CSX Corp (CSX) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to CSX Corporation's fourth quarter 2005 earnings call. Today's call is being recorded. During this presentation, all participants will be in a listen-only mode. Afterward, a question-and-answer session will be conducted. For opening remarks and introductions, I would like to turn the call over to Mr. David Baggs, Assistant Vice President, Investor Relations for CSX Corporation. Please go ahead, sir.

Thank you, and good morning. And welcome to our fourth quarter presentation this morning. Earlier today, CSX released on its website presentation materials, its quarterly flash, and the quarterly safety and service measurements. And they available under www.csx.com on the Investor's Landing page. In addition, following the presentation this morning, a webcast and podcast replay will be available. Here representing CSX this morning, are Michael Ward, our Chairman; Tony Ingram, Chief Operating Officer; Clarence Gooden, Chief Commercial Officer; and Oscar Munoz, Chief Financial Officer.

Now before we begin the formal part of our presentation 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, and Happy New Year, everyone. Today, we have good news on many fronts, including a strong fourth quarter, the restoration of our New Orleans line, and our first steps toward bringing our expansion plans to life. I would like to start by thanking the hundreds of men and women who worked through the holidays under fairly extreme conditions, to restore the New Orleans line ahead of schedule. We're already running local trains in the Gulf, and expect to restore through-train service by February 1st. We have also started construction on the sidings and other capacity improvements along our Southeast Corridor between Chicago and Jacksonville, Florida, and Chicago to New York Corridors. And we have announced our intention to build a new Intermodal Logistics Center in Central Florida. These expansion projects are consistent with the capital plans we announced last August.

Turning to our financial results, I'm pleased to say this morning that CSX reported fourth quarter earnings per share of $1.03, a 45% increase from the same period last year. This improvement was driven primarily by the eighth consecutive quarter of consistent, continuous improvement in our core Surface Transportation businesses. With operating income reaching a fourth quarter record of $415 million. As Clarence will review in more detail, revenue reached a record $2.2 billion representing the 15th consecutive quarter of growth. Transportation demand and pricing remains strong across nearly all our markets and we expect it to continue in the foreseeable future. At the same time, as Tony will discuss, we believe the ONE Plan is gaining traction, particularly when you view our performance against of the backdrop of Katrina's impact on a major artery of our network.

From a fourth quarter and a total year perspective, the story is the same: stable to improving performance in nearly all key operating measures. From the beginning, we knew it would take time to realize the benefits of the ONE Plan, and while we still have works ahead of us, the signs of improvement are evident, both in our measurements and in our culture. In short, we like what we see at our Surface Transportation businesses. The economic environment is strong, and our performance is improving. Now, I will let Tony share with you the operating results. Tony.

Thank you, Michael, and good morning, everyone. Today, I'm going to cover 4 key areas. First, I have told you my belief that leadership begins with safety, and we continue to make great progress in this area. Second, our team is starting to run the ONE Plan with more discipline, and we are starting to get better results. Third, as Michael said, we're back up and running on the Gulf Coast. With the hard work of many good people, we restored local service in December and through-service will be back February 1. This is a great execution by the team. And, finally, we're moving forward with the expansions we told you about last August.

On the next slide, can you see the results of our focus on safety. On a rolling 12 months, injuries are down 25%, train accidents are down 17% from the fourth quarter of 2004. We like these results for the obvious reasons: our people are safe and that's good business. But it also proves to our people that leadership drives results. Gains in safety leads to improvements in other areas.

This brings me to my Slide 8. On-time performance is a major operating driver. Last, like safety, gains here drives improvement in other areas. On-time performance is key to running a disciplined network, and we are gaining traction. On-time originations tell us how well we are running the ONE Plan, and arrivals track originations. This chart shows we're beginning to execute better. On a rolling 12 months, originations improved to 51%, and arrivals to 40%. Of course, there is a lot of work to be done, but w are headed in the right direction. More important, service to our customer is improving.

On the next slide, you will see our dwell time is stabilized, and cars online have improved. On a rolling 12 months, the dwell time is stable, around 30 hours, and cars online have improved to just over 233,000. Overall, this means our network was fluid, in spite of the impact from Katrina. As we continue to improve on-time performance, these numbers will also continue to improve. Next is velocity. We were down some in velocity, mostly in the second half. While our network remains fluid, can you see a lower velocity on this map, between Nashville and Florida. These are related to the reroutes from Katrina. As we restore the through -service on our Gulf Coast and see progress in the rest of the operation, velocity will improve. In the future, we will keep using these slides we have just reviewed to help you track our progress on a consistent basis.

Now, let's move to the next slide. Last August, we announced plans to expand our network in places where we can grow and improve service. The investments are in 2 key corridors: the Southeastern Corridor, which is a growing market, and the I-90 Corridor, which connects Chicago to the Northeast. Over the next 2 years, we'll complete around 60 projects. I'm pleased to tell you that we have already started construction on the first 20. And we're right on schedule to complete them by the third and fourth quarter of this year. There are 20 additional projects that will begin later this year, and will be completed in 2007. The last 20 will be started in 2007, and will be completed at the end of that year.

Looking ahead, we have strong momentum in safety. And that will continue. We're beginning to get traction on the ONE Plan. I meet with the managers every day, and their confidence is growing. We also continue to hire new people. You can see in the flash that we hired over 500 new people to run the railroad and we stay ahead of attrition. And our capacity plans are on schedule. In summary, a turnaround of this size happens through discipline, repetition, and steady progress over time. That is happening on our railroad now, and I am very encouraged. And with that, I'll turn it over to Clarence Gooden, our Chief Commercial Officer.

