CSX Corp (CSX) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CSX Q1, 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would like to now turn the conference over to Mr. David Baggs, Assistant Vice President of Investor Relations. Go ahead, sir.

Thank very much, and thank you, everyone, for joining us this morning for our first quarter earnings presentation. Before we get started this morning, just a very quick reminder, that this presentation and other statements by the Company during the course of this presentation do contain forward-looking statements, and these forward-looking statements are subject to a number of risks and uncertainties, and that actual performance may differ materially from these forward-looking statements. And with that I would like to turn things over to Michael Ward, our Chairman and Chief Executive Officer.

Well, thank you, David. Good morning,everyone, and thank you for joining us on our first quarter earnings call. With me today are Clarence Gooden, CSX's Chief Commercial Officer, Tony Ingram, our Chief Operating Officer, and Oscar Munoz , our Chief Financial Officer. Clarence will discuss our top line results, Tony will provide an update on operations, and Oscar will review the Company's financial performance for the first quarter. Then I will make a few closing remarks and we will take any questions that you may have.

As reported this morning, I am pleased to note that CSX's core surface transportation businesses produced all-time quarterly record operating income of $351million, versus $151 million a year ago, a $200 million improvement. However, last year's first quarter included a $53 million management restructuring charge. So, on a more comparable basis, surface transportation results increased $147 million, or 72%, year-over-year. We are very pleased with these results and, notably, they represent the fifth consecutive quarter in which CSX delivered year-over-year growth in core earnings. Also in the first quarter, CSX completed the sale of it's World Terminal business. This transaction resulted in an after-tax net gain of $425 million for the quarter.

Oscar will talk about the numbers in greater detail later. However, more importantly for CSX and it's shareholders, this transaction allows the company to even further sharpen it's focus on our core surface transportation businesses. The year-over-year growth in operating income was driven largely by revenue gains, and a strong focus on productivity and cost control, which resulted in only a slight increase in expenses for the quarter. The results are also enhanced by the management restructuring, which we completed in the first half of 2004. From a top-line perspective, this quarter represents the 12th consecutive quarter CSX has delivered solid revenue growth.

As reported this morning, service transportation operating revenue was $2.1 billion, an increase of $188 million, or 10%, versus the same quarter in 2004. A strong pricing environment contributed significantly to this year-over-year revenue growth. As recorded in our quarterly Flash document, value pricing and yield-management initiatives, along with the fuel surcharge program continued to drive improvements in our top line. Highlights for the quarter included a 20% year-over-year improvement in coal revenues on revenue gains of 9%, and $8% year-over-year growth in merchandise revenue on relatively flat volumes.

In operations, on a positive note, there was continued progress in key safety measures for the first quarter, with personal injuries and train accidents both down year-over-year. And while we were disappointed with the results the Company delivered in many of our other key service measurements during the first quarter, the operating team remains focused on enhancing CSX's service product, with an emphasis on execution and refinement of the ONE PLAN. As Tony will discuss in a few minutes, the company is taking steps to adjust the operating plan to accommodate the changes in traffic volumes and to better balance our resources. Additionally, while costs related to train operations remained high, the company is making progress in containing costs in other operating areas. While these trends are encouraging, we remain committed to consistent, continuous improvements in all areas of safety and service.

Turning to the economy, current global and domestic economic activity continues to provide forward momentum. Despite the recent tempering of forecasts, the U.S. Gross Domestic Product is still predicted to grow in 2005, although at a, more likely, slower rate than in 2004. We believe that transportation services demand will remain strong through 2005, and that the resulting pricing environment will remain favorable. With that background, I would like to turn the stage over to Clarence Gooden, our Chief Commercial Officer. Clarence?

Thanks you, Michael, and good morning. Before I get to the results, let me give you a broad outline of our business as we see it. We continue to see a strong, healthy economy in 2005. The Institute of Supply Management Index of Manufacturing Activity was at 55.2% for the month of March, the 22nd consecutive month of expansion. Railcar loadings continue at, or near, record levels, and we expect this to continue throughout the year. Turning now to slide five, during the first quarter, revenues of 2.1 billion exceeded the prior year by $188 million. This represented a $9.8% increase compared to the first quarter of 2004.

