CSX Corp (CSX) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the CSX Corporation third quarter, 2008 earnings conference call. As a reminder today's call is being recorded. During this call all participants will be in a listen-only mode. For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Assistant Vice President, Investor Relations for CSX Corporation. Sir, you may begin.

Thank you Lori, and good morning everyone. And welcome to CSX Corporations third quarter, 2008 earnings presentation. The presentation material that we'll review this morning, along with our quarterly financial report and our safety and service measurements, are available on our website at CSX.com, under the investor section. In addition, following the presentation a web cast and podcast replay will will be available for your review. Here representing CSX this morning are Michael Ward, the Company's Chairman, President and Chief Executive Officer; Tony Ingram, Chief Operating Officer; Clarence Gooden, Chief Sales and Marketing Officer and Oscar Munoz, Chief Financial Officer. Now, before we begin the formal part of our presentation this morning let me remind everyone that the presentation and other statements made by the Company contain forward-looking statements and actual performance could differ materially from the results anticipated by these statements. With that let me turn the presentation over to CSX Corporation's Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Well, thank you, David. And good morning, everyone. The third quarter CSX demonstrated its continued strength at a time of significant economic uncertainty. Like any American business today, we continue to monitor our environment with vigilance. However, this morning we will provide you with the reasons why your business is resilient and can continue to succeed even through challenges in the economy. Lets start with our most recent results, yesterday we reported record third quarter earnings per share from continuing operations of $0.94. That represents a 40% increase from same period last year. Our strong earnings were driven by record revenues and operating income as well as our ability to sustain high levels of performance on our railroad. Revenues grew 18% to nearly $3 billion for two primary reasons. First, we were able to price our services to the value we're creating for our customers and recover the high cost of fuel. Our customers rely on the service, performance and efficiencies we offer, particularly in today's economic environment. Second, our diverse business portfolio affords us the ability to capitalize on growing segments even when other markets are experiencing weakness. In the quarter, the majority of our markets produced revenue gains, despite the ongoing softness in the housing and automotive sectors of the economy. The gains were led by shipments of export coal, grain, ethanol and metals. These factors, the capability to produce strong yields and the diversity of our markets create the opportunity to provide sustained earnings growth despite challenges in the economy. In addition, our employs continue to deliver high levels of safety, service and productivity. As a result, our operating ratio improved 250 basis points to a third quarter record of 75% and we continue on our path to the high 60s operating ratio by 2010. The strong performance of our railroad in the third quarter not only reflects the excellent efforts of our employees, but also the ability of our network to recover from major storm damage and disruptions along the gulf coast and in the Midwest. This morning we hope to give you some insight into the underlying strength and potential of our business which is derived from a business portfolio we've created and the performance we continue to deliver. With that, let me turn the presentation over to Tony to discuss our operating results. Tony?

Thank you, Michael. Good morning, everyone. Our focus on leadership, discipline and execution continues. That's what drives results in our business and we will take us to the next level. Looking at the quarter, excuse me, our safety measures show continuous improvement. In addition, we are delivering productivity to offset inflation and drive the operating ratio lower. Finally, operations were impacted by the weather in the quarter but the network remained fluent and stable and we expect service levels to improve. On slide seven, you can see where the network was affected by severe weather in the quarter. The New Orleans line was out of service for over five weeks due to storm damage from hurricanes Gustov and Ike. During that time, interchange traffic with our western partners was routed through other gateways, St. Louis, Memphis and Birmingham. These reroutes combined with heavy rains and flooding in the Midwest, caused congestion in some corridors and terminals and impaired key gateways. Overall, the network was stable and with the New Orleans line back in service, the system is recovering well. Now, let's look at the safety and service measurements in more detail.

On slide eight, you see our safety performance, personal injuries were 1.12 for the quarter, a 12% improvement from prior year. Train accidents also remained at low levels and showed continuous improvement. Our focus on safety is part of our culture and the team is producing strong improvements, but we also know that we can and must get even better. Now, looking at our service performance on the next two slides, the results clearly show that the impact of the recent storms. Looking at slide nine, the well and velocity were stable. For the quarter the well time was about 24 hours and went up from prior year due to congestion in some of our terminals. It was a similar story on the line of road, velocity was 20.1 miles per hour, down from prior year's levels. Looking at all-time performance on slide ten, on time origination and arrivals declined from prior year but remained at the low -- at the high levels we've seen since 2006. While not satisfied with these results the network is stable and proved to be resilient in spite of service disruptions. Looking forward our commitment to running a schedule railroad has not changed. We will drive on time performance even higher. In summary, we're operating at a high level in both safety and productivity. Safety performance is solid, but we can do better. Leadership will continue to take us to the next level. Our productivity initiatives are delivering as expected and we continue to drive the operating ratio lower. We will continue also our positive momentum and service and deliver more reliable service to our customer. As always, we get the job done with leadership, discipline and execution. Now, I will turn the presentation over to Clarence, to review the sales and marketing results.

Thank you, Tony. And good morning, everyone. In the third quarter our team again delivered strong revenue growth. With our diverse portfolio, a strong service product and managements focus on yield management, our results show that revenue growth continues to be sustainable, even in a more challenging economic environment. This morning, I will highlight our results for the quarter and the primary driver of those results while offering insights on what we see as we look ahead to the fourth quarter and to 2009. Now, let us look at the results. CSX achieved another great quarter of revenue growth despite continued softness in the housing and automotive sectors of the economy. Revenues increased 18% to an all-time record of nearly $3 billion as strong, market-based pricing and fuel recovery more than offset the impact of lower volumes. These yield improvements continued to reflect the value we are providing to our customers through consistent service. In short, the secular strength of our business has continued to generate revenue increases throughout the economic cycle as reflected at over six consecutive years of top line growth. Now, lets look at the revenue performance by market on the next slide. As Michael mentioned earlier, nine of our ten markets experienced strong revenue growth for the quarter. The only market segment that produced lower revenues was the automotive sector due to declines in demand and production. In agricultural products, coal and metals, we produced significant revenue growth on both stronger yields and volume growth. The remainder of the markets produced revenue growth as pricing gains and fuel recovery more than offset the weaker volumes.

