CSX Corp (CSX) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the CSX Corporation first quarter 2009 earnings 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 introductions, I'd like to turn the call over to Mr. David Baggs, Assistant Vice President Investor Relations for CSX Corporation.

Thank you, and good morning everyone and welcome to CSX Corporations first quarter of 2009 earnings presentation. The presentation material that we will 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 for your review. In addition following the presentation this morning, a webcast and podcast replay will be available on the website.

Here representing CSX Corporation this morning are Michael Ward, the Company's Chairman, President, and Chief Executive Officer; Tony Ingram, our 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 you the presentation and other statements made by the Company contain forward-looking statements and actual performance could differ materially from the results anticipated by those statements and 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. Good morning, everyone. Last evening we reported first quarter earnings per share of $0.62 per share down 23% from the first quarter of 2008 on a comparable basis. These results reflect a severe economic downturn and difficult environment we're facing. Volume is down double digits in nearly every part of the economy we serve. In this environment especially we are diligently focused on the things that are more in our control. The first thing is excellent safety and customer service. Our team is delivering both. Our historically high service levels are creating value for our customers and helping us to invest in our people and our network. The second thing is cost control and resilient operations. We've taken swift and decisive actions to resize our resources in response to the significant decline in volume, which helped keep our operating ratios stable in the first quarter.

Over the past four years, we've positioned our operations to perform in any environment. Obviously we would rather not be fighting our way through a global recession and we very much regret the impact on our employees. But as a vital transportation service, it is our obligation to withstand this downturn and our responsibility to prepare our network to meet the nations transportation needs long term. That's what we're doing. When this economy turns around and it eventually will, CSX will emerge as even a stronger Company with a lower cost base and a network that serves some of the largest markets in our country. Clarence, Tony, and Oscar will provide more detail on our first quarter results, the challenges we face, and the actions we are taking to ensure the vitality of our business in the near and long term. With that I'll turn it over to Clarence.

Thank you, Michael, and good morning, everyone. In the first quarter of 2009, we continued to feel the impact of this economic downturn across the many markets that we serve. That said, we are delivering a strong service product for our customers and continue to remain focused on yield management. This morning I'll highlight our revenue results for the quarter, the key driver of those results, and also give you a sense of what we see for the remainder of 2009. Now, let's look at the results.

CSX revenue declined 17% to $2.2 billion due to broad based volume weakness. As you can see on the chart, the effect of continued market based pricing and a mix offset the impact of declining refuel recoveries. Price and mix accounted for $138 million in year-over-year revenue growth while fuel surcharge revenues declined by $133 million on lower fuel prices. These two components mostly offset one another resulting in a net positive revenue per unit impact of $5 million. Yet the overwhelming revenue story in this quarter is the 17% volume decline which led to the $471 million less in year-over-year revenue. On the next slide, let's look a little closer at several of the economic drivers affecting our volume.

When looking at the many markets that we serve, most of them are impacted by five key economic drivers. These five drivers are; industrial production, housing starts, consumer spending, as well as agricultural and energy production. In this chart, we have aligned each of our traditional commodity groups by each of these drivers to better illustrate what is impacting our volumes across our business. While I will talk about each of these markets individually on the next few slides, let me make a couple of observations.

First, markets driven by industrial production and housing starts, often associated with the consumer wants, have declined the most. Yet they represent less than 25% of our business. Second, markets most driven by agricultural and energy demand which are more closely associated with customer needs have declined the least. This more stable portion of our business represents just under half of our traffic base. Yet, while we experienced this decline in volume during the quarter, let's look at our pricing results on the next slide.

This slide shows that overall revenue per unit was essentially flat as continued core pricing growth was offset by reduced fuel surcharge revenues. As you can see in the bars on the chart, the same-store sales price increases were 6.5% for the quarter. Remember that these shipments represent approximately 75% of our total base. At the same time, 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. On this basis, revenue per unit was essentially flat. Our price improvements continued to reflect the value that we are providing to our customers through a consistently high level of service as well as the relative value of rail versus other modes of transportation. As you can see on the next slide while we had good success and better pricing our service for the value we are providing for our customers over the last few years, it is important to view that performance from a broader perspective over the last 28 years. As you can see here, since the railroad industry was deregulated in 1980 with the massage of the Staggers Act, customers have enjoyed significantly better pricing. Today, despite the recent increase in rates, rail customers are still paying half of what they paid in 1980 including the impact of significantly higher fuel costs. With the top level review of our revenue performance complete, let's take a look at each of the major markets that we serve.

Quarterly merchandise revenue decreased 20% to nearly $1.1 billion. As I mentioned earlier, we saw the largest volume declines in our industrial markets as chemicals and metals experienced reduced demand and inventory corrections. At the same time, we are also experiencing significantly reduced domestic demand in phosphates as buyers wait for commodity prices to further decline. Our export phosphate shipments have also fallen by almost 25%, and our housing related markets further weaknesses led to lower volume in forest products and emerging markets. As we look forward, while there may be some minimal opportunity for increased traffic resulting from the U.S. infrastructure needs and the recent stimulus package, the ongoing drivers in merchandise will continue to be the weakness in the industrial sector and an ongoing slump in housing.

Turning to the next slide let's review our results in coal. Quarterly coal revenues were $744 million, a decrease of 2% primarily driven by lower volume. Volume declined on weaknesses in utility coal shipments and reduced demand for exports. Export coal volumes are expected to return to near 2007 levels. All electrical generation in CSX served territories was down roughly 3% during the quarter. In addition, we have begun to see sharp declines in metallurgical coal, coke, and iron ore due to the previously mentioned declines in steel production. As a result, these shipments were 30% unfavorable during the quarter.

Moving forward, lower energy demand will continue to effect coal shipments while stockpiles continued to grow especially at the Southern utilities that we serve. Also, lower cost of natural gas have led to lower coal usage at utilities and will continue to do so moving forward.

Turning to the next slide, quarterly automotive revenue was $95 million, 53% lower than last year. The lower consumer demand and tight credit conditions continued to impact vehicle sales. North American light vehicle production was down 52% in the first quarter as automotive plant shut downs and idlings have accelerated. In the remainder of 2009, the key drivers will continue to be lower consumer demand and excess inventories. The latest North American light vehicle forecast for the second quarter is down 40% from prior year. Finally, the pending restructuring of the Big Three creates additional uncertainty.