Thank you, Tony, and good morning, everyone. Before getting to our results, let me discuss the broader economic and business outlook. The latest forecast for 2006 GDP is 3.4%, while industrial production is forecasted at around 3.5%. Manufacturing activity is still strong, as the Institute of Supply Management Index was 54.2% for December, the 31st consecutive month of expansion. Export volume growth is expected to continue high-single digits, and both import and export volumes are expected to stay stronger than 2005 levels. And finally, the Transportation Services Index for freight was 111.3 in October, the latest month reported, with demand for transportation still near the record levels achieved over the last 2 years. So we see a growing economy and strong demand for rail traffic in 2006.

Now, let's look at our results. During the fourth quarter, revenues of 2.2 billion exceeded prior year by 156 million on a 13-week basis. You will recall that CSX had an extra week during the fourth quarter of 2004, which accounted for $117 million. This chart, and the remainder of my presentation, will reflect comparisons that exclude the extra week in 2004. Fourth quarter, 2005, was the fifteenth consecutive quarter of year-over-year revenue improvement, and it represents a new quarterly record for total surface transportation revenue at CSX. As you can see from the chart, revenue growth during the quarter was led by the merchandise and coal markets, though all major markets were experiencing revenue growth. Revenue, lost to Hurricane Katrina, amounted to approximately $20 million. Revenue growth was again driven by a continued emphasis on yield, a strong fuel surcharge program, and strong demand.

Overall, volume was down 3.1% from a year ago, primarily as a result of hurricane impacts, the shedding of low-margin business with some weaknesses in merchandise and automotive. I will talk about that more in detail in a moment. This reported number also differs from industry-reported data, the CS-54 Reports, due to the differences in the handling of the fifty-third accounting week. For 2006, we continue to expect increasing volume growth as our service delivery and asset utilizations improve, and as our New Orleans gateway returns to normal.

Now, turning to Slide 16, and our revenue per unit growth. In the fourth quarter of 2005, we continued to achieve revenue yield improvement. Revenue per unit grew more than 11%, driven by our continued focus on yield, and our fuel surcharge program. This represents our highest percentage revenue per unit improvement during any quarter. As we have shared with you during prior quarters, the components of revenue per unit, increases in the fourth quarter were approximately half from price, half from fuel surcharge, with a nominal mix impact. Our revenue per unit continues to be susceptible to fuel price fluctuations. Yet, as I will address in a moment, our fuel surcharge program and coverage is instrumental in helping to offset the high cost of fuel. The environment continues to be favorable for increasing price, with strong transportation demand, tight transportation supply, and the growing economy.

As for our fuel surcharge program, turning to slide 17, in order to offset higher fuel prices, we continue to focus on increasing coverage with fuel surcharge mechanisms. Currently, fuel price fluctuations are covered by both our fuel surcharge program, with about 55% of our traffic, as well as our RCAF indexes, with 25% of our traffic. In 2006, we are requiring all new and renewed contracts to include the fuel surcharge program. Along with this policy focus, we expect that we will increase our overall coverage by about 6%.

And now turning to Slide 18. Quarterly merchandise revenue of 1.1 billion increased nearly 7% on a volume decrease of 39,000 car loads. Revenue per unit of $1,558 increased nearly 13%. These revenue and revenue per unit results represent record results for our merchandise unit. This is also represented in the fact that this is our fifteenth consecutive quarter of year-over-year merchandise revenue growth. Volumes in the merchandise market decreased 5.3% due to several factors. Hurricane-related plant closures and plant curtailments impacted volumes in our phosphates and fertilizers, in our chemicals, and in our cement markets. Reduced demand for transportation impacted a few markets, including our military shipments, forest and paper, and our auto shredder residue. Food and consumer volume was unfavorable due to a cycling in shipments of building products when compared to the strong hurricane recovery levels that we experienced in Florida in 2004. And finally, our focus on yield improvement, in some cases, has resulted in the shedding of low-margin traffic.

Looking forward, our outlook for merchandise is generally favorable. We continue to expect increasing volume growth as service delivery improves, and as our New Orleans gateway operations returns to normal. In addition, we expect our momentum and continued focus on yield improvement will lead to favorable revenue results.

Let's turn the page, and look a little closer at the revenue per unit. Merchandise markets recorded stronger yields in nearly all markets. As can you see on this chart, results in the phosphates and fertilizers market led the way, with an increase in revenue per unit of nearly 22%. Close behind that market was metals at 19%, and food and consumer at 18%. In addition, forest and agricultural products, along with chemicals, experienced increases in revenue per unit of over 11%. Price improvements were also achieved in our emerging market sector, yet mix impacts more than offset these gains in terms of overall revenue per unit. Moving forward in merchandise, we will continue our momentum in improving our revenue per unit.

And now, let's turn to Slide 20 and look at the strong results in coal, coke and [iron]. Quarterly coal revenue of $521 million increased over 14% on a volume increase of 14,000 carloads. Revenue per car of $1,158 increased by nearly 11%. We believe the favorable environment for pricing will continue in coal. Strong demand exists across all of our coal markets. Growth was strongest in the utility, integrated steel and industrial markets. In addition, electrical generation was up 4% in CSX served markets. Western coal volumes also continued to grow versus the prior year. The 2006 outlook remains favorable. Producer intent is expected to be slightly higher than last year, as electrical generation demand remains strong. Utility inventories remain below target levels, and alternative fuels are expected to remain expensive. In addition, 2 new destinations on CSX recently began receiving coal, and in late 2006, we expect to begin shipping coal to another new plant.

Turning to Slide 21 and the automotive market results, quarterly automotive revenue of 225 million increased over 3% on a volume decrease of 5,000 carloads. Continued efforts to improve yield in this market resulted in revenue per unit of $1,800, which increased 7.3%. While overall North American light vehicle production was favorable year-over-year in the fourth quarter, production for the big 3 domestic automotive producers was down 2.5%. In addition, volume continues to be negatively impacted by plant closures that occurred earlier in 2005, and by diversion to truck. At the end of the fourth quarter, filled inventory levels were 65 days, down 2 days year-over-year, and near target levels. The 2006 outlook is neutral, as the decline in the Big-Three production is expected to be mostly offset by the new domestics, like Hyundai, while rail shipments at the CSX plant continued to grow.

