CSX Corp (CSX) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the CSX Corporation second quarter 2006 earnings call.

As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. [OPERATOR INSTRUCTIONS]

For opening remarks and introductions, I would like to turn the call over to Mr. David Baggs, Assistant Vice President of Investor Relations for CSX Corporation. Sir, you may begin.

Good morning and thank you, Lisa. Welcome again to CSX Corporation’s second quarter 2006 earnings presentation this morning.

The presentation material that we will be reviewing this morning along with our CSX flash and our quarterly safety and service measurements are available on our Web site at csx.com under Investors. In addition, following the presentation this morning, a Webcast and podcast replay will be available.

Here representing CSX this morning are Michael Ward, the Company's Chairman, President, and Chief Executive Officer, Tony Ingram, our Chief Operating Officer, Clarence Gooden, our Sales and Marketing Officer, and Oscar Munoz, Chief Financial Officer.

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 these results.

With that, let me turn the presentation over to CSX Corporation's Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Well thank you, David, and good morning, everyone.

I'm pleased to report that our transportation businesses continue to operate at record-setting paces. Late yesterday, we announced second quarter earnings of $1.66 per share, which included Hurricane Katrina recoveries and benefits from the resolution of certain tax matters.

Excluding these items, earnings increased 21% on a comparable basis to $1.16 per share.

Our surface transportation businesses generated record revenues of $2.4 billion and record operating income of $519 million, a 23% increase year-over-year after adjusting for the Katrina recoveries. As Clarence will discuss, yields improved 12% as demand and pricing additions remained strong across nearly all markets.

In addition, we continue to see shippers turning to rail at a time when import growth, highway congestion, and trucking constraints combine to make rail an attractive option.

As we work to meet that demand our discipline in running the ONE Plan is yielding substantial momentum. As Tony will discuss in more detail, our operating team continues to deliver. In the second quarter, the team was a key contributor to our improvement and our ability to once again achieve a solid 80% operating ratio.

In addition to delivering another very good earnings quarter, we also announced actions that reflect our commitment to create value for our shareholders. This included a $500 million share buyback program which we intend to complete over the next 12 months. At the same time, we announced a 2-for-1 stock split and increased our quarterly dividend on the split shares by 54% to $0.10 per share. We're taking these actions at a time when our momentum is strong, we continue to deliver record financial results and are building for the future by expanding our capacity along key corridors of our network.

With that, I'd like to turn now to operations report and our Chief Operating Officer, Tony Ingram. Tony?

Thank you, Michael. Good morning, everyone. Today I'm going to give you a quick update on our three critical drivers. First, our safety results continues to improve. We're getting these results through and with outstanding leadership across our organization. Second, the railroad's running well and the ONE Plan is working. We're executing better, we're turning the assets and we're getting the trains there on time. Third, our capacity expansion program is right on schedule. We're building our network for improved service and future growth.

Let's look at our safety performance. As you can see on Slide 7, we continue to have strong performance in safety. Personal injuries for the 13 weeks, or the average of the second quarter, improved to 1.37. Injury frequency also improved on a rolling 12 months. Train accidents are another great story, down 9% quarter-over-quarter and over 17% for a rolling 12 months. Clearly, we have great momentum in both of these areas.

While these results are good, the work here is never done. Our goal is steady, consistent improvement. As I've said before, safety and leadership are closely linked. When safety improves, good things happen in other areas. This brings me to the next slide.

We continue to run a disciplined operation. Trains are leaving and arriving on time with greater frequency. Originations improved to 77% in the quarter and are up 65% over a rolling 12 months. This is the best performance we've seen since 2002.

We have the same kind of trend in arrivals. The team continues to embrace the ONE Plan and things are falling in place. Our customers are getting better service and that's what it's all about.

On Slide 9 you see that our network is improving and getting more fluid and we're making better use of the assets. The dwell time and cars on line continues to improve. On average, we improved our dwell time to about 25.5 hours in the second quarter, and the trend is favorable over a rolling 12 months. Cars on line went down to about 223,000 and again, the trend is favorable on a rolling 12 months. As we keep working on our execution and discipline, we should see these measures continue to improve.

Let's look at Slide 10, Velocity. This measures average train speed on the network. Second quarter velocity averaged 19.5 per hour. This also drives our rolling 12 months average to 19.5 miles per hour as we trend back up from the Katrina period.

