CSX Corp (CSX) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CSX Corporation third quarter 2007 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 David Baggs, Assistant Vice President, Investor Relations for CSX Corporation. Sir, you may begin.

Thank you and good morning, everyone, and welcome to our first quarter call. 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 web site at csx.com under the Investor section. In addition, following the presentation this morning, a web cast 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 this morning, let me remind everybody 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 statements. And with that let me turn the presentation over to CSX Corporation's Chairman, President, and Chief Executive Officer, Michael Ward. Michael?

Thank you, David, and good morning, everyone. Yesterday we announced earnings per share of $0.52, including insurance recoveries. On a comparable basis, our earnings were $0.50 per share versus $0.53 during the same period last year. These results highlight the earning power of our service transportation businesses and the secular shift that's taking place in our industry. Our service transportation operating income was $469 million, excluding insurance recoveries related to Hurricane Katrina. As we will demonstrate, our true earning power improved by $45 million when you adjust for two items outlined in our press release.

First quarter revenues were a record $2.4 billion and it was the 20th consecutive quarter of year-over-year growth. Even in a softer economy, revenue per unit was up 8%, reflecting the secular pricing environment we continue to see. This pricing strength overcame volume weaknesses in construction and auto-related sectors. Our operating team was able to sustain higher customer service levels in spite of some winter storms and two serious derailments that impacted our operations and caused disruptions to our neighboring communities.

Public officials, including the FRA, share our concern about the train accidents that occurred in the first part of this year. We've been working closely with them to promptly and aggressively address the safety issues identified in their report through heightened inspection standards and other specific initiatives with the FRA. Over the years we've made it clear to you that safety is the bedrock of our business, our values, and our cultures. The best indication of this is the fact that over the past two years we have reduced employee injuries by about 40% and train accidents by 30%. By operating a railroad with a higher and higher level of safety and customer service we'll continue to position our businesses for strong demand conditions we see over the long-term.

Now with that I'll turn it over to Clarence for a discussion of our market environment. Clarence?

Thank you, Michael, and good morning, everyone. This morning I'd like to highlight our first quarter results, the primary driver of those results, and offer some insights on what we see ahead for the remainder of 2007. CSX achieved another successful quarter of revenue growth in spite of the continued softness in construction and automotive sectors of the economy. Overall, we generated record quarterly revenues of $2.4 billion exceeding the prior year by $91 million. This was our 20th consecutive quarter of year-over-year revenue growth driven by yield improvements of $181 million, which more than offset the impacts of lower volumes. As you can see on the next slide, the pricing environment continues to be strong. The line on this chart reflects the year-over-year change in total revenue per unit, which includes the impact of pure price, fuel surcharge, and mix.

During the first quarter, overall revenue per unit increased 8%. This increase is in-line with the rate that we saw in the fourth quarter as the benefits of fuel surcharge and mix have moderated. The bars on the chart reflect the increase in pure price on a same-store sales basis, which excludes the impact from fuel surcharge and mix. Same-store sales are defined as shipments with the same customers, same commodities, and car types shipped between the same origin and destination. These shipments represent approximately 75% of our total traffic base. On this basis, we achieved average overall price increases of 7.1%. Let me remind you that in any given period, not all our traffic is up for renewal. These results reflect our continued focus on pursuing the highest yields on existing and future traffic despite some temporal weaknesses in volume. So let me reiterate that the volume -- the environment continues to be favorable for pricing; moving forward in 2007, we absolutely expect to continue our momentum in improving yield.

Now let's look at some of the factors driving volume change. While overall volumes were down 4% for the quarter, the real story is the trends in the quarter. As we enter 2007, we continue to experience the softness in construction and automotive sectors of the economy. In addition, you'll recall we had some pent-up demand coming into the early part of the first quarter last year. These headwinds contributed to a 4% decline in volume for the month of January on a year-over-year basis. As we moved into February, the benefit of a mild winter last year added to this year's headwinds and volumes were off nearly 7% for the month. However, by the end of the quarter weather impact had moderated. In addition, metals, chemicals, and phosphate shipments turned favorable and we began our new intermodal service with BNSF. As a result, even with continued softness in the construction and automotive sectors, our volumes were off a little over 1% during March. Even more intermodal growth expected into Atlanta and with the winter and difficult year-over-year comparisons behind us, we see an improving volume growth trend for the balance of 2007.