Now, lets look at pricing on the next slide. As we have reviewed with you in previous quarters, the line on this chart highlights the year-over-year change in total revenue per unit which includes the impact of price, fuel, and mix. During the third quarter overall revenue per unit increased 21%. The bars on the chart show the increase in price on a same-store sales basis. This excludes the impact of fuel and mix. Same-store sales are defined as shipments with the same customers, the same commodities and car types shipped between the same origins and destinations. These shipments represent approximately 75% of our total traffic base. Same-store sales price increases were 6.2% for quarter, consistent with the increases you've seen over the last few years. Based on the service and the value we are providing our customers we expect our pricing momentum to continue into 2009.

And now, let's look at the major markets. Quarterly merchandise revenue increased 16% to nearly $1.5 billion. This growth was driven by stronger yields in all markets. Revenue per unit increased 20% more than offsetting the lower volumes which continue to reflect challenges in the housing and the automotive markets. We saw the most significant volume declines in our emerging markets, forest products and food and consumer markets, due to lower shipments of cement, aggregates, lumber and appliances. The terms of revenue all of the merchandise markets generated higher revenues with agricultural products, metals and phosphates and fertilizer producing the highest gains and chemical revenue growth, despite the impact from recent storms.

Turning to the next slide, lets review the results in coal. Quarterly coal revenues improved to $850 million, an increase of 31%. Continued strong demand for export coal drove overall volume growth. Utilities stock piles remain below prior year levels and we expect strength going forward as utilities replenish inventories. The basic need for domestic electrical generation, future potential for replenishing utilities stock piles and continued export strength, provide resiliency to the coal market even with reduced industrial production. In addition, the yield environment for coal continues to be strong with revenue per unit increasing 30% in the quarter. Price and fuel recovery were again the primary drivers.

And turning to the next slide, quarterly automotive revenue of $195 million was 2% lower than last year. CSX volumes were lower as North American light vehicle production once again declined during the quarter. However, pricing actions an increased fuel recovery, resulted in an increase in revenue per unit of 27% which helped moderate the impact of lower volumes. Turning to our intermodal results, intermodal revenue of $399 million increased 18% versus last year and revenue per unit increased 18% in the quarter, on higher fuel recovery and favorable mix. Volumes were flat as weaknesses in the international market was offset by growth in the domestic market. And finally, our continued focus on driving bottom line results through profitable revenue growth and cost control drove intermodal to record third quarter operating income of $97 million.

And now, let's look ahead to the fourth quarter and into 2009 across all of our markets. Even when excluding the impact of fuel recovery, our fourth quarter revenue outlook remains positive versus prior year. The outlook for revenue is favorable across six markets, neutral for three and unfavorable for one. Value pricing will continue to be the key driver across all markets as we deliver value for our customers through strong service. Merchandise should see revenue growth in agriculture products, chemicals, emerging markets, food and consumer and metals. Coal, coke, and iron ore revenues, are also expected to remain strong due to the strength in the export and utility markets and the favorable pricing environment. Intermodal revenues are expected to be flat as moderating volume losses in the international segments are offset by strength in domestic traffic. Revenues are expected to be flat in forest products and phosphate and fertilizer markets, as yield efforts are are expected to offset volume softness. Finally, the outlook for automotive is unfavorable as we expect declining volumes to more than offset the benefits from yield management.

In summary, as you can see in the pie chart on the left, markets with a favorable fourth quarter revenue outlook represent nearly 70% of our traffic base. We would be disingenuous if we did not address your concerns related to the current economic challenges and uncertainty. That being said as we look forward towards 2009, we will face continued and additional weaknesses from the housing and automotive sectors of the economy. In addition, the industrial sector and broader economy are expected so to slow in the first half of 2009. Yet, with our diverse business portfolio, we should continue to show resiliency as many of our markets we serve provide the essential needs for everyday life. While export coal, agricultural products and ethanol will continue to grow. Finally, we remain committed to improving the yield, which will more than offset the volume weaknesses reflecting the excellent service -- the value that we are providing our customers. Thank you, and now let me turn the presentation over to Oscar to review our financial results.

Thank you, Clarence. On slide 23, and as Michael mentioned earlier we recorded earnings per share of $0.94 up $0.27 from the prior year. Starting at the top of the slide and working our way down, revenues increased 18% to nearly $3 billion reflecting our strong service product and our focus on yield management and fuel recovery. This revenue growth along with our continued focus on cost efficiency drove an all-time quarterly record operating income of $733 million, a 31% increase over last year. As we move below the line, other income decreased $6 million and interest expense driven by the incremental debt issued over the last year increased $29 million. Next, income taxes increased $55 million due to the improvement in this year's earnings and finally, the number of fully diluted shares outstanding is 37 million lower reflecting the on going impact of our share repurchase program.

Now, let's review the key drivers of our operating income results on the next slide. In addition to our core earnings momentum, two unique items impacted our results in the quarter. First, we experienced a $44 million impact from recent storms which included loss revenue as well as expenses related to asset write downs and re-route costs. However, nearly offsetting this impact was a $39 million benefit in the quarter as a result of the two month lag in our fuel recovery programs. After adjusting for these two items the real story continues to be the strength of our core business which delivered earnings growth $180 million driven by a sustained focus on the fundamentals of our business. This momentum is also driving margin expansion which I will highlight on the next slide. Here, the Company's operating ratio improved 250 basis points to a third quarter record of 75.2%. This improvement was driven by our continued focus on pricing and productivity, which has been a consistent story over the last three years and has driven a reduction of our operating ratio of 800 basis points over that time. This quarters performance continues our drive towards a high 60s operating ratio by 2010.