In summary, the railroad is improving in safety, service, and asset utilization. This is by design. This team believes the improvements can be sustained and that's the most important thing for our customer and shareholders.

Looking ahead to Slide 11, the safety momentum will continue. The ONE Plan is making us more reliable, fluid, and efficient and we expect that to continue. And our capacity investments are right on schedule. I'm encouraged by what we're seeing. Consistency is the key. We're going to keep building on our foundation with leadership, discipline, and execution.

With that, I'll turn it over to Clarence Gooden, Executive Vice President of Sales and Marketing.

Thank you, Tony, and good morning.

CSX achieved another successful quarter in the midst of continued strong demand for rail traffic, which was driven by coal demand and growth in manufacturing. These favorable market conditions and our improved service led to record quarterly revenues of $2.4 billion, which exceeded the prior year by $255 million.

Revenue during the quarter was led by merchandise market, though all major markets experienced growth. Overall volume was flat from a year ago as strength in coal, agriculture products, and emerging markets offset declines in phosphate and forest and paper traffic, which I will speak to in a moment.

We continue to improve our yields. As you can see on the next slide, in the second quarter of 2006 overall revenue per unit grew 12% as a result of increased pricing and our fuel surcharge program. Revenue per unit gains were strongest in merchandise market at 16%, followed by coal and intermodal, both at 7%, and automotive at 6%. During the second quarter, the drivers of this revenue per unit increase were approximately 50% price, 30% fuel surcharge, and 20% mix.

Looking at our merchandise markets, quarterly merchandise revenue of over $1.2 billion increased 14%. This represented the 17th consecutive quarter of year-over-year merchandise revenue growth. Merchandise recorded its stronger yields in all markets as revenue per unit increased 16%. The volume decrease in merchandise was largely driven by the continued impacts from phosphate and fertilizer plant closures. As we mentioned in the first quarter, this trend will continue throughout 2006. That said, the underlying strength in the other merchandise markets remain solid. Excluding phosphates, overall volumes were up 1%. Moving forward, the outlook for merchandise is favorable.

As you can see, merchandise volume growth was strongest in agricultural products and emerging markets. In agricultural products, improvements in grain unit train service contributed to growth, as did strong demand for ethanol shipments. Strong demand for movement of aggregate products, municipal waste, military shipments and machinery drove our emerging market volumes up 6% for the second quarter.

The markets in which we saw the most significant declines in volumes were phosphates and fertilizers reflected in plant closures, and forest products reflecting the shedding of low margin business. While volume growth expectations and merchandise from mix, we expect to see overall volume growth in the second half of 2006 as service continues to improve.

Now let's look at the strong results in coal, coke and iron ore. Quarterly coal revenue of $593 million increased nearly 10% on a volume increase of over 2%. Strong demand continues in coal. Growth was the strongest in the utility and river markets. And while the inventories are at target levels, utility demand remains strong.

Growth was also driven by improved service and cycle times as well as additional car resources in our coke and iron ore market. In addition, we expect to see a new coal fired plant come online during the fourth quarter. Revenue per car increased 7% and we believe that the favorable environment for pricing will continue in coal.

Looking forward, our outlook remains favorable as utility demand is expected to remain strong. The demand for exports is expected to grow, and our alternative fuels are expected to remain expensive.

Now turning to our automotive market, quarterly automotive revenue of $223 million increased almost 6% on flat volume. North American light vehicle production was unfavorable year-over-year in the second quarter by 2%. Production for the Big Three continued to decline, more than offsetting the growth with the new domestic producers, yet, growth in shipments from Honda at Marysville and Hyundai at Montgomery allowed CSX to overcome the overall market weakness. Continued price increases and increase in fuel surcharge coverage resulted in a revenue per unit increase of nearly 6%. The outlook for the remainder of the year is expected to be unfavorable to 2005.

Now turning to our intermodal results. Quarterly intermodal revenue of $356 million increased nearly 8% on a volume increase of nearly 1%. The volume increase was driven by growth in our core intermodal traffic that more than offset reductions in the transcontinental and offcore traffic.

Overall revenue per unit increased 7%, largely due to increased price and fuel surcharge that more than offset the mix related impacts from the loss of the transcontinental traffic. Second quarter 2006 also represented the ninth consecutive quarter of year-over-year operating income improvement. We are extremely pleased with these positive bottom line results and expect them to continue as we grow the volume in the second half of 2006.

