CSX Corp (CSX) 2005 Q3 法說會逐字稿

Welcome to the third quarter CSX Corporation's third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Wednesday, October 26, 2005. I would now like to turn the conference over to David Baggs, Assistant Vice President Investor Relations at CSX Corporation. Mr. Baggs please go ahead.

And good morning, everyone. And welcome to CSX Corporation's third quarter earnings presentation. This morning, presentation material, along with our quarterly flash and our quarterly safety and service measurements, are available on our Website at csx.com. In addition, following the presentation a Webcast replay will be available.

Now, before we begin the formal part of our program this morning, let me remind everyone that the presentation and other statements made by the Company contain forward-looking statements. And actual performance could differ materially from the results anticipated by these forward-looking statements. And with that, let me turn the presentation over to CSX Corporation's Chairman, President, and Chief Executive Officer, Michael Ward. Michael?

Thank you, David. Good morning and thank you for joining us this morning. Three of my colleagues are with me here today. Tony Ingram, our Chief Operating Officer. Clarence Gooden, our Chief Commercial Officer. And Oscar Munoz, our Chief Financial Officer. Each of us will provide some perspective on the quarter and then we'll take your questions.

This morning we're pleased to announce a 31% increase in our third quarter earnings per share. As well as an increase in our quarterly dividend. Our third quarter earnings per share of $0.72 c was driven by record third quarter operating income in our surface transportation, which was up 46% above the same period in 2004. In addition, it was the seventh consecutive quarter of year-over-year improvement in our core earnings.

Revenue growth for surface transportation was once again strong, up 9% or $182 million compared to the same period last year. Our pricing, fuel surcharge, and yield management continued to drive revenues, while volumes held steady at near record levels. The team's focus on productivity also contributed to financial improvement. As a result, our overall operating ratio improved more than four points from last year to an 83% operating ratio this year.

Our third quarter results were particularly gratifying in the light of the impacts of Hurricane Katrina on CSX. Let me say that I'm proud the job that our team has done in quickly re-routing the traffic for our customers. Assisting our employees impacted by the storm. And beginning the process of rebuilding the Gulf Coast. All of this took place while we continued to drive operational improvement across our network.

Looking forward, the 30% increase in our dividend, which we announced the morning, reflects our strong financial improvement and management's confidence in our ability of our Company to deliver continuous consistent gains going forward. As we told you at our August investors conference, we expect to produce double digit annual growth in surface transportation, operating income, earnings per share, and core free cash flow over the next five years. Our network is ideally positioned. The market environment is strong. And our team is beginning to get traction on improving operations as Tony will discuss later.

But first let me turn it over to Clarence Gooden to talk about our commercial performance. Clarence?

Thank you, Michael and good morning, everyone. Before I get into the results, let me provide you with a broad outlook of our business. We continued to see a growing economy and strong demand for rail traffic in the third quarter of 2005. The latest GDP growth forecast for 2005 and 2006, are 3.5% and 3.4% respectively. Representing continued strong economic growth.

Overall, transportation demand is still near record levels as you can see on the transportation services index chart to the right. And as we look more specifically at the manufacturing, the Supply Institute Management Institute's Index was 59.4% for September, the 28th consecutive month of expansion. This represents the highest level of this Index thus far in 2005.

Looking at our results on slide six. During the third quarter revenues of over 2.1 billion exceeded the prior year by 9.4%. Third quarter 2005 was the 14th consecutive quarter of year-over-year revenue improvement for CSX, as all major markets experienced revenue gains versus 2004. Revenue growth was again driven by continued emphasis on price, our fuel surcharge program, and strong demand in coal. As Michael mentioned, our overall volume remains near record levels despite the effects from the hurricanes.

Before going to the next slide, let me comment regarding the hurricane's impacts. Revenue impacted by Hurricane Katrina amounted to approximately $17 million. CSX is successfully re-routing interline traffic that had been moving through the New Orleans gateway. Please be aware that about 87% of our New Orleans gateway traffic is interline as opposed to local. As for local customers impacted by the storm damage, the CSX operating routine restored service to several lines within days of the hurricane. And as Tony will provide in greater detail, continues to make good progress towards rebuilding the remaining infrastructure. We expect that service will be restored to all of the affected customers by end of year.