First quarter of 2005 was the 12th consecutive quarter of year-over-year revenue improvement. And, revenue growth was again driven by a continued emphasis on yield, a strong fuel surcharge program, and strong demand in most markets. Now, let us look at the slide for the overall yield and volume change. In the first quarter of 2005, we continued to achieve revenue- yield improvement. Revenue per car grew 8.6 %, driven by our continued focus on yield and our fuel surcharge program. The environment continues to be favorable for increasing price, with record transportation levels, trucking capacity constraints, and the economy continuing to grow.

The Transportation Services Index for freight, that is published by the Department of Transportation's Bureau of Transportation Statistics, rose 1.9% in January over the December level. The January, 2005 level of 130.9 is 7.2 % higher than in January of 2004, the biggest January year-to-year gain since 1997, and it is a record index level going back to 1990, the first year covered by the Index. Our fuel surcharge program continues to be crucial in helping to partially offset rising fuel-oil prices. As I mentioned in the fourth quarter, our fuel surcharge represents roughly one-third of our revenue-per-car increases, with price and mix each representing one-third as well.

Overall volume was up slightly, by 1.1%, primarily as a result of strength in coal, more than offsetting relative flat growth in the automotive and merchandise markets. Continued Intermodal volume decline resulting from our Network Simplification Initiative, in which we shed marginal business in June, 2004, and the effect of service issues in certain markets. We continue to expect increasing volume growth as our service delivery continues to improve.

Now, turning to slide 7, coal revenue of $506 million exceeded the prior year by $84 million, or 19.9%. Pricing, and strong escalators, contributed to gains as revenue per car was favorable by 10%, with all lines of businesses favorable year-over-year. These price increases, along with the fuel surcharge program, offset a slightly unfavorable mix, resulting from newer, shorter-haul but profitable traffic. Volume exceeded the prior year by 38,000 car loads, or $9%.

The fundamentals in coal remain strong, due to the strong global demand for metallurgical coal, China's continued coal consumption levels, and favorable vessel rates. Significant volume and revenue gains were achieved in export, coke, northern utilities and industrial markets. Utility inventories are below last year's first quarter levels, and at least 25% below targeted levels, even with our increase in volume year-over-year. The strength in coal offset flat volume growth in our automotive unit.

Let's look at the next slide. Automotive revenue of $208 million increased $6 million, or $3%, versus the first quarter of 2004. This was driven by revenue-per-car improvements of 3% resulting from our yield-management success. Volume was flat, year-over-year, as North American light vehicle production decreased roughly $4%.

Although sales were favorable year-over-year, drawing upon inventories which, although reduced versus last year, still remained high, at 69 days for most manufacturers and 79 days for the Big Three. Now let's turn to slide 9 and look at our Intermodal results. Intermodal revenue of $329 million increased $14 million, or 4.4%, versus the first quarter of 2004. Intermodal revenues have now grown year-over-year for ten of the last 11 quarters.

While strong demand continues to be fueled by the economy, increased international trade and truck-capacity constraints, overall Intermodal volume was still down 3.8%. Let me further explain several different changes taking place in CSXI's Intermodal business. Domestic revenues declined 13% on a 16.5% decline in volume, largely due to the network simplification process in June of 2004, and from west coast weather and service issues. Yet, domestic revenue per unit increased 4.2% as a result of successful yield management efforts. International revenues grew 6%, primarily on a 7.1% volume growth, as continued growth in imports more than offset losses in off-core, transcontinental traffic resulting from marketing changes and the west coast embargo. Yet, this international growth came at a lower revenue-per-unit than in the domestic market.

Yet, even more important is the improvement in Intermodal's bottom line. As you can see on slide ten, CSX Intermodal's operating income increased roughly $30 million, or 140%, largely due to the increase in supplemental revenues. Growth in our other revenue line includes reductions in incentive refunds, increased fuel surcharge, increased per-dime and supplemental charges related to asset utilization, as well as some one-time adjustments. This is the second consecutive quarter in which our Intermodal subsidiary has achieved significantly higher year-over-year operating income improvement. Now, let's finish with a review of the results in the merchandise markets on slide 11. Merchandise revenues of over $1 billion increased $80 million, or 8.4%, versus the first quarter of 2004. First quarter, 2005 was the 12th consecutive quarter of revenue growth in merchandise. While volume increased by 3,000 car loads, or essentially was flat, merchandise yield improved nearly 8%, driven by strong focus on price and our fuel surcharge program.