Turning now to our Intermodal results, quarterly intermodal revenue of $366 million increased 1.7% on a volume decrease of 28,000 units. Domestic revenue per unit increased over 5%, and overall revenue per unit increased 6.7%, largely due to increased fuel surcharge and price increases, that more than offset mix related impacts from the loss of core traffic. Volume decline was driven by reductions in transcontinental and off port traffic, as well as the shedding of low-margin traffic. Yet, moving forward, demand for intermodal transportation remains strong. China is expected to continue to having a strong impact on international traffic. Our on-time performance in our Intermodal network remains near 90% in our major corridors, which we feel is competitive to truck. The outlook for Intermodal is generally favorable as I will discuss in more detail, along with the intermodal profitability on the next slide.

CSX Intermodal's operating income increased 63% to $248 million for the full-year 2005. In addition, the operating ratio improved 690 basis points year-over-year, finishing at 81.8% for the full year. As you will recall in 2005, we set out on a conscious strategy to improve the bottom-line profitability of CSX Intermodal, which focused on the shedding of low-margin traffic. We are extremely pleased with these positive bottom-line results and we'll focus -- and we'll continue to focus on this through the first half of 2006. In the second half of 2006, we expect to see volume growth, along with our continued yield management efforts. And finally in summary, demand and growth remains strong for all rail transportation. The favorable pricing environment continues, due to the strong growth in demand, and high fuel prices and tight transportation supply. We're increasing our emphasis on our fuel surcharge programs coverage, and we believe that the service improvements will drive our volume growth. Thank you very much, and let me introduce to you Oscar Munoz, our Chief Financial Officer.

Thank you, Clarence. As Michael mentioned, our fourth quarter results marked the eight consecutive quarter in which we produced core earnings improvement. Driving these results was surface transportation operating income, which increased 100 million, or 32% from the prior year, reflecting strong revenue gains and continued cost control. Looking below the line, other income increased by 24 million, primarily driven by higher real estate activity. Next, as can you see, our interest expense was lower by 13 million for the quarter. This reflects the debt repurchase executed in the second quarter, partially offset by higher interest on our floating rate debt.

Moving to income taxes, our improved results drove the $54 million variance from the prior year. And going forward, you can expect an effective tax rate of approximately 38%. I would also think of that 38% as predominantly current, rather than deferred. Overall, on this first chart, our consolidated debt earnings were 237 million or $1.03 per share, an increase of 45% over 2004.

Moving to the next slide, let me go through some of the highlights for Surface Transportation on the quarter. Our results, as you have seen and heard, were led by solid revenue growth, reflecting the strong yield emphasis, increased fuel surcharge coverage, and were offset partially by slightly lower volumes. On the cost side, we contain expenses to 3% for the quarter. Primary drivers were increased labor costs from additional hiring, higher performance based compensation and general wage inflation. In addition, higher net fuel costs were partially offset by increased productivity, lower volume-related expenses, and a net favorable benefit in casualty and other related reserves.

Next, let me update you on the financial aspects of Hurricane Katrina. In the fourth quarter, we estimated an impact of $20 million, which is $5 million higher than we forecasted in our third quarter call. This makes the full-year P&L impact approximately 40 million. Now, as Tony told you, we are nearly complete on all our major reconstruction projects, and therefore, have revised our total estimated impact related to the hurricane from 250 million, to a cost of at least 300 million. Now let me remind you that amounts above 25 million, our self-insured retention, d are expected to be covered by insurance.

Now, let's move on to the next slide and look at our Surface Transportation P&L in more detail Now, as Clarence mentioned earlier, we have adjusted the fourth quarter of 2004 to be on a comparable 13-week period. On this basis, revenue was up 8% and expenses were up 3%, resulting in a 35% increase in operating income and a corresponding 380 basis point improvement in our operating ratio from the prior year. Let's take a detailed look at our cost. Turning to labor and benefits, these expenses increased 55 million, primarily driven by a higher incentive compensation of 20 million, general inflation of 15 million. In addition, we saw 14 million in higher labor costs due to our year-over-year head count increase of over 500 field employees, as we have continued to higher ahead of attrition and prepare for our increased capital activity in 2006.

Our MS&O expenses were lower than last year by 38 million. The primary driver was a net favorable adjustment of 22 million in our casualty and other related reserves. This reflects our recent safety record, the results from our litigation efforts, and a favorable trend in occupational claims. The balance of the variance in this line items was largely related to lower freight loss and damage expenses, reflecting our improved trend in train accidents. Next, fuel increased 59 million due to higher prices, partially offset by our hedge position. I will get into more details on our hedge position in a minute. But first, let me finish my expense review for the quarter. Depreciation was higher due to our increased capital activity, and the remaining expense line items on the chart were favorable, primarily due to our lower volumes and increased productivity.

Now, moving to the next slide, let me detail our hedge position for 2006. On Slide 29, you can see that our hedge position has declined from 54% in the fourth quarter of 2004, to 39% in the fourth quarter of 2005, the lowest hedge position we have had all year. On a go-forward bases, our hedge position declines to 25% in the first quarter of 2006, 11% in the second quarter, and finally expires by the end of the third quarter. This declining hedge position will be partially offset by increasing fuel surcharge coverage, as Clarence spoke of earlier. And as a result, we expect to face an estimated 100 million headwind from fuel for 2006. That finishes our fourth quarter review.