Turning to slide 9, let's discuss our merchandise markets. Quarterly merchandise revenue of $1.2 billion increased 5%. This represented a new record as the 20th consecutive quarter of merchandise revenue growth. This growth was driven by stronger yields in all markets as revenue per unit increased 10%, more than offsetting volume softness in several markets. We saw the most significant volume declines in our forest products, food and consumer, and emerging markets, where the softness in construction reduced shipments of lumber, building products, roofing granules, and aggregates. In addition, the continued weakness in the automotive sector led to lower demand for metals and plastics in our chemicals market. Although these segments did see year-over-year growth in the latter part of the quarter. Growth in agricultural shipments was slightly favorable as declines in grain shipments were more than offset by the rapid growth in the northeast ethanol market. The strong demand for ethanol also led to higher phosphates and fertilizer shipments, reflecting the increased need to fertilize corn.

Let's turn to the next slide and review the results in coal. The strong pricing momentum drove quarterly coal revenues to a record $633 million, an increase of over 9%. Carload volumes were down nearly 3% as declines in utility shipments were partially offset by the strong demand for export coal. However, total tons shipped were down less than 2% as we were able to ship more coal per carload. Revenue per unit increased 13% to a new record of $1,370, significantly more than offsetting the decline in volume. This reflects our continued focus on yields and we believe the favorable pricing environment in coal will continue.

Now turning to our intermodal results. Intermodal revenue decreased nearly 5%. Quarterly revenue of $318 million decreased 5% on lower volume. Operating income for the quarter declined $13 million, primarily as a result of a decline in other revenue of $11 million. This was driven by the termination of two customer agreements relating to the storage of containers and other ancillary charges. Price on a same-store sales basis increased 4.3% across the intermodal portfolio, yet the overall revenue per unit decreased by over 3% due to mix changes. New, shorter haul domestic train service into and out of Atlanta as well as other new dedicated train services drove growth in domestic traffic. These new services will be a catalyst for growth as the year progresses.

Going forward, we remain confident that we will achieve solid intermodal earnings growth in 2007, reflecting a balance between volume, price, and productivity.

Now turning to the automotive market results, quarterly automotive revenue of $203 million decreased 12% on a 14% volume drop. North American light vehicle production for the Big 3 continued to decline in the first quarter. We expect auto industry restructuring to continue in the future, resulting in additional plant closures. This trend continues to more than offset the growth from current international manufacturers located on CSX. Price increases more than offset fuel surcharge declines, resulting in revenue per unit increases of over 2%. The pricing outlook remains favorable as contract renewals continue this year. Long-term, we feel well-positioned with the Big 3 and for continued growth with international manufacturers such as Hyundai at Montgomery, Honda at Marysville, as well as future growth with Kia at West Point, Georgia.

And now let's take a look at the revenue outlook for the second quarter. Overall, our second 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 7 of our 10 markets, neutral in 2 others, and unfavorable in 1. In contrast to this past quarter, the outlook for intermodal is positive, as we see continuing benefits from improved operations and our new service with BNSF between Atlanta and Memphis. Coal, coke, and iron ore revenue growth will remain strong due to continued pricing strength, despite volume challenges from tough year-over-year comparisons. Automotive is expected to see continued production declines overall. As a result, the outlook for revenue and volume is unfavorable. These trends should improve in the second half of the year. The revenue outlook for merchandise is generally favorable, although continued softness in both construction and automotive will impact volume and revenue in several segments.

Let me close by looking at the overall business environment. Although economic growth remains moderate, the outlook is positive with growth in 2007 and 2008 expected to be between 2 and 3%. More importantly, the favorable pricing environment continues to favor the economics of rail. While near-term volumes will be soft, our overall volume outlook is improving. We are committed to providing excellent service and value for our customers, but we will not sacrifice price for volume in the short-term. This focus reflects our long-term vision of pricing to the market to support higher yields on existing and future traffic. Thank you very much and let me introduce Tony Ingram, our Chief Operating Officer.