A few highlights across the markets include -- in our food and consumer revenue growth of 19.3%, driven by yield management and volume strength and building products and alcoholic beverages, strong revenue-per-car increases in metals, reflecting the strong yield management together with high demand, and favorable yield and volume growth in most emergent-markets lines of business, that were more than offset by the declines in the higher revenue-per-car military traffic. Looking across our markets, our new business development efforts continue to have success in metals and paper markets. Our TRANSFLO subsidiary continues to see strength in the emerging-markets arena, and finally, our industrial development efforts resulted in $24 million in new annual opportunities in the first quarter, with actual startups of $7 million.

Let me close with our outlook on slide 12. As I previously mentioned industrial production and manufacturing saw continued strength in the first quarter, and transportation demand continues at record levels. With the exception of our automotive business, our customers are expecting their business to continue at these record levels throughout the year. We expect our coal business to remain strong for the next 12 to 18 months, and we expect our Intermodal subsidiary will begin volume growth after the impact of NSI, the Network Simplification Initiative, is behind us. But, importantly, Intermodal's profitability will continue to improve. We will continue to focus on our yield and pricing successes throughout this year. Again it was a pleasure to speak with you today. And now allow me to introduce my colleague, CSX's Chief Operating Officer, Tony Ingram.

Thanks, Clarence. As in previous calls my comments address the operating team's three primary performance drivers. First is safety. As you will see in a moment, the first quarter safety results are encouraging. Second, service. We must raise the level of our service we provide to our customers and we also focus on productivity. Land execution is a key driver of productivity. In addition, we are progressing initiatives to improve and eliminate delay.

As you can see in slide 15, our first quarter Personal Injury Frequency Index improved to 1.67 reportable injuries per 200,000 man-hours. This is a 23% improvement versus last year. At the same time, train-accident frequency improved to 4.41 incidents per million train-miles, which is an 11% improvement versus 2004. These results are gratifying, but we strive for even better results in reducing train accidents. The next slide, 16, shows train velocity over the last five quarters. I will will only talk about velocity this morning, but the remaining performance measurements follow a similar pattern over the same time period. You can find the details in the Flash document.

After a marked decline in the first half of 2004, velocity recovered in the second half of the year. As many of you are aware, we rolled out our new operating plan, the ONE PLAN, in the third quarter of 2004. We rolled out the ONE PLAN on an expedited schedule to stop the decline in service performance. Previously, in my career, I have implemented a similar process in approximately 18 months during a period of declining demand.

In 2004, CSX rolled out the ONE PLAN in an aggressive six months, while demand was increasing. Nonetheless the results were very promising. In the third and fourth quarter of 2004, we halted the decline in performance and posted some improvements in velocity, in other measurements. Unfortunately, the momentum did not carry into 2005. We are still experiencing some difficulty in executing our operating plan consistently.

So, what are we doing about it? First, and foremost, we remain committed to our ONE PLAN, the primary driver of CSX service improvements. We are working to adjust the operating plan to accommodate changes in traffic volume and to better balance our resources, primarily locomotives. These refinements enhance our ability to execute the plan consistently.

For an example, refinement to the automotive plan produced tangible results in the first quarter. Automotive train arrivals improved by 25 % through the first quarter, while the variability of transit time declined. Automotive trains make up roughly 15% of our schedule trains on our network. We are still working on phase II of the ONE PLAN, and will continue to keep that underway. Phase II addresses local operations, which is the critical link connecting the customer to the local serving yards. This work continues, but our primary focus is getting the ONE PLAN correct. In addition, we are also working to improve the performance of our 13 major terminals. Obviously, these terminals play a critical role in planned execution.

We are applying process improvements to these terminals with a well structured initiative. Our objective is the standardization of terminal processes, which will raise both the consistency and efficiency of terminal operations. And, we will also remain focused on execution. To realize the benefit of ONE PLAN, including both improved service and lower operating costs,we must employ a more disciplined approach to operation across the entire network.

To summarize, we remain focused on the key performance drivers -- safety, service, and productivity. We are making progress in both safety and productivity, and we look to build on this success. While costs related to direct train costs remain high, we are making progress in other functional areas of operation. As Oscar will display later, these improvements are strongly offsetting the increases in the direct costs of train operation. Network performance remains our largest challenge. We remain committed to the ONE PLAN, combined with a higher level of operating discipline and execution.

Now, it is my pleasure to introduce our Chief Financial Officer, Oscar Munoz.