Now, let me turn to Slide 30 and talk about the full-year results. Consolidated operating income increased 550 million, to over 1.5 billion, driven by the strong increase in our Surface Transportation operating income. Looking below the line, the change in other income was primarily driven by higher real estate activity. The next line item is related to the debt repurchase, which we completed in the second quarter. This repurchase was also the primary driver of our lower interest expense for the year. Income taxes were up due to higher income, partially offset by the impact of a state legislative change in the second quarter. Net earnings from continuing operations increased 302 million, to 720 million.

Let's move on to the next slide to discuss earnings per share. You will recall that in our third quarter earnings presentation, we increased our full-year earnings guidance to a range of 320 to 330 per share. This guidance reflected the strong earnings growth throughout the first 3 quarters and adjusted for 2 unique items that occurred back in the second quarter. First, we saw an after-tax expense of 123 million, or $0.54, relating to our debt repurchase. And second, a change in state tax legislation which, reduced income taxes by 71 million, benefiting EPS by $0.31. The net impact of these 2 items was a negative $0.23 for the year. Adjusting for these 2 items, we produced a full-year EPS of $3.40. Now, one quick note. In the calculation of the $3.40 EPS, as you know, is based on a fully diluted share calculation of 228 million shares. This is an increase of approximately 3 million shares for the year, primarily due to our higher-share price and its impact on previously-issued stock options.

Now, let's move on to the full year Surface Transportation operating results on Slide 32. 2005 operating income was 1.5 billion, a new record for the Company. This was an increase of 485 million, or 46%, after adjusting 2004 results for the $71 million restructuring charge. On this same basis, the operating ratio improved by 480 basis points. In addition, with these higher earnings, I'm also pleased to report we exceeded our original free cash flow target of 450 million, which I will summarize on the next slide. As can you see, the Company generated over $1 billion in total free cash flow. In the table on the right, you can see that total free cash flow included 2 unique items. First, 640 million of after-tax proceeds from selling our World Terminals subsidiary, and 123 million of after-taxes, excuse me, of after-tax expenses associated with our debt repurchase. Adjusting for those 2 items, the Company produced core free cash flow of 513 million in 2005.

Now, let's discuss the progress we have made in reducing CSX's debt ratio on the next slide. As we said in our second quarter presentation, we have achieved a debt ratio well below our target of 50%. With the World Terminals proceeds and our strong core free cash flow, we reduced debt, and our total leverage now stands at 46%. As we continue to generate cash, we will be spending more on our network to enable future growth and improve service reliability.

So let's talk about our capital spending plans for '06 on Slide 35. As we announced at our August investor conference, we expect the 2006 and 2007 capital spending to increase to 1.3 to 1.4 billion per year. Consistent with our philosophy of earning the right to spend, and as a result of the Company's strong earnings and cash performance in '05, we have a target capital of 1.4 billion in 2006. On this slide, we're providing some additional detail in where this investment will be made. Of particular note is the 18% of total capital that is focused on new capacity. Primarily for new sidings along the southeastern portion of our network, and on our line running from Albany to New York City. In addition, we will continue to add locomotives to our fleet, which also support future growth and improve our network fluidity.

Now, as we move on to the next slide, you can see, even with this increase in capital spending, core free cash flow is expected to be over 300 million in 2006. This reflects not only the continued improvement in core earnings, but also an approximate 100 million of net insurance recovery related to Hurricane Katrina. Let me summarize for the quarter and year. The fourth quarter provided a very, very strong finish for 2005. And '05 was a year in which we saw record Surface Transportation results, significant free cash flows, and an improved capital structure. As we look forward to 2006, we expect to generate solid free cash flows, while increasing investment in the business, and absorbing the headwind from fuel. Overall, we are gaining momentum and are confident that we will achieve our 5 year targets of double-digit growth in EPS, operating income, and cash flow, that we outlined at our August 11th investor conference. Now with that, I would like to turn it back to our Chairman for his closing remarks.

Thank you, Oscar. As we begin another year, CSX is a stronger company. We have a healthy balance sheet, we have a team focused on results, and we have momentum behind our key strategies that we shared with you last August. The ONE Plan is beginning to gain traction. The economic environment favors rail transportation, and demand continues to drive yields. And more importantly, we see no end to the opportunities available to CSX with this tremendous market reach into the Northeast and Southeast populations centers. As we continue to build a more reliable railroad, volume growth will accompany the pricing and productivity improvements we are experiencing today.

At the same time, we're expanding our network capability to leverage the changes in the transportation marketplace, and further drive value for our shareholders. In short, we're on track to deliver strong results for 2006, and we look forward to sharing our progress with you over the coming quarters. At this time, we would like to entertain your questions. I will ask you, if you would please identify yourself and your company affiliation for the benefit of all the listeners on the call. So with that, we're ready for questions.

[OPERATOR INSTRUCTIONS] Ed Wolfe, Bear, Stearns.

Good morning, everybody. Just a couple of things. First of all, I thought I heard you say that beginning in February, when the Gulf track is back on line, we should see some velocity improvement. Can you talk about the magnitude of what we should expect to see there?

Well, that's a little -- this is Michael -- it's a little tough to calibrate. As you know, you saw from that one chart, there were some fairly sizeable impacts on our velocity, as we look at that Southeast corner between Nashville and Jacksonville. And I guess we would expect to see somewhere between a half a mile an hour, a mile an hour. And one half and one mile an hour impact as we work through getting Katrina fully up. Now, to remind you, we will start running trains in February, but they will gradually phase in over the month. Because we basically put a new track structure in place there, you have to run some trains over before can you get to full capacity there.