If we turn to our third quarter cost structure on slide 27, overall expense growth was driven by significant higher fuel costs. Total expenses were up 15% overall and 7% excluding the impact of fuel. The increase in non-fuel expense was largely driven by the unfair ability in MS&O, which is the line item that contains the storm related impacts. The remaining expense items collectively were essentially flat on a year-over-year basis reflecting general cost inflation, offset by lower volumes and productivity. Now, let's look at our expenses in more detail. We'll start with fuel. Total fuel costs increased 54% versus last year and the table on the right outlines the main drivers. Of course, the primary driver continues to be the price of fuel which increased expense $173 million, resulting from a $1.32 or 59% increase in the average price per gallon. Slightly offsetting this impact were lower volumes and our continued focus on fuel efficiency. On the chart to the left efficiency is measured by gallons per thousand gross ton miles improved by 3% in the quarter and resulted in $8 million of year-over-year savings. The remaining variance in the quarter was driven by the increase in our non-locomotive fuel expense also reflecting a higher fuel price.

Lets continue with our expense review on the next slide. Labor costs increased only 1% or $6 million from last year primarily driven by wage and benefit inflation. These increases were mostly offset by net labor productivity savings of $16 million associated with the reduction in train crew head count. As you can see from the chart on the left we were able to lower head count around 800 people or 2% year-over-year, reflecting our focus on cost control. On a go forward basis we expect our labor and fringe expenses to increase less than inflation as we achieve our productivity objectives and you can expect that we will continue to size our resources to meet business demands.

Now, moving on to MS&O on the next slide, these expenses increased 21% or $97 million versus last year. This quarters result reflect a few key drivers. First, as I mentioned earlier, the impact from storms in the quarter totaled $44 million. Of that amount $30 million of expenses are included here and were primarily driven by the write off of the lines destroyed by the storms. Next, proxy related costs were $16 million in the quarter and we expect no further impact going forward. In addition, our cost of risk was up $11 million year-over-year which was predominantly driven by derailment costs associated with high value cargo. Finally, of the remaining expense items totaling $40 million roughly half is attributable to inflation, the other half is driven by a number of smaller items, none of which are are significant by themselves.

Now, turning to rent on the next slide, this expense decreased 7% or $8 million in the quarter as volume and lease-related savings more than offset a decline in equipment utilization. The chart to the left shows payable days per load which measure the utilization of the freight cars where we pay rent. As you can see from the blue bars on the chart our total payable days per load increased 23% versus last year reflecting the impact from the significant decline in our automotive business. If you exclude these multilevels our days per load performance still increased 10% reflecting the storm impacts of the additional time associated with re-routes and terminal dwell that Tony mentioned earlier. Looking forward, you should expect our rent expense to continue to move with our business volumes.

On the next slide, lets talk about the remaining expenses. All other expenses increased $12 million or 4% versus prior year. Appreciation was up $7 million as the net increase in our asset base was partially offset by lower depreciation rates when the life studies completed in the prior year. Finally, our inland transportation expense was 8% higher driven by the increase in intermodals transcontinental business and general inflation. This concludes the P&L review for the quarter. Now let me update you on our share repurchase program, our liquidity position and financial guidance over the next few slides.

Starting with our share buyback program on slide 32, the Company has repurchased almost $4 billion or close to 90 million shares of its outstanding common stock since 2006. During the third quarter of this year we repurchased $836 million or just over 14 million shares. With the remaining $2 billion of authority under our existing program we expect our cumulative share repurchases to approach $6 billion by the end of 2009. This program is supported by the Company's strong liquidity position which I will highlight on the next slide. After satisfying debt that has come due in the early part of the fourth quarter, we only have an additional $412 million of debt maturing through to 2010. With our sound cash balance, our access to investment grade markets and with free cash flow that is expected to remain strong going forward, we are well positioned to weather the current crisis in the financial markets.

And so, let me wrap up with our 2008 guidance. Building on the results of our third quarter and reflecting the current economic uncertainty we are targeting full year EPS now at the low end of our range of $3.65 to $3.75 on a comparable a basis. We remain confident for several factors, and as Clarence mentioned, we see continued strength in pricing and we expect consistent same-store sales pricing growth through the end of the year. Second, moderating fuel costs and continued cost control to our various productivity initiatives, will help mitigate inflationary pressures and finally our diverse business portfolio is enabling us to grow earnings throughout the current economic cycle. In addition we continue to expect strong free cash flow of about $1 billion for the year after the $1.75 billion of CapEx. With that let me turn the presentation back to our chairman for his closing remarks. Michael?

Well, thank you, Oscar. To some investors, the results you've heard today might seem inconsistent with the current economy. The fact is, while no company is immune from the realities of the economy, the relative value of our transportation service stands out in an environment we are seeing now. Our customers are relentlessly focused on their supply chains and railroads, like CSX, offer the best ground transportation alternative. Our job is to deliver superior safety, service and productivity while operating a transportation network thats flexible enough to adjust to the economic conditions. Our one plan and our culture of accountability allow us to do those things well. And our performance is built on a Company with a strong balance sheet and a resilient business portfolio. We are confident that CSX is well positioned to deliver high levels of customer and shareholder value. In fact, as you saw in our press release we have reaffirmed our long term financial guidance. Both now and well into the future, the transportation outlook favors rail not only because we offer the most efficient way to move products but also because rails take traffic off the highways, reduce fuel consumption and help the environment. CSX employees view this as an opportunity to produce kinds of positive results we discussed today by constantly inventing new and better ways to improve our business processes. So, at the end of the day, CSX is positioned in an external environment that favors our services and with an internal culture that is geared for performance and durability. We believe that makes us a truly unique investment in today's capital markets and it motivates us to deliver even more value to you, our share holders. So, with that, we'd like to open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from John Barnes with BB&T Capital.

