CSX Corp (CSX) 2005 Q2 法說會逐字稿

Welcome to the CSX Corporation second quarter 2005 earnings call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Wednesday, July 27, 2005. I would now like to turn the conference over to David Baggs. Please go ahead, sir.

Thank you very much and good morning and welcome to CSX's second quarter earnings presentation. Before we get started this morning, let me remind everyone that this presentation contains forward-looking statements and it is important to recognize that these forward-looking statements are subject to a number of risks and uncertainties and that actual performance could differ materially from the results anticipated by these forward-looking statements. And with that, it is my pleasure to turn things over to CSX's Chairman, Chief Executive Officer, and President, Michael Ward.

Thank you, David. Good morning and thank you for joining our second quarter conference call. With me today are Tony Ingram, our Chief Operating Officer; Clarence Gooden our Chief Commercial Officer; and Oscar Munoz, our Chief Financial Officer. Tony will update you on operations; Clarence will discuss the top line results; and Oscar will review the financial performance. Then I'll make some closing remarks and we'll take your questions.

We are pleased to report the sixth consecutive quarter of core earnings growth for CSX. Surface transportation which includes our rail and Intermodal businesses produced record operating income of $422 million, up $280 million from 2004. It is important to note that last year's quarter included a $15 million pretax management restructuring charge. So, on a more comparable basis, service transportation results were up 127 million, a 43% year-over-year improvement. This improvement was driven largely by higher revenue and our continued focus on productivity. From the top line perspective, the second quarter was our 13th consecutive quarter of solid revenue growth. As reported in morning, surface transportation operating revenue was $2.2 billion, an increase of 169 million or 8.4% compared to the same quarter in 2004.

A strong pricing environment continued to play a key role in our revenue growth as our fuel surcharge program and yield management initiatives together drove better top line results. Revenue included $17 million from a coal rate case settlement. We expect favorable pricing environment to continue throughout 2005 as demand for transportation services continues to exceed supply.

Turning to operations, CSX continued to make good progress on its key safety measurements in the second quarter. Significantly reducing both personal injuries and train accidents versus the prior year. In addition, as mentioned before, our productivity initiatives produced solid results for the second quarter, helping to contain the total expense increase to just 2%. We're proud of the progress we've made but we're not satisfied with the service levels we provide to our customers in the second quarter. Reliable service is critical to our long-term success and we're absolutely committed to improving operations and becoming a high-performance organization.

Our second quarter results also included a number of favorable developments. As you know, we successfully completed a $1 billion repurchase of CSX's debt. This transaction strengthens our balance sheet, reduces interest expense going forward, and enhances our credit profile. In addition, the State of Ohio recently passed tax legislation that phases out a corporate franchise tax on net income and replaces it with a gross receipts tax. And finally, as I mentioned before, we favorably settled a coal rate case. With that, I'll turn things over to Tony who will provide you with more detail on our key operating initiatives. Tony.

Thank you Michael, and good morning. Slide five shows the key drivers in operations. These do not change. We talk about these in every meeting with our people. The first is safety. Safety is something that great companies do well. At CSX, safety is a foundation of everything we do and we are getting better. The next driver is service, the operating team is focused in improving service. Since last quarter, we have added new processes to the ONE Plan which I will talk to you in a minute. The third driver is productivity. As Michael told you, the cost of operation is going down year-over-year. The team is driving that improvement with productivity. Just like safety, productivity is another part of the high performance culture we're building.

Now let's look closer at safety. On slide six, you'll see we're getting better in injuries and accidents. The index on the left looks at the number of injuries for every 200,000 man hours worked. At CSX, we improved by 16% to a ratio of 1.86. Our train accidents also improved 29%. To a ratio of 3.2. Again, all of this has been driven by our people through safety programs and training and I have said before, fewer injuries and accidents are not just about safety. They also prove that with discipline and focus, we can perform at a higher level in service.

Looking at slide seven, which shows train velocity, velocity declined in the first half of the quarter and then went up. You'll also see that we had some traction going on in July. In the last week, we did some maintenance on a major corridor which affected this velocity. One of the things that caused a slowdown in the second quarter was the fact that coal was up sharply. More coal shipments are good for earnings but at the same time coal trains run at a slower velocity. Having said that, I'll tell you that velocity will get better as we execute better and I believe we're on that path.

