CSX Corp (CSX) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the CSX Corporation fourth quarter 2006 earnings conference call. As a reminder today's call is being recorded. During this call all participants will be in an listen-only mode. Afterwards you will be invited to participate in a Question and Answer Session. [OPERATOR INSTRUCTIONS] For opening remarks and introduction I would like the turn the call over to Mr. David Baggs, Assistant Vice President Investor Relations for CSX Corporation. Sir, you may begin.

Thank you, Lisa. And good morning, everyone, and welcome to CSX Corporation's fourth quarter 2006 earnings presentation. The presentation material that we'll review this morning, along with our CSX flash and our quarterly safety and service measurements are available on our website at www.csx.com under the investor section.

In addition, following the presentation a webcast and pod cast replay will be available. Here, representing CSX this morning, are Michael Ward, the company's Chairman, President and Chief Executive Officer; Clarence Gooden, Chief Sales and Marketing Officer; Tony Ingram, Chief Operating Officer; and Oscar Munoz, Chief Financial Officer. Now, before we begin the formal part of our program 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 President, Chairman and Chief Executive Officer, Michael Ward. Michael.

Well, thank you, David, and good morning, everyone. Yesterday evening we released fourth-quarter earnings that demonstrate our ability to sustain improvements in our operations, continue our momentum on yield and deliver record results in our service transportation businesses in a more moderate economic environment.

This morning we will review our fourth-quarter performance and provide some insights into what we see going forward in 2007. For the quarter, earnings per share were $0.75, including insurance recoveries, Conrail property gain and income tax benefits. On a more comparable basis, earnings increased 10% to $0.57 per share compared to $0.52 during the same period last year. Our service transportation businesses produced record fourth-quarter revenues of $2.4 billion and record fourth-quarter operating income of $487 million [sic -- see Press Release], up 15% adjusting for insurance recoveries. During the quarter, overall volumes were flat, as continued strength in our grain and coal unit train businesses were offset by some temporal issues in the automotive and housing sectors of the economy.

That said, overall yield for the rail and intermodal services remained strong. As a result, pricing momentum continued across all of our business segments. Through the direct efforts of Clarence Gooden and the sales and marketing team, overall revenue per unit exceeded $1,300, an all-time record for the company. This represents an 8% increase over the prior yearly levels, and we fully expect the pricing momentum to continue in 2007. Part of that confidence is reflected in the value we are providing our customers today through better service.

During the fourth quarter, Tony Ingram and the operations team continued to improve the network's performance across all key measures, and we continue to see that momentum thus far in 2007. In particular, I am pleased with the team's performance in safety. For 2006, personal injuries improved 21% and train accidents improved 24%. Unfortunately, we did have a major derailment in Brooks, Kentucky, last week, which you may have seen on the news. We've been dedicating our efforts to taking care of the community, the environment and assisting emergency responders and officials. We're grateful to area residents for their patience and to the public officials for their efforts and their support. We will continue our focused efforts there on a clean-up and restoration, but I am pleased to report that there were no serious injuries, the environmental remediation is under way, and the rail network is back to normal operations.

Now, turning to the economy, while the economic environment has moderate more recently, we continue to see solid growth for the U.S. economy in 2007 and 2008. This will provide a strong foundation for growth in some of our key market segments like intermodal. With that, let me turn the presentation over to Clarence, who will provide an overview of our revenue performance and outlook for each of our market segments in 2007. Clarence.

Thank you, Michael and good morning. CSX achieved another successful quarter of revenue growth despite the softness in the housing and automotive sectors. Overall, CSX generated record fourth-quarter revenues of $2.4 billion, which exceeded the prior year by $177 million.

Revenue growth during the quarter was led by our coal and merchandise markets. Overall volume was essentially flat, as continued strength in coal and agricultural products offset declines primarily in the automotive, phosphate, forest products and food and consumer markets. We also continued to improve yields, and we believe that the yield environment remained strong. As you can see on the next slide, in the fourth quarter of 2006, overall revenue per unit grew over 8% to a new record level for CSX. This was driven by increased pricing and our fuel surcharge program.

Revenue per unit gains were strongest in the merchandise and coal markets at 11%, followed by automotive at 4%, with all three markets achieving record levels. Intermodal revenue per unit decreased 2%, reflecting a change in traffic mix. Yet, the overall pricing environment remained strong.

As I have shared with you in prior quarters, the drivers of the 8% increase in surface transportation revenue per unit in the fourth quarter were approximately 60% due to price, 20% due to fuel surcharge and 20% due to mix. Let me give you a slightly different look on the next slide. Even as the year-over-year change in fuel surcharge and mix have become less favorable, the price environment continues to be strong.