Turning to our intermodal results, intermodal had first quarter revenue of $270 million, down 22% versus 2008 and driven primarily by 13% lower volume. Volume decreased as a result of the continued decline in imports and a leveling off of domestic growth from 2008. Revenue per unit was down for the quarter due to lower fuel recovery and the competitive environment. As we look forward in the second quarter, the key drivers we are facing are lower global trade, weak consumer demand, and a competitive truck market. Against this backdrop we will continue to look for ways to convert freight off the highway and on to intermodal and for ways to reduce cost. Now, looking ahead, as you are aware, we are in the midst of an extraordinary economic downturn and much uncertainty remains. That being said, let me share a few forward-looking thoughts.

As you can see in the chart, the latest 2009 projections for industrial production are negative, falling by more than 10% in the first three quarters of 2009. This forecast has deteriorated over the last few months and now industrial production is not expected to turn positive until the second half of 2010. Based on the current economic forecast, we expect our volume will continue to decline by double digits in the second quarter and will remain unfavorable throughout the year. Similarly, excluding the impact of fuel surcharge, our second quarter revenue outlook is unfavorable in nine of our 10 markets and favorable in one, agricultural products. Yet, we continue to sell the value of rail transportation, especially as shippers look for the most cost effective and environmentally friendly business solutions. This involves working closely with our customers in these challenging times to forecast traffic levels, to make appropriate resource adjustments and to improve service. We continue to develop new business opportunities as customers undergo change and prepare for an eventual turnaround in the economy. Even in these difficult and changing times, opportunities are emerging as reflected in over 100 new start ups on the CSX network during the last 12 months.

In closing we feel confident that our strong service product and our attention to customer needs supported by a balanced regulatory environment will position us for profitable growth as the economy rebounds. Thank you, and now let me turn the presentation over to Tony to review our operating results.

Thank you, Clarence. Good morning, everyone. In these very difficult economic times, our strong culture of leadership, discipline and execution positions us to respond to this challenge. Of course, our committment to safety will not waiver in any business and climate and we strive for even better results as a leader in one of the nations safest industries. We are driving productivity, responding quickly to declining volume, and lower resource levels to estimated cost and finally, even as we take these actions to streamline our network, we're keeping service levels high for our customers. Now let's look at some of the details.

Slide 17 shows our safety performance for the quarter. The number of FRA reportable personal injuries was up slightly in the quarter, four injuries higher than the previous year. This produced a personal injury rate of 1.30 in the quarter. FRA reportable train accidents declined in the quarter but the train accident rate increased slightly to 3.08 as lower train miles more than offset the reduction in accidents. Overall, our safety performance remains strong and we aspire to eliminate all injuries and accidents, making a safe environment even safer for our employees and the public. Now let's turn to productivity and cost management.

The slide shows the change in car loads and road crew starts over the last two quarters. As you can see, car loads fell off sharply after Thanksgiving. In response, using the one plan, we better aligned the schedules and train network against the lower volume. As a result, road crews starts, the crews have moved trains across the system, are tracking lower with volumes down 15% for the quarter. We also reduced the yard and local train network to align them better with the current volume levels. Yard crews down 9% in the quarter, other crews or switch cars in the yard and bill outbound trains. Local crews down 13% for the quarter connects the yard to our customer.

Turning to the next slide. A smaller train network requires fewer resources, looking at locomotives on the left, the active fleet is down 9% versus prior year and we have over 500 serviceable locomotives and storage. Storing these locomotives avoid inspections and maintenance costs. Looking at train and engine employees on the right, the number of active T&E employees was 13% lower. The total crew related expenses that climbed $39 million for the quarter, because management is not limited to the train network and crews. We're making reductions in other areas and currently have nearly 2400 employees furloughed. These employees are available for recall as normal attrition and business conditions warrant.

Now let's look at service. As we reduce the train plan and resource levels, we remain focused on maintaining the high level of service for our customers. Service reliability, measured by on time originations and arrivals remain strong and continues to improve. Originations were 83% in the quarter, 4 points higher than last year. In addition, on time arrivals improved to 79%. Looking at network performance, train velocity improved to 21.6 miles per hour and the system remains very fluid. And finally, average to well increased to 24.1 hours primarily due to the reduced number of train departures from our terminals.

Now let's wrap up on Slide 21. Safety performance remains at strong levels and we strive for continuous improvement. We are adapting to lower volumes, driving productivity, and managing our costs to help offset revenue declines. The network is running well with leaner resource levels and service reliability remains high. We will keep delivering improved results through our leadership, discipline, and execution. Now let me turn the presentation over to Oscar to review the numbers.

Thank you, sir, and good morning everyone again. Looking at the quarters results on slide 23, you can see the topline was significantly impacted by the declining volume trend that Clarence discussed earlier. Overall, revenue fell $466 million or 17% to $2.2 billion driven principally by the 17% drop in traffic levels. Expenses in the quarter declined $362 million, about half of that change was due to lower fuel prices with the remainder being driven by our productivity and right sizing initiatives reflecting the hard work Tony just discussed and his team to match resources to our current volume levels. This heightened discipline around expense reductions helped partially offset our revenue loss and drove operating income of $522 million for the quarter.

As we move below the line, interest expense increased $22 million for the quarter primarily due to the incremental debt issued over the past 12 months. Other income decreased $64 million versus last year driven by a couple of key items. First, income from real estate operations declined $29 million versus last year due to large prior year gains from property sales. Second, we are cycling an equity earnings adjustment which yielded $30 million of additional income in the prior year. In addition, we had a $13 million income tax benefit in the quarter and these below the line items along with our lower income tax base and lower shares outstanding result in a reported EPS of $0.62.

Now as with prior quarters, fuel once again played a role in our results so let's look at the lag impact on the next slide. As you can see from the graph in times of rising fuel prices as experienced in the first and second quarters of 2008, our fuel surcharge recovery lag hurts our results. However, as fuel prices have fallen, the opposite effect has occurred resulting in a benefit of $38 million for this first quarter. As I've mentioned previously, we rely on the forward curve to help predict these impacts. Due to the recent uptick in fuel prices and the upward trend in the curve, it looks like we will experience about a $20 million negative impact in the upcoming quarter.

Now let's look at the key drivers of our expense results on the next slide. Total expenses were down 17% or 362 million as I mentioned earlier. Non-fuel inflation was $37 million in the quarter which was more than offset by declining fuel prices that yielded a year-over-year favorable impact of $172 million. All the actions you've heard us reference over the last few months are included in the productivity, right sizing, and other bucket. Things like storing locomotives and freight cars, furloughing employee's, building increased efficiency in our train network and all our safety and other cost initiatives are driving real savings in this challenging environment and yielded a benefit of $227 million in the quarter. As business levels improve, we will maintain this cost discipline and we will not bring back these resources on a one for one basis.