Turning to slide seven, in the third quarter of 2005, CSX continued to achieve revenue yield improvement. Revenue per car grew 9.3%, driven by our continued focus on yield and our fuel surcharge program. In previous quarters, we've shared with you the components of the revenue per unit growth. In the third quarter, over half of the growth was from price with the remainder coming primarily from fuel surcharge. The environment continues to be favorable for increasing price with strong transportation demand, tight transportation supply, and a growing economy. Our fuel surcharge program continues to be crucial in helping to offset rising fuel prices, and we are continuing our focus on increasing program coverage across our customer base.

Now, turning to slide eight and our coal results. Quarterly coal revenue of $512 million increased nearly 17% on 4.5% volume growth. Western coal volumes received traffic, that is, continues to grow on a year-over-year basis. Strong demand existed across all coal markets supporting continued price increases. Revenue per unit of $1,158 increased nearly 12%, representing a record third quarter revenue per unit level for coal. Producer intent through the first half of 2006 is expected to be very similar to 2005 year to date. As electrical generation demand remains strong, utility inventories remain below target levels, and natural gas is expected to remain expensive.

And now turning to slide nine for the automotive results. Quarterly automotive revenue of $200 million increased over 8% on a volume increase of 1.8%. Continued efforts to improve yield in this market resulted in revenue per unit of $1,754, which increased over 6%. The revenue per unit level is a quarterly record at CSX in the automotive sector. A reduction in down time at CSX serves plants, versus 2004, more than offset the continued effect of plant closures earlier this year. As well as a 1% decline in production for the big-three automotive manufacturers. In addition, Hyundai rail shipments at the CSX serve Montgomery, Alabama, plant continued to grow. As of the end of the third quarter, field inventory levels were down to 57 days, which is near target levels. Outlook for this market moving forward is unfavorable as the fourth quarter North American light vehicle forecast is expected to be down 2%.

Now let's discuss our intermodal results on the next slide. Quarterly intermodal revenue of $337 million increased over 3% on a volume decrease of 15,000 units. The volume decline was primarily driven by reduction in the transcontinental and offcore volumes as well as the shedding of some low margin traffic. Overall, revenue per unit improved nearly 6%, largely due to increased fuel surcharge, increased asset utilization charges, and reductions in volume incentive refunds. Domestic revenue per unit increased by more than 8% as a result of successful yield management efforts. Pricing gains were also achieved in our international sector. Yet were offset by the mixed changes associated with the reduction in the transcontinental and offcore traffic we mentioned earlier.

Looking forward, our outlook is favorable. We have capacity for growth on our intermodal network, and we have service levels approaching the 90%, on-time performance. On slide 11, you can see that CSX intermodal produced operating income of $68 million, which is more than double the third quarter of 2004. The operating ratio for the third quarter came in below 80% at a healthy 79.8. This is the fourth consecutive quarter of year-over-year operating income improvement.

Year to date, CSX intermodal operating income of $175 million more than doubled the 2004 figure of $81 million. Once again, we are very pleased with the bottom line improvement that we are seeing at the intermodal Company. And that bottom line focus will continue into the fourth quarter. Now as we look forward, it is important to note for year-over-year comparison that the fourth quarter of 2004, was the first quarter in which we saw significant operating income improvement in our intermodal Company.

Turning to slide 12 and the merchandise results. Quarterly merchandise revenue exceeded $1 billion, increasing 8% on a volume decrease of 4,000 units. This represents the 14th consecutive quarter of year-over-year merchandise growth. Agricultural product, emerging markets, food and consumer, phosphate and fertilizer experienced year-over-year volume growth. While declines were experienced in forest products, metals, and chemicals, which was particularly impacted by the effects of the hurricane. Revenue per unit of $1,459, increased 8.6%. This revenue per unit also represents a record level for CSX merchandise.

As we turn to the next slide, we can see that all the merchandise markets experienced year-over-year revenue per unit gains as a result of the continued repricing and our fuel surcharge program. Revenue per unit gains were led by metals at almost 19%. Food and consumer over 12%. And forest products over 11%.

And turning to slide 14 and looking forward, the economy and transportation demand remains strong. Our yield environment remains favorable, relative to the truck competition. Our pricing momentum is strong. Contract renewals are steady. And we will continue our aggressive yield management focus in all of our markets.