We believe that a foundation for intermodal growth is in place. After several quarters of network simplification, service improvement, and the repricing of traffic, we are now beginning to see year-over-year growth. This growth is due to improved service, new service products and having moved beyond most of the unfavorable year-over-year comparisons.

On time service levels on our major intermodal carters remain near 90%. Our key service lanes have train capacity for growth and our new capacity projects are progressing.

Reflecting our improved service levels and the value of rail transportation, we are attracting new businesses seen in our new dedicated services with Schneider National, which previously moved by highway. CSX intermodal will leverage improvements in service and capacity to continue to grow the volume in the remainder of 2006. Trucking capacity is expected to remain tight due to the continued driver shortages and high fuel prices.

And finally in summary, looking forward to the second half of 2006, GDP is forecasted around 2.8% while industrial production is forecasted around 2.4%. Demand for rail transportation will remain strong as international trade and manufacturing drive growth.

Service improvements will continue to support our volume growth. The favorable pricing environment will continue due to the strong demand, high fuel prices, and tight transportation supply. We will remain focused on improving our bottom line profitability.

Thank you very much, and let me introduce Oscar Munoz, our Chief Financial Officer.

Thank you, Clarence. Again, good morning to everyone on the call.

As we announced last evening in our quarterly financial report, we reported earnings per share of $1.66 for the second quarter, an increase of $0.93 over the prior year. This was driven by surface transportation operating income, which increased 223 million and included a gain on insurance recoveries related to Hurricane Katrina of 126 million.

As we move below the line, other income declined 19 million, primarily due to lower real estate sales in 2006 compared to the prior year.

Continuing down the slide, you will recall that we incurred 192 million of expenses relating to the $1 billion debt repurchase in the second quarter of 2005. One of the benefits of that action was a $12 million decrease in interest expense year-over-year.

Lastly, our income tax line contains several items, including the impact from the debt repurchase and a state income tax benefit we had last year, as well as the impact of the gain on the insurance recoveries and the resolution of certain tax matters this year. All that said, and adjusting for those items, we continue to have an approximately 38% effective tax rate.

Turning to Slide 24, I'd like to review a reconciliation of our GAAP results. Removing the gain from insurance recoveries, surface transportation operating income for the second quarter was 519 million, an improvement of 97 million, or 23% for the quarter.

Turning to EPS, you can see that several items impacted the comparability of the results, including the insurance gain, debt activity and tax matters I've already mentioned. On a comparable basis earnings per share for the second quarter of 2006 were $1.16, a 21% increase versus $0.96 for the same period last year.

Let me take you to the details of our surface transportation results on the next slide. As Clarence discussed, our top line growth was 12%, reflecting continued yield strength, increased fuel surcharge coverage, and a favorable impact from mix. On the cost side, total expenses increased 9%, or 158 million for the quarter. The main driver of this expense interest was fuel, which rose 64%, or 112 million. Excluding fuel, total expenses were up less than 3% as the improvements from operations and the related productivity gains partially offset the inflationary pressures and an increase in gross ton miles.

The net result for the quarter was a 23% increase in operating income and a 78.6 operating ratio. This was a 190 basis point improvement from prior year and follows on the heels of significant margin improvement we saw over the course of 2005. Clearly, we're pleased with the progress that we've made and will continue to work towards our long-term goal of a mid-70s operating ratio.

Let me discuss our expenses in a more detailed view over the next few slides. On Slide 26, labor and fringe benefits increased 9 million, or 1% over last year. This was driven by wage and benefit inflation of 13 million, as well as approximately 14 million in costs associated with an increase of almost 800 train crew employees. These increases were partially offset by lower incentive compensation expense of 15 million and productivity gains from our improved operations.

Moving to the next slide, let me review our materials, supply, and others or MS&O expenses. Total MS&O expenses increased by $27 million, primarily due to the effects of higher inflation and the cycling of a prior year supplier credit. These increases were partially offset by productivity gains generated from our improved operations which had a direct impact on locomotive related costs. In addition, our favorable trend in train accidents helped lower freight loss and damage expense.

Let's talk about fuel in the next slide. Overall, fuel increased 112 million or 64% versus last year driven by higher fuel price of 68 million and by 44 million in reduced hedge benefits due to our lower hedge position. While we did see slightly higher fuel consumption driven by volume and ton miles this quarter, it was offset by gains in locomotive fuel efficiency.