Now, let's take a look at our expenses in more detail starting with fuel which is our biggest variance. Total fuel cost declined 57% versus last year. Of course the primary driver again is the price of fuel which decreased $172 million resulting from a $1.43 decrease in the average price per gallon. Adding to this favorability was the $62 million impact of lower volume in the quarter. Looking at the chart to the left, fuel efficiency as measured by gallons per thousand gross ton miles improved 2% in the quarter and resulted in $5 million of year-over-year savings. The remaining variance in the quarter was driven by the decrease in our non-locomotive fuel expense also reflecting lower prices and volume.

Now let's continue with expenses and labor. Labor cost decreased 11% or $83 million from last year with the majority associated with labor productivity savings of $49 million as a direct result of the reduction in headcount that we discussed earlier. As you can see from the chart on the left, average headcount for the quarter declined by over 1700 people but the number is greater if you look at it on a March to March basis and it reflects our actions to right size resources to current business levels.

Moving down the slide, a year-over-year reduction in incentive compensation provided an additional benefit of $38 million in the quarter and inflation of $20 million was mostly offset by various other cost savings, none of which are significant by themselves.

Moving to slide 28, MS&O expenses declined 6% or $28 million versus last year. This quarters results reflect a few key drivers. First, we were able to realize a $17 million in volume related savings in various areas such as terminal and peer expense and freight car repair. Next, a reduction in our bad debt reserve yielded a $7 million benefit in the quarter due to an improvement in collections and a lower receivable balance. In addition, our cost of risk decreased $11 million year-over-year which was predominantly driven by reduced derailment and train accident related cost. Collectively, these items more than offset the cost of inflation and other smaller expense items.

Return to rents on the next slide, for the quarter, rent increased 2% or $2 million versus last year. While we were able to realize a substantial cost reduction of $23 million due to the decline in volume, these savings were more than offset by two items. First was a $14 million increase associated with equipment utilization. If you look at the chart to the left it shows payables days per load which measures the utilization of the freight cars on which we pay rents. As you can see from the blue bars on the chart, our total payable days per load increased 33% versus last year reflecting continued significant declines in our automotive business. If you exclude the multi-levels, our days per load performance still deteriorated 4% as a result of the increase in dwell that Tony mentioned earlier. The second offsetting item was a $12 million increase related to unfavorable settlements with other railroads. As this is more one-time in nature, looking forward, you should expect our rent expense to move more in line with volume.

On the next slide let me review the remaining expenses. All other expenses decreased $3 million or 1% versus prior year. Depreciation was up $2 million as the net increase in our asset base was partially offset by lower depreciation rates by the life studies completed in the prior year. Finally, our inland transportation expense was 8% lower as rate inflation from other railroads was more than offset by decline in volume. Now, given the challenging environment we face, managing our cost structure in response to volume decline has been our key focus. As we move to the next slide I'd like to remind you just how we view that cost structure.

On slide 31 walking down the left-hand side of the chart as we outlined last quarter, we can divide our cost structure into a few broad categories. Short-term variable cost such as fuel and unit train crews can be affected with one quarter and should move more or less with volume. Long term variable costs such as locomotives and scheduled network crews take a little more time to adjust and should move directionally with volume over time. Finally, our fixed and indirect costs include expenses such as depreciation, track maintenances, pension and property taxes, even though these costs are more fixed in nature, we continue to work diligently to find ways to variablize them in response to changing business levels.

As I mentioned last quarter we are committed to remaining transparent to investors regarding our performance in each of these areas. To that end I would like to outline our first quarter results through this lens and on the right hand side of the chart. As you can see, we were able to realize a 38% decline in short-term variable expenses versus last year. It should be noted that a good portion of this reduction is being driven by the steep decline in fuel prices that I talked about earlier. What's normalized for fuel prices, short-term variable expenses declined 17% in line with our volume loss. We are also able to make meaningful reductions to our long term variable expenses of 10% by right sizing our resources which include the schedule network, yard and local crews that Tony talked about as well as the locomotives and freight cars. Finally, our fixed and indirect expenses decreased 6% reflecting the reduction in incentive compensation we discussed earlier and our focus on all other cost categories.

Taken together, these results show that we were able to respond relatively quickly to declining volume and we expect this solid performance to continue. And while these first quarter results show good progress in this tough environment, as we look forward, we will remain highly vigilant in controlling costs. Given the uncertain business outlook and at the same time it will be equally important for us to maintain our strong balance sheet which I will talk about on the next slide.

As you can see on this chart, our core financial foundation remains strong with cash and short-term investments exceeding $1.1 billion. We continue to have solid access to the capital markets and an untapped line of credit totaling $1.25 billion spread across a diverse group of banks. Against the substantial liquidity of over $2 billion we only have debt maturities of a little over $400 million through 2010. Taken together these facts underscore our substantial liquidity of solid investment grade profile and will continue to allow us to weather this current economic downturn.

Moving on, let me update you on or view of some specific line items as we look toward the rest of 2009 on slide 33. We expect depreciation to rise slightly across the rest of the year from $228 million in the second quarter to about $230 million in the fourth quarter driven by our increasing depreciable base. Despite the first quarter loss in other income, we do anticipate the full year total will be about $20 million as we proceed with the divestiture of The Greenbrier. Interest expense is expected to decline slightly between the second and fourth quarters due to scheduled debt payments and our effective tax rate should be in the range of 37 to 38% throughout the year. Finally, you can expect our diluted shares outstanding to remain constant at about 395 million through 2009.

And wrapping up on the next slide, managing our cost structure has been and will continue to be our key focus. We've had good success right sizing our resources in response to lower volumes thus far and after adjusting for fuel price, our short-term variable costs were reduced in line with volume and we made good progress in reducing long term variable cost. We will maintain that aggressive approach moving forward. At the same time we are very committed to pricing our service for the value we created for our customers which will enable us to continue to make long term investments in the business. This, coupled with our significant liquidity, will help us to emerge from this economic downturn even stronger. So with that let me turn the presentation back over to our Chairman for his remarks.

Thank you, Oscar. One of our goals this morning has been to give you a clear picture of how we're dealing with today's economic environment. This team is more focused and determined than ever and that will continue. But as we look at the urgent challenges we face, it's also important to keep our enormous longer term opportunities in mind. In the years preceding the recent economic downturn, we celebrated the long term outlook for railroads. Today, the facts behind the railroad renaissance remain firmly in place. We know the population growth, crowded highways and the need for environmentally responsible transportation all point to railroads as a vital solution. That has not changed.

What has changed is the economy and the new focus on our regulatory environment. While the economic downturn is very real, it is temporal; however regulatory changes could have a more critical and lasting impact. As you know, there have been discussions from all sides about a comprehensive railroad bill. We're working hard in Washington D.C. to make sure any new policy decisions are based on all the facts.