Okay, and then the same question on the volume side. The volumes, give or take, are down 3%, apples-to-apples. What should we expect in '06 for volume growth, assuming an economy that decelerates modestly, but remains strong. What is the right volume number? How much of this is intentional, and how much of this was related to the Gulf?

well, there was -- Ed, this is Clarence Gooden. There was about 17,000 loads in the fourth quarter, that was directly related to the Gulf. Some of that business will come back as the factories down there come back on line, particularly around the New Orleans area, going forward on the merchandise side. We expect to see strong coal growth, as we told you, going forward. Our automotive forecast is essentially flat. But we expect to see our Intermodal business start growing in the second quarter, and then pick up momentum in the second half. And we expect to have a good year on our merchandise business.

So, when you add it all together, what is kind of a fair volume estimate overall for the year for '06? 1to 3%, is that kind of the range?

Yes, I think you could expect 1 to 3%.

Okay, just, for a second. Oscar, just to understand a couple of things in the quarter. Can you talk about the gains on sales, and also you mentioned about a reversing of some reserves, I thought I heard you say. What did those 2 equal in the quarter versus a year ago?

Let me talk about both of them. The gain on sales, just our normal real estate activity. And I think that's fairly well outlined. As far as -- not so much reversal of reserves, it is based on our improvements and our favorable occupational claim trends, as well as safety improvements that Tony talked about, in both personal injury and train accidents. And as you know, we use outside parties, actuaries, that help us with those numbers and taking the trends a couple of times a year. We make those reversals.

And where do we see those in the income statement?

It is in the MS&O. The net amount of that was around 20 million.

And is that ongoing?

No. No, the favorable trends we're seeing will help our overall financials, but the impact that happened this particular quarter, we can't forecast as to whether or not it will be. But we have had a good year in injury, and that's been helpful.

But if we continue to see the improving safety trend that we saw this year, and we certainly anticipate will happen, as the actuaries look at that performance, Ed, we could, again, as they true that up for the run rate we're seeing, could expect to potentially see something again next year, as we continue to improve both our personal injuries and our train accident performance.

Yes, and Ed, as you look kind of on a run-rate basis, there was many items in the quarter that helped us. We had some additional expenses as well between the additional hiring, the additional hurricane cost above what we expected, and so on, so forth. So, as a general rule, the 415 is a very solid number for us.

Okay. I asked a question about some kind of guidance on volumes. The same thing on the yields. What is your expectation going forward for yields? Obviously they can't stay at 11% forever. But we are getting a sense -- what percent of contracts are coming up in the next couple of years that you can reprice? And what is your expectation, both for fuel and for pricing?

Ed, I'm going to ask Clarence to answer that. But I think at that point, we might need to let some others ask questions as well.

Fair enough. Thank you.

Well, about two-thirds of our merchandise business, Ed, will be up for repricing this year. About 10% of our Intermodal business will be up. Very little of our automotive business will be up for repricing. And about 20% of our coal business will be up for repricing, although that is weighted in the coal part of the business, more toward the fourth quarter. Having said all that, we expect to have a very strong pricing environment going forward in 2006. I would not at all be surprised if you didn't see a very similar performance in 2006 to what we had in 2005.

A similar performance in terms of yield or in terms of pricing? And then I'll let someone else ask.

In terms of yield.

In terms of of yield. But the pricing aspect of it, Ed. Obviously, the fuel surcharge component is going to be driven by what fuel prices are doing.

Okay, thank you.

Scott Flower.

Just a couple of quick ones. I know that Tony showed the slides that showed some improvement, obviously, in some of the originations and terminations on time, and those are rolling numbers. Could you give us some sense of what the marginal on-time, or originating on-time data are for let's say, the last month or 2? In other words, the rolling aspect may hide some of the improvement. I'm just trying to get a sense of what the more current month-to-month figures might be, versus a rolling average.

Well, Scott, that is a good question here. We, actually since the first of the year, we have been able to improve our on-time originations up above 70, and on arrivals, above 60. But you've got to take in mind here, this is sort of the beginning of the year. You got to reset during the holidays. You've got the cars on line down, and things are extremely good right now as far as volume. But we're able to sort of, what we call, reset the railroads. And what we see is extremely good at this point.

Okay. And just want to come back to volume for a moment. And I know that Clarence gave us some sense of the coming year. But I guess I'm just trying to get a sense of , if you strip out Katrina and some of your conscious repricing actions on business, that was not necessarily meeting your thresholds, would your volumes on merchandise and Intermodals still have been down?

Scott, this is Clarence. The Intermodal volumes would have been down because lost some third party international business by design, that was -- never operates on the CSX railroad. It operates in the west. On the merchandise side of our business, there were 4 principal factors. Katrina was 1 that I had mentioned there. We had the loss of some of our aggregate business there for extended period of time in South Florida, when Hurricane Wilma went across. We had a large phosphate customer cease operations in the Bone Valley that had lots of volume to the port, not the high revenues. And then we had the year-over-year negative comparisons with our military shipments. And those were the principle drivers on the merchandise side.

I mean, you still feel pretty good as you look out, in terms of seeing volume growth as you get through Katrina's effects, and through some of your conscious repricing actions on lower-margin business?

Absolutely. Without question.

Okay, and then just the last question, and I'll let someone else have at it. I just want to clarify Ed's question on the reserves. This is a trueing up for the year. In other words, the 20 million relates to the prior quarters in 2005, is that correct? I'm just trying to make sure I understand the impact. It's on-going.

Yes, Scott. We do the actuarial work twice a year, in our second quarter and our fourth quarter. And so, yes. This particular number would have some benefit. Again, it's a full-year calculation on a trend-rate basis, but the last time we did it was mid-year.

All right, thank you.

James Valentine, Morgan Stanley.