Thank you, Clarence. Good morning, everyone. Let me update you on our key performance drivers. First, our safety results continue to improve and our people remain focused. Second, the network continues to run well. We're executing, we're running trains on time, and we're more reliable. Finally, productivity is improving. That allows us to make better use of the cars and locomotives.

And let's look at safety in more detail. Slide 17, you see that we continue to reduce personal injuries and train accidents. In the yellow box, you see personal injuries at 1.35 for the quarter. On a rolling 12 months, injuries were down 18% to 1.38. Train accidents were 2.84 for the quarter; on a 12 months rolling period they were down 21% to 3.17. Even though there were fewer train accidents, we had some significant derailments in the first quarter. As Michael said, we have been working with the FRA to correct problems found in recent inspections. Although the specific issues that were brought to our attention have been addressed and we continue to work with the FRA to prevent future accidents. Bottom line, our employees remain committed to safety and we're working closely with the FRA and our momentum on safety will continue.

Now let's turn to the next important area of focus, customer service. On-time originations were 74% in the quarter. On a rolling 12 months, our performance held steady at 76%. On-time arrivals were 64% for the quarter, and our performance held steady on a rolling 12 months. I would like to see more improvement here. However, I'm pleased by the way the network recovered from the winter storms and derailments. Our employees responded to these challenges and we'll build on our success.

Looking at slide 19, our asset turns are improving. On average, dwell was about 25 hours for the quarter and for the rolling 12 months. Our terminals were fluid and our cars made their connection. Cars online remained at good levels, averaging 225,000 cars for the quarter and for the rolling 12 months.

Now let's look at another measure of network performance, velocity. As a reminder, velocity is the average train speed between terminals. First quarter velocity averaged 19.9 miles per hour and is holding steady over the rolling 12 months. The network remains stable at a high level of performance and we are delivering reliable service to our customers. Looking forward on slide 21, our plan is working and we're going to stay with it. We'll build on the solid foundation with leadership, discipline, and execution. The momentum and safety continues as we focus on the prevention of injuries and accidents. Service reliability is improving and there's more to come. We continue to raise the bar on productivity and the use of our assets. At the same time, we're managing resource levels to improve service and support growth. With that I'll turn it over to Oscar, our Chief Financial Officer.

Thank you, Tony. A pleasant good morning to everybody. On slide 23 that shows our reported earnings per share of $0.52 for the first quarter, which is a decrease of $0.01 from the prior year that Michael mentioned. In the quarter we saw service transportation operating income of 487 million, including an $18 million gain on insurance recovery. Other operating income declined $8 million as we cycled a gain on the sale of equipment from our former container shipping business. As you move below the line, other income was also $8 million below last year, as an increase in interest income was more than offset by lower real estate, resort, and other miscellaneous income.

Finally, taxes are $12 million below prior year as our 38% effective tax rate was reduced this quarter by the resolution of certain state tax matters. Turning to the next slide, let me review a reconciliation of our GAAP results. On the top and after removing the gain on insurance recoveries, earnings per share on a comparable basis for the first quarter of 2007 were $0.50. Making the same adjustment to the operating income below on the chart, our Surface Transportation business produced earnings of $469 million.

If I could, let me put this result in a much broader perspective. If you turn to the next slide, slide 25, the real story this quarter has been how far CSX has come over the last three years and what it says, I think, about the future of this industry in this new environment. Our chart provides a clear picture of the impact the rail renaissance and the Company's ever stronger operations are having on our core earnings power. As our operations have progressed and the market has begun the see the value of rail transportation, the secular strength in our business has improved significantly. As a result, our first quarter operating income has more than doubled over the last three years and remains near all-time highs despite a softer economic environment.

Further, if we look specifically at the first quarter of this year on the next chart, you can see that our core earnings power is even stronger when you consider there were two key items driving the slight decline in our operating income. The first is the cycling of our now-expired fuel hedge position, which increased last year's first quarter results by $35 million. The second is the $28 million of expense to address the community and environmental impacts of the Brooks, Kentucky derailment. Absent these two items, our core earnings would have increased $45 million, or 9%, while absorbing the headwind of the mild winter the industry enjoyed last year.