Finally, we will continue to focus on increasing our fuel surcharge program's coverage. And with that, thank you very much. I'd like to introduce Tony Ingram to discuss our operating performance.

Thanks, Clarence. And good morning, everyone. As you know, Katrina hit along the Gulf Coast portion of our railroad. Between Mobile, Alabama, and New Orleans. Most of the damage was on a single track line running about 85 miles east of New Orleans. Our team is making great progress on the rebuild. We have already reopened the yard in New Orleans and several miles east. As Clarence told you, we will have all of our local customers along this entire route back in service by year end.

As noted on slide 16, five major bridges were damaged. One of the major bridges will be back in service in just a few days. Three more will be completed by the end of November and December. The last bridge over Bay St. Louis, which is approximately two miles long, will be back in service in the first quarter. This will restore our line between Mobile and New Orleans.

Turning to slide 17, many of you know that New Orleans is a major gateway. When traffic came to a halt in New Orleans, we quickly re-routed trains. Using the ONE plan through other gateways, primarily east St. Louis, Missouri, Memphis, Tennessee, and in Alabama at Birmingham, Mobile, and Montgomery. In addition, we are detouring our trains over other railroads. This will continue until we get our line back. To wrap up on Katrina, our network is fluid. Our reroutes are working very well. And we're building and planning for the future.

Now, let's look at our operating metrics on slide 16 - - 18. I'm pleased to see our operation has stabilized after Katrina. At the same time, traffic was building for the fall peak. The ONE plan is fully in place, and our team is aligned and improving. In addition, our new locomotive plan puts the right power with the right train at the right time. We will continue to see benefits from the locomotive plan as traffic patterns continue to normalize around our system. And even though velocity was down slightly in the third quarter, with all the reroutes, there are some gains in our performance. Our train originations, arrivals and especially cars on line.

Now looking at slide 19, safety is improving. Injuries are down 21%. Train accidents are down 13%. This slide indicates the improvement in safety. This is the rolling 12 months average. At CSX, safety is all about our people and our communities. And as I have said before, safety is the foundation of everything we do at CSX

Looking at the next slide, 20, shows a pyramid we discussed at our August investor conference. It goes like this; Leadership drives safety, safety builds discipline, discipline drives productivity. All of this takes time because we're changing the culture here at CSX. We want a culture where people hear the same message every day. That is, execute the plan and get better every day. With that, I'll turn to my colleague, Oscar Munoz.

Thank you, Tony. Let me move to slide 22 and start by updating you all on the financial impacts of Hurricane Katrina. And then move onto the consolidated financials. Our total estimated impact remains at 250 million, covering lost profits from business interruption, reconstruction costs, and other expenses related to the storm's damage. As stated in our press release last month, CSX has a $25 million self-insured retention. We expect anything above this amount to be covered by insurance. However, due to the timing of these recoveries, we will see P&L impact above $25 million in the back half of this year.

In the third quarter, for instance, we saw storm related impacts on operating income of approximately 19 million. This amount included lost revenue, re-routing, and cleanup expenses. In the fourth quarter, we are estimating an additional storm impact of around 15 million, making the full year P&L impact of Katrina approximately $34 million. Now, you can find further information on the accounting treatment of Hurricane Katrina in our filed 10-Q.

Now, let's move onto our third quarter results on slide 23. As Michael mentioned, our third quarter results marked the seventh consecutive quarter in which we have produced core earnings improvement. Overall, our consolidated net earnings were 164 million. This resulted in an EPS of $0.72 or an increase of 31%. Driving these results was surface transportation operating income, which increased 114 million or 46% from last year. Reflecting again strong revenue gains and continued cost control. On the next line, other operating income, this decreased 11 million, representing wind down costs from our former container shipping operation. On a go-forward basis, you can expect approximately 3 million of quarterly income in this category.

Looking below the line, our All Other Income decreased by 30 million. This was due to last year's gain on the Conrail spin transaction, lower real estate activity this quarter, and the absence of income from our discontinued World Terminals business. On the next line, you can see interest expense was lower as a result of our recent debt repurchase. And if you turn to the income tax line, higher business results drove the nearly $40 million variance. For the quarter, our effective income tax rate was 38%. And you can expect it to continue at approximately that rate.