Hi, good morning, guys. Two questions, number one could you talk a little bit about coal volumes during the quarter. It looked like export coal volumes maybe were a little weaker than expected, just elaborate on that and has there been any change in your outlook on export coal volumes?

John, this is Clarence Gooden, on our export coal volumes going forward, there's no change on it. We expect the export market to remain fundamentally strong. There's a worldwide inadequate supply of metallurgical coals, the API2 index and rotterdam (inaudible) thermal coal, although is down, is still up significantly by historical standards. On your second question, we were able to meet most of our requirements with little exception on export coal for the, during the third quarter. We've maintained our supplies to our producers equipment going forward. We've got adequate crews, locomotives and cars committed to the service, so numbers really, John, were what they were based on what the demand was at the time.

Okay. All right. Very good. Oscar, in looking at your full year guidance, obviously if you look the $0.94 that you reported -- if you add it back in, I think you said the impact from the hurricanes was $0.06 to $0.08, you would be looking at something of the magnitude of $1.02 or something like that. As go back and look in our model in prior years typically you have a little bit better fourth quarter than you do third quarter so I am just try to go understand, you know, exactly, you know, what the big fear is, is it, you know, are you worried about a more severe slowdown in volumes in the fourth quarter? It doesn't seem like pricings really been impacted by that. So, I wouldn't imagine pricing comes off that much or is there something in the OR we should be prepared for in the fourth quarter that maybe we don't have currently modeled?

John, yes thanks, yes a couple of events I think that have transpired over the last couple of weeks and probably the most significant and these are all top line issues, I think GM shuttered a few more plants than were expected. And I think that's going to continue to affect our automotive business clearly. As you've seen and as you'll continue to see in addition, the international intermodal business is a bit soft. And we do have, although small, some lingering effects as our chemical plants, really while our lines are up and running, some of our customers not yet quite up and running. So, I think the combination of those three items offset by fuel, offset by some productivity, I think is what is sort of the component drivers for that range going down at the lower end of our range.

Okay. All right. And does any -- I mean would the change in the, you know, kind the economic climate in the last couple of weeks, you know, couple of months, you know, are you still comfortable with the guidance -- the longer term guidance that you gave a month ago or so?

Yes, from a 2010 perspective as we reaffirmed in our press release, yes, we are. For the environment that we feel today we're comfortable. Thank you, John.

Okay. Very good. Thanks, guys.

Thank you. Our next question comes from Tom Wadewitz with JPMorgan.

Yes, good morning. Lets see, I had some questions on the look at 2009. I know you're reiterating the view on earnings [kager] and so fourth for both 2009 and 2010, but wanted to see if you could comment a little bit on what you think of the volume outlook for 2009 specifically and then also on pricing as you look into 2009, is it, you know, similar to 2008? Is it moderately lower, and what the view is on those two elements in 2009?

Well, Tom, calling 2009 obviously is a little difficult given some of the concerns out there in the economy. We have not been feeling the impacts to date in our current shipments they're continuing to be down a little bit as they have all year. And I think as Clarence alluded to, we expect to see some weakness in the industrial sector in the -- certainly in the first half of 2009 and continued weakness in automotive and housing but we also think that we're going to see the continued strength in coal and phosphates, fertilizers -- I mean in ethanol and agg. So, overall we still see, it may be down 2% to 3% versus this year's volumes. Go ahead, Oscar.

No, I just, I think, as we -- as what Michael said clearly there is some things we're feeling or not feeling today as the case may be but what we have line of sight as we move forward into, things we control to a degree. And that's price and productivity. We have a great line of sight towards those items. And while we still feel comfortable we are, there's a lot of things happening around the world and as you'd expect us to do, with the ranges we provided for you in long term guidance, we've done our own sensitivity analysis and because of the ranges we've given you, we can -- from the year end volumes, we can drop 2% to 3% in volume. And again that's not our plan what so ever, but we do have that range and still be within the guidance. So, we're thoughtful and considerate about the future. We've viewed everything -- from what we feel today, we are comfortable with that long term guidance.

Oscar, when you say you can drop 2% to 3% and still be within the guidance, you're saying in 2009 you could have volumes down 2 to 3. And 2009 results would still be in that 20% to 25% earnings growth guidance or what do you mean by that comment?

Tom, you know what, we're starting to stretch that guidance, I mean I just -- I think as we've proven before our guidance is thoughtful and considerate and has sensitivity and what I can tell you is it has a volume range that we can afford to move from, but that is not our plan. So, we'll keep you posted.

Okay. But there's not much volume sensitivity in term of the guidance. I guess, one other question on pricing or I guess two within the pricing, what -- Clarence, what do you think pricing might look like in '09 versus '08? Do you think it's kind of broadly similar trend or would you expect a meaningful deceleration and you've talked about line of sight. Can you give us a little bit more perspective on what gives you a good line of sight to '09 pricing at this point?

I would answer your first question as saying it will be broadly similar to what you've been seeing. I would answer your second question by saying by -- what we mean by line of sight is we get about a third of your contracts that we've already got negotiated and finalized going forward into next year. We're in the process of negotiating about another 0.3 so we've got some feel for that and a final third will be negotiated mostly in the first half of the year and we see no reason to deviate off of the course that we are on. We feel very strong. It's strong pricing going forward here.

Okay. Great. Thank you for the time. I appreciate it.

And Tom, I'd like to add too, in economic downturns here, the value proposition that rail offers is very strong and our service is strong and that's helping us to continue to get the pricing that we're getting.

Okay. Great. Thank you.