Now let's get back to the financials and walk through the details of our Surface Transportation results on the next slide. As Clarence discussed on slide 27, we saw our 20th consecutive quarter of year-over-year topline growth. In total, continued strength in yields more than offset our decline in volume, resulting in 4% growth for the quarter. On the cost side, total expenses increased 6% or $109 million for the quarter, the details of which I'll review over the next few slides. Net result was a solid first quarter operating income of $469 million and an operating ratio just above 80%. So let's start our expense review with labor and fringe, which is our largest expense category, increased $14 million or only 2% over last year. While we had inflation of $21 million, lower volume and our continued focus on productivity and cost control helped to partially offset the increase.

On the next slide, MS&O materials -- expenses increased by $81 million or 17% over last year. About half of this was an increase in train accident expense of $42 million, most of which was the $28 million from the Brooks, Kentucky derailment.. Excluding these costs, expenses increased 8%, primarily reflecting sharply higher materials inflation and rising insurance costs, which the industry has been experiencing over the last several years. As we stated in the past only about 20 to 30% of total MS&O expenses are tied to volume. The remaining costs are more indirect in nature, such as contracted services, cost of risk, and infrastructure and equipment maintenance. In the near-term, you can expect the run rate on this line to continue growing at 6 to 8% on a year-over-year basis. Now to manage these costs, over the long run, we are broadening our supplier base both in North America and overseas.

Let's move to fuel. Overall, fuel increased $6 million or 2% versus last year. While there was a reduction in average fuel price of $16 million and lower fuel consumption with the decline in volume and ton miles this quarter, this was more than offset by the expiration of our hedge position which accounted for a $35 million benefit in the first quarter of last year.

On the next slide, let me talk about equipment rents, which declined 2% or $3 million driven by a reduction in rail car lease expense. Driving this reduction were lower volumes in our automotive merchandise and intermodal markets, additionally, the continued improvement in operational fluidity resulted in better asset utilization, further reducing expenses. On the next slide, let me finish with the remaining expenses. All other expenses increased $11 million or 4% versus prior. The primary driver is depreciation, which is higher due to a net increase in our capital asset base.

So with that, let me shift gears and update you on how we're returning value to shareowners. On slide 33, and as you may recall, on February 14 we announced a 20% increase in the quarterly dividend. Our third dividend increase in the last 18 months. In addition, we announced a $2 billion share repurchase program, which we expect to complete by year-end 2008. Specifically, we have a hard target of completing at least a 1.050 billion of this program by the end of this year, including the 179 million of shares repurchased this quarter. On total over the three-year period ending in '08, we expect to have repurchased 2.5 billion of outstanding shares. These actions reflect the strength in our underlying business and more importantly this team's clear and continuing commitment to returning value to shareholders. Now if I could wrap up on the next slide, the first quarter provided a strong start for 2007, with our earnings reflecting the momentum in our operations and a yield environment supported by the secular nature of our business.

As you may recall at our investor's conference in 2005, we shared our goals for double-digit growth of EPS, operating income, and free cash flow. At this point in this dynamic environment that we call the rail renaissance, we are clearly on a path to exceed our long-term financial targets. Now while we still see double-digit growth in our earnings, cash flows, and operating income, it is now a substantially higher base. In this environment, the opportunities to invest at returns above the cost of capital are increasing. With these higher returns and with our increasing earnings power, we will continue our balanced approach of investing in the business and returning value to shareowners through dividends and share repurchases. Now while our long-term plans continue to evolve, we will provide a much broader overview of our strategies and financial target at our September investor conference. With that, let me turn it back to Michael for his closing remarks.

Well, thank you, Oscar. I continue to be excited about the dynamic playing out in our industry and our Company. Not only are we seeing the external environment change to recognize the extraordinary value of rail transportation, but we're also seeing our people rise to the opportunities it presents. For CSX shareholders, the result has been a dramatic increase in earnings and value in recent years. We've enhanced our operations and our network to deliver long-term growth and have sharply increased buybacks and dividends to provide exceptional value for our shareholders. You know the story of the renaissance taking place in our industry. All the external elements we predicted a few years ago are now in full force, increased imports, highway congestion, the cost and environmental benefit of rail are all advantages that will be with us for many years to come. And CSX is positioned in parts of the country where those conditions will have the greatest impact.