If we turn to the next slide, I'll update you on our remaining hedge position. Slide 29 shows the historical and projected financial value of our remaining hedges. As you can see, our hedge value is declining and will completely expire by the end of next quarter. In the second quarter of 2006 we were 12% hedged and saw a $19 million hedge benefit. For the third quarter of 2006, we are less than 1% hedged and expect an approximate $1 million hedge benefit.

Now moving on to Slide 30. Overall, building and equipment rents declined 4%, or 5 million, driven by a reduction in rail car lease expense. This was a direct result of the continued improvement in operational fluidity, which drove improvements in shipment cycle time and reduced the number of cars on line.

On the next slide, I'll review the remaining expenses. All these other expenses include depreciation, inland transportation, and Conrail feeds overall increased 15 million. The primary driver was depreciation, which was higher due to a net increase in our capital asset base.

On Slide 32 and looking forward, the second quarter was another record quarter for our surface transportation business which, combined with our first quarter performance, generated first half operating income of over $1 billion. As we look towards the second half of 2006, it's important to recall that our results for the first six months included three items of note, the 126 million gain we saw in insurance recoveries, the 54 million of fuel hedge benefit, and an approximate $25 million favorable impact due to the mild winter we had in the first quarter. So we remain on track to generate 300 plus million free cash flow for the year after our planned 1.4 billion in capital investments.

As Clarence discussed, the transportation environment remains strong and in addition, with our solid operating performance from Tony's team, we are now ready and poised for growth.

Lastly, let me spend a few minutes reviewing the equity actions we announced yesterday on the next slide. As Michael mentioned, these actions reflect our commitment to distribute value to our shareholders. The highlights of the actions are as follows. First, we announced the 2-for-1 stock split which will be effective in August. Second, we are increasing the dividend to $0.10 a share on a post-split basis and effective with the September distribution, this represents a 54% increase in dividends from today's level. And third, we announced the share buyback program of 500 million which we intend to complete over the coming twelve months.

These actions reflect the strength in our underlying business performance, our strong balance sheet, and this team's confidence in our ability to deliver. So with that, let me turn it back to Michael for his closing remarks.

Thank you, Oscar.

As Oscar highlighted, these equity actions reflect our confidence in the people of CSX. We have now delivered 10 consecutive quarters of improved results and are making great strides across all of our core strategies.

We're delivering revenue growth and operating discipline with a performance-oriented team that strives to deliver consistent, continuous improvement. Our investments to expand capacity, along with improved asset utilization and our focus on the fundamentals, are helping us build a strong foundation for long-term growth across our system. Our momentum is strong, the transportation environment remains robust and is expected to continue for the foreseeable future.

So with that, we'd like to entertain your questions. I would ask for the benefit of those on the call, would you please identify yourself and your company affiliation.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Mr. Tom Wadewitz with JPMorgan.

Yes, good morning.

Good morning, Tom.

Let's see. Two questions for you. I wondered if you could give me some thoughts on looking to second half and the pace of margin expansion. I guess you have some puts and takes, maybe a bit more pressure from fuel, but you may have some of those capacity investments coming on and perhaps benefiting in terms of fluidity. Can you give us, I guess, some thoughts about how we might think of the pace of margin improvement in second half compared to what you've seen in the last few quarters?

Well, we aren't giving guidance today, Tom. As we look forward, I think what we've said is clearly first and foremost we see, because of our improved operating performance, volume growth. And so volume will certainly be something that helps.

In addition, fuel continues to be an issue that we're worried about but as far as margin improvement and a continuation therefore, I think our record is pretty straight in that regard.

Is it fair to think that some of the capacity investments will help you with operating cost improvement as they come on in second half?

Well, Tom, this is Michael. To some extent they will. You may recall we had 60 total projects within that two-year program. Some of those -- 20 of them roughly, will be coming in line in the course of 2006. So clearly they will help us as those get into place.

But you'll recall that a lot of those investments we're making were for the growth we saw in the future. So they are future-based to support growth in future years. Clearly they'll have some benefit for us and help us with service reliability, which will give us the opportunity to grow as we expect to do in the second half. Yes, it will be helpful. Is it going to be something that drives it through the roof, I don't think so. I think it will be some incremental improvement in our reliability allow us to grow.