As I said before, our team has made improvements to the ONE Plan. I believe the ONE Plan is absolutely the right way to go. But to really make it work, we need clear rules of engagement on how to schedule and manage our resources. We have done just that. Just as important, we need to communicate new rules in the clearest way possible and we're doing that. We've been improving our processes and training our people for several weeks and I believe we'll see the results.

So, in summary, our improvements in safety and productivity are good signs and we're putting new discipline behind our ONE Plan to make service excellence a reality at CSX. We'll talk more about our initiatives in detail at our August 11, investors conference. Now with, that, I would like to introduce Clarence Gooden.

Thank you, Tony. Good morning. Before I get into the results, let me give you a broad outlook of our business. We continued to see a growing economy in 2005. The institute of supply management index of manufacturing activity was 53.8% for June. The 25th consecutive month of expansion. Also, the latest GDP growth forecast for the year is around 3.6%. Down slightly from the previous forecast but still depicting a very healthy economic outlook. 2006 GDP growth is also forecasted to be around 3.1%.

Now, turning to slide nine, let's look at the results. During the second quarter, revenues of $2.2 billion exceeded the prior year by $169 million an 8.4% increase. Second quarter, 2005, was the 13th consecutive quarter of year-over-year revenue improvement and revenue growth was again driven by continued emphasis on yield. Strong fuel surcharge program and strong demand in coal.

Turning to slide ten, in the second quarter of 2005, we continued to achieve revenue yield improvement. Revenue per car grew 10.6% driven by our continued focus on the yield and the fuel surcharge program. If you break down the revenue per car increase into its components, approximately 40% is coming from price. 40% from fuel surcharge. And 20% from mix changes. Previously, our breakdown was about a third each for price, fuel surcharge, and mixed but with the higher fuel prices and the vibrancy of our pricing program, that mix has changed this quarter. Revenue per car will continue to be susceptible to price fluctuations in the fuel and into mix changes.

The environment continues to be favorable for increasing price and the near record transportation demand, tight transportation supply and a growing economy are helping this. Our fuel surcharge program has continued to be crucial in helping to partially offset the rising fuel prices. Also, overall volume was down by 1.9% from the record high of a year ago. Primarily as a result of the automotive volume weakness due to decreased production levels continued intermodal weakness due to the network simplification in 2004 and the shedding of low margin business and the strength in our coal which only partially offsets these declines. We continue to expect increasing volume growth as the service delivery continues to improve.

Quarterly coal revenue of $541 million increased $99 million or 22.4% year-over-year. On a volume increase of 32,000 car loads or 7.4%. This represents a record revenue level at CSX for coal. Even without the $17 million from the rate case settlement. Revenue per car of $1,179 increased $144 or almost 14%. Without the rate case settlement, revenue per car increased a healthy 10.4%. This revenue per car level also represents a record at CSX for coal. The 459,000 car loads of coal moved during the second quarter, represent one of the strongest quarters since the Conrail acquisition from a volume perspective. Strong demand exists across all coal markets with only a mild softening in steel-related traffic.

Looking forward, utility inventory remained below target levels and producer intent during the second half of 2005 is expected to be very similar to the first half. As for the automotive sector, quarterly automotive revenue of $211 million decreased $9 million or 4.1% year-over-year. On a volume decrease of 11,000 car loads or 8.1%. While overall North American light vehicle production was unfavorable by 1% year-over-year in the second quarter, production for the big three domestic automobile producers was down 10%. And General Motors permanently closed three plants served by CSX at Lansing, Michigan; Linden, New Jersey; and Baltimore, Maryland. Yet vehicle production for the new domestic producers was favorable year-over-year, (INAUDIBLE) rail shipments that CSX serve at Montgomery, Alabama plant during May.

As of the end of the second quarter, field inventory levels were down 14 days year-over-year to 58 days which is near target levels. In the third quarter, the big three domestic production forecast is unfavorable 5% year-over-year. And finally, continued efforts to improve yield in this market resulted in revenue per car of $1,702 which increased $72 or 4.4%. This revenue per car level is a quarterly record at CSX for the automotive market.

Now, let's look at our intermodal results. Intermodal revenue of $330 million increased $5 million or 1.5% year-over-year on a volume decrease of 46,000 units or 7.8%. Volume decline was primarily driven by a decline in domestic traffic of 16.4% largely due to the network simplification earlier in 2004, as well as the shedding of a low margin traffic. Domestic revenue per unit increased 11.4% as a result of the successful yield management efforts and overall revenue per car improved 10.1%, largely due to growth in our other revenue line which includes increased fuel surcharge, increased asset utilization charges and reductions in volume incentive refunds.

