame, it just generates more car supply, and as a result of that, we're able to increase our order fulfillments, and that alone is generating volume for us.

Okay, and looking at continuous and consistent improvement, just to put it in scale perspective, looking at the operating ratio improvement, would you be happy with 100 basis points of margin improvement. What is continuous consistent improvement to you? I mean if you were to be here with a 20-basis point improvement -- what kind of? Can you put it on a scale level? [ Laughter ]

Oscar, would you like to tackle that one or would you like me to?

Why don't you take it.

We're not going to answer question. [ Laughter ] I mean we have not predicted where we're going to be on operating ratio. That's not our policy. I think you're going to see as we roll all these things out, they are going to be good result out of the can, but we don't want to put a target out there--what we would be pleased with-- obviously the bigger number improvement we're going to be more pleased with than a lesser. But I think we feel very good about the momentum we have in the company and the bounce back in steps, so we're looking forward to a good 2005, but we're not going to predict a number.

Not for a lack of trying, so I'll ask one that can be answered. Tony cany you talk a little bit about where you are in the process one the one plan. How is that--the big part was that you rolled it out and it becomes tweaking for the next year. Can you get a little bit into the details of tweaking and then potentially phase two. Thanks a lot.

Well, the one plan has been installed now five months, six months at the most, and it took us 18 months on NS to get it rolled out completely. So, we're still in what we would call the infant stages of finding some areas to redefine, so we'll be fine-tuning the plan for awhile.

And then as Clarence gets different mixes, we'll be making changes as we go forward. So it will be a continuous improvement on the one plan.

Okay. Tom.

I want to ask a question, well two questions. Perhaps on the first one, Michael and Tony, if you want to give me your thoughts. In terms of going into this one plan, there is a sense that you need a good Xs and Os, the right way to go forward, but you also need to change some culture.

I wondered if you could give me your thoughts on where think you're at. Do you think the organization's fully bought into that, or is there still some remaining work to do along those lines and then I've got a follow-up as well.

I'll take a quick commit on that and then maybe turn it to Tony. Here's my perception. Whenever you do things where you're changing, people are always a little bit skeptical. And I think when we rolled out the one plan, there was a reasonable level of scepticism of that as well.

What we found though as we rolled it out and people saw the power of it--the way we got through those storms and that their lives out in the field got much more predictable and they knew what they were supposed to be doing-- we started getting a lot more buy-in and excitement about it and people wanting to drive toward it. So, Tony, I know you're more day-to-day deal with our field people and maybe I pre-empted your answer there, and if I did, I apologize. But maybe you could add to that.

Seeing is believing. As we have rolled it out, it's made some improvements in some areas and people have bought in to a more consistent way of operating the trains. It is different from what we have done in the past here.

It brings structure and accountability to the model of running the trains at a certain time, at a certain schedule, with certain blocks on it. So as we rolled out, we have seen some enthusiasm as Michael's mentioned there with our employees, and we're pretty excited about the response we're getting as far as being able to execute the plan.

It's a little bit -- one final comment--it's a little bit of a cultural change because many times local people before were making good, what they thought were good, tactical decisions to maybe cancel a train to save a crew, and now they have a better appreciation if they cancel that train, that power and that train are not positioned to where they need to be for the next movement. Soe I think that growing appreciation of that is really starting to change the culture.

Okay. Great and then the follow-up, I guess for Clarence and Tony. In terms of the network improvement and the capacity, and when you might want to see volume growth come back, can you give me any thoughts on that? I think we saw from one of the big western carriers that they actually, you know, really plan to hold down volume growth so they can focus on network fluidity.

I'm wondering if you also want to hold volumes down a little bit, perhaps in first half-- and then maybe look more towards second half to see that volume growth pick up. Any thoughts on that question?

Well Tom, I think you will see volume growth, for example, in our agricultural network. We have the train sets in there to handle the grain demand, the corn demand, the soybean demand that's coming in for the spring here, and that looks very positive.

The turn times on that equipment has improved significantly with what Tony's been able to accomplish with the one plan, and the focus that the field has on improving that is a good news story.

A second area of volume growth for us is in our aggregates business. There is a lot of demand, particularly in the South, when we have a lot of pavement projects going on in the South as you're aware. You can pave most of the areas during the winter months. We have taken our aggregate cars out of the North, which normally we would put in storage at this time of the year, applied the locomotive resources that were on them in the North, and moved them to the South, and we're picking up additional volume growth there.

We have had volume growth in the first time period here, which you can see from the CF-54 report data that you have available to you now. And our automotive business that we had not expected in the first two weeks of the year-- a lot of that was business that was all quality whole going into the start of the year, but still, that's an improvement in volume and that number will carry forward in the first quarter here.

Where you may not see the volume improvements might be in the box car fleet. We're aggressively trying to price there to get up to reinvestment hurdles and we don't plan on adding capacity there.

We've added some capacity in our center-beam flights for construction materials, but we don't want to get carried away there and put too much capacity in there as interest rates go up.

So I guess the bottom line of what I am saying is, that with velocity improving, you should expect to see volume movements increase. What we don't want to do is just go out and get volume right now in this type of environment just for the sake of getting volume. Jordan.