Since the Staggers Act was passed in 1980, productivity has tripled, volumes have doubled, accidents have declined by two-thirds, and service has reached record levels, and the rates are half of what they were on an inflation adjusted basis. We have done all this while investing about $430 billion to maintain and improve the nations rail infrastructure and while employing hundreds of thousands of people in jobs with excellent pay and benefits. We are encouraging Washington to set policies that meet the needs of rail customers while ensuring our ability to provide vital transportation solutions for our nation as it strives to remain strong in the world economy. Regardless of the differing views, all sides on this issue, that the Americas rail system offers a tremendous competitive advantage. At CSX, we hold ourselves accountable for keeping it that way regardless of the economic conditions we face. I can assure you that this global recession as powerful as it is has not and will not throw us off course. In fact it's sharpened our focus even more. The decisive actions we're taking today will make us even stronger in the future. Now with that we'll open it up to your questions.

Thank you, we will now be conducting a question and answer session. Our first question comes from William Greene with Morgan Stanley.

Good morning. A couple of revenue questions for Clarence. Clarence, on the coal side, where do you think natural gas is competitive with your utilities?

We find that when natural gas starts falling under $5 per million BTU that it becomes competitive with our marginal plants and obviously as it goes significantly lower than that number, it allows the utilities to crank up their combined cycled gas plants.

Have you found a historical relationship between your volume change and the change in the price of natural gas?

Yes, we have. As natural gas prices move lower, our coal volumes tend to move lower as more of the combined cycle plants are started up.

Of course, I guess I assume, was there a rule of thumb sort of at 4 we see a 5% impact on volumes or something like that?

No.

Okay. Did you -- what's the rate that you negotiated for your export coal for the upcoming contract here?

Well, as you know, we don't discuss rates between us and our customers and some of those metallurgical export coal rates are in the process of being negotiated now and haven't settled yet.

And the expectation is that these will be higher year-over-year despite the market for export coal being so rough?

No, the expectation is that they will not be higher on a year-over-year basis on export coal.

That the rates will be down?

It could be down.

Okay. Can I ask a question on, you have I think a rate case or two that are pending. What percent of the revenue do these rate cases represent?

Well, we have two cases out there. One is a case with DuPont, and we've made some progress there. We, as you know, have a mediation under the STB, and we and DuPont have asked for a stay of those proceedings until April 24, and I think we're making some pretty good progress in that mediation. The other rate cases with Seminole Electric and on that one we have not been successful in the STB mandated mediation. The STB you as you probably know denied Seminole's injunctive request and the tariff rates remain in effect and that case is expected to be decided some time in the third or fourth quarter of 2010. So that's where those two cases stand, William.

All right and then just one quick question for you, Oscar or maybe Mike. Share buybacks, you just went through how good your liquidity is and yet you aren't doing share buybacks so it's not clear to me why given how strong the liquidity is that you wouldn't start to approach those given where the stock is.

Bill, it's Oscar. You're right. Our liquidity is strong. I think as we've said earlier we're just monitoring the markets both business conditions and capital markets to insure that we do the right things across on a balanced basis.

Well, thank you, William.

Thanks.

Edward Wolfe with Wolfe Research.

Thanks, good morning.

Hi, Ed.

Can you talk a little bit about the headcount, first of all, thank you for the Page 11 of your statistics with the headcount by month. That's a nice addition. But if I look at the total headcount in March you're down at 30,554, down from the average for the quarter. How do I think about that headcount in second quarter? Does that go down from the ending at 30,554 or seasonally or do some heads need to come back or does this keep going down?

Ed, I think you're quite right to point it out. If you look at the average for the quarter we're down about 1700 quarter to quarter but at the end of the quarter we were down more like 2400, so you'll see us continue to make some modest adjustments to that but a lot of the work Tony has already done has resourced our network for those lower volumes, so there may be some modest incremental above that end of March rate in the second quarter. Obviously the quarter to quarter comparison will have the same average impact that you're talking about for the first quarter and obviously it depends on volume levels as well. So I would say you could expect it to come down slightly from the levels that we see right now.

I'm sorry, I just want to clarify that answer. So what I heard from you was we ended at 30,554. That's probably a good number or it's going to even come down from that end of March number assuming no change in volumes in this quarter?

Ed it's Oscar. It will come down slightly and then stabilize given all the things Michael said and by the way the March to March is about 2300 rather than 2400.

Okay, and can you talk a little bit about the pricing trends in the quarter and how much of the year at this point rates are done for for '09? Any change in that same-store peer pricing number that you gave, Clarence, as we went through January, February, March, into April?

No. Ed, as we told you earlier, we expect that the pricing gains will stay in the 5 to 6% range and that's pretty consistent with what we previously have given out. We've got about 85% of our contracts now negotiated or renegotiated for 2009 and of the remaining 15% we've got a pretty clear line of sight into the pricing that we expect for the remainder of the year. I do think it's important that we remember that these rail prices are still about half of what the 1980 inflation adjusted levels were.

Fair enough. Michael? You said you're working hard in Washington and clearly we're hearing that from everybody. What does that mean? Where is your time being spent? What are the key issues that you see the regulators focused on right now?

Well, really, as you know, we're always having discussions with policy makers about what's important to the railroads, our role in the economy and the need for balanced regulation. We're really pushing that we need to have earnings sufficient for us to continue to make those investments because as you know on a replacement cost basis, we're earning probably about half of what the required return on capital is, so we're letting them know the importance we bring, the need for us to generate sufficient funds to make those investments and enter returns for our shareholders.

Well, that hasn't changed though what are the regulators focused on that the noise is louder now with Rockefeller and Overstar and their pending bills. What do you sense if there's one or two things that are the focus, what are those?

Well, as you know there's the anti-trust bill out there that was passed by the Senate Judiciary Committee and the House, the momentum on that has slowed and there's a hearing that will be held on that issue before the Judiciary Committee. Under the one that was passed by the Senate, we railroads would have to operate under conflicting and overlapping regulatory schemes being regulated by both the STB and the Department of Justice, and we think that's not sound policy, so we're continuing to participate heavily in that House hearing to bring those points to the floor. On the re-reg side or the Rockefeller bill, we're working with staff as we always do to educate them as to what our concerns are and what issues they need to consider as they look at those things.

Within that bill though is the focus on bottlenecks? Is the focus on switching? Is it on something different? What seems to be the focus of that bill as you see it?

I think you'll probably find every issue that's been out there for the last couple years is of interest to the staff.

So nothing has come not to the forefront that's different from the past?

No.

Okay one last question. Tony, when you think about all the locos and people being furloughed and put away in cars off line and that kind of stuff, if demand were to come back at some point in a couple of quarters or next year, how quickly can you bring these things back? How do you think about that and where would capacity be tightest and maybe having tight capacity for a little while is not a bad thing but where would those constraints be?