Thank you, Tony. As you know, we have established this concept of continuous, consistent improvement as the benchmark for our success. Our first quarter results reflect our delivery on that objective. This is the fifth consecutive quarter in which we have produced earnings improvement. We continue to see healthy top-line growth, strong demand for our services, as well as results from our focus on productivity and cost reduction. Now, before I get to the details on core earnings, let me speak to CSX's consolidated results on slide 20. We saw an increase in EPS from continuing operations of $0.55 to $0.68 for the quarter. This was drive by a 202 million increase in operating income year-over-year

Moving down the chart, we saw a slightly higher expense of 6 million, due to the ConRail debt that has now been consolidated on our balance sheet. Income taxes were $71 million higher than 2004, largely due to our higher operating income. The tax rate that you see here is roughly 35%, which is slightly lower than our normal 38% run rate due to a one-time, favorable impact from a tax legislation change in one of our states Overall, CSX reported consolidated earnings from continuing operations of 154 million, which resulted in the corresponding EPS of $0.68.

As Michael noted earlier, the World Terminals transaction closed this February, and resulted in a net gain in the quarter. Highlighted in the boxed area at the bottom of the chart is our net earnings, reflecting CSX's gain from the sale of our World Terminals unit, as well as the result from our continuing operations. So, including the net gain on World Terminals, CSX's reported net earnings were 579 million, or $2.56 per share, versus 30 million, and $0.14 per share, last year.

On the next slide, let me provide some additional details on the World Terminals transaction. The gross proceeds from this transaction were 1.14 billion, which nets to a pre-tax amount of $1 billion after certain expenses. The reported net earnings from discontinued ops were $425 million for the quarter, which resulted in EPS of $1.88 per share. If you need any further details on this transaction, they can be found in our Flash document.

Now, moving to slide 22, let's begin to focus on our core business. You may recall that last year's operating income included a $53 million charge for our management restructuring program. Adjusting for this item, surface transportation operating income increased 147 million, year-over-year, to 351 million in the first quarter. EPS on that same adjusted basis increased by $0.41 to $0.68, for this quarter.

Now, let us move to the P&L details on the next slide. The story this quarter is continued strength in our top-line, as seen by our nearly 10 % growth, as well as a strong focus on productivity and cost control, with only a 2 % increase in expense. This resulted in a greater percentage of our revenue falling to the bottom line than in previous quarters, as evidenced by our 72 % increase in operating income, and our over 6-point margin improvement.

Since Clarence already brought you through the revenue detail, let me focus on the expense side of the business. While we have seen continued challenges in some of our operations, we were pleased with our progress on safety and productivity in the quarter. Looking at the line items of operating expense on the chart, you can see that there are a number of variances, many of which are impacted by our ConRail spin last fall. So rather than walk you through the line-by-line comparisons, which you can read in the Flash, let me shed some light on the total expense increase of 41million, or 2% for the quarter, on the next slide.

On slide 23, the first bar on the left, and the chart, shows the impact of fuel price which continues to be a challenge for the transportation sector. Our fuel cost increased 19 million net of the favorable impact of our hedge position. As we have stated before, we expect to be about 50% hedged, at an average price of $0.88, for the full year.

The next bar shows the $14 million impacted volume and inflation had on our business. This has two components. Labor, benefits, and materials inflation was 25 million. That amount was partially offset by a $11 million favorable impact from traffic mix. Now, historically, we have looked at the next two bars as a combined operations number. In order to provide a bit more transparency, we separated the results between train operations and productivity for this quarter.

We saw cost from direct train operations increase by 11 million. This was due to the continued challenges in our network operations, and primarily reflects higher spending on crews and locomotives while we work on improving our service. The next bar to the right shows that we achieved a $10 million improvement in productivity in our engineering, mechanical and back-office activities. These three operational areas contributed to our year-over-year, bottom line improvement in this first quarter. So, as Tony mentioned, while we are not pleased with all areas of operations, we are making some good progress. When you combine the two operating bars on the chart, you see that we only show a $1 million impact year-over-year.

In the next bar, we see that the management restructuring program that we completed in the second quarter of last year brought us $19 million in year-over-year expense decreases. It is important to note that we have achieved our financial goals from this program, and that we have now cycled this item for the last time on a year-over-year basis.

Finally, on the far right, we had an increase of 26 million in other areas. This was due to expenses related to some non-trade receivables, resolution of legal matters, and incentive compensation. Now that I have shared with you the details on expenses, let's turn back to total surface transportation results on the next slide.