Now, let's move onto slide 24 for a discussion of our third quarter surface transportation results. The continuing story for the Company is strength in the top line along with a focus on productivity and cost control that is now generating strong operating income. The net result of this quarter was a 46% improvement in op income, which drove a 430 basis point improvement in our operating ratio from last year. Now, since Clarence has already discussed our 9% revenue increase, let's move onto the next page to examine the key expense drivers in the quarter.

On slide 25, the first bar on the left end of the chart shows the impact of fuel, which continues to be a challenge for the entire transportation sector. Our fuel price increased $28 million, net of the favorable impact of our hedge position. Now, recognizing the importance of managing our fuel costs, we've continued to focus on running a fuel efficient operation. We are doing this in a number of ways. Including bringing online, new, more reliable and more fuel efficient locomotives, leveraging our APU or auxiliary power unit technology, and continued refinement of our operating procedures. If we move to the next bar, it shows the net $8 million impact that volume and inflation had on our business.

This variance was driven by an increased labor and materials inflation of 26 million, partially offset by an $18 million favorable impact from traffic mix, predominantly due to the increase in foreign line haul. We move to operations, and as Tony mentioned, this area continues to be a key focus for the business. We saw a slight increase in our train operations expense, mostly driven by hiring and training of our T&E employee work force. In addition, the Company achieved 9 million in productivity gains, predominantly due to the process improvements in our mechanical and engineering functions.

Finally, on the far right side of the chart, we saw an increase of 39 million in other expenses. This was primarily related to incentive compensation due to our improved financial performance. However, it also included a property tax settlement, hurricane-related expenses, and a few other items. Partially offset by a Conrail federal tax refund. So in summary, while expenses are up 4%, we continue to make progress in operating costs.

Now let's move to slide 26. Earlier this morning, the Company announced a 30% increase in our quarterly dividend to $0.13 per common share. The dividend increase reflects this team's continued confidence in our earning power. Over the last two years the Company's earnings have improved significantly. And as we outlined in August, we expect that to continue over the next five years with double digit annual growth in surface transportation operating income, EPS, and core free cash flow.

Now, if we can turn to the last slide and look forward to the balance of the year. As you may recall, in the second quarter we provided guidance of $3.15 to $3.25 a share on a full year basis. Now, as a reminder guidance included the $0.05 benefit a rate case settlement but adjusted for the affects of our World Terminals gain, debt repurchase expenses and the Ohio tax change in the first half of the year.

Based on our strong third quarter results, we are increasing our full year guidance to a range of $2.20 to $3.30 a share. Furthermore, we are on track to produce core free cash flow of 450 million. And with that, I'd like to turn it back over to Michael for his closing remarks.

Well, thank you, Oscar. So, once again, CSX is continuing to capitalize on the terrific market conditions and working hard to become more competitive than any economic environment. While we've enjoyed sharing our solid results we've produced in the third quarter, we know that we can further leverage CSX' tremendous market reach into the most populated and growing areas of our country. Our ongoing efforts to improve operations, along with the network uptakes we told you about at our August investors conference, will increase customer satisfaction, drive long term growth, and make CSX a stronger Company in the rail renaissance. With that, we'd like to entertain your questions. I would ask that you please identify yourself and your company affiliation for the benefit of the others on the line.

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from the line of Ken Hoexter at Merrill Lynch. Please proceed.

Good morning. Nice job on the quarter. Just a couple of quick questions. The - - a little bit on the peak season, how is it progressing? And as you see a shift to the - - to some of these East Coast ports, does that require any shift in your investment thinking on how you want to roll out some of those CapEx dollars that you're planning on spending?

Well, Ken, this is Michael. We see the peak is pretty much as we expected. The coal demand, as Clarence indicated, is extremely strong. So, we're seeing good volumes in that and grain. And we're enjoying the peak and moving the volumes for our customers. I don't think, though, that any East Coast port developments is going to change our strategy. We still think that there's investments we talked about in August between Albany, New York, and New York City and between Chicago and Jacksonville are still where we need to put our capital investments for the future. So, we have not changed our view on that.

