CSX Corp (CSX) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CSX Corporation second 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 would like to turn the call over to Mr. David Baggs, Assistant Vice President, Investor Relations for CSX Corporation.

Thank you, and good morning, everyone. Again, welcome to CSX Corporation second quarter 2009 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 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; Clarence Gooden, Chief Sales and Marketing Officer; Tony Ingram, Chief Operating Officer; and Oscar Munoz, Chief Financial Officer.

Now before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the Company this morning 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 corporations Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Well, thank you, David, and good morning, everyone. Last evening, we reported second quarter earnings per share from continuing operations of $0.72, down 24% from the same period last year. As we examine the quarter we clearly see two distinct forces at work. First, is an economy that continued to significantly impact our volumes and our revenues. Second, is your Company, which responded by becoming even more productive and resilient. Revenues were down 25% to $2.2 billion reflecting significantly lower volume and the effect of lower fuel recovery.

In short, we saw what our customers saw, more tough times, but we also saw some signs of leveling off in many of our markets. At the same time we continued to deliver reliable service to our customers allowing us to sell the value of rail transportation. On our first quarter earnings call, we described the swift actions we took to right size our network and serve our customers in response to the worsening economy. On today's call you'll hear how we are building on that success.

As we continued to do the right things on the expense side our relentless focus on safety also continues. As a result, we are sending home more employees home safely at night which also allowed us to significantly reduce our casualty reserve. Our safety, service and productivity performance led to a second quarter operating ratio of 73.4% and supported an EPS performance that was in line with 2007 levels. So while the economy continues to challenge all of us, your Company is standing strong. We're more focused than ever. The leaders you will be hearing from today are committed to fighting through this recession and coming out stronger on the other side. With that let's examine the quarter more closely beginning with Clarence Gooden. Clarence?

Thank you, Michael and good morning everyone. In the second quarter of 2009, we continued to feel the impact of the economic downturn across most of the markets that we serve. That said, we're delivering a reliable service product for our customers even as we right size our network resources and 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 results on the next slide. CSX revenue declined 25% to $2.2 billion due to continued broad based volume weakness. As you can see on the chart, the effect of continued market based pricing and mix partially offset the impact of declining fuel recoveries. Price and mix accounted for $97 million in year-over-year revenue growth. Next, the impact from declining fuel prices further reduced revenues $223 million in the quarter. Yet the primary revenue story this quarter is the 21% volume decline which lead to $596 million less in year-over-year revenue.

Turning to slide seven let's take a closer look at overall volume changes across our major markets. Volume declined by double digits across all key markets. In comparison with the first quarter of 2009 the most significant change in volume was in coal where we experienced a 21% decline in shipments, while earnings were down across all coal markets with large declines in experts, yet when looking at the other key markets that we serve, you'll see that we experienced year-over-year volume declines mostly consistent with the first quarter. We believe that these three markets which account for nearly 75% of our traffic volume may be near the bottom. Yet before going further into the drivers of this volume change during the quarter let's look at our pricing results on the next slide.

This slide shows that overall revenue per unit declined as continued core pricing growth was more than offset by reduced fuel surcharge revenues. 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 declined 5.4%. At the same time, the bars on the chart which represent our same-store sales price increases were 6.6% for the quarter. Remember that these shipments represent approximately 75% of our total traffic base. Looking ahead, and based on the strength of our first half performance, we now expect to slightly exceed the upper end of our full year 2009 same-store sales pricing guidance of 5 to 6%. Our improvements continue to reflect the value we are providing to our customers as well as the relative value of rail transportation. Here, rail customers are still paying only half of what they've paid prior to 1981 including the impact of significantly higher fuel cost.

Now let's take a look at each of the major markets that we serve starting with coal. Quarterly coal revenues were $662 million, a decrease of 20% primarily driven by lower volume. Volume declined on weakness in global demand for exports. In addition utility coal shipments also declined on reduced demand, high inventories and low natural gas prices, lower domestic demand resulted from reduced electrical generation and declines in metallurgical coal, coke, and iron ore due to weaker steel production. Looking forward to the third quarter, the decline in coal volumes are expected to moderate. Lower domestic and global demand will continue to affect coal shipments. Stockpiles should remain above target levels and lower natural gas costs should continue to negatively impact coal use at utilities.

Turning to the next slide, let's review the results of merchandise. Quarterly merchandise revenue decreased 26% to nearly $1.1 billion. We experienced the largest volume declines in metals, as steel production has been cut by half, and in forest products and emerging markets where further housing and construction weakness have led to lower volumes. Phosphates also experienced declines on reduced domestic demand and inventory corrections more than offsetting growth in export shipments. Looking forward to the third quarter, we are seeing stabilization in several merchandise markets, yet the industrial sector and housing and construction markets are expected to remain weak. Volume declines in agricultural products are expected to be less severe as gain on ethanol shipments have partially offset other declines.

Turning to the next slide, quarterly automotive revenue was $113 million, 45% lower than last year. Lower consumer demand and inventory corrections have reduced automobile shipments. At the same time, plant shut downs continue and were further impacted by bankruptcy proceedings. This resulted in overall North American light vehicle production being down 45% in the second quarter.