The line on this chart reflects total revenue per unit over the last two years. As you can see, the year-over-year growth rate has declined in the last two quarters due to changing fuel price and mix. The bars on the chart reflect the increase in pure price, based on the same-store sales concept, which excludes fuel surcharge and mix impacts. Same-store sales, which represent approximately 75% of our total traffic base, is defined as shipments with the same customers, same commodities, and the same car types shipped between the same origin and destination. On this basis, we continue to see overall average price increases in excess of 6%. This includes both renegotiated and non-renegotiated traffic. So let me reiterate, the environment continues to be favorable for our pricing. Moving forward in 2007, we expect to continue our momentum in improving yield.

Let's look at some of the results in our merchandise markets. Quarterly merchandise revenue of over $1.1 billion increased nearly 9%. This represents the 19th consecutive quarter of revenue growth. The fourth quarter represents a new record for merchandise revenue, driven by stronger yields in all markets, as revenue per unit increased 11%. This occurred despite softness in several markets. We saw the most significant volume decline in phosphates and fertilizers, where increases in off-shore production and domestic plant closures continued to reduce exports.

The softening in the housing market reduced demand for forest products, chemicals and food and consumer products. This includes: lumber, roofing materials, aggregates, PVC pipe, and other building products. In addition, the softening in the automotive sector led to lower demand for metals and plastics in our chemicals market. Growth in agricultural shipments helped to partially offset these declines, driven by the sustained improvements in our grain unit train service and the continued strong demand for ethanol shipments.

Turning to the next slide and reviewing our results in coal, quarterly coal revenue of $604 million increased nearly 16% on a volume increase of almost 5%. Volume growth was driven by increased demand in the export and river coal markets. In addition, improved service and additional car supply drove volume growth in our coke and iron ore market. Overall demand in the utility market was slightly favorable as inventories are now at target levels. Revenue per car increased nearly 11%, and we believe that the favorable pricing environment in coal will continue.

Now turning to the automotive market, quarterly automotive revenue of $210 million decreased 7% on less volume. North American light vehicle production for the Big Three continued to decline by 11% in the fourth quarter, driven by a rapid decline in the SUV market. This decline more than offset the growth from the new domestic producers located on CSX. Long term, the company is well positioned to maintain a solid position with the Big Three, and for continued growth with the new domestics, such as Hyundai at Montgomery, and Honda at Marysville, as well as future growth at Honda at Greensburg, Indiana, and Kia at West Point, Georgia. Price increases and improved fuel surcharge coverage resulted in a revenue per unit increase of over 4%, and contract renewal opportunities will continue.

Turning to our intermodal results. Quarterly intermodal revenue of $358 million decreased 2% on flat volume as growth in international traffic offset decreases in domestic traffic. Although price on a same-store sales basis increased nearly 5%, overall revenue per unit decreased by 2%, largely due to mix changes. Mix impacts were driven by the loss of the higher revenue per unit domestic traffic and the increase of shorter haul, yet profitable, international and domestic truckload business.

Operating income for the quarter declined $5 million as a result of the change in mix, the loss of fuel hedges and a strong fall peak comparison in 2005. Yet full-year intermodal operating income improved by $20 million. Going forward, we remain confident that we will achieve significant operating income improvement in 2007, reflecting strong expectations for volume growth and pricing gains, as well as a continued focus on product activity improvements.

Now let's take a look at the revenue for the first quarter. Overall, our first quarter revenue outlook is positive. Pricing strength will continue to be the key driver across all markets. As you can see, in the near term, revenue is expected to be favorable in six of our ten markets and neutral in three others. The outlook for intermodal is favorable as we see benefits from improved operations and from our new service with BNSF between Atlanta and Memphis beginning in late February. Coal, coke and iron ore revenue growth will remain strong due to continued pricing strength. While first-quarter volume growth faces strong year-over-year comparisons, and uncertain weather impacts, automotive is expected to see continued production declines overall. As a result, the outlook for revenue and volume is unfavorable.

The revenue outlook for merchandise is generally favorable while the outlook for volume is unfavorable. The softness in both the housing and automotive sectors will continue to impact volume in revenue in several of the merchandise segments.

In addition, we will continue to cycle the impact of the phosphate plant closures through the second quarter of this year.

Let me close by looking at the overall business environment. The overall economic environment remains positive, with the outlook for growth in 2007 and 2008 expected to be about 2% to 3%. The favorable pricing environment continues due to strong demand, high fuel prices, driver shortages and increasing truck costs. While near-term volumes will be soft, reflecting the weakness in the housing and the automotive sectors, we will not sacrifice price for short-term volume gains. The focus reflects our long-term vision of leveraging the favorable transportation environment to support higher yields on existing traffic and higher yields on future traffic.

Thank you very much, and let me introduce Tony Ingram, our Chief Operating Officer.