Great. And then Tony, are there additional locomotives for the locomotive plan, have they come on board? And how has that helped out with the velocity in the ONE plan kind of rollout? Have you adopted already to the new locos?

Yes, we have, Ken. And we are now around 90 of the 100 that we did in this quarter. Of course we have another 100 coming in the next year. We've implemented them in the ONE plan.

Just a quick question for Oscar. If you're talking about a new $3.20 to $3.30 guidance, just with a lot of charges in the first half of the year, what are you look at as for your first nine months as a basis to work off of?

Again, including the rate case, which we've included in ours, that would be a $2.36 year-to-date number.

Great. Thanks a lot.

Our next question comes from the line of Thomas Wadewitz at J.P. Morgan. Please proceed.

Yes, good morning. Tom Wadewitz with J.P. Morgan. One technical one here for you or I guess, whatever, cleanup. One for you Oscar here before I ask some other questions. On the guidance, the $3.20 to $3.30, does that exclude the costs you identified for Katrina, or does that include those costs?

That would be absorbing those costs, Tom. So we would absorb the cost out of Katrina and still deliver in that range.

Was that your question Tom?

Yes, I just wanted to make sure I understood whether that was including or excluding. Let's see. On the operating improvement, I guess a question for Tony or Michael. You talked about when the bridges are going to come back online on the Gulf Coast line and the locomotive timing. Is it reasonable to think that when you get that power in first quarter and you get that line back up, that you'd see improvement in velocity? And we might have optimism about a trend moving the right direction on the metrics if we think of maybe end of first quarter? Is that a reasonable way to look at it? Or would you look at it a different way?

I think that's reasonable. Although I would clarify it a little bit, Tom. This is Michael. I think we are seeing some momentum now. If you look, we had the ONE plan in place, the new locomotive plan has been put in place, as Tony said. We've got the management aligned about running on time. And so we're seeing even between the second and third quarter some good sequential improvement. If you look at where we are, as Clarence mentioned, our intermodal performance is over 90% on time. Coal, we're moving volumes stronger than we have in the last four years, and we're meeting the demand. So, we think that we're seeing progress even despite this. And I think you're going to see continued improvement as we move through the fourth quarter and into the first.

Do you have any ideas about where you think velocity could be in 2006? Could you approach levels you were at in say end of '01 and '02, where you were maybe running 21, 22 miles an hour? Or is that a bit aggressive to think about that for 2006?

I think that might be a bit aggressive. Not because of the ability to deliver but if you look at the difference. One, we have a lot more coal business right now, which does move at a slower velocity. And secondly, when you have a lot more business on your system, you're not going to move as fast. And I think that's true - - I think you'll see that with all of the major railroads. As the volumes pick up, the velocity isn't going to be as high a level as when you're running at much lower levels.

Okay. One then just one last quick one here I think for Clarence. On the fuel surcharge coverage, I believe you commented on where you're at at the present time. Where do you think you can be in 2006 in terms of what percentage of the portfolio is adequately covered with surcharge?

Tom, I think we mentioned at our meeting in August that we expect that we can pick up 5 to 10 basis points in the total coverage of our fuel surcharge in the year 2006 as contracts which up for renewal.

So that takes you up to, what, nine - - you said you're at - - ?

Our numbers right now are at about 50% on fuel surcharge and 25% on other fuel recovery mechanisms. And I think you could see that get into the range of 55 and the fuel surcharge recovery is as high as 30 in the sum fuel sur charge recovery mechanism.

And that's primary our cap the other mechanism?

That's right.

Thank you very much.

Our Next question comes from the line of James Valentine at Morgan Stanley. Please proceed.

Mr. Valentine: Thanks, guys. Oscar, could you help us quantify at least two of the items in terms of the Conrail rents and service adjustment? And the property tax settlement in terms of if we take it out, it helps us kind of normalize what we should be looking at for the fourth quarter of next year?

That would be great. You want the background behind them or the amount?

No be just the amounts. So I can take them out and kind of feel what a normalized third quarter was.

The Conrail tax brief was o was about $11 million. The property tax settlement is $9 million. And then the hurricane related expense in that line are 5 So they pretty much wash.