At the same time, our team's working to increase customer satisfaction and we've made great progress. At CSX, we're proud of our heritage, but we're even more excited about the fact that our story is as fresh and exciting as it was 180 years ago. We're on target to deliver the best year in our history and we will continue to provide the value that our shareholders have come to expect from us in this new environment. So with that I'll take any questions you may have and ask you please to identify yourself and your affiliation for the benefit of those on the line.

We will now begin the Q&A session. [OPERATOR INSTRUCTIONS] Our first question comes from Kevin Maczka with BB&T Capital.

Good morning.

Good morning, Kevin.

Just a question on the $28 million derailment-related expenses, is that the entirety of the expense you expect there, or should some of that bleed over into following quarters?

Kevin, this is Oscar. I think the $28 for that particular derailment is all in for the quarter.

Okay. And for any other incidents that you've had to date, are you expecting any further charges going forward?

If they are, they're minimal, Kevin. I think the bulk of those two major incidents are in the quarter.

I'm wondering, separately, if you can give an update on this FRA investigation? You talked about safety in the prepared remarks, but can you give an update on where that stands?

Yes, this is Michael, and I'll be glad to do that. We've been working very closely with the FRA. As you know, I think we're very focused on safety and as you've seen, we've made some very significant progress in that. We're in nice dialogue with the FRA at this point about some potential enhancements to our technology and to our safety programs that we think are going to allow us to be even more safety going forward, so I think we'veaddressed, essential, all the specific issues they identified and we're working with them to improve our safety even further. It's a good cooperative relationship.

Okay. If I could just ask one more and then I'll turn it over. On the intermodal pricing, I think you said the peer price increase was about 4.3% on a same-store basis, but mix drove the negative revenue per unit. When do you think that mix will work itself through and we'll actually see the positive same-store sales translate into positive RPUs?

Kevin, this is Clarence Gooden. I think you'll see those mix issues throughout the entire year this year, mainly driven by two factors, the new BNSF business that we have, which is very profitable, but it's short-term business and it just began in late February, and the Snyder business that we handled between St. Louis and Marion, which began in the fourth quarter of last year is also relatively short haul business and both of those throughout most of 2007 will impact that mix issue.

Thank you, Kevin.

All right, thank you.

Our next question comes from Scott Flower with Bank of America Securities.

Good morning, all.

Good morning, Scott.

I know you addressed, obviously, working with FRM. Just wondering, will there be any capital implications? And secondly, are there things relative to your operation in terms of velocity, this will either help or hurt as we look at the data that you all report weekly?

Well, to date, Scott, we have made several improvements, we really haven't seen any material impact on our OE expense. On the capital side, as Oscar allude to, we are evaluating our future capital needs but we're really confident we can continue to improve that safety and reliability and still deliver real good shareholder value. I don't think there's major adjustments going on here, I think it's more fine-tuning and tweaking where we are at this point --

So there might be some tweaking on capital, but nothing substantiative out of this?

I would see no real material impacts.

Okay. One for Clarence. I know you alluded to this, but I want to ask two things on fuel surcharge, and I know you get a variety of them but was the year over year change in fuel surcharge fairly minimal in the quarter? And then related to that, has participation, and if you could give us a sense of what that is, has participation improved?

It was very minimum, and about 85% of our revenues now are covered by our fuel surcharge, Scott.

Okay. Well, thank you very much.

Our next question comes from Ed Wolfe of Bear Stearns.

Hey, good morning. A couple of things. Clarence, you've been talking about volumes picking up, if we go back to the beginning of '06, we're supposed to see volumes grow 2 to 3% at the end of the year. You still seemed pretty optimistic when you went over the revenue. When do you think we're actually going to see positive volumes in a quarter, if you had to call that right now?

Well, Ed in some of our markets, we're seeing those positive volumes. Automotive and construction, as you know, are working on our head, just to put it mildly. In our chemicals markets, we've been up. In our fertilizer markets, we've been up. In our metals markets, we've been up. Our emerging markets unit has been flat and that's a result of a lot of the construction material, particularly in the aggregates area being in there. We've offset it with some other things. Our ag markets have been up with the growth in ethanol. With exception of a couple of markets, construction, automotive, and paper being down, we've seen some fairly good vibrancy in our other markets.