Thank you, Clarence. And good morning, everyone. We want to give you a quick update on our three key performance drivers. First, our safety results continue to improve. The safety process is delivered.

Second, the network continues to run well. We're executing better, we're running trains to schedule, and our service is more reliable.

Finally, because we are running better, we are using our assets better. Rail cars are turning faster, locomotive productivity is increasing. Now let's look at our safety performance. On slide 17 you'll see our strong performance in safety continued in the fourth quarter. Personal injuries, frequency continues to trend down, improving 10% for the quarter and 21% for the year. Train accidents also continued to trend down, improving 16% for the quarter and 24% for the year. The momentum in safety is strong, our employees are committed to the safety process, and performance will keep improving over time.

We're also committed to service reliability, which leads me to my next slide. Both train origination and arrival showed marked improvement. We're running the plan with more discipline. Originations were 70% for the quarter and for the year, which represents a 49% improvement for 2006. On time performance was 66% for the quarter and a 63% for the year, which represented a 56% improvement for 2006. The team is focused on consistent execution by running the plan every day. As a result, our customers are seeing more reliable service. Turning to slide 19, you can see the better execution makes our network more fluid. When trains run to schedule, and terminals make their connections, cars spend less time in the terminals. On average, dwell time improved 17% for the quarter and 14% for the year. Cars online remained at a good level, down to under 225,000 cars for the year. I am pleased with these results. I expect to see continued improvements, which will drive service up and equipment rent down.

Now let's look at velocity. Slide 20 shows velocity, which is another measurement of our network fluidity. Velocity is the average speed of train when running between terminals. Fourth-quarter velocity averaged 19.8 miles per hour, consistent with the full-year average. This is a 3% improvement during 2006. Even more important, velocity was more consistent from week-to-week in 2006. This tells me the network is stable and delivering a more reliable service product for our customers.

Looking forward on slide 21, we will keep building on our foundation with leadership, discipline and execution.The momentum and safety will continue. The reliability of our service product is improving and we expect more. Finally, using the technology in our one plan, we'll adjust operations to respond to change in demand conditions. At the same time, we will manage resource levels to improve service, support the future growth and take advantage of better asset utilization. With that, I will turn it over to Oscar Munoz, our Chief Financial Officer.

Thank you, Tony, and good morning, everybody. Last night we reported earnings per share of $0.75 for the fourth quarter, an increase of $0.23 over the prior year. This was driven by surface transportation operating income, which increased $90 million, including a $27 million gain on insurance recoveries. Below the line, other income was flat with last year and includes a $26 million nonrecurring Conrail property gain recorded in the quarter. Finally, our tax line includes the impact of our increased earnings, which was more than offset by a benefit of $41 million, principally related to the resolution of certain federal income tax audit.

Turning to the next slide, I would like to review a reconciliation of our GAAP results. Removing the gain from insurance recoveries, surface transportation operating income for the fourth quarter was $478 million, an improvement of $63 million, or 15% for the quarter.

Moving to EPS, you can see the impacts from the insurance gain, as well as the Conrail property gain and the income tax benefits I previously mentioned. On a comparable basis, earnings per share for the fourth quarter of 2006 were $0.57, a 10% increase from last year.

Now, let's walk you through the details of our surface transportation results. On slide 25, and as Clarence discussed, our top-line growth was 8%, reflecting continued yield strength, increased fuel surcharge coverage and an overall favorable impact for mix. On the cost side, total expenses increased 6%, or $114 million for the quarter, the details of which I will review in the next few slides. The net result was a record fourth-quarter operating income of $478 million, a 15% increase from prior year, and 80.1% operating ratio. This was a 120 basis-point improvement from prior year.

Now let's start our expense refuel with labor and fringe. On slide 26, labor and fringe increased $22 million, or 3% over last year. This was driven by wage and benefit inflation of $18 million, higher incentive compensation, as well as higher costs associated with the year-over-year increase of 200 train employees, due to our continued commitment to hiring train crews ahead of attrition. These increases were partially offset by productivity gains from our improved operations.

Move to the next slide and review MS&O expenses. Sequentially, our MS&O expenses are consistent with the third quarter, and you can expect them to generally move with inflation and our business activity over time. On a year-over-year basis, MS&O expenses increased by $64 million, or 15% driven by two key items. First, primarily driving the increase, our net favorable casualty reserve and other adjustments we are cycling from prior year. In addition, we continue to experience higher than historical inflation levels, particularly with our material and insurance expenses.

Now, let's talk about fuel on the next slide. You can look at the quarter's $271 million fuel costs as being simply driven by our 150 million-gallon of fuel consumed at an average fuel prices of $1.81 a gallon. Overall, fuel increased $31 million, or 13% versus last year, driven by $58 million in lower hedge benefits due to our now expired hedge position. Partially offsetting the hedge loss was a reduction in average fuel price of $27 million.