Well, at this point we don't have any restraints. We wish we had the volume that would deliver some restraints, but it would be the locations that we had before obviously the volume decline. As far as calling people back, they've got 15 to 30 days to come back. Most of them right now are at work and as attrition occurs and we call people, they come back pretty quick. It might take us a couple days for a little bit on the training from their safety viewpoint but we can get our locomotives right out of storage, we can fire them up in a few hours and they are all put up serviceable and it doesn't take too much of shop time to get those back out. The cars will just have to be inspected so it's not a big process here. We got them stored in locations where they are needed when we come back, so just very minimum time. All we are waiting on is the volume.

Well, thank you, Ed. Amen to that. Thank you.

Ken Hoexter with BAS/Merrill Lynch.

It's actually [Chris Weatherly] in for Ken. Clarence maybe we can just hit on the yield side for a second. I just want to understand the mix impact in the quarter. It looks like rate and mix was a 5% positive. I want to understand what's going on on the mix side there?

Well, it was predominantly in the price between the price and the mix. The price and mix was about $138 million as we showed on one of the slides there and the fuel was about $133 million but Chris, it was predominantly price.

Okay. It looks like mix maybe was a little bit of a head wind in the quarter. That's what I was trying to narrow in on if you had core pricing up around 6.5% on 75% of your business I just want to understand the mix aspect if I could?

Well, I'm not sure exactly how to answer it other than to say that mix was not a large part.

Okay. I guess when you think about just switching gears to intermodal I guess, when you think about the business it sounded like it's probably getting a bit competitive, certainly there's a lot of capacity floating around certainly in the truck market. I guess how do you make decisions on where you want to be competitive and what business you want to take or what business you actually want to walk away from, with the OR getting into the 90's it looks like some of that business is getting a little less profitable so maybe if you could comment on that that would be helpful?

We try to focus on the lanes where we can run balanced traffic easier than the lanes in which we have to run unbalanced traffic one way, directional traffic would be the first criteria. The second criteria would be where we have box availability and not have to reposition boxes to get loads. And the third factor that would be on there would be the capacity utilization on the train either by day of week or by lane of which that train is operating in.

Okay. And I guess just finally on the intermodal side, when you think about RPUs down in the double digits, obviously I don't think you're going to give me the exact number, it would be great if you did but just kind of directionally where do you see the actual price in that? I know fuel is playing a big part of that as well but how competitive is that market on pricing?

It is very very very competitive on pricing. We're seeing a lot of competition coming from the truck side of the business every day and virtually every lane.

Chris, it's Oscar, just a quick addition to that comment. The projection that we're not going to give you with regards to intermodal pricing, our internal projection is included in our overall 5 to 6% pricing decline for the Corporation, so--.

Pricing increase.

-- pricing increase.

So that incorporates what's going on?

It's already Incorporated right.

Okay, great. Thank you very much.

John Barnes with BB&T Capital Markets.

Good morning, guys.

Good morning John.

Tony, as you look at, you detailed the service improvements in the network, I'm just kind of curious as to as volumes begin to recover, and let's say they recover at a similar pace as we saw coming out of the last recession in '01, '02, how much of that service improvement do you think you sacrifice at least initially as you absorb that new volume into the system? Would you -- train velocity would you be back down into Q1 '08 levels or would it be even further down than that?

Well, John, one thing we got going for us, we got better tools. Our modeling system now, we own our modeling system which we can predict a little better on our train performance. I don't think that you'll see us drop back to those kind of levels that we had in the early 2000. We've improved the network. We've added capacity. We've improved the rails, ties, better locomotives, better training. We've got a lot of good things that's happened to us so I think as we, as the volume comes back, I think you'll see us put this on in a smart way that we will not add that much cost to the system as we handle the market increases.

Okay. And then given where volumes are today, step up, step down, either way, what kind of magnitude of the employees currently on furlough, I mean is there, is it 1% improvement in volume equates to a certain number of employees that come back into the system or is it less science than that?

Well, I think it's a little less science than that. We do have about 1300 planning on retiring this year so we're not training as many. We do have some suspension in our training side, so we'll watch that real close so we will have the number of people that's required to handle the business as we go forward.

Okay. Oscar, going back to the question on share buyback and your current liquidity situation, if not share buyback, what's kind of the goal for cash flow, the use of cash flow for the balance of '09 and as you get into 2010 and when does share buyback become more of a priority?

I guess the balanced approach to deploying cash back to investors has always been something we talked about, John. Again, given the certain -- the uncertain outlook for business, I think you'll generally find us being a bit more conservative so our current plan is to do the things that we've talked about. So continue our cash investment in the business, our dividends remain strong and comparable to others, and on the share repurchase we'll continue to monitor the markets and determine the right time when we get back into that business.

Well, thank you for your questions, John.

No problem.

Tom Wadewitz at JPMorgan, you may ask your question.

Yes, good morning.

Good morning, Tom.

Let's see. On the coal side, you had a couple questions early on and I guess if we look at recent coal volumes have been relatively weaker. Clarence, what are your thoughts on coal going forward. Is the run rate of coal volumes step down because of the various pressures you mentioned, should we think of coal volumes being down kind of 5 to 10% instead of down a couple percent as you look forward or is that just more of a near term glitch in what we've seen the last couple weeks where there's greater weakness in coal?

Tom, as we mentioned earlier, we think the second quarter and we don't see much beyond the second quarter at this point in time, coal volumes will be slightly down over what they were in the first quarter. They are driven essentially by four things, reduced industrial production, lower consumer demand, the lower price in natural gas and the fact that stockpiles are near the target levels.

Okay, so year-over-year you think it's a little bit worse than it was in first quarter in coal?

Just a little, yes.

Okay. Let's see. In terms of any thoughts from customers regarding inventory reduction and how close we are to being through that and that potentially having a little bit of a constructive impact on the year-over-year volumes?

You talking about inventory reductions in general?

Yes, in general and just the idea that year-over-year volumes could look a little bit better if customers as they approach being done with the inventory reduction phase?

Well, our view is that destocking is almost industry unique, meaning each segment has its own critical functions in destocking but what we've seen is that not only as destocking occurred, there's also been less buying, so those ratio of buying to those inventories has pretty much stayed in line so we don't see as a result of destocking any significant upturn in the short-term in the economy.

So you think there will continue to be destocking activity through second quarter if you look at some of the major industrial segments?

I think so, yes.

Okay. And then I've got I guess two quick ones for Oscar. The incentive comp was down pretty significantly year-over-year and first quarter I think $38 million. Is it reasonable to think there's opportunity for large reduction like that in second quarter and third quarter or do the comps make it more difficult to see that kind of reduction?