We are very pleased with our solid results this quarter. Record operating income of 351 million, 72% improvement versus first quarter of '04, a 6 point improvement in [margin] year-over-year, and a 152 % gain in EPS. We expect strong top line growth to continue, and we are committed to greater improvements in safety, service, and productivity. Now, let's turn to my last slide and look forward to the rest of the year.

As you know, we will face tougher year-over-year comparables as we move throughout the year. In the coming quarters, we will be cycling the gains from our management restructuring program, as well as cycling our pricing actions, which ramped up significantly during the course of 2004. And, therefore, while we expect year-over-year bottom-line gains throughout 2005, we would not expect them to continue at the torrid pace we saw in this first quarter. We believe we have a strong foundation in place for our success. Our core strategies are taking hold, and financial results are continued on improvement path that we set in place last year.

So, said simply, while the bar ges higher, we remain intently focused on delivering consistent, continuous improvement in every part of our business. And, with that I would like it turn it back over to Michael for his closing remarks.

Thank you, Oscar. So, as you can see, the first quarter of 2005 the employees of CSX delivered some strong top-line and strong bottom-line results. As we look ahead, the nation's economy continues to expand, and demand for transportation services will continue to be strong.

Growth in the industrial markets will foster continued demand for transportation services, which we believe bodes well for CSX and the entire rail sector. And, I remain confident that great long-term opportunities exist for CSX and the rail industry, as the highway systems remain congested, and the trucking industry faces challenges including hours-of-service laws and driver shortages.

As a result of these factors, the pricing environment for railroads will remain favorable. Simply put, I think long-term trends favor the growth of rail transportation, and CSX is well positioned to capitalize on this emerging rail renaissance. And while CSX remains focused on yield improvement, we are committed to taking the steps necessary to improve our operational performance. Long-term operational improvements will allow us to leverage the strength of CSX's eastern rail network.

Also important to CSX and the rail industry is an enactment of a comprehensive national energy policy. Over the last four years, high energy prices have severely burned American consumers and businesses. Diesel prices alone have increased more than 60%.

We strongly support President Bush's call to achieve greater energy security by harnessing the power of clean coal, and we encourage the quick passage of the present energy bill before Congress. This legislation will expand incentives and funding for clean coal technologies and advance and development of other domestic initiatives to reduce this country's dependence on foreign sources of energy. Additionally, we endorse continuing actions on the provisions of the Clear Sky Initiatives, which would ensure further environmental gains, while keeping our energy sources reliable, affordable,and secure.

So in summary, CSX produced solid financial results in the first quarter of 2005. And while the bar does get higher, as Oscar said, the company remains focused on continuing to drive improvements in safety, service, and productivity while sustaining it's top-line performance by pricing our services to market levels and therefore improving the company's bottom line. CSX has a solid foundation in place and every member of the CSX team is committed to delivering continuous, consistent improvement for our customers and our shareholders. With that we would like to take your questions. For benefit of all participants on the call, I would ask you that please identify yourself and your company affiliation prior to asking your question.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Ken Hoexter at Merrill Lynch.

Good morning. Two questions. First, I guess, I will start out with an easy one. You obviously received a lot of cash. Have you finalized your plans for the cash from the sale of World Terminals? Are you focusing on that reduction? Are you planning on doing any stock buy-backs -- can you talk a little bit about that -- as you start generating additional cash?

Ken, this is Oscar. Clearly, we have thought through very thoughtfully, and we will be reviewing that with our Board of Directors. And, sometime after that we would be live with certain decisions based upon that.

Second, I guess a little bit on -- Tony, let me focus in on the ONE PLAN -- and velocity remains, even today, still a down year-over-year. And, I guess, now that you talked a bit about being almost a year into the ONE PLAN. What is going wrong here, do you think, from what you are seeing operationally, that is causing you trouble, versus what you expected when you rolled it out?

Ken, at this point we are having a bit of different change in traffic. The coal is up a little bit higher than it was last year. That puts a drain on our locomotives and crew resources and other areas. The grain was also up a little bit compared to last year. But, some of our biggest improvements that we are working on now to improve is in our terminals. It seems like our trains are running pretty good, but we are having some issues with our terminals which means we haven't completely -- one, got the plan executed properly, and number two, we have still got some refinement to do with it as a mixed change.

That clearly, at least in this quarter, didn't impact your ability to hold down costs. Is that something that, if this doesn't get resolved by second, third quarter, it starts to concern you, or is that something that you are able to kind of work through -- obviously, seeing the results you today, where you were able to hold down costs. Can you continue that?