Let's talk about rent. Overall equipment rent declined 8%, or $11 million, driven by lower volumes in our automotive and merchandise markets, as well as improvement in operational fluidity, which Tony referenced, which drove improvements in asset utilization.

On the next slide let me review the remaining expenses. All other expenses, which include depreciation, inland transportation and Conrail fees, increased $8 million, or 3% versus prior year. The primary driver's depreciation, which is higher due to a net increase in our capital asset base. So, that concludes our fourth quarter review.

Now, let's turn to slide 31 and look at our full-year results. For the full year 2006 we reported operating income of over $2.1 billion and earnings per share of $2.82 from continuing operations. Adjusting for the items you see here and the details of which you can find in our flash document, on a more comparable basis we produced full-year operating income of $1.958 billion and earnings per share of $2.22, a 31% increase from last year.

Now, turning to the next slide you can see the momentum we've established in growing our surface transportation operating income. Again, on a comparable basis our '06 operating income increased $409 million, a 26% improvement from last year and represents a new record for the company. The foundation that's been put in place over the last few years is beginning to take hold, and as you can see on the chart we have delivered significant results with growth in operating income more than doubling in just three years. And, additionally, as you can see on the next slide, our continued focus on both yield management and operating efficiency resulted in a 250 basis-point improvement in our operating ratio from 2005 and an over 800 basis-point improvement from just three years ago. Clearly, we are pleased with the progress we've made today that we will continue to work towards our goal of achieving a mid-70's operating ratio in the next couple of years.

Let me update you on the free cash flow and the capital spending for 2007. In addition to supporting the continuing investment in the business, I am pleased to report that we exceeded our original free cash flow target of $300 million. Before 2006, the company generated over $360 million in total free cash flow, including net insurance proceeds of about $80 million. Looking towards '07, we expect to generate $500 million in free cash flow, which is over $200 million more than 2006, excluding the insurance proceeds. As we have demonstrated, we will continue to have a balanced approach in the use of our free cash flow between reinvesting in our business and providing direct value to our shareholders through dividends and our share repurchase program.

As a result of the company's continued strong earnings performance and consistent with our philosophy of earning the right to spend, we are targeting capital of $1.4 billion in 2007. This investment level will be consistent with 2006 in nearly all respects, our primary spend will be on our core infrastructure followed by investments in new capacity, which will enable future growth and further improvements, of course, in our service reliability.

Lastly, we will maintain our steady investment in locomotives, rail cars and other supporting assets next year.

Wrapping up, the fourth quarter provided a very solid finish for 2006 and a year in which we saw improving service levels, record results and significant free cash flows. As we look forward to 2007, we expect to generate even better free cash with momentum building throughout the year. At the same time, we will sustain a steady level of investment in the business and continue our focus on improving productivity and service. Overall, we are gaining momentum and are confident that we will achieve our long-term targets of double-digit growth at operating income EPS and cash flow. So, with that, let me turn it back to Michael for his closing remarks.

Thank you, Oscar. Well, CSX delivered another strong year for our shareholders. Our stock was up 36% in the year that we also increased our dividend 54% and repurchased $465 million of our stock. Our surface transportation business again produced record results. In addition, we recorded a sub80 operating ratio for the first time in nearly a decade on the strength of better service and pricing and an organization that is driven to produce superior results. As we look at 2007, we are confident that the momentum will continue. While there are some temporal issues in the housing and automotive sectors of the economy, the foundation for the renaissance in our industry remains firmly in place, and the outlook continues to be strong. Long-term demand for transportation services remains high, and that translates into better yields and stronger margins for our shareholders. In addition, with longer supply chains and challenges in the trucking industry, the long-term growth prospects for our industry have never looked better. More importantly for CSX, we will leverage our momentum to produce even better results for our shareholders going forward. In 2007, which represents our 180th year serving America's transportation needs, we look forward to producing record earnings again for our shareholders. With that, we will be happy to take your questions, and as you do so please identify yourself for the benefit of those on the call.

[OPERATOR INSTRUCTIONS] Thank you. Our first question comes from Ed Wolfe with Bear, Stearns.

Hey, good morning, guys.

Good morning, Ed.

Clarence, why is coal revenue listed favorably in 14. I mean, given where stock piles are and some of the reductions we've heard out of Appalachia, why do you assume that that's going to be, on the positive side and if anything not in the neutral or the downside?

Ed, good morning. One reason primarily, we think our volume will be slightly down this coming year, but we think on the strength of some of the price increases that we are able to get both at the end of last year and price increases throughout this year, and on a couple of contracts that are being priced for the first time, we think we'll be able to get significant price increases, which will continue to take our revenue up.