Actually, you'll see slightly less but yes, you will continue to see some additional reductions in that incentive comp over the course of the year.

Okay, and one last one and I appreciate the time. You've done a nice job of highlighting what you think is near term variable, long term variable and fixed, and I think when you did your fourth quarter call, you implied there would be some building in the cost, pace of cost improvement and maybe we would have to wait for second quarter to see some of that fully come in. How much greater do you think the cost savings will be in second quarter if you take out the impact of fuel prices? Is it going to be materially stronger cost reduction that you'll be able to point to or is it really a fairly incremental impact in terms of the timing?

Well, a couple of things, Tom. I think that on the short-term variable you seen that we actually moved right along with volumes so I think we made pretty good progress there. On the longer term variable, actually, Tony and his team probably moved a little quicker than we expected so we've got a little bit more of the savings quicker than we expect. Having said that we do expect that middle line item or long term variable to continue some improvement into the second quarter and beyond, and then of course the longer term fixed stock will kind of move up and down. There's a lot of things that move around in there for us so we had a great quarter this year, this particular quarter and we'll see what happens in the next quarter but I think generally a slight continued improvement in the big cost of our business which are in Tony's area.

We have more of the incremental because we've done a lot of the downsizing already.

Right, yes. It seems like you had very good cost performance in first quarter. Thank you for the time.

Thank you, Tom.

Matt Troy with Citigroup -- Citi Investment Research. You may ask your question.

Yes, thank you. A question I have relates to capital and cash flow, specifically three buckets. Just wondering in the slide presentation, you talked about forecasts for industrial production going down, I think certainly the volume declines we've seen have been not getting anyone to jump out of bed in the morning. Have you revisited your capital plan for 2009? Is there additional discretionary CapEx that might be trimmed? Could you just help us in terms of ranges, what CapEx might look like and might it come down further for you guys?

Hi, Troy it's Oscar. As we've said, we expect roughly around $1.6 billion of spend this year which is down quite a bit from last year spend so we've taken initial steps already. As you'd expect us we do have ranges and buckets though I'm not sure I'd call them necessarily discretionary. They are all-important to our business but there are areas that we might trend if indeed in your hypothetical hopefully, business continues to decline but right now our call is for 1.6.

Okay, second aspect on the capital front would just be pension requirements. What are your anticipated funding needs and what kind of cash since you aren't buying back stock currently might you contemplate throwing at the pension funding in 2009?

Troy, we have until September to make that decision. There are several alternatives that have been provided to us by new legislation. We're reviewing all of those different methods and we'll make that determination later, but I don't think it will be a significant number.

And the last question I have just relates to the cash flow in the first quarter. If I look at total cash generation it was down about $800 million and some of the drivers clearly too have net earnings down $100 million, you didn't issue as much debt, you didn't have as much proceeds from sale of investments but you also had some offsets, CapEx was down about $140 million, share repurchase down $300 million so there's about $400 million in cash flow degradation in the fourth quarter. I'm just looking to get a sense if there were any one time items or something that was changing that would drive that. The big number that sticks out is the $200 million use or degradation and other financing activities, $100 million in other current liabilities and about $75 million in working capital. Are there any items we should be aware of that were either one-time in nature last year or this year that would skew those comps or is there a way we can get greater clarity into that $400 million core decline in cash flow? Thanks.

Matt, that has a pretty involved question.

I know, I know.

I'm not quite sure how to answer it other than there aren't really any anomalies that we know of whatsoever in there. I know working capital stayed all in basically equal so it's probably moving parts, receivable balance and seller financing, capital arrangements we've made but just ongoing business issues so nothing particular.

Okay the only thing I'd want to follow-up and maybe after the call would just be the other financing activities of $200 million, just wondering if there's one or two big lumpy things in there.

It's attributed to seller financings on the equipment that we bought last year that is being paid for this year.

Matt, we'll give you a call to go through the detail with you after the call.

Appreciate it guys, thank you.

Chris Ceraso with Credit Suisse, you may ask your question.

Thanks, good morning.

Good morning.

A couple of things. There's been some discussion about coal and maybe a bit of a slowdown in the volume trend. Can you give us just some ballpark feel for the relative profitability of coal, either in total or on a per car load basis versus the average? Is it equal to the average car load? Is it 20% higher? 50% higher? What's the relative prof profitability of coal?

Of course we aren't going to get into a detailed discussion but I'd say we like the coal business, its margins are somewhat better than our average contributions so it is a good line of business for us but we aren't going to get into the specifics of the contribution levels by any commodity or customer.

So somewhat better but no quantification there?

Yes.

Oscar, on the fuel slide, can you maybe fill in a couple of blanks here? How much fuel was in the revenue in the second quarter and then maybe what was the net fuel surcharge benefit or hit in Q2, Q3, Q4 of this last year?

I'm sorry, ask that question again. We have the chart and the appendix of our presentation.

Right. And you showed us that it was a $38 million-- ?

End quarter lag.

Right. So in Q4, you had a big benefit. What was the dollar amount? You gave us the dollar amount for Q1 and Q2. I'm just looking to fill in those blanks for the quarters of 2008.

Yes, the lag in the fourth quarter of I remember correctly was $150 million.

Okay, what about Q1, 2, and 3?

Gosh,--.

Chris why don't we call you. We'll give you a call afterwards and give those numbers.

We had some headwinds in the first part of the year and benefit in the second half, the exact numbers I don't want to misquote on the call.

Okay and then last question, has pricing gains in some other parts of your business accelerated such that you've been able to offset the price pressure in intermodal and still achieve the 6.5% overall gain on a same-store basis?

Chris, I think that would be fair. In all of our businesses, we expect to get about 5 to 6%, obviously some of them are a little more difficult than others, some are a little easier than others but overall we'll hit the 5 to 6% number.

Is intermodal sort of equally represented in that 75% of the business that's covered or is it underrepresented in that sample?

It's roughly equal in same-store sales, roughly.

Okay, thank you very much.

David Feinberg with Goldman Sachs.

Good morning. One quick question as it relates to the automotive market share that you broke out earlier in the presentation. Can you give us any detail within the big three what your share is amongst that pie?

I don't know right off the top of my head but the Big Three is 50% or greater of our total. General Motors is number one.

That's helpful. In terms of your '09 pricing outlook you've been consistent on the 5 to 6% pricing but I just want to clarify Oscar, when you're talking about 5 to 6% expected for '09 is that a same-store sales number or does that include the impact of mix?

That is a same-store sales number.

Can you help us then think -- you posted a 6.5% same-store sales number here in the first quarter. And the implication then is that there's going to be degradation throughout the year. What's driving that?