Well, we will continue to try to refine this and, of course, with the metrics that you see is a reflection in the costs also. But, we will continue to work, execute this plan, and keep refining it. This plan will work. We just got to execute it and [refine] it to get it where we need to be as a business change..

And we will continue to push on the other elements of productivity as we go forward on the year obviously, Ken.

Great, Michael. Let me throw out just one last quick one. On the economy, you noted kind of a robust outlook. Is that -- when you see this strength in volumes in the rail network -- is that irrespective of, kind of, the overall economy showing a little bit of slowdown, with consumer confidence down and some other factors -- GDP numbers out this morning -- a little mixed?

Ken, this is Clarence Gooden. We see, on the marketing side, nothing but a strong economy. In fact, if you look at those numbers that are out this morning, you look at numbers that's been out for the last two weeks, for that matter, some are up, some are down, some are mixed. My own personal view of it is it is too soon to tell that. We don't see any indication that it is slowing down. And, I certainly don't want to be one these guys that talks myself into a recession.

Thanks a lot, guys.

Thank you. Our next question comes from the line of James Valentine at Morgan Stanley.

Thanks. Good morning. Very impressive improvements for the quarter. First question I have is that we have been hearing a lot of noise that the utilities are saying that the railroads aren't providing the service they'd need. And, last year, I kind of understood it in terms of some of the service metrics, but it appears that things are starting to get better, especially across the whole industry. And yet, we have got what appears to be more noise recently from the mines and the utilities.I guess [Massy] came out sending letters leading to force majeure.

I guess my question is -- I guess three of them. First is what is causing this heightened noise in railroad congestion? Is it real or perceived? And then the second is that -- is currently any coal related congestion on CSX's franchise? And then, finally, what is the potential legal risk here that, to the extent if someone comes back for these damages against a railroad? What is in the precedent?

Jim, this is Clarence Gooden. First off, our coal loadings, as you saw this morning, are up 38,000 carloads on a year-over-year basis. So, simply put, we handled 38,000 more cars of coal this quarter than we did the first quarter of last year. So, that is a good news story. Even though the stockpiles declined because of some of the winter burn issues and other factors around it. Secondly, there is an increased demand in the coal business, and if you look at our CS54 car loadings of coal, we have remained strong here as we are moving forward.

Third is, is that with some -- and I don't want to get in it with specific customers here on the call -- but, in most of the cases in the coal fields that I am aware of, we've actually loaded more cars this year for those same producers than we did last year. So, all of those have been favorable things for us. And then, we keep up with our utilities and, if you will recall on the last earnings release, we told you we had some utilities that were at critically low inventory levels. As of this morning, we have no utilities served by CSX , that we are aware of, that are critically low inventory levels. In fact, they all, this morning, were above a 10 day supply.

Great, that just confirms what I thought. Like you said, [given] car loading numbers, it would appear as though things are getting better. And yet, the mines and utilities are complaining so -- and I'll have to investigate further at their end. Maybe, that is where the problems are arising.

If I can shift onto a second question, Clarence, in terms of that 10% increase you saw in coal yields. Can you give us some kind of feel for how much of that was the RCAF versus your overall price increases versus just the mix of the coal, namely either short or long haul, or export versus domestic?

Most of it was in price increases, although there were strong escalators, as you know, in [RCAF]. The major mix change was an account -- a fairly large account in terms of volumes -- that was a relatively short haul that we got that actually drove down the percent of increase or it would have been higher.

So, overall coal pricing probably was -- I mean, real pricing before RCAF was probably up north of 5%, maybe 6%, and then you are saying the balance here would have been RCAF?

That is right, well north of 6.

Excellent. One last question, if I can. Just your overall business mix, you said that a third of your overall yield improvement came from pricing which makes it, what, about 3%. Do you think that is going to stay steady throughout the year, is that going to accelerate, maybe decelerate, as comps get tougher.

Well, as the comps get tougher, it is obviously tougher, on a year-over-year basis, and I am reminded by our financial people all the time that it is going to be more difficult to do. Having said that, we are in a very strong pricing environment , Jim and I don't know of any reason in the short term -- short term between now and the end of the year -- why that would change.

Great, appreciate it guys. Thank you.

Our next question come from the line of Tom Wadewitz at Bear, Stearns.

Good morning. Nice cost-side results. I have two questions for you. One for Oscar -- I know there were some items of the sales of the terminals and also you have that benefit from the management restructuring from last year and that lapsed, so you don't get that in the second quarter but -- within the other cost savings you had, which were solid, is there anything one-time in there, or should we really look at those as being ongoing as we forecast for 2005?