Roughly, what percentage of your total business and what percentage of your coal business has not been repriced since '04 and what percent give or take this year?

Since '04 -- well, approximately 15% to 20% of our total contracts have not been repriced since '04, and in our coal business about 50% of our business has not been repriced since '04.

And what percentage in '07 do you expect of that 15% or 20% of the total to come up in the 50?

For coal, or for all?

For both, the 15% or 20% of the total and the 50% of coal that's still out there, what's coming up this year?

Well, I don't know if that has not been repriced. I know what the number is of our contracts that will be -- our total revenue base that will be repriced, and that number is between 50% and 60% of our total revenue base.

I'm not sure I understood that question. 50% to 60% is what?

50% to 60% of our total revenue base in 2007 will be repriced. And that's very similar to what our 2006 basis was.

I see.

That's not addressing how much of this has never been touched. We don't know that number.

That is correct.

Okay. Switching gears for a second, in a flat-volume environment with better productivity on the railroad in terms of speed and dwell and the railroad running better, do you expect to be continuing to add employees as we go forward like you did this quarter?

Why don't I take that. Hi, Ed, good morning.

Good morning, Oscar.

I think as we look forward into '07, our head count more than likely remained flat as the temporal business issues surface where we have a pretty fact-based and flexible planning process that we work through, and so at this point in time I anticipate it being flat or maybe even slightly down on the near term.

Ed, maybe no more than one other question. Because we do need to let others have their opportunity.

Sure. Last one. Clarence, on one of the slides showed that pure pricing on a same-store basis was 6.6% and later noted in intermodal it was about 5%. I realize there is a big mix change, but you break out international, and international was 1.3%. So, I'm just trying to understand if same-store is 5%, including domestic which is weaker, what's that 1.3% in international? How did you get -- what was different between the mix here or something else that gets to you that 5% same-store?

Recall, Ed, in the intermodal on the international it tends to be longer-term contracts, and all other intermodal tends to be on a very short-term basis. So, we're getting most of that price increase in intermodal either through our trucking operations there, or through our domestic intermodal pricing.

But you don't see it in 1.3%?

1.3% is in the international number?

Yes, you would think that if you had long-term contracts that number would be above the 5% same-store?

We haven't had any significant long-term international contracts renewed last year.

Should that improve in '07, then?

It will improve in '07, yes.

Thanks, guys, for the time.

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

Hi, good morning. Clarence, I just wanted to review something you said. You said on the intermodal side you saw the operating income decrease because of decreased domestic and a loss of fuel hedges and a lack of peak season. I just wanted to understand that loss of fuel hedges. Is that because trucking competition kicked in you didn't get surcharges or because you didn't add any?

Ken, it's Oscar. I think it is a function of a significant impact from the loss of the hedge programmed from last year that we're cycling. We did increase our fuel surcharge, and fuel price did decrease. The net of those three items did have a negative impact in the quarter.

Okay.

Did I get you there?

Yes. I just want to delve into that, then, if we can get a bit of an outlook here on the domestic intermodal side, obviously very tight into the truck market. What is your outlook I guess particularly with the start-up of your Burlington contract and with the Snyder volumes? What do you expect is your outlook for that portion of the business because it seemed to have kind of a negative impact on the intermodal?

Well, we expect that the first quarter our volumes pretty much going to be flat on a year-over-year basis. We think it will start picking up toward the end of the first quarter and then going forward, mainly because of the start-up of the BNSF business, which will occur partially in late February and hopefully be fully implemented by sometime in May. We think our Snyder business in our contracts with Swift and our business through Pacer will continue to grow. So we think we'll have -- we'll show some significant growth throughout the entire year of 2007, flat in the first quarter.

And, lastly, I just want to wrap up on what you had said about the intermodal operating income was down I guess sequentially. Is that something you expect to rebound on, on an operating income basis? You had also deterioration on the margin year-over-year. I just want to see what you do to fix that.

Absolutely. We expect to have a fairly significant improvement in our intermodal operating income for next year, and we expect our same-store sales in intermodal to also grow about 5% next year.

Great. Thanks, Clarence.

Thank you. Our next question comes from Tom Wadewitz with J.P. Morgan.

Good morning.

Hi, Tom.

Let's see. To start with here, question for you on the margins. You've seen pretty strong margin improvement throughout '06. Was it a more moderate pace if you look at fourth quarter with about 120 basis points versus call it 250, 260 on a full-year basis, and you identified a few kind of one-time items. I'm wondering, what's a more realistic pace to look at? Is fourth quarter kind of a realistic run rate going into '07, or do you think perhaps that understates the margin momentum in the business due to the one-time factors and maybe you get more on the pace you saw earlier this year?