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

Great, good morning. I guess I want to just follow up on the outlook question for a quick second, but. When you look at your high 60s target, is this kind of a perfect environment? I'm just looking at the world that we just went through last quarter. Does it include kind of the normal swing of hurricanes and floods that we see as working as an outdoor sport or is that kind of a high 60s target if everything goes right in the second year of that target?

Ken, it is Oscar. Clearly, as we model things going forward, the concept of contingencies is always built into a normal planning cycle. And because we do operate in the kind of world that we do, there is some level of expectation that those things will continue. Anything obviously majorly catastrophe of some nature is not always built in, but I think as a general rule, we have a lot of those things built in. We're not expecting a perfect storm to hit that guidance number.

Okay. If I can follow up with Clarence on the pricing side, if I look at coal and agg, pricing was up 30%. If I look at the rest of the group it was somewhere between 10% and lets say 20% on a yield basis. Was there something that is going on with the agg pricing? Are they just better at getting fuel surcharge recovery. Are you taking pricing up in those particular commodity areas, you know, twice the rate you are in other areas? Just wondering why we would see such significant out liers when fuel is such a big part of this equation.

Two factors in agg. The first was we got some generate increases a couple of fairly large contracts on the purely agricultural side of the business. And the second factor that was driving it was a significant growth in our ethanol business which came at fairly high rates. So, the revenue in ethanol was up almost 124% in the third quarter. And the case with coal it was primarily driven by higher rates in fuel particularly in the export coal market.

And now when you talk about contract renewals, what percent of coal have you still not touched yet since, lets say, '04?

By the, by the end of this year, there will be about -- we'll have in total legacy contracts, including coal about 7% of our contracts left. And Ken, as we discussed the last time, most of those renewals then are in the out years beyond 2010. So, it will be 2011, 2012 type time frames for those.

So, nothing major coming up next year?

Most of the stuff we've got coming up next year, we pretty much finish renegotiating already.

Great. Thanks for the time.

Our next question comes from the William Greene with Morgan Stanley.

Yes. Clarence, the one area you're looking to see weakness coming up here is autos, but I realize the way you guys report that is that might just be sort of the finished vehicles and parts. So, if you looked in total at the inbound and outbound for the total auto industry that goes through your network. What percent of revenue or volume would all auto and auto related be?

I don't know because we got -- you got -- you've got sand that's involved in that, you've got plastics, you've got chemicals that get involved in that, you've got sheet steel. I would tell you that commodities like sheet steel, right now down in the marketplace, are significantly down in the metals market and all of the industries that are associated with automotive are down.

All right. So, if we look at the same-store sales number that you've talked about, this 6% that you got. When you look at what's driving that, can you estimate how much of that's being driven from, lets say, economically sensitive traffic, versus commodity like stuff rather like coal or grain?

I would tell you that we've had better pricing in the coal and the commodities than we've had in the consumer related goods, things such as appliances, things on the -- that's moving by -- truck conversions over. We're not getting as much of the price in there as we are in the other commodities.

Okay. And one quick last one. If you look at 2009, what percentage of the revenue is sort of contractually locked in? How much pricing is already known for 2009?

As I said earlier we've about 0.3 of the contracts completed we're in negotiations with about 0.3 and the other 0.3 will be in the first half of 2009.

So, 0.6 you kind of mostly know, is that a safe way to say it or do you have to wait until you get to '09 is that last 0.3?

I would say we have good line of sight towards that.

Okay. Thanks for your help.

Uh-huh.

Thank you, our next question comes from Edward Wolfe with Wolfe Research. Mr. Wolfe, your line is open.

Yes, hello. Can you hear me now?

Yes.

Sorry about that. Good morning. Oscar, talked about a line of sight into things you can control to some degree, pricing and productivity. Clarence gave a bit about that pricing visibility. Tony, could you talk a little bit about the visibility into the service metrics, the timing for when we'll start to see positive dwell and speed and on time stuff again? When should we start to see the inflection back positive?

Well, we've got the railroad back in our lines in New Orleans so we're beginning to see those metrics improve now. And you can also compare these metrics with the metrics last year. We didn't have any hurricanes in the third quarter last year. So, you can see the impact that it has done to our system, and the other areas that's on your map you also see the outer effects of most of the issues we had with the flooding in Chicago, Evansville area. Our main line to Chicago was the remnants of the hurricane that came in and (inaudible) and then sort of turned northeast as it went through. We had record rain fall in Chicago with seven inches here in less than 20 hours. So, we had some significant issues in that area. So, we think that we're back on track now. They're beginning to come back as we move into the fourth quarter.

So, you think by the end of the fourth quarter we'll see a year-over-year improvement in these weekly metrics.

We should be back better than we were last year.

Okay. Can we talk a little bit about coal and -- Clarence you said that stocks were down. Can you give a sense of how much those stocks feel like they're down and the visibility to -- how long those will be increasing and maybe a little bit of your experience historically into recessions. Are the utilities less likely to stock pile as high as during historically average times?

In the south our utilities are down on a year-over-year basis about 6 million-tons. In the north I will give it to you in days, in the north we're down from -- on a year-over-year basis about 13 heating days or cooling days in the north. Now, what that means in English is those piles are down, and utilities will have to start looking at replenishing those. Our experience is in recent years that the utilities are not going to let those stock piles decline to the levels that they let them decline at two or three years ago because it's just simply not in their best interest to do that. And to keep an even flow of coal in the supply line, is in everyone's best interest. We can't handle the surges -- the producers can't handle surges anymore, and the utilities don't need surges anymore.

Is there any rough rule of thumb of how much coal it takes for every heating day to make up or anything like that?

I don't know of one.

Okay. But given your sense I'm guessing you've known when we were 13 days in the hole before, is this multiple quarters? How do we think about the time to catch up on something like that?