When do you think, overall, though, do we turn positive? Do you have a sense of that. I'm guessing it's not second quarter, is it?

I don't think your automotive and construction markets will be back much at all this year. I think the more markets, though, will be reasonably strong. I think our intermodal will be reasonably strong.

You mentioned that export coal was strong, but you didn't talk about domestic coal with Appalachia production down almost double-digits this year, what are you expecting for domestic coal volume?

We think our domestic coal volume will be almost flat on a year-over-year basis. Most of our utilities are at their target stockpile levels.

Okay. Oscar, on the labor side, 2% is pretty good. Is that sustainable as we go out the next couple quarters, at least?

Thank you, it was a good quarter. I think over the course of the year -- we don't provide much guidance in these line items -- but the way I see it is our labor year-over-year will probably increase at less than inflation, inflation being 3.5 to 4. So somewhere below that is our productivity goals achieve their objectives.

Okay. I just want to make sure I heard this right. I thought Clarence's response to what pricing was in intermodal net of mix, did you say 4%? Is that domestic intermodal or is that combined?

That's combined.

And is the BN contract all under domestic, or is that a part of each?

It's a part of each.

Hey, Ed, we need to give others a chance to ask some questions, too. If you want to come back later. Absolutely, Thank you.

Next question is from Tom Wadewitz with JPMorgan.

Good morning.

Good morning, Tom.

I wanted to drill down a little bit further on the yield side. I know you've had a couple questions on this. I wonder if you could give us a sense of the breakdown of that 8.1% yield growth in terms of mix, price, and fuel specifically, and then I had a follow-up on that as well.

Well, this is Clarence. Price was at 60%, the mix was at 30%, and 10% was from fuel.

Okay. And in terms of the drivers of the price, I think our sense had been that coal was really where you still had legacy contracts left to reprice, but yet we see a real good strength in a lot of the other line items. I'm wondering, is there a legacy contract impact on some of the other line items, chemicals or other segments, or is this really you're taking a second bite at the apple or a third bite and you're still able to take up rates pretty aggressively?

We feel very positive able being able to increase price, so there were no specific legacy contracts in any of the other areas. It was just pure pricing vibrancy.

And do you think that pace continues in '07 if you look out to '08, do you think you'd expect some slowing in that, or is that something that potentially you can continue at that pretty strong pace in '08?

Tom, I feel good about it through '07 and '08. I think the fundamentals in the rail marketplace that we've talked about over the last two to three years are still fundamentally there and fundamentally sound. And I see no reason that we can't continue our pricing vibrancy.

Okay, great. Thanks for the time.

Okay, Tom.

Our next question comes from Ken Hoexter with Merrill Lynch.

Hi. Good morning. Can you -- Tony, I want to talk about the benefits of the ONE Plan. Has it kind of run its course as the on-time originations and destinations kind of stall out a little bit here, are there other things you can put in place to get those performance issues back up a bit, and is the safety issues sight into that at all?

Again, the safety issues are not closely tied to the operating plan that we got, which went we developed it, we called it the ONE Plan. This is the way we manage our train network, and we'll continue to make those adjustments. Looks like we had in the past with the automotive network when it went down. So we'll continue to make some adjustments on that, but with the winter that we had in February and the derailments, which slowed us down a little bit back on our performance, we continue to see that we've recovered there and start our improvements back. And you would probably anticipate that over the course of the year, we continue to see incremental improvements in those measures, we overcame this couple challenges in the first quarter. We won't see a big step function like we did last year, but we expect to continually incrementally improve those, which obviously helps both our service and our productivity.

Great. If I could just do a follow-up on the intermodal side for Clarence. Can you talk about what's -- is there anything particularly driving the slowing of East Coast port's relative to the West Coast's port's performance just seeing it looks like some of the volume that is coming east are slowing. Just wondering if there's a change in destinations there. Also, does the increase in domestic short haul moves that Clarence talked about, does that increase or decrease your potential profitability on the intermodal side?