Great, thanks. First, sorry to keep going back to this materials and other line, but I'm trying to understand how you did, relative to my expectations. And Oscar, you mentioned something. Obviously, we know the reserve, now, you've addressed that. But you mentioned something about Katrina in the quarter. Is this like above and beyond just the expectation we would have all had going into the quarter, knowing that it was still there? Meaning was there like a one-time hit, or like where the insurance wasn't going to cover it, so you guys wound up paying out of your own pocket, you weren't thinking? Can you give us some feel for when you talk about the offset to the benefit being done negative Katrina.

Really, I think what we said in the third quarter, is we estimated a number of about 15 for the quarter, and then the actual numbers came in about 20. That was just slightly a higher impact on volumes, and some of the other business interruption expenses that we saw.

Okay, but it was not like you paid 20 million through the materials line, that you thought the insurance was going to cover, and you had to pay out of your own pocket?

No.

I thought that's what you were implying. Okay. I guess the real question I want to ask you guys -- ?

Just to be clear, it's on the revenue side, predominantly.

Okay, good. The real topic I want to just hit on, and I think you addressed this back in August. But now that we're closer to these expansion projects, can you talk about how we might want to be modeling any cost result from potential disruptions? I mean, Burlington Northern, obviously, has had problems in the Powder River Basin as they expanded, not just this past year, but there's been a number of times over the last 10, 15 years during heavy maintenance, we've seen cost go up. We saw CP with Western Canada expansion. Is it realistic that we're sitting in the third and fourth -- second and third quarters, that you guys would be talking about headwinds from this construction slowing down maybe some of your velocity?

I guess 2 points on that, Jim. You may recall from our August conference. We said a lot of these investments were really to support future growth that we anticipate. So some of this build is about where we see the growth occurring between Albany and New York City, and then in between Chicago and Jacksonville. So, some of this we're putting in is to support the further growth. In addition, it will help us on the fluidity of the railroad. And I don't think we're going have major impacts. There will be some impact as we put it in place, but I don't think it will be real big, Jim. Because a lot of the work we're doing here is extending existing sidings, putting new sidings in, improving the signalling, and then the speed of turn in and turnouts. You can do a lot of that work parallel to the existing track. And the only real disruption to your normal traffic flow is when you tie it in.

Okay.

So we don't see big impacts from this construction. But a lot of future benefits.

Okay, great. Let me ask one last question, and that is we talked about the inflation that you're going to see in contracts -- long-term contracts that have signed over, been signed up -- in terms -- what I'm trying to get at is, the inflation escalator historically, we have seen in railroad contracts, can be anywhere from negative, to only up 1%. And I guess I'm trying to understand going forward, maybe Clarence can address this. When you sign a long-term contract, are you looking for something above historical rates, like maybe as much as 3% or even better, as the inflation escalator going forward?

Yes, is the short answer. I'm not aware that we have any contracts left that have any negative escalators in them at all. We went through that with a fine tooth comb. We had 1, and that went away 2 years ago. In all of the contracts that we have got going forward with escalators, at a minimum, they would have the RCAF-U. But more than likely, they will have the RCAF without fuel, plus fuel surcharge.

Great, so you're going to basically -- you'll at least cover your cost inflation then?

Yes.

Excellent. Thanks, guys.

John Barnes, BB&T Capital.

One, can you give us an idea on your insurance recoveries thus far from Katrina, how much cash you have actually received in?

We have received about 120 million to date.

And how much is outstanding?

Again, our total costs are 300 plus, and less the deductible. So I would say just do the math on that.

Okay.

We don't have the full-end number yet, so -- .

Okay and then -- ?

So, roughly, then we have about 280 million plus, after the deductible. And we have gotten about 120 of it thus far. And we'll probably receive a lot of that during the course of 2006.

Okay. Very good. As you look at your Intermodal business, you talked about intentionally losing a little bit of business I guess on that international traffic. Are you done there? Do you feel like you're done calling out the unprofitable or intermodal traffic, or the traffic that doesn't necessarily mesh up with your system well? Or is there more of that to go in 2006?

John, this is Clarence Gooden. On the core, the CSX lines themselves, I think we're about finished. In the West, we still have some third-party international business, that some of those contracts expire in 2006, and some of those contracts expire in 2007, that will continue to go. But it's -- the impact to the Intermodal Company's bottom line is a very negligible number.

Okay.

So, you could -- .

You said you expect actually, that the profitability will continue to increase in the first half, with the volumes not really increasing that much. And they'll grow in the second half.

That is correct.

All right, very good. And then, Clarence, also, thanks for the color on the book of business to be repriced in '06. Do you have a similar feel for what is up in '07?

I don't have it with me.

Okay.

But, the patterns will run roughly the same in '07.

All right. Very good. And then lastly, Oscar, on the other line item, the other income line item, can you give us an idea how 2006 is going to progress? I mean, what are you looking full-year? And can you give us an idea of, at least should we divide it up kind of seasonally, evenly throughout the quarter? Or is it more front-end loaded, rear-end loaded? Can you give us some clue as to where that line item is going?

It's predominantly, as you know, real estate activity. And those deals close as those deals close. And I think if you look at a couple of years back, and you look at that general average, I think, is how we project it, going forward. And seasonality-wise, I think we spread it accordingly. So, no, there is no real science to that. We know of 2 or 3 major issues that are going to hopefully close over the course of the year. But it's difficult to give you any specific -- any more specific guidance than that.

Okay, good deal. All right, guys. Thanks for your time.

Ken Hoexter, Merrill Lynch.

Great, good morning. Just a question on the Intermodal operating ratio. It looks to have actually increased a bit sequentially, while last year's fourth quarter was just a massive improvement. Just wondering, I know you're focused on eliminating some of the unprofitable revenues. What would cause that progress to go a bit awry there?

Well, the operating ratio in the third quarter was 79, and I think it was 80 here in the fourth quarter and -- .

Right.