In my view with the demand on the supply lines as it is now it would take a couple of good quarters to -- at best to make this supply up because of the way things are concentrated production in the coal fields and spread out demand in both the export markets north and south utilities.

Wouldn't you say, Clearance that given the export demand and expected utility demand the production side may have some challenges meeting all of that demand which will make (inaudible) multiple quarters?

Absolutely.

And the export side of things obviously off of a smaller base but growing 47% which is slowing a little bit. Whats a -- kind of growth range your could foresee in '09for export coal? You know, roughly it is 10% to 20%, is it 0, is it -- I'm guessing it's not 47%.

I don't think from a volume standpoint export coal will grow in 2009. All of the estimates I have seen from the experts have it flat. Now, it's flat at an all-time record. But we'll have revenue growth.

Okay. So, it will be on the pricing side is this?

Right.

Can you talk about the visibility of that pricing? How comfortable are you with export coal pricing assuming you kept flat volumes for the next couple of years, should export coal pricing -- I'm guessing those are one year contracts?

Most of them are one year. Some of them are multiple years and to answer your question directly, I feel great.

Okay. Don't hesitate.

And we ought to make this your last question so we can have others can ask other questions.

Fair enough. Michael, just some big picture kind of things, first of all have you had any time to interact with the new board and do you have any general sense of how things might be, the same or different?

Well as you know we've invited all five new members onto the board. We've had all five of them in for orientation sessions to review all of our longer term plans as well as to meet the management team. Those meetings have went very well and I think basically the attitude of all of our directors and our management is we're going to continue to work to keep creating the kind of values we have over the last four to five years. We have our first official board meeting next week, and we anticipate that we'll be working closer together to create more value.

Okay. Good luck, everybody. Thank you.

And thank you. Our next question comes from Gary Chase with Barclays Capital.

Good morning, guys. Two questions for Clarence. First, you know, you say about a third of your business rolls every year and I think you broke that into thirds, the stuff that you had completed and so on. On the remaining 0.6 can you give us a sense for the escalation that has been built into those contracts on a year on year basis and maybe contrast that with the kind of escalation you had, say, in 2008 so we can get a sense for how much contribution is coming from the things that are not being repriced?

Well, first let me not correct you, but to say I didn't say that 0.3 of your business comes up due every year. Actually that number is about 50% of your business comes up for renewal every year. What we've got is 0.3, that we've finished the contracts, 0.3 we're negotiating and 0.3 in the first half of the year. Your second question was what, now?

On the 50% that is not going to be up for negotiation this year, what is the escalation that has been built into those and how does it compare to, you know, the escalation you had on existing contracts say in 2008?

All right. On a comparable basis of how it is escalated, it will mostly by and large be identical to 2008. And that basis is mostly RCAF, less fuel surcharge because most of our business is then covered on the fuel side by our fuel surcharge program.

Okay. And then, when you talk about -- in the press release, there's -- when you talk about the intermodal yields, you say that yields are flat exclusive of, you know, fuel and mix. Was just curious if there was additional color there. Have domestic yields been generally up on a core basis and offset by international or is there something or is that intended to mean both domestic and international were flat on a core basis?

Well, the domestic yields have been up essentially due to the fuel surcharge and mix. The domestic volumes also were up which helped drive that yield a little higher and then the international volumes being down have driven that side of the equation.

Is there a reason we should be, you know -- how come the core pricing isn't a little bit better than flat in the domestic intermodal business?

Well, yesterday I sat down and counted and I had 15 different types of intermodal competition in both the west and the east that we're facing and with the truck competition now being very strong, it's -- it's difficult to get the pricing that we need to get in there on a, you know, daily basis.

Okay. Thanks, guys.

Thank you. Our next question comes from Matt Troy with Citigroup.

Thanks. A question for Mike and/or Tony, just wondering, the longer term operating ratio goal to drive it down to the high 60s, obviously in the current environment not expecting progress to be linear. But curious, how do you predict the gains you've made to date in the overall trajectory into an environment where volumes are going to come under pressure as a result of the slowing economy. Just wondering if you can talk about some of the specific things you are doing operationally today, right now, to blocking and tackling?

Well, this is Michael. We as you know, in our long term guidance outline, $400 million worth of productivity initiatives. We have good line of sight on those and a lot of those are looking at our processes, deploying technology to improve our productivity. In addition, as we've went through this year, and I think Jody has mentioned this before, with the one plan, if we see a given market down, we have the ability to fine tune that, to change some of the configurations and train starts and as we've talked about we have total service integration where we're pushing that, how do we define the most efficient way to move product for the customer that also meets their needs and gives us very high efficiency. And we also have the ability as we go forward if there is some lessening of the business, to furlow our employees, some of which we have done this year as we have right sized to the slightly down revenues. So, I think we use those tools to help continue heling us in our drive to those high 60s.

Okay. And then I guess on the pricing story, same- store sales trend in the low 6% range. Your commentary has been exhaustive in terms of something broadly similar in 2009, and beyond. I'm just curious if I take a very long term view, my understanding is that the pricing gains have been a function of the service and the capacity within the total industry. If capacity should loosen a bit from an industry perspective given slowing volumes in a down economy in the number of legacy bulk traffic contracts subject to the larger pricing gains start to attenuate into the back half of next year, what is the strategy to protect or maintain the rate improvement into 2009 and 2010 and beyond? If your customers are used to the improved service there's a little bit more capacity, should we expect to see different categories take a leadership role in terms of where you see pricing, is it broad based across the portfolio? Just tactically, over a three year basis, how do you think about maintaining that pricing momentum?