Tom, this is Oscar. I think as the guidance we've given for the long-term is the double-digit increase in operating income, EPS and cash flows, and, in addition, the drive to a mid-70's operating ratio is something that we'll continue to work through. Outside of that, I wouldn't want to let the fourth quarter be a trend for anything. I think our '07 numbers, with the projections we've given you around cash, I think should suffice at this point for any kind of forward guidance. Thanks.

Okay. You mentioned, Oscar, I think a double-digit type of EPS growth, and I'm wondering should we model that with less growth in first half and perhaps stronger in the back half of the year given what we see as some near-term economic weakness, is it fair to look at things that way, or is that behind your double-digit growth comments?

Two answers. First, again, the double-digit was a five-year kegger for the five-year program. Absolutely. In 2007, certainly we will grow through the year, so some of the fourth-quarter temporal business softness, I think will continue into the first quarter as Clarence outlined, but we do see growth in a lot of the areas into the back half.

Okay. And I guess maybe one for Tony. I think when you get the rail networks moving in the right direction, or I suppose in the wrong direction as well, they tend to have some ininertia and some momentum which continues. I wonder if you see a pretty significant opportunity again in '07 for the network improvement to continue and to drive a pretty significant cost improvement opportunity as well?

Well, Tom, we still have some improvements to do on our productivity and improving our network, and I think there is still a little upside left in getting those as we go forward, and as our capacity projects comes on.

Thank you, Tom.

Okay, thank you.

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

Good morning, gentlemen. Clarence, I would like to talk a little bit about the intermodal contract again with BN. Just let me get this straight. You say it is going to be starting up in late February, is that correct?

That is correct, Jason. When are you guys going to ramp to the two trains per day? Is June still the goal?

Well, it will either in -- It is in May, is the time period now. Okay. May. That moves up a little bit. Okay. May for that. And Oscar, where we're modeling out, what sort of impact on the revenue per car load should we expect once this business is up and running? I'm assuming down, but to what magnitude?

Yeah, if you isolate this one in particular, Jason, yes, because it is its short-haul nature it will compute as a lower RPU, and again, without stating the obvious, the margin on the business is a strong one for us.

Right, right. Okay. And I guess, in general, if we just isolate the domestic business in the fourth quarter, I guess in early in the first here in 2007, is this where you're seeing sort of the most pressure for more truckload capacity out there, or other areas of the business that's getting a little more competitive as well?

This is Clarence again, Jason. In the fourth quarter the biggest impact on our domestic was in our transcontinental business, mainly as a result of less transloads on the West Coast coming to the east, and that is, as you know, fairly high revenue and margin business for us.

Right. Okay. Fair enough, gentlemen. Thanks for the time as always.

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

Gentlemen, good morning.

Good morning, Kevin.

Just another question on pricing, if I could. I think in Clarence's comments he made the remark that solid demand is one of the key drivers of the positive outlook for pricing, so my question is, we saw that industry volumes in general decelerated in the fourth quarter. So, I am just trying to get a sense for how much of your positive pricing outlook might be at risk if that continues or even gets worse, because I assume a portion of it would not be given the amount of commentary on the amount of business that's due to reprice anyway?

Well, Kevin, this is Clarence. I still feel very good about our pricing environment. The fundamentals have not changed in the trucking market, driver shortages, truck costs going up, the capital cost of new classic trucks increasing, insurance costs rising, and the business that we're after is that business is greater than 500 miles, and I think you're seeing a lot of downward pressure on trucks that are in shorter haul or regional trucking, so that's one reason. Second reason is, is that about 30%, 35% of our business is directly subject to truck competition, and we think we're able to compete in that market still very effectively. And third is that as our business comes up, we think we offer a very solid value proposition.

And we expect the 2007 the overall pricing environment is going to be the same as 2006.

Absolutely.

Okay. So, just to clarify, going back to your slide, which is a nice slide on slide 8 with the same-store sales, that's 6.6% or so range for a pure price is what you're expecting going forward in '07 as well?

That is correct, yes.

Okay. Thank you.

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

Good morning, all.

Good morning, Scott.

Just, I guess, a couple, maybe for Clarence and one maybe for Tony or Michael. What is your fuel surcharge coverage now, Clarence, if I could and obviously you're mentioned you're getting greater participation and what did it bump up in the fourth quarter year-over-year?

Scott, it covers about 85% of our traffic.

Okay and that's a combination of RCAP and fuel surcharge, right?

That is correct.

And then, just to -- one of the things you mentioned is, which I just wanted to probe, you talked about keeping discipline, and I understand that relative to the different opportunities in taking on shorter-term volume, but does the converse of that also work that maybe some of the volumes softness is that at the margin some of the peripheral traffic might be going away, but you're not going to chase it?