-- I am not sure, off the top of my head, what has caused that to change. I will say that the earnings in the fourth quarter this year for the Intermodal company were better than the fourth quarter earnings were last year. And if you will recall last year was where we made the step function, if you will, Ken, in the profitability at the Intermodal.

Yes, in other words, a significant jump down in the fourth quarter last year. Agreed.

Hey, Ken, it's Oscar. Usually, the slight operating ratio movements have something to do with the math, slightly higher revenues -- that issue between revenue and expense. So, fuel surcharge increases might have increased revenue a little bit, and that might do some of the math. There's nothing fundamentally different in Intermodal, with regards to strategy or philosophy or vision. And so, it's probably more a blip in the math than anything else.

Great. And then just last thing. You gave some great detail on the cash and your returns coming forward on the year. Can you talk a bit about Cap Ex, where you're spending it, what you're focused on, when you're going to bring in the locomotives? And I guess those other locomotives ended up coming all in at the end of the third and fourth quarter that we were targeting for the second kind of ship this year. Is anything big on the horizon coming through in early '06?

Yes. Ken, this is Michael. We have 100 additional locomotives coming on toward the end of the first quarter and the beginning of the second quarter. So, that will, I think, give us additional help as we move into the -- be prepared for the fall peak of next year. So, yes, we're acquiring 100 new. And as we continue to run that ONE Plan better, we think that also is going to improve our locomotive utilization, create some further capacity for growth, and we will continue to add locomotives to support the long-term growth we expect. But to your specific question, we have 100 coming on late first, early second quarter.

Great, and that leads right into my last question. Would just be, I guess, more a Tony-related question on the ONE Plan is, and I think it's a follow-up, that I think Scott mentioned it before. But on the on-time performance, what gets that to jump significantly? I know you said a bit of congestion here from the New Orleans line. Bit is there something we should look for to get that moving a bit quicker?

Well what improves your on-time originations, is getting the trains across the railroad and getting it in the terminal, so can you have the power to get it turned around. So as long as you don't spend too much time out on the line [inaudible] with your trains and get them over the line quicker and in the terminals. And that makes power available and gets your on-time performance up. And the ONE Plan helps us design that. As we got more fluid here, we're able to redesign the locomotive plan and either 1, take some time out of the dwell on the locomotives, or remove some of the locomotives and put them in some other type service.

So should we see that jump up at the end of the first quarter, when those other locos come on?

Well, I think -- yes. You should see some improvement with the locomotives that's coming on. I mean, we're invested in the [hundred] day. They need to show up somewhere in improvements.

And you will see some improvements, I think, as Tony alluded to. The first 3 weeks of this year, we have had very good originations and arrivals, and we expect that to continue, and as we add the additional locomotives, it'll take it to another level.

Great. Thanks a lot for your time.

Tom Wadewitz, J.P. Morgan.

I have got 2 different questions for you. I think it's a follow-on to some of the other questions that have been asked about operating improvement. But it seems that you are going to have this Gulf Coast coming back on line for the through traffic in February. You've got probably more locomotives than you would normally expect in a first quarter. And I am wondering how much confidence that you have that you really see a pretty significant improvement in velocity and fluidity, and so forth that in second quarter, let's say. I guess the other aspect of that would be, do you still think that there is a lot of work to be done from the cultural aspect and really getting the operational discipline involved that might hold you back from just a kind of a capacity-driven move up in velocity?

Tom, we're excited about a couple of things here. One is, we have improved our velocity and some terms when we have been having to reroute about 12, 1,300 trains a month in different areas. And we have had to depend on our other Class Ones to work through interchanges. They normally don't take high volume. So getting our railroads back, getting our velocity back up after the slow orders are worked through, we're pretty excited at what we see there. Now, we have some other issues that we're working on. The ONE Plan, I'm real excited about the ONE Plan. The guys are working through the culture issues. We're raising the bar constantly. That's showing some improvements. I think some of the improvements you're seeing is not only on our improvement in our leadership. And our drive to raise the bar is also getting our railroad back, and the locomotives coming on will help, too. So, we're pretty excited at what we see so far. We have got good traction going. The attitudes are great, and we are building a good team.

Okay. Great, and 1 follow-up, I think probably for Clarence, maybe for Michael. You're talking about pretty optimistic end demand, and potential to improve that volume growth. And I am wondering, is it really dependent on seeing that velocity improve first, or is there enough customer interest, enough, I guess, renewed volume from the Gulf Coast area, that even if you don't see that velocity improve, and for a second quarter, you could still see the volume growth improve meaningfully?

I think we're going to see the volume growth improve, particularly in our Intermodal business, because Tom, as I mentioned in our presentation, our on-time performance in our key intermodal lanes now, for more than 6 months has been at the 90th percentile, which we think is competitive in the marketplace to regain the intermodal business back. On the merchandise side of our business, as you have seen, our metrics that are published now with the AAR, our velocity has been improving. That's creating car supply that is enabling us to have higher order fulfillment on our merchandise side of the business. So we again feel very positive about what has happened there. And as you have watched the CS-54 car loadings that has come out so far this year, we have picked up a lot of automobiles that were left on the ground during the Christmas holidays from the auto makers. And we have been able to clean up all of that backlog. And our coal numbers have remained very strong. So I feel very positive going forward.

That's great. I guess I am tempted to ask 1 last one here, and I will pass it along. Michael, any thoughts on potential to reach below 80 OR in 2006. It seems like you have a lot of things that could work in the right direction. I know you don't want to forecast that necessarily. But is that possible in '06?

You're absolutely right that we don't want to forecast that, Tom. And I'll just leave it at that.

Okay, thanks for the time.

John Larkin, Stifel Nicolaus.

Good morning, everyone. It's actually Stifel Nicolaus. It will take awhile to get that right. But I had a question on the $100 million fuel headwind that Oscar talked about. What is the embedded cost of fuel that is assumed in that assessment?