I think if you look back in history it generally as contracts have been renewed a lot of them start in the first half of the year so as you look back, you always see sort of a first quarter, first half sort of benefit and then it does degrade mathematically down over the course of the year.

And then taking that out to 2010 given the weak volumes in the economy, are you seeing that any customers are trying to negotiate contracts or renegotiate contracts for 2010 early here in the year and if so, what success they're having?

Well, we always have people who are trying to get the rates reduced if that's your question that you're asking we look at it on a case-by-case basis.

And well maybe another way to ask the question, is there a similar figure you can give of the 85% of contracts you have in place for '09 what you have in place for 2010?

Most of those contracts are renegotiated in the second half of the year so that really has not picked up yet to really get a good read of what that 2010 pricing will be. The best we could say about that is we continue to expect that we will see plus inflation, pricing above inflation on a long term basis, we expect that for 2010. How much above is that question?

Great. And then Michael a follow-up question as it relates to the time you spent in D.C. You mentioned the term balanced regulation several times. Can you give us a sense in terms of the issue Ed was referring to earlier what your view of balance regulation looks like whether it be bottleneck pricing, STB review, what are the issues you think reflect both the shippers needs and the rails requirements?

Well, I think one of the key elements that we think is really important is to start thinking in terms of replacement cost. If you look at our assets and the need to replace these assets over the long term, we have to have sufficient earnings to allow that to continue to happen and we actually think there will be a need for increased spend to meet growing demand over the long term so we need to be assured if one of those bottleneck or one of those others are put into place that it's a balanced regulation that allows us to still earn the returns to allow us to make the investments for the long term.

And maybe a follow-up there. We've talked about the rails and the shippers. Any indication in terms of where the Unions are coming out in the discussion or if they are involved in these discussions at all?

Actually, the Unions also recognize the need to have balanced regulation, the Brotherhood of Locomotive Engineers has come out against some of the proposals that are out there, as the Transportation Communication Union, I think the UTU, United Transportation Union is also moving in that direction so I think the Rail Unions are recognizing this need for balanced regulation as well. The one other thing that we put on the table for them, we do have this mandate for positive train control by 2015 We're also pointing out to the policy makers we need to be earning sufficient returns to make those investments as well as normal infrastructure needs.

Great. Thank you very much.

Gary Chase with Barclays Capital. You may ask your question.

Good morning everybody.

Good morning Gary.

Two follow-up questions for Oscar. First, on the incentive compensation you were answering I think it was Tom's question, you said you would see less than that $38 million year on year variance. Can you give us a sense of how much less? I mean how much of that might be one-time and then also what is the sensitivity around that? Is that a decision that's been made this year, you're just going to have less incentive comp or is there some factor that we can look at that might trigger a reversal of that trend?

A couple things. First, Gary, as far as the decision as to how we make them are tied to the expected results and clearly, as you know, with the financial outlook and the business outlook that it is, the Company, the industry will earn less money and therefore we will as well. I mean, probably the best way to characterize that is roughly a third of what we accrued and paid in the previous year which was a terrific year by the way, 2008, is about what we will accrue this year, so over the course of the next two to three quarters, you'll see the incentive comp number that you had there will move around, over the course of the three quarters it generally will be sustainable -- sustainable cost savings so it's not a one-time effect. Okay, so there's no significant portion of it that relates only to the first quarter?

No.

There's always a catch up from an accounting perspective but you'll see pretty market declines in the next couple quarters.

Okay, and then more importantly if I could take you to Page 31 again, where you're talking about that second bucket of cost, and I know you did say that was something that was going to take some time, can you give us a sense of what the longer term target might be? So in other words if short-term variable can move perfectly with volume, you've already got 10 of the long term variable out on a 17% volume decline, as we think over time two to three quarters could that be 17% down on a 17 decline?

No. I think part of the longer term concept is that invariably there's something in there that isn't quite adjustable and so I would not think that that number will reach the exact volume percentage in any given quarter.

Actually, turning pretty aggressively to park those cars, park those locomotives which drove a lot of that, Gary, so I think we're seeing pretty much maybe a sustainable rate with where we are now.

Okay, so you wouldn't expect more--?

It might inch up, Gary but it's not going to jump up.

As I said, Gary, it will improve but not markedly as it has over the course of this last period.

Okay guys. Thank you very much.

Thank you.

Randy Cousins with BMO Capital Markets. You may ask your question.

Good morning.

Good morning, Randy.

For Clarence, Clarence, wonder if you could talk about truck competition, when I got on the call the sort of near truck category so that would be like scrap steel, forest products, lumber, paper, there's a variety of things the trucking industry can't compete on beyond just simply intermodal and what impact if anything is that having on your pricing?

Some of the specialty trucks, flatbed trucks for example, are impacting in the short-term, some of the steel markets but to be honest with you on the scrap steel there's not much of it moving since the factory utilization rates are down 40% or less and the same is true in lumber. It's just not hardly any movement at all.

So in terms of sort of impacting your pricing in your traditional car load type business, you're not seeing the truckers having any material impact at all?

No. Only around the edges.

Okay and then with reference to the baseline pricing wonder if you could give us some sense as to how much of the price increase that you've seen is kind of due to repricing of legacy contracts or contracts that were say two to three years in age?

Well, some of it obviously has been in legacy contracts but the vast preponderance of it has not. About 50% of our business is repriced each year so you're seeing business that we're repricing now that we've repriced two to three times.

Okay. And then finally for Oscar I wonder if you could give us some sense as sort of relative sensitivity between free cash flow and earnings, so if everybody thinks earnings are going to be down 20% does that mean free cash flow is going to be down 30? How should we think about that?

I don't know how you build your model but I would not have that direct relationship. There are several moving parts underneath the normal earnings aspect of that, obviously CapEx, pension contributions, working capital management and such so I don't think it's a direct correlation and we've not given guidance for the full year on free cash as we normally do but it will be clearly in excess of all our needs.

Okay, great. Thank you.

Thank you.

Jason Seidl with Dahlman Rose.

Hi, guys.

Good morning Jason.

Quick question here. Back to pricing, in the 5 to 6% that you're giving for the forecast for 2009, is the assumption that the intermodal pricing on the domestic and international side stays where it's at or are you assuming that picks up?

This is Oscar. I think the outlook is our outlook. I guess I don't want to foreshadow what we're doing but we don't see a lot of strength in pricing this year and we've built that in.

So if it were to come back that would be on the positive side. That's fair enough. Also knit picking question Oscar while I got you here, bad debt allowance went down in the quarter given the economic times seems the wrong way for this thing to be trending. Can you talk to us a little bit and give us some more color about what's going on there?