Great. The second question I had was for Clarence. You look at the high natural gas prices. I'm hearing some railroads say, yes, that's having a negative impact on chemical and fertilizer production. We're hearing some railroads say no, it's not. Where do you come out on that?

Jim, truth is we probably don't know. Our chemical business has been done. It's been impacted some extent by the hurricanes. We are seeing lower inventories, however, particularly at our plastics plants for making a plastic bottle. So we would expect some rebound in our plastics business, which is the largest segment of our chemical business in the first quarter.

Great. One other thing. My last question, Clarence, is on the coal. I think you said - - maybe I misinterpreted something about you're expecting or your producers are expecting to be - - have about the same production in the first half of '06 as the first half this year, but I guess implicit in that it's flat. Is that what you were trying to - - the signal you're trying to send that your producers are going to be flat?

No, our producers expect to have a very robust 2006. In fact, our producer standpoint, our production levels in central Appalachia will be slightly up over what they were this year.

Okay. So you're looking for -- I know you also have growth from interline business from the west. But you're saying that in addition to that you're going to see your - -.

Originating coal should be slightly up.

Great. Excellent.

Next question comes from the line of Kevin Maczka at BB&T Capital Markets. Please proceed.

Good morning. Question on the intermodal side. Your volumes were down about 3%. The industry volumes much higher than that. And your eastern pier closer to 9%. So my question is, you talked a little bit about shedding some offcore business and some lower margin business. But yet the [798 OR] looks solid. So, my question is, are you getting pretty close to the end of that calling of lower margin business, or is there something else going on there?

I would give it three points there. First is, is I don't know that you're ever at the end of calling low margin business, we're constantly in a yield mode. Secondly is, as we've pointed out that some of the loss of the volume in revenue was the result of some marketing changes that we had with western carriers as it related to third party intermodal business. But I - - Kevin, I think the most telling number is, is that in 2004 we made $31 million net operating income in the third quarter. This year, we made $68 million of net operating income in the third quarter and that's the key factor we're focusing on. The profitability of intermodal and how high can we take those numbers. Now, I'd be remiss if I didn't point out to you that that improvement started in the fourth quarter of last year. So we'll start to lap ourselves in that net operating income improvement next quarter.

So you'll have tougher comps there, of course. But as you look at volume alone though, fourth quarter and 2006, what should we expect there?

Kevin, this is Michael. As Clarence indicated, our real focus has been on the profitability of the business. But with services running at a good level at over 90%. So, I think we'd expect as we move into '06 we would see increase in the profitability from two sources. One, that we would start growing that revenue some by volume as well as continue to focus on the yield of it. So, wouldn't you agree, Clarence, as we go into '06 we'll see some volume growth?

Yes.

That's not our primary focus. Our primary focus is the profitability of the segment.

Sure. Just a quick question on fuel. It looks like your fuel expense was up only about 16% year over year, and some of your peers up much more than that. Could you just talk about how much of a benefit you're seeing from your hedging programs? And if that benefit will diminish as we go forward here and by how much?

Kevin, this is Oscar Munoz. As far as the continuing fuel hedge benefit, we are hedged at a higher rate probably than others at this point in time. It does diminish. And will go to 39% in the fourth quarter at approximately a $0.98 price. And then next year obviously begins to decline, as well. The hedge benefit for the quarter, this particular one, was around $70, $75 million.

$75 million. And the 39 - - so that was 39% in the fourth quarter or $39 million?

Sorry, 39% at an average price of $0.98.

And it's 75% was the third quarter? Did I miss that?

51% was our third quarter number.

51%. Okay.

About $75 million.

Okay. Thank you.

You're welcome.

And our next question comes from the line of Ed Wolfe of Bear Stearns. Please proceed.

Good morning, guys.

Good morning, Ed.

Just - - I think you had mentioned, Oscar, there was $19 million of hurricane impact through the P&L in the quarter. Some of that I know is revenue. Can you kind of give us more specificity? Which cost lines did that come out through?

Let me tell you what the cost is. There is a revenue impact offset by, obviously, lower incremental costs, which is approximately 14 million. And then there's $5 million of sort of down payment on the retentive - - on the retention, the - - around that. So that's the 19. And so the lines they hit, the lost revenue is obviously in the revenue line that's not there. And the operating expense is probably on our MS&L line.