Roughly 60.

Okay. $60 a barrel. So, if that were to decline significantly, that headwind would decline along with it, I guess.

Clearly. And then our fuel surcharge recovery method is what's impacting that as well. So, many moving parts to it. But I think our forward look is around 60.

Okay, thanks. And then, Mike, in his opening comments mentioned a new Florida Intermodal Logistics Center. Could you talk a little bit about what that entails, how much it will cost, and when it might be open, and what the impact on traffic in the future might be?

John, this is Clarence Gooden. That will involve both an intermodal facility there in Central Florida, as well as an automotive facility in central Florida. And then Transflow capabilities there to move product from traditional rail cars into trucks, as well as warehousing, and things of that nature in and around that facility. We're in the developmental stages of that, so it will be sometime in 2007 when you see the facilities start to come on line there.

As you would expect, John, there is a lot of issues when you build a center like this, but we're working with the city that this is located in. We have very good cooperation with the city council. But there is a lot of details to be worked out through yet, with the citizenry to make sure they're comfortable with the job creation this will entail. As we get some of those more details in line, we'll probably be able to talk a little bit more about what the cost of it is. But it would be contained within the outlook we gave you in our August presentation about the capital we would be spending to improve capacity. So this not add-on. It is part of the longer-range plan we talked about, of increasing our ability to serve the markets.

Okay, and then 1 maybe question on the new utilities that may be coming on line over the next few years. Clarence mentioned that there were 2 new coal destinations that came on line recently. There is another 1one is slated for late '06. I can remember you telling me that there was going to be a doubling of the coal fire plants over the next 6 or 7 years in the state of Florida. Could you just give us a little more detail on that outlook?

Well, those new plants that came on line for us were convert -- the first 2 were conversions. TVA's Paradise Kentucky Plant was converted from barge to rail. Dynegy's Vermillion, Illinois, plant was converted from truck to rail. And then Santee Cooper 's Cross South Carolina plant will come on line in September of this year. Those 3 account for about 3.5 million annual tons of coal.

And the outlook for Florida's continues, as you expressed at our August conference, isn't it, Clarence?

That's right. There's plants that have been announced in Perry, Florida, by JEA. Seminole Electric has announced coal-fired generation at their Bostwick, Florida, locations. Orlando Utilities has announced expansions and a coal gasification facility at their Orlando plant. Florida Power and Light has announced coal-fired generation in South Florida. And then Gainesville Utilities is looking at developing additional coal-fired capacity.

Are all those new plants strictly served by CSX? Or do some of them have access to water served deliveries?

The one in Perry, Florida, is joint with -- will more likely be joint with CSX and NS. And the others are at inland points.

Thank you very much.

Jason Seidl, Credit Suisse.

1 quick follow-up question here on coal. You mentioned that your Western coal volumes were up. Can you give us a little more color as to how much and what is the feeder for it? Which rail line?

Our Western coal volumes are up almost 60% on a year-over-year basis. Most of that is coming off of the UP. It's coming mainly out of Wyoming, as well as some growth out of Colorado.

Do you anticipate sort of strong double-digit growth again? I mean, it seems like the Western guys are seeing more of a demand to push the PRB coal out East.

Right. Most of our coal is primarily going to TVA. And most of it, not all of it, has been conversion from barge.

And then, you probably need to talk a little bit, and I know you do, to the Western roads. I know there is some issues as to how much PRB coal they can get out there in the short term. So, but we will continue to work aggressively with them where there are spots that make sense for our customers.

Thank you, gentlemen.

Jordan Alliger, Deutsche Banc.

You mentioned that even after the CapEx, I think, that your cash flow would be 300 million plus. I'm wondering what, if anything, that would be earmarked to.

Well, I guess as you think about that, Jason -- Jordan. As Oscar told you, we reached our targeted debt levels. So we think we're pretty comfortable with where we are on our debt. You know we increased our dividends 30% in the third quarter this year, reflecting the improvement we've made in our core earnings, and our confidence in the ability to continue to deliver this double-digit earning growth that we talked about in August. I think as the earnings continue to increase and our cash flow increases, we're going to look and evaluate what the best course of action to build that shareholder value, and we really haven't made any decision yet how we will deploy that cash, Jordan.

Okay. And then just -- I just want to make sure -- I know you touched on fuel in terms of the impact of the fuel surcharge in the fourth quarter. I think you indicate about half of the yield improvement came from the fuel surcharge -- fuel surcharge revenue. Is that safe -- I mean, if you sort of assume it's about 5.5% of the increase, about $120 million or so against the fuel expense increase of about 50. Is that how you look at sort of the differential between the 2, and how much the fuel and the impact of the hedges before they roll off, have an effect on the quarter?

Well, you have to be a little careful of it, because as you know, our fuel surcharge mechanism we have in place now, really don't fully recover what the cost of the fuel increases are yet. Clarence and his team are going to continue to work to increase that fuel surcharge coverage, so that we get to the point where we are covering the increases. You're quite right. We had the hedges that helped us mitigate some of that gap this year. So I think as I think about it going forward, our goal is the hedges roll off here very quickly at the beginning of the year, is to position ourselves where the recovery mechanisms we have in fuel surcharge and RCF, capture that variance in fuel price to make us neutral. So, that's where we're trying to take it, overall.

Okay. So, basically over time, it's the goal of the fuel mechanism.

For neutrality.

As opposed to -- . Okay. Fine. All right, thank you.

And we have no further questions at this time. Gentlemen, I'll turn things back over to you for any additional or closing remarks.

Well, thank you. I want to thank everybody for joining us this morning, and appreciate your attention. Thank you.

And that does conclude today's conference. Thank you, everyone, for your participation.