As a result of these yield management efforts turning to slide 14, CSX intermodal operating income increased $24 million or 77%. This is the third consecutive quarter of year-over-year operating income improvement. In addition to the yield management improvements, operating expenses were $19 million favorable. We're very pleased with the bottom line improvement that we're seeing in the intermodal company and that bottom line focus will improve and will continue in the third quarter.

As for the merchandise results, quarterly merchandise revenue of $1.061 billion increased $70 billion or 7.1% year-over-year. On a volume decrease of 12,000 car loads or 1.6%. This represented a 13th consecutive quarter of year-over-year merchandise quarterly revenue growth. Although the volume was down, the 743,000 car loads moved during the quarter was among the strongest merchandise quarters ever at CSX. Revenue per car of $1,428 increased $115 or 8.8%. This represents a record level at CSX for our merchandise traffic. All markets experienced year-over-year revenue and revenue per car gains as a result of the continued repricing of traffic and the fuel surcharge program and we expect this trend to continue.

In summary, the economy continues to grow. We will continue to focus on aggressive yield management in all markets. Our yield environment remains favorable and our momentum is strong and now let me introduce CSX's Chief Financial Officer, Oscar Munoz.

Thank you, Clarence. Good morning to everybody. As Michael mentioned, our second quarter results marks the sixth consecutive quarter in which we have produced core earnings improvement. We're very pleased with the progress we've made to date and look forward to sharing the longer term direction of CSX in our August 11, conference.

Now let's take a moment to look at the details of our second quarter results on slide 18. Overall, CSX's consolidated net earnings were 165 million. This resulted in an EPS of $0.73, an increase of $0.20 or 38% from last year. Driving these results was our surface transportation operating income which increased 142 million from last year reflecting strong revenue gains and cost control. I'll get into the details of our surface transportation results in a minute but first let me move down the rest of the chart of our consolidated results. All other income was up 24 million primarily due to higher real estate sales at our resort properties and greater interest income related to our higher cash position from our recent World Terminal sale.

Moving to the next line, as most are aware, we recently completed a $1 billion debt repurchase. The cost of this which primarily reflects the increase in current market value above the original issue value was expensed in the quarter. You see this as the 192 million pretax debt repurchase expense on this slide. This negatively impacted EPS by $0.54. The other large variance on this page is in the income tax line which is affected primarily by three factors, the higher surface transportation results, our debt repurchase expense, and a state tax law change that Michael mentioned. This change eliminated the corporate franchise tax in Ohio which was being replaced by a gross receipts tax. As a result, CSX was able to reduce certain deferred income tax liabilities resulting in a lower income tax expense of $71 million. This positively impacted EPS by $0.31. On an ongoing basis you can expect our effective income tax rate to continue to be approximately 38.5%.

Let's move on to slide 19 and the details of our second quarter surface transportation results. The continuing story for CSX is strength in our top line as seen by our 8% revenue growth which, as you heard, includes the rate case settlement of 17 million. This combined with only a 2% increase in total expenses resulted in operating income of 422 million, a 43% improvement year-over-year. As you can see, the primary expense drivers were in labor and fuel as well as the various effects of the Conrail spin last fall. The details of all our expenses can be found found in our flash document. I would like to take you to the next page where we can look at the 42 million or 2% expense increase from more of an activity perspective.

On slide 20, the first bar on the left end of the chart shows the impact of fuel price which continues to be a challenge for the transportation sector. Our fuel cost increased 22 million net of the favorable impact of our hedge position. The next bar shows the net 8 million impact that volume and inflation had on our business. This has several components. Inflation on labor and materials was up 26 million. That amount was partially offset by an $18 million favorable impact from traffic mix and lower volume. In the next two bars, we show the continued improvements in our core operations. We saw cost from train operations decrease by 4 million due to improvements in network efficiencies relative to last year as well as a $7 million improvement in productivity, a key lever we're focusing on to reduce cost to the Company. Finally, on the right hand of the chart -- on the right side of the chart, we saw an increase of 23 million in other expenses. While there are a number of items in there, it is primarily higher due to a percent of compensation and partially offset by supplier cost recovery.