Jason you're right. We expected that question a little bit earlier. Actually the team both sales and marketing and financial and legal and otherwise and given that we in the freight industry have seen a slowdown in the economy for quite a while now we've been highly vigilant and monitoring credit watch, a lot of our customers and because of that we're able to get ahead of things. Our experience in collections has improved mightily, the accounting around that actually calls for sort of a lower percentage exposure, that lower percentage exposure on a lower receivable balance actually has created the value that you saw in this quarter and we want to make sure we highlighted that. It's not something we necessarily see continuing onto the next part of the year, but that's the driver.

Okay. I appreciate the time as always guys.

Thank you, Jason.

Arturo Vernon with Macquarie Capital, you may ask your question.

Good morning, gentlemen. Michael, a quick question. Is there a sense of timing of when the Rockefeller bill is expected in a draft format? Is there a sense of urgency? Is it going slowly, any comments on that?

I don't know that there's a good sense of timing. I know the Senate Commerce Committee staff has been seeking inputs from all of the rails as well as the customer base and that they are actively listening to everybody. They have not given us a sense of when they might come out with what they're proposing.

All right and do you have a sense whether the Senate is working on this bill together with the House or whether it's separate efforts?

At this point they are separate efforts.

That's good to know. That was it. Thank you very much.

Thank you.

Walter Spracklin with RBC Capital Markets. You may ask your question.

Thanks very much, good morning guys.

Good morning.

Just on the renewal pricing environment, I was wondering, is there any change in dynamic from your customer with regards to how they're negotiating their pricing, obviously there will be push back on pricing as there always is but are we seeing any changes from prior periods? Are they asking for shorter term contracts compared to what they once asked for? Is there any -- or is there, and follow-up question is there any industry group that is being particularly difficult on the pricing front understanding that everyone does want lower rates in this environment?

Walter, we haven't seen any particular, excuse me, group that's been more aggressive or less aggressive than any other group. We are getting more requests for longer term contracts with specific rate increases in the out years than we've seen in the past. We again look at those on an individual case-by-case basis. Pricing is always a difficult thing to do and certainly, with the economic conditions the way it is this year, it's been a little bit more difficult than it's been in the past years.

Well, and a lot of our customers are seeing a decline in their overall cost because of the fuel surcharges abating with the lower fuel costs so I think that helps our customers to some extent as well.

Okay. And just my last question here is for Tony. On the cost cutting, absolutely great job that you've done with this first sort of leg down in volumes and this relates to a prior question but I guess I'll put it a little differently is that if we do see another further leg down, obviously it gets a lot harder to cut costs if we've got a further deterioration in volumes. Is there a benchmark beyond which that you just find it very very difficult to be able to match our cost cutting initiatives? Is it here at 17% or is it at 20, is it 25 before you really start getting down to the bone and it's very difficult to cut costs after those kind of volume declines?

Before Tony answers, I do want to comment. We don't anticipate that we're going to start seeing it down 20 and 25%, so he is going to be answering a highly theoretical question here because we actually see our volumes probably being fairly consistently down second to first but with that cautionary comment, I'll turn it over to Tony.

Walter, we obviously chasing these kind of expenses the first 10 or 15 is much easier. The second one you are sort of getting into what kind of service you want to provide for your customer, and that sort of gives some specialized service so what we have to do is be very very cautious on how we make the reductions going farther down the line. Now, you also can also look at other shop expenses and those kind of things where you further reduce your locomotives and cars, so I think that the next 15%, if that occurs and we don't want that to occur, then it probably wouldn't be as good as the first 15%.

Okay, that's fair enough. Great job in a tough quarter guys.

Thank you.

Our last question comes from John Larkin with Stifel Nicolaus. You may ask your question.

Thank you, Operator. Good morning, everyone.

Good morning, John.

Just looking for a little color on the domestic intermodal numbers which actually looked pretty good volume wise to maintain that volume year-over-year is indicative I think, that you probably captured some market share. Is that volume coming from IMCs? Truckload based, intermodal marketers? Some other source? Could you give us a little color on that please?

John, this is Clarence. The answer is yes, it is coming from all of those above. We've seen our truckload business grow quite significantly during this period of time, Schneider's truckload business in and out of their Marion facility has grown nicely. Our truckload business out of our new Chambersburg facility has grown nicely, our IMC business is up on a year-over-year basis so it's coming from all of those sources as well as our door to door brokerage service.

That's good color. Had a question on the impact of lower commodity prices, as it impacts your overall expense level, I gather steel prices are way down, wood prices are way down, for example, any estimate, Oscar or Tony as to how much that may have saved you year-over-year in the quarter?

I think one of the charts kind of breaks it up the best. We had on non-fuel inflation about $37 million. That's less than 2% which obviously is a lot lower than we've been running over the past few years, so it's a fairly small number in the quarter but again, it signifies exactly what you're outlining.

Okay. Thank you, and then any labor contracts that are going to be expiring in 2009 and how are the labor Unions reacting to the large number of people you have on furlough currently?

Two things, John. Our contracts expire at the end of this year, so that what we call the Section 6 notices which are what you would like to see in the next round of bargaining, those will be served probably in the fourth quarter of this year which will start the next round as you know, we bargain on a national basis with the Class 1s and the Unions form various coalitions but that probably won't start up until toward the end of this calendar year, and as you're aware sometimes it takes several years to conclude those. As far as the people on furlough, I think the Union officials probably feel no different about it than we do. We regret that the employees are on furlough. We want to try to bring them back when the business allows us to do so, but we clearly think that, it's something that we regret, they regret, we think they will come back when the business rebounds and we've had pretty good experience when it does rebound that they can -- they do come back to us because we do have good paying jobs.

Maybe just one final question on strategic marketing and operating projects and/or agreements with other railroads. There's a lot of fanfare around the National Gateway when you announced that. Any updates there or on any other projects you may have under way, similar to that or with other railroads?

John, I think we're making really good progress on the National Gateway. As you know Governor Rendell has endorsed it, strongly supporting it, we've gotten very good support from Pennsylvania, Virginia, Ohio, Ohio and Pennsylvania both allocating some of their stimulus money toward their National Gateway contributions, so it's building good momentum because it's I think a very good project that will help relieve highway congestion.

If you were to total up the states contributions that you garnered so far, what would the total number be?

Well, John, it's a little difficult because at this point it's still into the requesting phase.

Okay.

I think Ohio's requested 20 million to $30 million, Pennsylvania like $35 million, Virginia I think is in the $25 million, so they are all starting to put their pieces in place.

Okay. That's very helpful. Thank you very much.

Thank you. Thank you for your attention today and for joining our conference call. See you next quarter.

This concludes today's teleconference. Thank you for your participation in today's call. You may disconnect at this time.