On your first question, I'm not aware of any issues on those east coast ports. On your second question about the short haul nature of that business, we think it's very profitable. We think we've got it priced right in the case of one of the trains we have no lift cost on either end. In the case of the other train, we only have lift costs on one end of the operation. We turned the equipment very efficiently and the business doesn't dwell on our intermodal facilities for very long periods of time, so we view it very profitability.

Lower revenue, but high profit.

Thank you.

Our next question comes from John Larkin.

That would be John Larkin of Stifel Nicolaus, thank you.

We know who you are, John.

That's a tough one. In any event, foundation coal had a little bit of a strike here, which I think is now settled. Went on for two or three weeks. Did that have any impact on the recent coal loadings?

John, this is Clarence, and the answer is no.

Okay. Norfolk Southern is using $100 billion of taxpayer funding to increase the clearances on their line, I believe from Norfolk to Chicago. Are there any other projects that you have in mind that might also tap into federal funding? To help you out on the CapEx a little bit?

Kevin, this is Michael. Something not necessarily on the federal side, we've announced several months ago a memorandum of understanding, John, with the state of Florida, that basically, we're going to have allow them some commuter daylight operations around the city of Orlando, about 61 miles, they are going to put capital then into our S line in the middle of the state to allow us to increase our capacity down there and help us build an integrated logistics center down in central Florida. There will be a public/private partnership involved there with most of it being state money, not federal money. We think it's an exciting project for both us and the state of Florida, let us tap into that growing Florida market.

That won't be spooled out for a couple of years, though, will it?

Obviously, those things always take some time, John. We have the memorandum of understanding, we're working on the definitive agreements with the state at this point, and I think the anticipation is that would actually occur in late '09 early '10.

Okay, just one final question. There's been a huge amount of speculation over the last couple of months with some shareholders and private equity firms sniffing around about the real estate component of your asset base and how detachable that might be and whether there are other detachable assets. Do you want to talk a little bit about that? My sense is that it may be more difficult to detach the real estate than people are suggesting and that much of its that salable has already been sold.

John, I think you hit that just about on the head. As you know, we've had a number of real estate sales over the year. It's been a very good resource of income for us and I think the idea that you can somehow create some sort of REIT type structure doesn't hold a lot of possibility. I agree with your assessment of it.

All righty. Thank you very much.

Our next question comes from Jason Seidl with Credit Suisse.

Good morning, Jason.

Good morning, gentleman. A couple quick questions. Tony, if I can go to some of the operational numbers in 1Q. If we move out the fact that we had a more normalized winter versus a very mild winter last year, where do you think some of the -- how do you think some of the metrics would look?

Well, some of the biggest measurements that are affected by what we had in the first quarter is on-time performance and the turning of our locomotive, which will affect our velocity quite a bit and the recoverability of those kind of issues.

When you said that the originations for the quarter are around 73, 74%, in a more normal environment, you'd expect that to be somewhere in the upper 70s kind of range with where they're running now, wouldn't you?

In a normal environment, in the first quarter, we should have been around 80, 81.

80, 81, that's fair enough. Clarence, if I could get back to price a little bit here too. Very impressive in the quarter. You mentioned your outlook goes through '08 with a lot of confidence and then most of this stuff was not due to legacy contracts. I guess that was a little surprising. Most of that jump in the coal RPU, that was pure price and not repricing the legacy contracts in the past?

Coal was a legacy contract.

Coal was, okay.

Coal was.

In the other market it wasn't.

That's good. If you venture your telescope beyond 2008, what are you looking for in price? Is it more of a normalized 3 to 5% every year as you guys go out, door do you think it could actually go beyond that based upon some of you're pricing power that your are seeing now in the other non-coal market places>

I'm going to let my little telescope go out to 2008, because it gets a little cloudy after that.

My telescope gets cloudy after one quarter out. All right, gentlemen I appreciate the time as always.

All right.

Our next question comes from Jordan Alliger with Deutsche Bank.

A couple things. I think you mentioned a big reason that the intermodal profits were down was tide to a couple contracts on the ancillary storage services going west. I guess my question is, I guess twofold, one, did they walk from any core intermodal business, the transportation piece and how quickly, or do you expect to fill that back in?