Great. And then I guess the second question is just on the volume side. How should we think about the margins of this traffic that you're bringing on? Are you able to leverage existing capacity so that the volumes come on at a stronger margin, a stronger incremental margin, or is it the type of thing that you have to price in a certain way to be competitive with truck and that perhaps it isn't a lot different from what your current margin is? How should we think about margins on new traffic?

This is Clarence Gooden. I think you can think very positively about the margins that's coming on on the new traffic. We certainly don't want to have gone through all the pain and anguish we've had in getting our price up and getting our yield improvements up and then turn around and take on less profitable traffic, number one. Number two is I think we did a fairly good job here in overcoming this loss of this short haul phosphate business that we lost down in the [Bohn] Valley, which we were able to actually keep our volumes overall pretty flat. And then secondly, in both our freight network and in our intermodal network, we have excess capacity on the existing trains.

Okay. Great. Thank you for the time.

Thank you. Our next question comes from Edward Wolfe with Bear Stearns.

Morning guys. Can you talk a little bit about the recent rain impact that we've seen throughout Pennsylvania and New York and other places, and what that had -- if there was any impact in the second quarter or the third quarter both to the metrics and to profitability?

This is Michael. Clearly those floods did impact us to some extent. We didn't see any real big impacts on our volumes. As you recall, it was about a 48-hour disruption. What we did is route around those so it did have some impact on some of our service measures and a little bit on our cost side of the reroutes and the repairs, but all in all, I would not call it an overly significant event for the quarter.

And it's behind you at this point?

Yes, absolutely.

Can you talk also about -- you had said that 11 of 15 trains I think were back in February in New Orleans. Can you talk about where you are in that process? Post Katrina, are you 100% back at this point? Where are you?

We're operating all of our trains through New Orleans. We do have some, Ed, we do have some issues that maybe that we're rerouting a couple occasionally through the Memphis-St. Louis gateway for operating efficiencies. But as far as the New Orleans Gateway, we're operating everything that needs to go through there at this point.

Okay. You had previously given volume growth for the year in the 2 to 3% range, which implies at this point 5% kind of 6% maybe even for the back half. I realize the comps get fairly easy against the Katrina stuff, but is that still -- any change to that 2 to 3% volume growth guidance?

Ed, this is Clarence Gooden. I think you'll see volume growth in the 4 to 6% range in our intermodal business. You'll see some year-over-year improvement in our coal business, mainly in the export coal. But we've got this phosphate deal that, as we told you earlier, will continue for the rest of the year on the merchandise side. And until we get that lapped, that merchandise volume growth will be essentially what it has been for the first half.

But overall, we're still in that 2 to 3% for the year. We're still at that same position, Ed.

Okay. Thanks, guys.

Thank you. Our next question comes from Ken Hoexter with Merrill Lynch.

Hi, good morning. I just want to ask a couple questions on Michael's comment that he's pretty confident about the 10% growth over the next five years, particularly on the earnings side. Do you account for kind of any market slowdowns? I know Clarence kind of threw out that we're looking for 2.5 or such GDP and IP growth. What if we get kind of a slower economy thrown in there? Are you assuming that, hey, if we 30 and 20% growth this year and next year, it will average out over 10%? Just kind of wondering what you threw into that number? Any kind of cyclical?

To your base question I think when we put that forecast out of the 12 to 14% growth in EPS and double-digit in free cash flow and earnings per share, we were considering that there might be ups and downs throughout that five-year period, Ken, so we're still confident we can deliver that.

You do need to remember that a number of our markets really are not all that impacted by the economic level of activity. Coal, grain, municipal solid waste, ethanol, a number of our markets aren't all that dependent on the economy. So we do believe that we certainly can achieve those commitments we've made regardless of any kind of normal market corrections.

Great. And then on the intermodal side, I think Clarence threw out there that you continue to see sustainable improvement in margins. But the margins actually are, or I guess the operating income appeared to decelerate sequentially for the first time in a while. Can you comment on whether this is as good as it gets on the intermodal side and now that you've focused back on getting growth instead of calling margins, how should we think about the future on the intermodal side?

Well, as you know, we did a pretty dramatic resizing of the business we were going after there, and saw some significant improvements in our operating profitability there. On a year-over-year basis we continue to improve the margins in that business, although at a somewhat lower, slower rate.

Some of that in the second quarter was impacted by the fuel cost and some increased use of outside agents for [dredge]. But as we look going forward, we think we're going to grow the business in the second half, as Clarence said, and we think that it's going to grow the profitability as well; and we're not going to be out there chasing business, we're going to be looking for good margins in it as we go forward. Ken.