As you know, our costs are cyclical but, as far as our results -- and you can read a lot of the detail in the Flash to sort that out -- but, there really were no -- any one-time items were offset by corresponding items in other areas. So, it was by and large a pretty solid, normal operating result.

Great, and then one other question, I think this is for Tony. When you look at the ONE PLAN, I am wondering if there are infrastructure issues where, if you spend a little more money on terminals or if you spend a little more money on locomotives, that might really help the fluidity a bit? And, I am wondering if that is something you might consider if you don't get the velocity up over the next quarter or two?

And then, also, we had heard some things, probably about a month ago, about some changes in some of the operating managers -- I think one person pretty high-level, and then a couple of others that were kind of mid-level operating managers. I am wondering if you feel like you really have the right team in place, and if you are getting the right response from the operating managers, or do you think there is still some heavy lifting in terms cultural change and really getting discipline in the system?

Tom, this is Michael. Let me address the infrastructure one and I'll let Tony deal with the management side of it. But on infrastructure side, obviously as we look at it now, as you know, we brought some resources on, Clearly, with us not executing the way that we want to -- that creates some issues of moving all the traffic we want to, and some capacity issues around locomotives and crews especially, more so locomotives. But, I think as we start running better, we are going to start seeing some improvements in those areas.

Looking at it from a longer term perspective, though, we are actually doing a lot of work right now. And looking at, not just this year, but two and three years out, where do we think that the business is going to grow? Because we do believe that it has long-term solid growth prospects. So, we are really examining all aspects of our infrastructure -- locomotives, crews, track, terminals to say how do we position ourselves for that growth. And we are going to be, on our Analyst's Day, August 11, giving a lot more detail about that. So I would prefer, if we could, to wait until then and talk about how we see the longer term future of our infrastructure needs. On the management side, Tony, do want to take care of that?

Yes, I will address the management changes. Most of you know we made a big management change about a year in our [OEI] process. And, we moved a lot of people around. And, at the same time, we have made some reductions and put some people in some new responsibilities. We also reduced the numbers, and we also put a bunch of new guys on new jobs, and ladies on new jobs.

And as a result, after a year, we have looked at some deficiencies in our accountability model. And, some of the things were just not improving. And so, we did make some management changes here. There is only five key positions that we have moved around here. And so, we will continue to make those changes as we go. It is just like any other organization. When your management team is weak, you have to improve on it.

Tony , do you feel like you are getting the response that you need in terms of the discipline, or is there still some work to be done there?

Well, in any new organizations and changing of leadership, you go through a learning process. And, I believe our team is coming around. They will learn how to execute the plan as we go forward.

Great, thank you for the time.

Thank you. Our next question comes from the line of Gregory Burns at JP Morgan.

Just a quick question on Intermodal. You have been paring back on the domestic side. My question is, do you feel you are done there? Will the volume comps turn positive as we move into the back half, or do you feel there is still more work to be done there?

Greg, this is Clarence Gooden. The comps for Intermodal have got one more quarter to go, the second quarter of this year, because that Network Simplification Initiative did not take place until June of 2004. But, going forward after that, I expect to see the Intermodal domestic volumes grow.

Thanks.

Our next question comes from the line of Scott Flower at Smith Barney Citigroup.

Good morning, all. Another followup question for Clarence. I guess we are not -- at least I'm not used to seeing CSXI margins in low 80 operating ratio. Is that something we should expect to continue? I am just trying to understand the other revenue line item. Is this a run rate we should expect to continue? Obviously, everyone is trying to get more efficient in demurrage and per diem and assessorials, but is this just a new plane relative to restructuring of the marginal business and well as charging customers for services used, it is more appropriate to the value of those services?

Well, in regards to those supplemental charges, recall that I told you there were some one-time expenses in there. So that run rate will be higher than it was last year, but not as high as it was in this quarter. And then, in regard to that operating ratio, I don't want to get into the business of forecasting operating ratios for the Intermodal company, because I have never gotten one right yet. But I do expect that the profitability of that Intermodal company will continue to be as robust as it has been in the last couple of quarters in terms of dimension as we go into the [out-quarters] here, Scott.

Maybe to follow-up on the comment made, is it more appropriate to look at the third and fourth quarter run rates of assessorial, then think of that as a reasonable bogie to look for?