On the next slide, slide 21, let's take a moment and remind ourselves where we stand on our fuel hedging program. In the second quarter, we're 57% hedged at an average price of $0.87 a gallon. Our hedge position was declined to 49% in the third quarter and 38% in the fourth quarter of this year. This means that for the second half of this year, we'll have a combined 13% average lower hedge position relative to the first half of this year. In '06, our hedge positions will continue to decline until our fuel hedging program is completely phased out by year end.

Now, on slide 22, let's look forward to the rest of the year. First, as we mentioned earlier, we reduced our debt by 1 billion this quarter. We're very, very pleased with the progress we've made on our debt reduction efforts and have now brought our leverage down to targeted levels. Second, as this quarter shows, we've remained focused on delivering consistent, continuous improvement across all areas of the business. Third, we're on track to achieve 450 million in core free cash flow this year.

Lastly, on August 11, we'll be unveiling our longer term plans. As we begin to execute those plans, we anticipate some additional spending such as increased hiring in the back half of this year. Even with that, we still expect to beat the current full year EPS consensus estimate of $3.07 and are projecting to achieve a full year EPS of $3.15 to $3.25 a share when you adjust for our first quarter World Terminal's gains along with the debt reduction cost and the Ohio tax change in the second quarter. Now, with that, I would like to turn it back to Michael for his closing remarks.

Thank you, Oscar. As you've heard this morning, another strong quarter for CSX with the employees of CSX delivering solid revenue growth and operating income improvements. We are encouraged by our financial progress over the past six quarters and believe that we're well-positioned to continue raising the bar going forward. Near term, we expect economy will continue to grow although at a slower rate than the nation has seen in the past several quarters. Meanwhile, the pricing environment remains strong and our team will continue to drive yield improvements. The operations team remains focused on three key areas. Safety, productivity, and service. In safety, the improvements are encouraging. We're confident these trends will continue.

In productivity, we continue to improve as well. Our overall cost remains relatively flat for the second quarter and expenses associated with operations declined on a year-over-year basis. That said, we continue to focus on improving service and creating a high performance organization. Every member of the CSX team has a defined role and accountability for meeting and exceeding customer expectations. As we improve service, we will strengthen the foundation needed to support long-term sustainable results.

With U.S. consumption increasing and more and more demand being met by imports, these must be carried long distances across the country. Our rail network is well positioned to make these deliveries into some of the most heavily populated areas of the country. At the same time, in the face of higher fuel price, greater congestion on the highways, and driver shortages, the trucking industry is finding that it makes sense for them to perform the short haul deliveries to and from the customer while the long haul deliveries are carried by rail. Bottom line, the long-term trends favor rail transportation. CSX is well positioned to capture the benefits of the emerging rail renaissance and we'll discuss how CSX is positioned in that environment in more detail at our investor conference on August 11. With that, at this point, we'll take your questions. We would ask that you please identify yourself and your affiliation for the other listeners on the call.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Thomas Wadewitz from JP Morgan.

It is Tom Wadewitz from JP Morgan. Congratulations, very strong results. I have got a few different questions here. First on the coal settlement that you had. You did identify it's 17 million in revenue. Were there expenses that you would identify with that as well so that we could parse it out on an operating income and also a net income basis?

Tom, this is Oscar. No, we expensed all related issues as incurred and that 17 million is the only impact on our quarterly result.

Okay. All right. So, you're saying that the revenue income just falls to the bottom line in terms of the impact on operating income as well.

Exactly.

Let's see. In terms of the head count comment, Oscar, since you responded to that one, would you expect head count to be up year-over-year in second half, or you think there is still a possibility that it is down a touch or flat?

The predominance of the sort of prudent early investment is in the -- our TNE, our running of locomotives area. And depending on attrition and other areas in the overall head count number, you may or may not see an increase in overall numbers but if you were to look at the detail behind it to what we use to run trains, you would obviously see a marked increase, but overall, I don't expect it would be a significantly higher number but again, I haven't looked at that.

Then maybe one for Clarence. Clarence, you've been quite bullish on coal for I think at least a year in terms of outlook for coal volumes. That has played out pretty well. Wondering if you would still think that you can see significant growth in coal volumes looking at the coming year and also as comparisons do get a bit more difficult in fourth quarter?