I would give you multiple answers on that. There will be different markets that will be able to have different pricing levels in it as we price the market, number one. Number two, our pricing in the rail industry in general is nowhere near where it was in 1981 at the time of the staggers act we've just now two or three years ago reached a point of inflection where we started back up. So, there's a lot of room to go there. And number three is at CSX we intend to maintain our pricing discipline. We're not going to give up the discipline that we've established over the last four years on an economic whim.

I understand and its certainly a consistent message. If I think long term, should we think about truck pricing as a theoretical umbrella or a 10% discount to that or how should we think about what our magnitude -- what pricing as an industry can do over a five to ten year basis, is truck pricing a good umbrella?

I think it's going to be positive over a five or ten year basis. If you look at class A truck sales, they're significantly down, as some of the analysts report regularly. There's capacity coming out of that truck industry. We're pumping money into the economy like it's going out of style here. This thing is going to turn and take off and when it does our pricing capability because of the overall capacity in the transportation industry, the demand that we have and it is important the value proposition of rail versus truck will enable us to continue strong pricing.

Excellent. All right. Thanks for the time.

Our next question comes from Chris Ceraso with Credit Suisse.

Thanks. Good morning. There's been a lot of talk about pricing. Can you give us a view on inflation, maybe some color on specific line items as you look out over the next couple of years?

Chris, this is Oscar. I think probably the biggest driver that you, that we feel every year is in the labor situation. And I'm not sure we've been public with any specific numbers around that but that's usually our biggest cost line item and I think the contractual increases are in the 3% to 4% generally. So, that's probably the bigger items. Anything that is industry specific or commodities with like steel or any kind of fuel components have been going up at higher rates than most others. And so, I would -- I think we've been experiencing things in the 5% to 8% over the last couple of years. We're working hard to moderate those costs by getting a lot of different suppliers from outside the country as well. But I think the inflationary pressures will continue to be pretty some strong ones that we've modeled in the next couple of years.

At the margin '09 inflation higher or lower than what you had in '08?

I think it's a tad higher because of the labor contractual costs that we've experienced.

Okay. Thank you very much.

Thank you. Our next question comes from Jason Sidel with Alman Rose.

Morning, gentlemen. Clarence, when you look at the coal demand on utilities side, have you seen any evidence of utilities switching over on the base loads more natural gas usage and does that worry you going out given where natural gas prices are currently?

On the margins, some of the more marginal plants that had the lower heat rates have converted to natural gas. We think that number for some of the more efficient plants is somewhere in the $5 range on natural gas. Now, every time I've tried to predict which way oil prices or gas prices are going I've been wrong. So, I don't want to go in that direction. But we have seen it on the very marginal plants convert.

Also you mentioned a little bit about productivity maybe constraining your ability to grow coal, there's been a lot of productivity cuts out east announced I mean, how should we consider the near term outlook, call it the next two quarters or so, for eastern coal?

I think that you will actually see production in central Apalachia 2009 on the latest forecast that we have both from our producers as well as independent outside consultants actually will rise slightly in 2009 over what production levels were in 2008. And you've seen production levels in 2008 and these numbers are through about I think it's either August or September is up 2% over 2007. So, although production is up you're seeing issues with getting enough labor to mine in the coal fields, enough equipment -- mining equipment in the coal fields and there's permitting issues in the coal fields.

Okay. That's great color, Clarence. My last question is for Oscar, Oscar I want to make sure I heard you correctly, the asset write downs in the quarter do to the hurricane, that was a total of $30 million?

Actually, the actual asset write down was roughly $25 million. The incremental $5 million was the reroute costs Tony experienced in the other railroads helping us out and on their lines.

And Oscar, your full year guidance includes the asset write downs, correct?

Yes, they were built into the third quarter results, so, yes obviously.

Okay. Thank you, gentlemen.

Thank you. Our next question comes from David Feinberg with Goldman Sachs.

Good morning. Some more questions about '09 but not about pricing and volume. Questions was, you talked about sensitivity into your long term forecast. I was curious how much of that sensitivity is dependent on completing the $2 billion worth of share repurchase that you have under authorization?

This is Oscar. It is not a big portion of that. I mean it's certainly included but it wouldn't be a material effect.

And then I guess as a follow up to that you talked about having access to the investment grade markets as being key. As I look historically at some points you funded part of your share repurchase through debt issuance. Can you talk about, in terms of your conversations with the markets or with the participants, how share -- how your thoughts on share repurchase may have changed over the last few weeks given the credit tightness and the ability to continue to spend at the rate that you did here in the third quarter how that may or may not have changed.

Well as you'd expect we're very mindful of having a prudent liquidity position and so we monitor all of these conditions very closely. In the third quarter we did, I think, a good amount of the share repurchase programs. But as you say, the credit markets have tightened and most importantly, the credit spreads have increased but with a stable cash balance and only a little bit of debt sort of maturing over the last couple of years, while we regularly evaluate how to deploy capital, we feel the environment today, we will continue that repurchase program as announced which is between now and the end of the year. And as you know that does include both, not only free cash flow generation, but also tapping the debt markets. And so, we'll continue to monitor closely.

And then as a -- touching on free catch flow, in terms of your CapEx budget for next year, you talked about volumes potentially being down 2% to 3%. How if at all, does that impact what your planning on spending on CapEx in '09 relative to '08?

Yes, this is Michael. If you look at that CapEx spend we have out there, and we put out the three year guidance on it, about 80% of that is really maintenance to keep the railroads safe and fluid, it's track, it's locomotives, it's cars, those sort of things. The other 20% is roughly split between growth and productivity initiates. So, we think that there's still for the long term [reviable], of course we'll continue to evaluate the market and regulatory conditions but we think they're in the appropriate range to meet our current and future safety and reliability and still create significant value for the shareholders. I'd say if anything, the biggest risk to the sustained CapEx would not be so much the economy but if there were some sort of regulatory change like a re-regulation, that might choke the expansion some because we would obviously re-evaluate our investment criteria at that point. Having said that though, we do believer that the public officials will recognize that re-regulations would damage a vital part of your nations economy and we hope they would see the wisdom of supporting additional investment in rail through investment tax credits and private public partnerships. And we are seeing that out there, in the legislative environment but that would be the thing that would more make us reexamine our investments.