Okay. If you look at the revenue, is there any particular segment that would have been or is it throughout everything?

No, I think the predominance given the chemical market down there is in the merchandise area.

And chemicals in particular.

Right.

Okay. And the most recent issues that you're seeing down there, with Wilma and so forth. Is there anything meaningful and impactful that you've had to do, shutting down offices or shutting down track or moving equipment, or anything like that? Any way to quantify that?

Yes, this is Tony. And we've just start getting a good assessment of what Wilma's done to us. And primarily at this point, we don't have any power from West Palm down. And obviously we've got trouble, some damage with our crossing gates and signals. Other than that, our roadway bed and everything is intact.

Just a matter of clearing some trees and debris and that sort of thing we normally do. And the big challenge is getting the power restored by the power companies that, as you know we put generators there to protect the public.

So the 84 to 94 fourth quarter guidance, that's included as well as the impact of Rita and Katrina at this point?

Yes, it is.

Yes.

Okay. Should we read into the dividend improvement that this pushes out a share repurchase, or is that something that's still on the table, as well?

Well, where we are at this point be Ed, we looked at this. We thought obviously that the dividend increase was the appropriate step to make to get our yield more competitive with our industry peers. As you know, the August conference, we did outline that a lot of our cash flow over the next two years is going to fund some of those infrastructure improvements to drive long term shareholder value. So, I would think that would be our primary focus in the next several years.

Okay. And then the tax rate, Oscar. I heard you say 38% for fourth quarter. Should we - - is that as good as any for ongoing after that?

Yes, I think at this point in time that's probably fair.

Okay. Thanks, guys, for the time.

You're welcome.

And our next question comes from the line of John Larkin at Legg Mason. Please proceed.

Good morning, everyone.

Good morning, John.

I had a question for Tony on the ONE plan. I was wondering if you could perhaps map us back into, what we used to talk about as phase one and phase two? And where you stand with respect to completion on phase one and phase two? And what the future impacts of those particular programs might be in '06 and '07?

John, we have implemented the phase one and two of our program. We're still fine tuning the ONE plan in both of those phases because we're continuously fine tuning. We've had a little offset in the last 45 days because we had to use the ONE plan to use our re-routing. And so we're still fine tuning the plan. It is in place, it is working. We continue to execute it. And as we improve, it will deliver results as we go along.

Okay, maybe a question for Clarence or Mike on the western coal. We've heard that western coal is beginning to grow as it interlines into the eastern carriers' networks. What percentage of the coal traffic is currently interlined, and where do you see that going, say, over the next five years or so?

Our growth for the western coal is up significantly. But it's off of a very small base. And so in 2005, John, roughly about 25 million tons of our coal is coming through the western gateways. And that's sort of a small amount in the overall 180 to 200 million tons that we're handling on a yearly basis. But it is as a percent of growth is growing very fast.

But there is a difference in that there's some traditional northern utilities in like Michigan, Ohio, and New York state that have been taking the PRB coal for a number of years. The growth we've seen recently really has been Colorado coal moving to TBA. We have not seen the PRB coal moving into the traditional southeast markets. So it's been more that northern tier, John, and Colorado coal starting to move into TBA. That's the piece that's been growing.

And we've heard from the western roads that there are some test burns taking place in the east. Are any of those in the southeast, or are most of those in other parts of the country?

I'm not aware of any.

Okay. Thank you very much.

And our next question comes from the line of Jason Sidle at Credit Suisse First Boston. Please proceed.

Good morning, gentlemen. Two quick ones here. One, one of your western competitors kind of broke out their pricing improvement at about 6%. You guys said about half of your RPU was priced. So that would put you at about 4.7. Are we to assume that there's more room for you guys to take this up as we go forward in '06?

Yes. You will see pricing and strong, aggressive pricing continue in '06.

Okay, fair enough. And Oscar, this may be one for you here. You guys broke out your Katrina impact pretty good in the quarter in terms of what was actual cost and what was lost revenue. Is the breakout percentage going to be similar for the $15 million in the fourth quarter?

Yes, I think so.

It's primarily just revenue. Primarily lost revenue in the fourth.

Primarily lost revenue. And we won't have - - well, primarily lost revenue.