Let me think about that a minute. It would be more appropriate to look at that fourth and first quarter.

Some of that is how you change incentive refunds and some of the facility charges.

So, that will begin to cycle itself here in the third and fourth quarters of this year.

And then, one of the things, just to get a sense, obviously, you have a good job on the fuel side. I just want to get a sense of --- have you been able to go to work with customers on getting greater coverage of the surcharge and, if so, could you give us some sense -- obviously, it varies. RCAP will help you on coal and that covers other buckets of costs. But, have you been able on the merchandise, and I take on most of Intermodal, have you been able to get fuel surcharge coverage?

Yes, that is correct. We have expanded it this year.

What order of magnitude of coverage are we having now?

Well, I would rather not talk specific about what percentage of coverage that I have got, Scott. I would rather just leave it that I have got about a third of this price increase in fuel, about a third is in price itself, and a third is in mix.

Alright, thank you.

Our next question comes from the line of Rick Paterson at UBS. Please go ahead.

Thanks. Good morning. [inaudible] the right numbers. Your [trial] volumes are down 30 %, [trials] are up 2 %. Could you address why trials have been so weak?

Yes, Rick. This is Clarence Gooden. Part of Network Simplification Initiative was to get out of rail-controlled trailers and certain markets -- the Philadelphia market would be an example of that, the Atlanta market would be an example of that. And, those volumes were subsequently replaced by containers. So, what you have seen is the domestic side and domestic containers grow, and the traditional rail trailer fall out of the mix. Now, what has not changed in that trailer mix is private trailers, and as service improves moving forward, as we grow the Intermodal business, you will see the private trailer part of the business grow.

Thanks Clarence.

Our next question comes from the line of Jordan Alliger at Deutsche Bank.

Hi, morning. Couple questions. One, and this is sort of following on some people's questions before. Obviously certain service metrics and velocity were not hugely critical in driving down that first quarter operating ratio. I am just wondering, how long can that disconnect continue with OR, and if it can't continue long, what's the sort of velocity levels you need to keep operating ratio at these rough levels going forward?

Jordan, this is Tony. The performance that we had the in the first quarter was sort of a recovery report. We had a low volume of these numbers in January and we actually improved a bit, to somewhat degree, in February and March. So, we recovered from our velocity there. At this point, we are trying to balance the plan more so we can improve and we are also working in our terminals to reduce our dwell time. Once you see us reduce our dwell time in the terminals, I think the velocity would also pick up.

Most of the money is in the terminals. Velocity is one thing about getting you over the road and the number of days that it takes to move a car across your system, which ends up to be [car, however]. But ,a lot of our costs is in our terminals and that is what we are working on at this time.

Jordan, as you saw in this quarter, you are right, the velocity didn't really improve. But our [AOR] improved pretty strongly, The way I would view that is, we are finding ways to find productivity other places within the Company, and as that velocity improves, you will see two things happen.

One, we will be able to handle more volume, and secondly the cost of doing that will improve because, as Oscar noted in his chart, we were $11 million up, year-over-year, in that direct train operations piece. So, as we continue to improve, we will see that number shrink in forward quarters. So, I would view it more as -- as we improve the velocity, it will be a plus to what we delivered in this quarter.

And then, just a follow-up question. This is on fuel, and I am not sure if I am looking at this too simplistically, but if a third of the improvement came from fuel surcharges, that would be by my calculation, about 670 million. And, if I am looking at it right, fuel expense was up 25 million. Does it imply, simplistically, that you made about 40 million, or $0.10, from better fuel surcharge recovery?

Jordan, this is Oscar. The way these things are calculated, and the way they are computed the way they are presented is something that, for a lot of different reason reasons, we keep internally. As your computations suggest, there are other factors that move those numbers. That's maybe a little simplistic, but at this point we remain sort of quiet, I guess, on that area.

The thing you have got to recognize is that part of that is helping those numbers move the way they are, Jordan, is the fact that we took a fuel hedge for about half of our fuel consumption. Now, that happens to be that is a positive now. But, when you are taking this hedge position, it can be a positive or it can be a negative. And, I think where we would like it get eventually is better coverage on our fuel surcharge mechanism, so that we are more than partially offsetting that, and not have to engage in hedges, because hedges can work both ways.

We have no further questions. We'll turn the conference over to you.

We thank you everybody for participating today and we appreciate your time and attention.

Ladies and gentlemen that concludes the conference call to today we thank you very much for your participation