Okay, Michael. I guess because you brought it up, so any developments on the regulatory front this quarter in terms of your conversations with the folks in Washington if at all?

I think the biggest thing and what we're hopeful on as you know, on this -- we've petitioned as an industry to have replacement costs basis for the cost of capital calculation. The STB at this point is set to decide that on October 28 of this year, although it could find some reason to extend the deadline further but as you know we in the industry have been a strong supporter of that. And they have announced, the STB has, that the replacement costs methodology may be superior to the present methodology and we think the petition we put in probably addresses some of the concerns they have. The other big development which I'm sure you are aware of is the mandate on positive train control. As you know we've been, as an industry mandated to install PTC positive train control, one, our network -- all rail networks actually, by 2015 on the routes with high concentrations of commuters or passengers, and where there's a high concentration of the toxin inhalant chemicals. We've obviously been evaluating these safety measures over a number of years. It's still very much in flux, exactly how we -- where we will have to do it especially on the TIHs, we'll look and see whether there're some rerouting changes we may want to make in that particular commodity but we're thinking that it will be at least 500 million and likely more to install that over that period between now and 2015.

I assume that's in the capital plan that we talked about earlier?

No, that's a new development that was just mandated to us with the passage of that bill. So, that was not included in the capital outlook we had given in our long term guidance.

Thank you. And then one last question, it's fallen a little out of favor and maybe I'm reading too far between the lines but your outlook on forest products the last two quarters it's been in the unfavorable category, it's now moving to neutral. Can I imply that perhaps we've hit the bottom here in terms of the declines in forest product shipments or is there something unique about the fourth quarter?

This is Clarence Gooden. We hope it's hit the bottom. That's the plan.

And any indication as we head into 2009 about shipments or is it too early to say as it relates to that business? I know you did say that you had a negative outlook there.

We do. You know that forest products covers a multitude of products. It's everything from our, you know, the lumber shipments and OSB boards and et cetera, et cetera and in construction business to news print to brown paper to white finished paper products and as you know, the paper industry is had its issues. It's still in a state of flux and consolidation. So, you know, more to come.

Great. Thank you.

Thank you. And thank you, our next question comes from John Larkin with Stifel Nicolaus.

Okay, good morning everyone.

Morning.

I think I've been paying attention closely but if you already answered this I apologize. Clarence, did you break out the differential between mix and fuel in the overall 21% unit revenue increase? I know 6% is pure price but the other 15%, how is that broken down between fuel and mix?

Almost all of it, John, is fuel and there's about 1% or less thats mix.

Okay. That's very helpful. I really applaud your confidence on pricing heading into what is somewhat of unchartered territory here in 2009 economically with the credit crisis that we're currently experiencing. Does your confidence stem somewhat from the fact that in the east railroads have perhaps a higher percentage of captive shippers relative to non-captive shippers and realistically many of your shippers have limited options other than CSX?

Absolutely not. And most of your shippers have a lot of options, a lot of our utilities, for example, have water options as well as rail options. Some of our utilities, particularly in central Apalachia, have truck options, water options and rail options. And our phosphate business, we have rail options and port of Tampa options to move up through the Mississippi river chain. So, a large preponderance of our business is very competitive.

Would you care to put a rough percentage on what percentage of the business is competitive versus say captive?

No, thank you.

All right. I thought I would ask at least anyway. And then also I know there was a lot of talk about cost inflation and Tony you mentioned briefly that he intends to try to offset some of that. Any rough quantitative guidance in terms of what the internal objectives are to offset those inflation costs through productivity, technology, application, et cetera.

John, I think we've been very public on that. We've said over the '08, '09 and '10 period we would get $400 million of the productivity.

Okay, and that's spread evenly over that period?

I don't think we've been specific but generally, yes, you'd expect some fluctuations, but generally that way,.

Okay. And then just lastly your competitors talked a lot about some of our corridor improvement initiatives, you all have a fairly major initiative, I think it's called the national gateway project, any updates in terms of soliciting or capturing state and local funding to help you with the development of that project.

John, we're seeing a lot of support for this it. As you know it involves six states and the district of Columbia. We've had endorsements by the governors in Ohio and in Pennsylvania and most of the state DOTs we've talked to about this are very supportive of it as well. So, we think it's got some good growing momentum. Now, obviously there's a challenge in that about half of the funding is going to come from state and federal funds and obviously people are a little bit pinched in their budgets at this point. But I think there's a growing recognition that these kind of public private partnerships really will help with highway congestion, environmental issues et cetera, so, we think it's got good momentum and we're really targeting to try to get reauthorization of the bill in the next Congress.

Thanks. That's helpful and then maybe one final one on the declining price of fuel. Oil today is down to like $76.50 a barrel. There's been a lot of discussion about how domestic intermodal, which has been strong for you, is more energy efficient, vis-a-vis truck. Are you worried that fuel prices may decline to the point where domestic intermodal growth may flatten out once again.

John, this is Clarence, I don't think so. As I mentioned here earlier, this value of this rail proposition shouldn't be underestimated and you see more and more as you know, truck lines that are developing entire intermodal product sections within their portfolio and I don't see them changing. The fundamentals that's driven this change to intermodal from the trucking companies is still there with the high insurance costs, the high capital costs of acquiring the new tractors, the driver retention issues, the insurance costs, the congestion on the highways. So, I think intermodal still has a very promising future.

Thanks very much.

Thank you. And this will conclude today's teleconference. Thank you for your participation in today's call. You may disconnect your line.

Thank you.