Ask me that one more time to make sure --

You mentioned about price discipline and you wouldn't, for short-term volume gain, wouldn't take pricing down which I understand and applaud, but does the reverse of that work. which is if some of the customers are rattling. that it is truck competitive for differential or changed pricing or not what you think is appropriate yield, you would be willing to let that business walk?

Yes.

And then, just lastly on pricing and revenues, can you give us any kind of ballpark, however you want to do it? Will we see a fairly significant step-up in the revenue per unit in the aggregate cold category because of these repricings, and can you give us any ballpark if it has been running 10% to 11%? Does that go up 15% or 16% on an aggregated toll? I am trying it get an order of magnitude of how the different repricing on a macro basis effect what we think about coal revenue per unit.

Our coal business on a revenue per unit basis, let me give you a range, will be in the 5% to 10% range.

Okay. For the coal unit.

The coal unit.

Okay. It will be up 5% to 10%, or --

You said on a per unit basis.

Right, per unit up 5% to 10%?

Right.

Okay. And the last question was more operational either for Tony and/or Michael, and I know that Brooks, Kentucky, incident got, obviously, the most focus, but there were a couple other chemical derailments that a little focus obviously in Albany, et cetera. I mean, is there anything in particular, are these just one offs, or anything we should be thinking about? Has the FRA contacted you relative to this, because you go back several years ago, when Amtrak had some issues on your network, they got focused. I'm just trying to get a sense of -- is there any commonality between those and whether the FRA is at all involved and does it have any demonstrable impact. My sense is, since you really haven't talked about it, that the impact is not meaningful from a financial context.

Well, the impact is meaningful, and the first thing we tried to do is get our community back in order and do the clean-up process, and we do have a trains now once that occurred, we've got the train operation back. These accidents happen occasionally. We try everything that we can do to improve it. Very seldom do these type of incidents happen, because the railroad working with the FRA and the NTSB do a lot of things to prevent these, so it is unusual we have these type of accidents going forward. So, I am not too concerned we have an issue with these type of things.

Scott, you alluded to some of the issues we have with the FRA maybe back in 1999. I don't think there is any issue around that we've been putting good money into our track structure, and it is very safe and we feel good about where it is. With your question around the financial impact of Brooks, just to get a little bit of view to that, obviously our concern has been on the communities, the environment there, estimates of what that may cost us are still somewhat tentative, but we're probably guessing somewhere in the ballpark of a $10 to $20 million issue.

Okay, Well, thank you very much, all.

Thank you. Our next question comes from Stephanie Leichter with Lehman Brothers.

Good morning. Leveraging the balance sheet has been a hot topic of discussion among investors recently among the rail sector generally, and I was wondering if you can please discuss your plans for cash flow in the balance sheet in terms of this going forward and if we should expect any changes and what your willingness is to leverage the balance sheet? Thank you.

Stephanie. Hi. Oscar Munoz. I think as we look forward we'll continue with our balanced approach and our use of cash and obviously focused on investing in the network and our business, and continuing the dividend increase in repurchasing share programs that we've done in the past couple of years. So, really no change at this point in time.

Great. Thanks.

Thank you. Our next question comes from John Larkin with Stifel Nicolaus.

It is actually Stifel Nicolaus but thank you anyway. Good morning, gentlemen.

Good morning, John.

Just wanted to get an update on the capacity expansion projects along the LNM and along the west bank of the Hudson. I guess you're probably something like halfway through all of that. Once you complete that, presumably at the end of this year, do you have other projects in mind, or would we expect CapEx to perhaps fall back a couple hundred million a year as you go back into more of a maintenance mode?

Hey, John, Oscar again. I will answer for Tony with regards to the capacity projects. Yes, you're absolutely right. They're about halfway done and on time and on budget, I guess would be the best recap on that. And as far as looking at CapEx kind of beyond '07 guidance we've given, I do not have any specific number to say share with you today, but I can tell you and this is what we talked about in our last investor conference, we'll generally stay in the 12% to 13% of our top line and I don't think there is any change to that guidance today.

Okay. Thank you. And maybe some discussion on the One Plan. One Plan was kind of the centerpiece of the operational turnaround and we don't hear too much about that, in your formal remarks, at least. Wondering, with still some improvement in the operating metrics possible, whether there are still elements to be implemented or whether it's now more of a fine-tuning process at this point?

Well, you pretty well got it. It is a fine-tuning process that we're at now, but it will constantly change as the different market swings and changes, and with the technology we have at this day and time we can change the plan as we go along. So, we are adjusting as far as example the automotive volume went down on us, and we just didn't take out a few trains to compensate for those volumes. So, we're constantly reworking it as the traffic pattern changes.

There there ever be a time when on-time performance might be up in the 80% to 90% range?

I hope. We're busting 80% right now, this month.