Great. Just a last question on your capacity additions, I think one thing I'm asked most often is how do you kind of ensure that you don't overadd capacity relative to where demand is? So I guess to lose any part of this pricing renaissance story that you're in, how do you -- how flexible are some of these plans to make sure that you don't overadd capacity and get into the same situation where we have pricing not as strong as you see currently?

I don't think that the adds we're making are such that they can tip that balance. It's really preparing us for growth in the future and it's really looking at a three-year horizon that we're adding these capacity additions for. So these aren't so huge that they can drive that supply demand balance. If you look at the challenges faced by the truckers with drivers and fuel, we think that the modest additions, if you will that we're adding, are not enough to tip that balance.

Great. Thanks for your time.

Thank you. Our next question comes from Kevin Maczka with BB&T Capital Markets.

Good morning. Just a question on headcount. It looks like year-over-year headcount was up about 3, 3.5% and volumes, of course, are still fairly flat. So just wondering if you can talk a little more on your strategy there. Is this just hiring in advance of this volume increase that you see?

It's a couple of things, but primarily as we've outlined previously, it is hiring ahead of attrition. We do expect significant attrition over the next few years, and to ensure that we have the proper amount of people to run our trains, and so in essence today, that hiring, again, is ahead of attrition and that's the primary reason.

Now as you look over the next couple of quarters, you'll probably see a continued increase in the third quarter and then falling off back in the fourth quarter because of attrition. So it's really an attrition-based issue, Kevin, as opposed to so much an anticipation of volume.

Okay. And just a question on the fuel surcharge and the fuel coverage. Your hedges, of course, are going away and about 30%, I believe you said, of your pricing increase was related to the fuel surcharge. What percentage of the business is covered currently?

This is Clarence Gooden. On the fuel surcharge side of the house, it's ranging between 58 and 59%. and then with the RCAF factor coming in, it's around 20%. So in total it is running between 78 and 79% right now.

Can you comment on where you see that trending over the next few quarters?

We renewed no contracts with that fuel surcharge, so -- and we have not for the past two years. So as our contracts come up for renewal, we expect that coverage to increase until we are fully covered.

Okay, guys. Thanks for the time.

Thank you. Our next question comes from Jason Seidl with Credit Suisse.

Morning, gentlemen. A couple of quick questions here. If I can go to the intermodal side. I think, Clarence, you said 4 to 6% growth in the back half of this year. When I look at the margins in kind of relations to Ken's question, I thought we'd get a little bit more expansion. How should we look at the margin expansion on the intermodal business in this back half?

Well, I think you can look fairly positive at it, as we talked about. The growth will come in two areas. Obviously domestic and international with the preponderance of it coming from international. So the revenue on the international traffic is not quite as high as the revenue is on the domestic side, but the yield on it is pretty good. So as I said earlier, I feel very positive about where we're headed there, and the traffic that we're growing in the last six or eight weeks has all come off the highway and has come at very attractive rates.

That's great color, Clarence, thanks. Can I get some more calls on the coal commentary? You mentioned you seem a little bit favorably disposed to coal volumes going forward. You said exports going to help you out. It feels like the stockpiles right now at the utilities are sort of at acceptable levels. How should we look at it from quarter-to-quarter in terms of the coal growth? Are we going to see more in the fourth because you're getting the plant online or is that going to be really fairly immaterial?

You'll see growth in the last half of the year from, I hope from three factors here. The first one is we expect the export to be up in the last half of the year over what it was in the first half of the year. Second, as we bring the new utility plant online, we'll have to build that stockpile. And third, it's hot right now in the east, and that's good for coal.

Yeah, well, unfortunately, we know that all too well here in New York. Could you guys remind us when you lapped the loss of the phosphate business?

Yes, it happened in mid-December.

Mid-December?

Right.

Okay. One final question. You talked about -- you guys are going to increase the amount of fuel recovery protection as you renew the contracts. Can you remind us of the contract renewals here coming up in '07 and also I guess a few years out?

Well, I can't for '07. I can tell you for '06 it's about 40% of our revenue is up for renewal in 2006 with very little of it in our coal business, and about 20% of our business is being repriced in this new pricing environment for the first time.

Okay, fair enough. I'll let somebody else have at it. Thanks, gentleman.

Thank you. Next question comes from Gary Chase with Lehman Brothers.