Well, Tom, as I mentioned in the presentation, looking forward, we expect the second half of this year to pretty much reflect and mirror what happened in coal volumes in the first half of the year. And then in 2006, we expect coal demand will stay fairly strong throughout the year, about the levels that you've seen in 2005.

So, you're talking in absolute terms or are you saying the rate of year-over-year growth can continue?

I'm speaking in absolute terms.

Fair enough. Any thought on the pricing story as well, whether the difficult comparisons you get maybe in fourth quarter where the pricing slows or you just think you can continue to work through the contracts and get that pricing momentum going through this year and next year?

We're pretty confident between now and the end of the year that as the contracts that come up for renewal will be able to achieve some of the pricing on a percentage basis that we've gotten with the contracts previous to this and unless something changes, we expect 2006 to be still a very strong economy.

Great. Thank you for the time.

Our next question comes from the line of Ken Hoexter from Merrill Lynch.

Good morning. I guess as we look at the car loads quarter to date. We're still running a little negative. I just wanted to understand this a little bit because I thought we had lacked particularly in the intermodal side where you had shut off some of the unprofitable business a year ago. Is this something we should expect to see turnaround this quarter, next quarter. What timing should we look for for some the volumes to really start to increase after you've lapsed some of the eliminations.

Well, Ken, this is Clarence. If you look at our numbers there, we had very strong coal quarter. Up in the neighborhood of 32,000 car loads above last year. We had our merchandise business although it was slightly down on the year-over-year basis, it was 743,000 car loads which is the second highest that we've had and that's against last year's second quarter. The automotive volumes were down just a little bit. As we spoke there, the big three production was down 10%. We are heavily weighted toward the business three production. The intermodal zone, the NSI, we're trying to focus as hard as we can on that bottom line. And as you saw in December, the fourth quarter's numbers and in the first and in the second quarter numbers, that profitability at that intermodal company has gotten very strong. So, on the intermodal issues, we expect a slight rise on the year-over-year basis in the second half but continued focus on that bottom line.

Clarence, that's not what I was talking about. I'm talking about quarter to date for the third quarter so far. Looks like we're still running down I thought we had lapped a lot of eliminations that occurred mid year last year. Is that not the case?

June the 28th was the date of NSI last year so you have seen -- so we have lapped but some of the declines here you are seeing is where we have priced away some of the, as I mentioned earlier, shedding of some of the low margin business.

So, you're still working on it. It is not like you've done it all last June and you stopped. You're still working on some of the--?

That's correct.

We're primary focused on the profitability rather than necessarily just pushing volume, is that right, Clarence?

That's correct.

Thanks, Michael. And then as you look at the velocity level, I think you said it was down, I think Tony mentioned it was down just because of some maintenance going on right now. I understand there is velocity levels that are set for some incentive programs. Have you discussed what levels those velocity levels need to get to or is there a target that you've put forth?

This is Tony, I don't know what you're talking about your incentive for velocity. We have some goals out there but we don't have our incentive that's tied to velocity.

I thought you had mentioned before that there was incentives tied to velocity and cash flow levels.

It is part of our -- this is Michael. We have a number of overall goals, Ken. Obviously earnings free cash flow, service statistics, safety statistics. There's a combination of goals we have in our bonus program. Velocity is one of those. So, we are focused on that because we know it is important for the long-term.

Great. My last question is just on -- Tony, you had talked a little while about big locomotive adds coming in the second half of the year which should get the locomotive plan aligned with the ONE Plan and see how that's proceeding. Can you give us a bit of an update so we can understand how well the ONE Plan is continuing?

Yes. We're looking at taking delivery in the third quarter of 100GE top locomotive 4400 horsepower and that will add to our fleet and should improve our on-time performance and also our other train delay performance and improve the integrity of our fleet.

Most those are coming late in the third quarter basically.

Yes, the delivery is pushed back a little bit, and it'll be in September, most of them in late August, September.

Can you just clarify how that's blending with your locomotive plan with the ONE Plan?

It will just supplement the numbers that we have now that would give us a greater availability there, Ken.

Great. Thanks for your time. Nice numbers.

Thank you.

Our next question comes from the line of John Barnes from BB&T Capital Markets.

Thanks, good morning. Oscar, real quick, I'm a little slow sometimes. The current or the guidance for full year of 3.15 to 3.25 excluding or including the two charges you took in the second quarter?