Then maybe a longer-term question for Clarence regarding the changing patterns in ocean container shipping. As we begin to see more and more traffic coming through the Suez across the north Atlantic to New York and New Jersey, when do you begin to see your preferred route from New York to Chicago really come into play there, which could drive some nice intermodal traffic moving in the opposite direction that it has been historically moving?

Well, we've been seeing some of the that, as you're aware, in the past year or two, not to the significant levels we anticipate seeing in the out years coming, but we're looking at capacity expansions right now in both the New York area, as well as in the Savannah and Jacksonville and Charleston areas, and connectivity at Norfolk to all of those ports so that we'll be able to handle that volume as it comes on through that Suez Canal.

Okay. That's all I had. Thank you very much.

See you, John.

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

Hi. Just a quick question, I am not sure I caught it when you mentioned it. On the mix effect with regards to intermodal, do you start to see that stabilizing in terms of the short-haul component of it at some point?

I think that for the calendar year, Jordan, 2007, you'll see our average RPU go down and the intermodal business in particular, because of the mix issue, particularly with the volume numbers that the BNSF, but you will see the same-store sales numbers for intermodal continue to go up in price in somewhere around the 5%-plus range.

Okay. And just out of curiosity, I know you had mentioned a few reasons for the profits to be down in intermodal in the fourth quarter. Relative to your plan or budget or expectations as you went into the quarter, how short did it wind up being, and I imagine you knew with the fuel hedge and the mix, I imagine it was the volume-related reasons that might have caused the differential?

This is Oscar, Jordan. Really, from an internal forecast perspective as Clarence mentioned, the fall peak is predominantly made up of high margin product, and some of that did materialize, and so at the understand of the day that's the bigger driver.

Okay. So it was not anticipated going in, though, that things would be to the negative on the profits?

That's -- exactly, that the volume wouldn't come in as strong as we have, and of course we always own the operational need of being able to drive our cost out and certainly we could have been faster than that. But again, I just want to reiterate that we've had 10 consecutive quarters of profitable income there. And so ne quarter does not a trend make, and we are bullish on '07 operating profit.

Just a final question, if you assume for the moment that volumes kind of stay flattish, at least temporarily here, and you assume same-store pricing is up in the 5% percent range, 5% to 6%, and some other various cost inflation pressures, can velocity -- does velocity need to push higher, can stay about the same to continue to get operating ratio improvement in that sort of environment, or do you need to see additional operational improvement with flattish volumes and price up 5% to 6%, or at the 19.8 mile-per-hour level you could still get the operating ratio improvement?

You know, I will take that one. As far as the financial modeling, and I think Tony can speak to the issue, velocity while a key metric in our business, I think Tony said it best, we're about a consistent conveyer-like sort of service level to our customers. And so I think the first step of making it very consistent from week to week has been Tony's first charge, and he's accomplished that well. As we move forward, clearly his internal plans are to improve that, and, yes, that is one way or turning assets quicker and gaining additional productivity. So, in your hypothesis of flat volumes, which again, we're not there, just as a quick reminder as far as long-term, but in that world it is more than just a price game. It is always a continual productivity across all angles, not just Tony, but the rest of the company as well.

Thank you.

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

Yes. Good morning, gentlemen. Just one little housekeeping tidbit, since it was responsible for at least one percentage point over the overall increase in reg, what drove the $25 million increase on the other line from $27 up to $52 million for the quarter?

I am sorry, Don, once again.

The other went from $27 million to $52 million. Seems like knit picking, but it was responsible for one percentage point of the revenue gain.

This is the below the line?

This is looking at you got total merchandise, call, auto and other before you get to total rail. It goes from 27 to 52.

I am sorry, we had several other items that didn't get that. That item is the earnings from our partially wholly-owned subsidiary in the railroad business. We have Peduca and Louisville,the Indiana Railroad and that's their operating results.

Alright. Fair enough. Thanks.

Thank you. Our final question will come from Ed Wolfe with Bear, Stearns.

Welcome back, Ed.

It has been a long loop around here. Clarence, in my other questions before you said you expected coal volumes to be down, and I just wanted to first of all make sure I heard that for the year, and get a sense of what I should think of in terms of revenues, or if you're more comfortable, same-store revenues for coal if volumes are down in '07?

Well, volumes will be slightly down in '07 versus '06, and again weather-dependent volumes. So, when you leave the hotel today turn on everything before you leave. And secondly, you can expect, depending on certain variables in there, that our revenue per unit will go up somewhere in the 5% to 10% range in our coal for next year.

So revenue somewhere between 4% to 9%?

I would have to do the math.

A little bit of down in volumes. 5% to 10% becomes 4% -- something like that.

Okay. Thanks a lot. I appreciate the time.

Thank you everyone for joining us today. We look forward to reporting some results for you that are just as pleasing in the second. 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.