Morning, guys.

Morning, Gary.

Mike, I've heard you mention a couple times, I think the term you've used is an opportunity to take a second bite at the apple in terms of pricing. As some of the contracts come up that you have renewed in the rail renaissance, or whatever it's been, the more favorable pricing environment, are you finding that that's the case? And given where you are operationally, what's your outlook for that going forward? Further pricing gains on top of what we've already seen in the core pricing.

This is Clarence Gooden. We've had a very favorable pricing environment, and in fact we just renewed some contracts this quarter that are sustaining the rate of increase that we've had over the last two years. And going forward, as far as we can reasonably see, 2007 we expect it to remain very strong and robust.

I think we've said before that we got this call at 5 to 6% real increases excluding the fuel surcharges last year, we expect to see similar levels of increase this year, and I think our outlook for '07 at this point would be for a similar pace as well.

Okay. And just a quick one as well for Clarence. You mentioned that you do have some excess capacity in the freight and intermodal networks. Any thoughts on why that might exist given the demand strength that's out there right now?

I would say there would be two reasons for it. In the freight network itself, the average size of some of our freight trains will run around 83 plus cars. And you can add incrementally to that up to somewhere around the 100-car level without having to start running second sections on our property. That's number one. Number two, in the intermodal network, we still had to maintain the service levels as we had right-sized that network and had gone through our network simplification. And with the abilities now to double stack more and more becoming available to us, it's just simply added capacity.

Okay. There's not a market issue on the freight side?

No.

Thanks very much, guys.

Thank you. Our next question comes from Jordan Alliger with Deutsche Bank.

Just a quick follow-up on coal. You mentioned the positive factors that should help it so I'm just wondering from a specific growth perspective, though, the second quarter was up about 2%, which was a little bit below trend versus the last couple of years, even with the discussions of the strong coal demand. So I'm wondering with those factors, will you be above that type of growth rate through the year?

I don't think we'll be significantly above that, no.

Okay. Second question. You made some good improvement again with the dwell time and the performance metrics and what have you. As you begin to test the peak season, can you continue to see improvement on that, certainly year-over-year, but even sequentially, or has it become a bit more of a challenge as presumably more volumes come through the system?

This is Tony. We've looked at our dwell in our yards and we're continuously -- we have a terminal group that works on the process, and we're continuously tweaking our ONE Plan. I still think there's some improvement in the dwell time as the volume comes. So we're still looking for a little bit of improvement in our dwell.

All right. Thanks.

Thank you. Our next question comes from Scott Flower with Banc of America Securities.

Good morning, all. Just a couple quick questions. I wonder if, Clarence, could you give us some color? What's the annualized tonnage on the new coal contract that does comes on in fourth quarter, order of magnitude?

Scott, I'm not sure right off the top of my head what that annualized tonnage is, but we can get back to you with it.

Okay. That would be great. And then also, if I recall, I think you said in the past that this year was a light year on coal renewals, and if I recall, next year is a little bit heavier. Is that accurate, and if so, what kind of percentage of the coal contracts do roll in '07?

Well, you're accurate that it's very light in 2006; and the preponderance of it is in December of 2006, it does come up for renewal. And in 2007, we have a couple of very large contracts that will come up for renewal. I'm not sure what percent that is of our total coal business, but it's a nice number.

Is that early in the year or late in '07?

It's early.

Early. And then when did the Schneider business come on?

Back in June.

Dedicated trains.

Dedicated train, runs between Kansas City and Marion, Ohio.

And then just a last question, and maybe this is for Michael. Where does the labor round sit -- or maybe the answer is nothing's really changed because the politics of midterm elections are coming into play and people are waiting to see how those turn out?

Well, you're quite right, the election does impact it, Scott. The negotiations are ongoing, we're still meeting with them, but it is challenging in light of the elections. The unions obviously would like to see what happens in the fall. We have remained committed, though, as an industry to reach voluntary agreements with our unions and have provided, I think, some very significant proposals to them along with the potential of running with one person, though, in some of our trains.

The one thing I would note, though, is the Railway Labor Act, as you know, provides a lot of safeguards against any kind of rail disruptions. So although a strike could be possible, we're a long way away from that and keep in mind, over the last 30 years, there's only been six days lost due to strikes over national bargaining. It's a little bit like watching paint dry to get through this, Scott, but we're making progress continuing in our dialog with them.