I think as I said in the script, it excludes the -- both the big items in the second quarter as well as obviously the first quarter number on the World Terminals gain.

Very good. Michael or Tony, could you detail the type of maintenance that you're currently doing that resulted in the slowdown of the velocity? Is this a change or is this one of your normal large summertime maintenance programs?

Well, the one that we made reference to here in July is our one of the kind that we have where we go in the coal fields and take down a segment of track for a whole week and move in five or six gains when the coal is a little bit light or vacation and we go in there and repair the track to keep from having maintenance crews in that area and running slower for a long time. We jump in there in one week. So this causes us to reroute the coals on the other routes and slows down the trains during that time.

Okay.

We'll be back to our normal maintenance schedule after -- well, we're back on it as of today.

Okay. As of today, okay. Oscar, on the second half spending and the hiring, could you give us some idea of the magnitude we're talking about in terms of head count increases. Is it a net head count increase or is this battling attrition or could you just give an idea of the magnitude we're talking about?

Yes. We are -- again, let me answer that in probably a different way because I'm not going to give an exact number because we don't know. We're building for the future. We're increasing. We have got this great training facility in Atlanta. We've been running lots of people through there. We have good capacity there, it's just continued to do that. People are being trained in the CSX way of doing things, not whatever was learned 10, 15 years ago which is very exciting for us. As we look forward to what we are calling the rail renaissance, we want to make sure we're ready. We'll put as many people through as we can. And so I don't want to quantify the number specifically because frankly, I don't want to be held to it just because it is pretty prudent spending for us. There's a couple of other areas that we're going to be working on as well. Again, and the year is working out pretty well for us. We certainly wouldn't want to be short sighted because of calendars. I hope that helps.

Yes, and this head count is primarily in the running trades, right? This is--.

This is fee and for sale.

Are there other opportunities on head count reduction in non running trade type of jobs?

I think at this point in time, I think given our issues we handled about a year and a half ago, with that holy eye thing that we don't talk about very much, I think we're pretty set as far as overall head count but again, we want to make sure we invest in the right areas.

All right. Very good. Lastly, Clarence, anything on the revenue front, the car load front that you're looking at that could potentially take away or continue to put downward pressure on the amount of exposure you have to the big three? I mean ex-autos, you guys had a pretty solid car load quarter. It just seems like autos is kind of sucking the life out of it. Is there anything you can do to just get the less and less reliance on the big three?

Well, as we mentioned, John, we've got the new Honda plant that's just opened up at Montgomery. That's in the process of ramping up. It takes about six to nine months before that plant is running at 100% capacity. So, we're taking a look at that and we're looking at some of the imports that are coming in through the Port of Wilmington, Delaware and through the Port of Brunswick to see if we can diversify the portfolio there but that's about the extent of the efforts in the automotive side.

All right. Thanks for your time.

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

Thanks. Just a few questions guys, in terms of pricing, first, I just want to make sure I understand this that your overall yields were up about 8%. Excluding the coal settlement and I think Clarence, you said about 40% of that was pricing. I just want to make sure that the same store sales pricing, ex-fuel surcharge was up a little over 3%.

Well the revenue -- what we said was the revenue car was up. That's about 40% of it was attributed to price. 40% to the fuel surcharge and 20% to the mix.

I think the math does work out then. So it would be about 3%. I mean well, let me ask this another way. Does 3% feel like that's what you're getting across the board. I know some contracts open up and you can get much bigger than that. But it just seems it is a little bit lower than we're seeing in some of the other railroads and yet it seems that CSX has been fairly aggressive on taking up pricing.

Well, let me think about that a second. I hope you don't get the implication that we're getting a 3% price increase on a per across the board deal. Some of these contracts as you're aware get very significant increases. It's just everything is not repriced in one year.

Right. Well, actually first question was setting up my second one. That is what portion of your revenue hasn't -- first, what portion has not had a chance to be repriced in this past, let's say, 18 months of the rail renaissance where we've had much better pricing throughout the industry. What portion hasn't reopened yet. And then of that, how much of it do you think will reopen between now and the end of 2006?

Let me make a comment before Clarence answers that. On your thing about the 3% overall, that's probably about right for this quarter. But that's a combination of what rolled off this quarter and what was available for repricing. I think it is safe to say that the approach we're taking to pricing to the market has not changed this quarter versus what we've been doing in the last year and a half. So, there's been no change in our approach to the market place or the target increases we're going for, just what so happened to be in this quarter.