Hi, can you talk a little bit more about the intermodal operating ratio improvement in the quarter and how much of that is part of the operating plan versus the extra week versus just big picture sustainability of that significant improvement.

okay. Well, if you look at the intermodal improvements in the 4th quarter, most of the revenue that went to the top line, and it was a fairly good improvement, fell to the bottom line. Now, the volume had gone down in the domestic side of the business and yet the revenue per unit on that domestic side had gone up significantly.

That was the result of both rate increases and the result of some incentive refunds that we, quite frankly, have taken back because there was no need to have those type of incentives in this type of environment.

The second thing that happened was, if you look at the numbers in the flash report, the terminal efficiencies had improved. You can read that as these guys were working hard to get the productivity levels up in their terminals and that was, in turn, reflected in their costs. The second was equipment costs that was the result of two factors in the equipment cost. First was the velocity in the intermodal network improved, and we actually took cars, car sets, out of the intermodal fleet and we were able to move those offline. And the second result was a one-time rate reduction in the 4th quarter by a trailer train, which you will not see recurring in the first quarter of next year. As I said earlier, it bodes well for next year.

You may see some more network rationization in very short-haul markets still left in our intermodal business that we just frankly don't have the profitability that we need there to reinvest. But, you know, that will be a process as opposed to an event.

I know you don't necessarily want to put at target on it, but obviously it was a big change from where you had been running. Any big picture thoughts as to directionally are we below 85, above 85, operating ratio intermodal?

The focus that we've had on intermodal has been around understanding the business model and how to service customers, as well as make money. And we have had some, you know, starts and stops with that. The 4th quarter results, although as he said, the top-line falling down to the bottom line is indicative of where we're headed-- if I look forward, I wouldn't project that 4th quarter number onto this year for a lot of different reasons-- seasonality, service, our continued focus on other network simplification we may be doing.

So, an improving rate. In fact, I think we had record revenues in intermodal this year, but I wouldn't take the fourth quarter number and project it too much just yet.

Thank you.

John.

Thank, Mike. John for Credit Suisse First Boston. Couple of questions on Cap Ex. Can you just remind me of what the breakdown is of your Cap Ex budget, and specifically what percentage of Cap Ex is geared towards expansion? Can you discuss anything that may change your outlook on your Cap Ex forecast? If volumes were to increase, if your velocity got better-- IS there something that would cause you to accelerate certain projects. And then lastly, Clarence mentioned track rationalization. Do you have a target on how many miles of track you may look to cull from your network this year?

Yes. I think I got all of those questions. I would love to remind you of our capital allocation breakdowns but since we haven't discussed it before-- it's the same as we have done it before. I think we have shown some charts that roughly a good portion of it is for ongoing investment with regard to our track maintenance, our track-- our infrastructure development, and then the other parts go to facilities, go to cars and power and such. So, nothing's changing with regards to that.

The second question with regards--well let me take the third question, I suppose, around-- actually, I've forgotten the two parts of the question now.

Track rationalization.

Right . We haven't gone public with that but we did about 800, double what we did the year before. I would probably suggest that we would do a least that much over the course of the year in the appropriate areas.

[ Question Indiscernible ]

Again, you've heard me say we will the earn the right to spend, and I think we have don that. I think our '05 capital budget represents some of that incremental investment. I think the way we are looking at it at CSX is we develop our sort of longer-term strategic plan. We know where our business market is going, what is the capacity? What is the economy going to do?

I think we're going to be able to really focus on where we need to spend from an investment, whether it's expansion-- which I think will be an issue. With regards to cars--there are certain kinds--cars are power.

And more importantly in any kind of technology investment.

So, I think I want to wait to answer that question. One, as we get the earning momentum to continue. Two, as we finish our strategic focus, to understand exactly where the best fit for our dollars are, and I think that's what is going to drive our investment. But generally, we will spend more over the course of time and reinvest in our business. Tony.

Thank, Mike. Tony Hatch. I have a couple for Clarence and maybe you touched on this, You were talking about the intermodal. And I guess if you look at the second half of '05, maybe you have an apples-to-apples comparison from the beginning of the simplification and what-not. What is your core growth rate, and given what the growth that we're probably going to see tomorrow and as we have seen, you know, there's different kinds of growth rates out there.

Once you figured out your system, where are you going to grow is kind of my question. And a second and more simple one is, emerging markets has been a star performer for you for a while. You shifted it to the middle column, your modest growth or flat, I can't remember how you phrased it exactly. What is going on within the portfolio of emerging markets that takes it out of your higher growth column for '05?

In the emerging markets case, it's mostly a year-over-year-type comparison, Tony. So as you know, we had a very strong year in our emerging markets unit. Our military shipments were very strong during this 2004. Half of me, I want to see the military movements continue and the other half of me as a citizen of the United States is, you know, I don't want to see those type of movements happening. In the aggregates area, as I told you in our emerging markets unit, it still very, very strong, but it's lower- rated (goods and services if you will) than the military moves, and in our Municipal solid waste business, although it is growing very strong-- until we get additional investment-- for example, here in the New York metro area, we probably won't see the growth there in 2005 that we saw in 2004.

On the intermodal perspective, I wish I knew the answer as we begin to, one, simplify the network further so we can get a higher return on our investment. Two, as we go into rate negotiations this year, particularly on our international contracts, with the increases that we will try to get.

But I would expect a volume growth somewhere for us in the neighborhood of 3%, 3.5%, 4% number.

Thank you for joining us today. We appreciate your attention and your attendance. Thank you very much.