Thank you. Our next question comes from Donald Broughton with A.G. Edwards.

Good morning, gentlemen. Can you give me an update on the status of your contract with UPS?

We really don't discuss contracts with our customers in a public forum like this.

All right. Fair enough.

Thank you. Our next question comes from Edward Wolfe with Bear Stearns.

I was just wondering if maybe you could take us through a little bit of the seasonality between second and third quarter? Historically your margins are weaker in the third quarter and I'm just trying to understand why volumes are lighter in the third. Obviously there's some issues with timing of auto and maybe some mine closings and so forth. Can you talk about historically what that looks like? And then in this third quarter what you expect versus history?

The question, to make sure I understand it correctly, is what is the margin going to be in the third quarter?

No, volume and margin just directionally in third quarter versus second quarter. Why you have lower volumes and slightly worse margins historically in the third quarter versus second quarter, and is there anything different this year?

There's nothing different this year, and the reason for that is the automotive network shuts down for a couple of three or four weeks during this time of the year for retooling and getting ready for the next model year.

Our coal business has, what has we refer to in our industry as a miner's vacation and miner's holiday that occurs during that period of time. And that, in turn brings, down some of the volumes. We're between seasons in the soybean crops right now, and so the crush is down and that impacts it. So it's mitigating factors like that that causes the third quarter to be down.

When you look at your auto business, there's no difference in what you expect for vacation versus a year ago? Where like last year when utility stocks were low, did they work through some vacation days that might make a tougher comp? Anything like that that we should think about?

Nothing that I'm aware of. The trends look very similar this year as they do in previous years.

Michael, you mentioned as a follow-up on a question on the unions, one-man crews. How important is that to management? Is that a do or die issue as you see it?

I wouldn't call it a do or die issue, but clearly there's some technology out there that's available to the railroads that can make it safer for both our employees and the communities we operate in. It's obviously a sensitive subject, and I'm not going to predict the timing, but I think you're going to see that technology introduced over time; and as it is introduced, we don't need as many people on the crew. So in this given round it's obviously a controversial issue, but I think over time you're going to see the technology introduced because it's safer and I think you will see a movement toward lesser people on the crews, on the trains.

Thank you very much.

Thank you. Our next question comes from Scott Flower with Banc of America Securities.

Just one quick follow-up. And I know that there's no precision here, but I guess this is for Oscar. Is this the lion's share of the insurance recovery, or can you give us any sense of what's outstanding in terms of discussions with the insurance company, understanding that you're obviously trying to work through what's the right number, or is this the lion's share in this quarter?

We've spent, Scott, and welcome back, by the way, we've spent about 80% of the money that we estimated to be our total cost; and of that 80% that we've spent, we've received proceeds of about 80% of that. And as far as you say with regards to any other conversation on this, I don't think we're going to talk about it publicly, but I think our conversations with our insurance companies are going well, and we'll keep reporting out. Your lion's share, those are the facts, there's still some money to be recovered and you'll see more of this in the next couple of quarters, more than likely.

Well I think, to recall, we have about $450 million worth of both business interruption and rebuilding. We expect -- there's a $25 million deductible, we expect to recover the excess, that 425 million. To date, we've gotten about 277 of it, Scott. That 126 in the recoveries we got, that's about half of what we expect to see eventually.

All right. Thank you very much.

Thank you. We have time for one more question. Our final question comes from Tom Wadewitz with JPMorgan.

Just a follow-up on the cost line items. On the comp and benefits per worker, it was down on a per-worker basis both first quarter and second quarter. Can we think that that trend continues in second half? And then I guess on the MS&O line, you mentioned the reimbursement benefit in the comparable quarter last year. Can you give us a sense for how big that reimbursement was?

Tom, yes. The reimbursement was about $10 million that we went through.

Okay.

And as far as the cost per employee, I don't have that number projected specifically, but, again, we will be hiring more employees in the third quarter and then have some attrition in the fourth. So overall headcount at the end of the year will be equal to where we are, compensation we'll continue to do and we have some other things. I don't have that specific data, but I wouldn't expect any meaningful change.

Great. Fair enough. Thank you.

Thank you. This concludes our question-and-answer session. I would like to turn the call back over to today's hosts.

Thank you and appreciate you joining us to hear the results for this quarter, and we'll look forward to reporting again next quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference call. We thank you for your participation in today's call and ask that you please disconnect your line. Thank you.