That's correct. And Jim, I don't know what percent has been repriced in the last 18 months but I would tell you that for the remaining part of 2005, we've got about $2 billion worth of revenue that will be repriced and in 2006 that number is somewhere between 3.5 and $4 billion that will be repriced.

Is most of that not really -- you really haven't had a whack at it in terms of under this new era of better pricing?

That's right.

Okay.

Some of that has already been repriced once, hasn't it Clarence?

In the merchandise side it has. In the coal side, it has not.

Okay. I suspect on the 11, you're going to probably go into that a little more detail and we'll catch up there. The last question I had was probably for Oscar. Oscar, in terms of your second half guidance, real estate sales for the railroads at times can be pretty volatile. Can you give us your implicit expectations here in the second half of what you think will occur for real estate sales?

Yes. I think the best way to look at the guidance, Jim, would be that is a core operational income-driven guidance, not one that is expecting any large impacts from below the line in that sense. You're right. Realty deals are lumpy and we probably hit the lump just recently so, our guidance is expected to give you a sense of where the business is headed, not where the line items hit. Does that help?

It is very helpful. Thanks so much, guys, appreciate it.

Our next question comes from the line of Edward Wolfe from Bear Stearns.

Just to start off, Oscar, just some clarification again on the guidance. The understanding that I just heard is you're counting this quarter as the $0.95 and the first quarter as $0.68, is that right?

That's probably a good order of magnitude. Give or take a penny I'd assume.

Sure. But I mean if I add those together, I've got $1.63 for the first half of the year and 3.20 at the midpoint for your guidance for the second half the year. So you just beat numbers by $0.14 and you're giving a number well below consensus for the third and fourth quarter. Is there a disconnect there?

Well, no. I think there's no disconnect. I think as I've said, a combination of a couple of things. I think as you look at the fuel hedge impact in the back half of the year, that's one area. Certainly we've talked about the incremental investment, prudent early investment we're making to build for the long run. I think that impacts that number a little bit. It would be probably the two major drivers there.

Okay. I just wanted to make sure I was looking at that right.

Yes, but again, our business remains very strong. As I said on an earlier question, it is a perfect time for us to look ahead and not let the calendar bother us. We're going to make the right investments in the business as we see the need to and therefore watch what we're trying to drive the guidance to a more appropriate level, I suppose.

Along those lines, can you talk a little bit about the surcharge roughly what percentage you're getting now and what you're getting a year ago?

Right now, this is Clarence, Ed. Right now, we've got coverage on fuel surcharge either through the surcharge or some type of mechanism to recover fuel in the range of 75 to 80% of our revenue. A year ago, I think we told you that that number was around the 70% range. All new contracts Ed are, since late 2003, all of our new contracts have been recovered -- have had fuel recovery in there of some form either through surcharge or through other mechanisms.

Clarence? Can you give us a sense of where you think this thing might be a year from now? Can it get to 95, 100?

I don't know if it can get to 95 or 100 in a year from now but as all those contracts that I've mentioned earlier are renewed, they'll all have some type of fuel surcharge mechanism in them.

Okay. Just shifting gears. Now that the intermodal is lapping itself in terms of the shedding of volumes, should we look at this thing going forward in the second half of the year for volume growth and if so, what should we look at in the end of '05 and the beginning of '06 for intermodal growth give or take the economy stays about where it is?

Well, as I mentioned earlier, you can expect some slight intermodal growth in the second half. We're going to continue to focus on the yield management efforts to fill up the existing trains with as high-priced revenue as we can and shed the lower margin traffic on the low end. But you'll see the net operating income of that intermodal company continue to improve.

Okay. On the coal side, are there constraints at some point with volume growing as fast as it is? Is there some level of volume growth that you can't get to or can we even see acceleration from your volume or are you kind of 100% at this point?

One of the things as you know that governs volume is production capability at the mines to mine the coal. And in the east, they've been going wide open. We've had some western coal growth. We have not been impacted by the Powder River Basin issues that we've had that some of the western carriers have had. They've continued, the western carriers have continued to deliver the coal to us at the interchange points so we see the second half being about like what the first half was in terms of volume for this year.

Is 7.5% as good as it can get or do you have to do something going forward? Is there something that you need to spend money on whether that's cars or infrastructure?