Okay. But some of that could be offset by insurance recoveries?

Exactly. And the timing - - the reason we always hesitate on this, the timing of all this it does vary. For now, let's say it will be mostly lost revenue in the fourth quarter. Subject to any recovery.

Okay. And one sort of nitpicking question. Your revenue per unit on coal was up nicely year over year but it looked like it moderated sequentially. Is that mix going on?

Clarence, do you know?

No, I don't.

We'll get back to with that answer on that one be Jason. We don't know off the top of our head.

I appreciate it. Thanks.

Next question comes from the line of Jordan Alliger at Deutsche Bank. Please proceed.

In terms of the operating plan, I know you mentioned there was some improvement. I guess my question is, are we now at the point where any major revisions to it are kind of done and it's just at best in tweak mode?

I'd say it's tweak mode but it's also execution mode. We have to - - as Tony said, do it on consistent basis every day. We're making progress on that. But there's more to be done yet.

And you've seen some good operating margin improvement even though, as you said, there needs to be more improvement on the operating plan side. So I guess my question is, how critical do the sort of that outlook for '06 and beyond, in other words, that double digit profit growth, etc., is going to be seeing those performance metrics? Obviously velocity may be impacted by volumes. But other metrics improving. Obviously fuel and price has been a big part of the story this year. I'm curious, do we shift to operations being the critical driver in the next two years?

I think actually we'll see both levers being pulled. We're obviously going to continue to grow the revenues both by growing the volume as well as by pricing to the marketplace. And secondly, we're going to continue to improve not only our service but the cost of providing that. And not just train service but our other areas like engineering, mechanical. So in our view, it's pulling both those levers is really the key to that value creation. And that's where we're focused, Jason - - Jordan.

Okay, great, thank you very much.

And our next question comes from the line of Scott Flower at Citigroup. Please proceed.

Good morning, all.

Good morning, Scott.

Just curious. I know there are different moving parts here, but the 250 million of total Katrina, how much of that will be in the capital line order of magnitude?

That's about 150.

That will be primarily spent next year?

I'm sorry?

That will be primarily spent in '05?

No. We've primarily - - As Tony said, there's going to be some work done into the first quarter of next year on one of our major bridges. And that is one of the major expenses. So, I'd expect a portion of that 150 to be spent in '06.

Okay. And then just trying to understand when we think about pricing and obviously you've done some things on intermodal and looking at that book of business. But I'm just trying to get a sense of how do you see the relationship of what you want to price at a steady state versus volume growth? Because one of the things that is obviously notable is that volume growth, and this is not true joust for yourself but all of the other roads. Volume growth in aggregate has been pretty tepid if you look at the raw numbers either in RTM's or volumes. And some of that is getting the water level right in terms of price versus what's profitable, etc. How do you see the volume growth numbers transitioning versus where you want to price at normal? In other words, will we see price gradually decelerate and volumes actually pick up at some juncture as we look forward toward '06, '07? Or will we see still more sort of price because fuel prices are so high and the opportunity is there for value creation. And price just stays high and maybe volumes don't grow as quickly.

This question relates to intermodal?

Just in general your book to business. Coal obviously follows it's own cycle. But I look at merchandise, I look at intermodal. They're both slightly down on volumes.

Well, we've been growing our car load volume. And one of the factors that impacts that volume is whether or not it's growing in private cars or whether or not it's growing in system cars and what that car supply looks like. And there's certain impacts of that on - - that relate to the velocity. So, it's a difficult question, frankly, to answer. But I would try to answer as us is succinctly as I can by saying this, where we have capacity, we will grow the volume. And where we have demand that bumps up against what our capacity limits are, we'll price to the market to see that we're getting the proper yields in those lanes.

Okay, and then maybe one last nuance of this. And I'm not trying to get too specific. But is it reasonable to assume that this order of magnitude same level of base pricing can continue into '06? You're going to be lapping yourself, obviously there are moving parts and pieces in this versus oil and competitive factors in the market. But is it reasonable to assume that pricing can stay at order of magnitude, the same kind of levels?

I think Clarence indicated earlier that he absolutely believed that would happen.

Yes, sir.

Okay, thanks. Thank you.

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

Thank you, everyone, for participating today. We'll talk to you next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.