There was two issues there. One, they didn't want, we did, because it did not involve our core intermodal transportation business, it was consuming a large asset that we had that we could better deploy that asset at a significantly higher profit margin without any additional capital expense. So that was one of the ancillary expenses. The other ancillary expense was during this time last year, we had a lot of RES-1 box pickup fee charges that we were able to charge because the market was red hot. And not being as red hot this year, we weren't able to get those type prices in the marketplace, and that was the other large ancillary charge.

Okay. Just as -- I know you guys don't usually give specific guidance, but given the profit trajectory, of the new BN business, etc., do you expect to see the intermodal profitability trajectory turn positive in the near-term, or will it take a little while to completely fill in?

Absolutely, for the full year. We expect the intermodal profitability trajectory to be positive.

Great. Thanks very much.

Our next question comes from Rick Paterson with UBS.

Good morning, guys.

Good morning, Rick.

Clarence, a quick one for you on price again. If you look at the multi-year contracts that did not roll over in 2007, that's the price escalator built into these deals? What I'm getting at, I'm trying to find out the floor run rate of price increases implicit in these contracts?

Let me make sure I understand the question. Going forward, on the contracts that are coming up, what is the rate of price?

Say a contract was signed last year, and it expires next year, so it doesn't get repriced in 2007, what's the annual price escalator in those deals?

Well, in most of those, it's RCAF. Is that your question? It will be the RCAF plus fuel surcharge.

Give us a ballpark run rate, I know it changes quarter-to-quarter, what's it been running at recently?

The last couple of years, it's been running at 2 to 3%.

Okay, okay, thank you.

That's just the RCAF.

The RCAF without fuel.

Right. Okay. So we should assume a minimum, you'll get 2 to 3% pricing probably this year as well, plus the legacy, plus the mix?

That's correct.

Okay, thanks.

Our next question comes from Sal Patel with Calyon Securities.

Good morning, just a follow-up question on the yield growth of 8.1%. My understanding is that earlier you said price was approximately 60% of that, so that leaves me to believe that pure price growth was about 5%, and mix was about, say, 2.4% of the yield growth. Going forward, what should we assume for that mix contribution to overall RPU? And if you could give me a little color on where the positive mix came from? You said that intermodal, I think, actually had some negative mix, so just curious about that?

A lot of that price, total price is going to depend on the fuel surcharge and what it's impact is going forward. On the mix issue, there's different mixes in just about all of our markets. For example, in our ethanol markets, there's been a mix impact because of the length of hauls that are going into the northeast. In some of our other ag markets, there's been mix issues there. I'm not sure how to give you a specific definitive answer on nearly 108 lines of business, how much mix is impacting that. Now, in intermodal, it's had, as we mentioned, the impact because of the BNSF traffic and the Snyder traffic.

Sal, this is Michael. Maybe I can try to make a cut at this. When we think about our business, the fuel is going to be what it's going to be. It's based on what the fuel cost is in the open market, and that's really hard to predict and we don't try to predict that. The mix, again, as Clarence said, there's a lot of lines of business and can be a lot of different things. What we really concentrate, what's the amount of pure price we're getting, because that's what's sustainable over the long-term. I think we've said several times in both '05 and '06, we've got 5 to 6% overall average price increases. We expect to see a similar type of price increases overall again this year. So when we think about the business, we think about what are we getting in pure price and the mix and the fuel are going to be what they're going to be.

Okay, thank you. Then just one question on cost, if I may. Excluding the $28 million derailment, X fuel costs were up about 4.7% year-on-year. Now you talked a little bit about what material service-- materials and services cost inflation should look like, can you give some color as to what overall X-fuel costs would look like on a year-over-year basis over the next few quarters?

Saul, this is Oscar. I think if you think about -- I'm hesitant to give any guidance, specifically to a bread line item, but I think expenses this quarter were particularly high for the items you noted and the weather in particular. On long-term basis, I'd say, roughly around inflation, maybe slightly below but that would be affective by our volumes as they come and go. I don't want to give any specific number, but all I'd say that first quarter was inordinately high because [inaudible]

That concludes the Q&A session. I would like to turn the conference back over to the speakers for any closing remarks.

We have no closing remarks and we thank you for your interest and participation today.

And that concludes today's teleconference. Have a great day. You may disconnect.