It is probably as good as you're going to see it. Production is going to have to be the key to improve and there are some projects that are currently ongoing in the coal fields to improve production and we'll know more about that towards our August 11, meeting.

So in other words if they could increase it, you could increase it.

That's right.

When you look out at CapEx and I'm guessing some of this you want to save for the meeting but it you look out at the CapEx, what areas of infrastructure do you see going out a year or two the way things are progressing that you're going to need to focus on directionally?

Ed, this is Oscar again. Again, that is probably best held for the conversation in its totality when we talk on August 11, including your question with the first half, back half, sort of thing I think it is all tied together.

Okay. One last area is on the labor. What should we think in terms of head count going forward and cost per employees which only raised less than 1% this quarter?

Again, we will be hiring some more people in the back half of the year. And that probably should uptick our overall head count a tad but exactly how much, I don't exactly know. As far as cost per head, that should stay relatively stable.

There's a July 1, increase--.

I'm sorry, there's a July 1, increase though which I think the whole industry is having so you have a little uptick there.

That's roughly all in around 4%?

I think it is 3.5, Ed.

Okay. And 4% is what head count rose. Is that a good number going forward year-over-year?

I don't know. I don't know. I don't think so though.

Somewhat less than that, you think?

Again, Ed, that's a good question. I just, I haven't focused on that. I don't want to give you a number or an estimate. Why don't you check in with David and we'll get you a -- I can't imagine it is that high.

Fair enough. I appreciate the time and look forward to your meeting in a couple of weeks.

Thanks, Ed.

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

Hi, gentlemen. Just wanted to get a couple of questions in. Wanted to get either between Michael and Tony, when you are looking currently at the ONE Plan, what would your current assessment be of what has gone extremely well, where are you pleased, what things are you continuing to view in areas you need to re-emphasize or work on to get further products? I'm just trying to get your sense of a mid quarter or mid report card update on what you think has gone extremely well and what areas you're re-emphasizing to get further traction as we go forward.

Yes, Scott, this is Tony. As you well know, we're almost a year into development of the ONE Plan and we keep refining that, we're finding that we have taken down some transit time in some of our areas on some of our cars. So, as that flowed, that's better. What we've got left to do is primarily tie the locomotive plan to improve the locomotive plan with our train plan to reduce the number of locomotives hopefully we can squeeze that a little bit more. Utilization out of our locomotive fleet. Those are the areas that we're working on at this point.

Okay. And then the other question and I guess this is for Oscar is you had mentioned being able to work with your suppliers and get cost recoveries. Is that a one off from a contract? Is that something that we should expect going forward in working with your suppliers that you're able to get better terms? How should we think about that?

As far as the event in the quarter, it was probably -- that was probably one large item that was more of that. On an ongoing basis, clearly, we worked toward purchasing efficiencies and such. But this was something that was probably more just for the quarter.

And any order of magnitude is this 5 million or 10 million or is it a net?

Well, the net effect across all of the expenses was a net but the actual number was probably closer to 10, yes.

Okay. Thank you very much, all.

Our next question comes from the line of Jordan Alliger from Deutsche Bank. Please go ahead.

Just one quick question. In terms of the expectations for the second half of the year, whether it be in terms of profitability or earnings, what sort of velocity or other -- I guess velocity because that's the one that gets focused on, does it -- does your profit and earnings expectations contemplate relative to where we are now? In other words, what do you feel you need to see?

This is Oscar. I'll take this one. Just from a financial forecast perspective, the way we do this is we look at current run rates, we look at all of the initiatives that are going on. We see that -- it's -- improvements are made in certain areas, and so on and so forth so I would say that there is no particular number tied to any particular metric but we see a moderate and continuous improvement over the course of the back half of the year that's built into that but not anything overly dramatic. Again, that's a financial forecast outlook rather than what we're driving for from Tony's perspective.

By continuous improvement, are we talking necessarily sequentially or versus a year ago?

Well, it depends on the metric. Clearly, sequentially, everything is most important. But getting above our prior years is also. So it's a combination of both. We hit on some and not on others but we keep both those measures and in fact we go back to prior years before that as to what our records are. So Tony is all about putting the right metrics in front of his and his team to achieve the right level of efficiency.

Thank you.

Mr. Baggs, there are no further questions at this time. I'll turn the call back to you.

Okay. Great. Thank you all for joining us today. Appreciate your time and attention. Thank you.

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