As we look forward to the third quarter, absolute volume levels are expected to stabilize when compared to the last quarter while year-over-year volume declines are expected to lessen on easier comparison. At the same time, we will continue to work closely with our customers to adapt to the many production changes taking place, including the ongoing industry restructuring, the growth of foreign brands and imports and the start up of new plants.

Turning to our intermodal results, intermodal had second quarter revenue of $291 million down 24% versus 2008 driven by a 14% decline in volume and 12% lower revenue per unit. The decline in volume was primarily related to continued weakness in the international market driven by the global economic turn down and declines in consumer spending. Domestic volumes grew slightly as truckload conversions and new service offerings helped offset declines in other segments. Revenue per unit was down in the quarter on decreased fuel recovery and a challenging over the road pricing environment. As we look forward to the balance of 2009, we expect continued softness in international volumes reflecting weakness in global trade and consumption. In addition, the truck pricing environment is expected to remain challenging due to soft demand.

Now looking ahead. As you are well aware, we are in the midst of an extraordinary economic downturn with much uncertainty still remains. That being said let me share with you a few forward-looking thoughts.

Many markets appear to have stabilized at current levels with year-over-year declines in non-coal markets moderating slightly during the quarter. Based on the current economic forecast, we expect the double digit decline in our volume will continue yet at a slightly lesser rate in the third quarter. Also, excluding the impact of fuel surcharge, our third quarter revenue outlook is unfavorable in 8 of our 10 markets. Flat in food and consumer and favorable in agricultural products. We continue to work closely with our customers in these challenging times to forecast traffic levels to make appropriate resource adjustments and to deliver reliable service. We also continue to sell the value of rail transportation, especially as shippers look for the most cost effective and environmentally friendly business solutions. This includes looking for new business opportunities as customers undergo change and prepare for an eventual turnaround in the economy.

In closing we feel confident that our reliable service product and our attention to customer needs will position us for profitable volume 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 this difficult business environment, our culture of leadership, discipline and execution keeps delivering. Our committment to safety remains strong and will not waiver in any business climate as we strive for leadership in one of the nations safest industries. We are driving productivity, responding quickly to lower volume, and right sizing our resources to eliminate cost and finally, even as we take these cost cutting actions, we are running the plan and service reliability remains strong. Now let's take a look at some of the details.

Slide 16 shows our safety performance, including both personal injuries and train accidents. As you can see, our performance improved dramatically over the last several years and the trend continued in the second quarter. FRA personal injuries improved 6% to 1.22 for the quarter. That's 25 fewer injuries compared to the previous year. FRA train accidents improved 16%, reducing a rate of 2.22, a historical best quarter for CSX. Overall, our performance remains strong and we strive 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. This graph shows the change in car loads and road crew starts over the last two quarters. Using the one plan, we work to align our scheduled train network to current business levels. As a result, road crew starts, the crews that move trains across the system are tracking lower width volume and were down 20% in the second quarter.

Let's turn to the next slide. Fewer trains require fewer employees in locomotives and our efforts to right size continued in the second quarter. Looking at train and engine employees on the left, the number of active employees was 17% lower in the quarter. As a result, a significant number of our employees are furloughed. I look forward to calling them back to work as attrition and business conditions warrant. In addition, the (inaudible) locomotive fleet was down 17% versus prior year, and we currently have over 640 serviceable locomotives in storage. Right sizing efforts are not limited to the train network and road crews. We are making reductions in other areas as well.

Let's turn to the next slide. As you can see on the chart, we continue to challenge the need for all resources. Even those that are not considered volume variable in the short-term. While the resources in the gray box do not track volume as closely, we have made significant reductions. Local crews, the crews that connects the yard to our customers were down 16% in the quarter. Yard crews, the crews that switch cars in the yard and build outbound trains showed a 12% decline in the quarter. Finally, the number of mechanical employees declined 9%. This is because we have fewer locomotives and freight cars to maintain.

Now let's look at our service measures. As we continue to align the train plan and resource levels to current business conditions, we remain focused on maintaining consistent service levels. Service reliability measured by on time originations and arrivals remains strong and continued to improve. Originations were 83% in the quarter, 8 points higher than last year. In addition, arrivals improved to 81%. Looking at our network performance, train velocity improved to 21.7 miles per hour and the system remains very fluid. Average dwell times to 24.1 hours primarily due to reduced number of train departures from our terminals.

Now let's wrap up on slide 21. Safety performance remains strong. We continue to right size resources, drive productivity and manage all of our costs to help offset revenue declines. The network is running well with fewer resources and service reliability remains stable. We will keep delivering results through leadership, discipline, and execution. Now let me turn the presentation over to Oscar to review the financials.

Thank you, Tony. Let me start with an overview of the quarters results on slide 23. As you can see the top line was significantly impacted by declining business levels. Overall revenue fell $722 million or 25% to $2.2 billion driven principally by the 21% drop in traffic that Clarence discussed earlier. Expenses in the quarter declined $587 million or 27% to $1.6 billion. A little over half of this change was due to lower fuel prices with the remainder being driven by our safety, our productivity and our right sizing initiatives. Operating income declined $135 million or 19% to $582 million as our continued cost discipline partially offset the revenue losses in the quarter.

If we move below the line, interest expense increased $6 million in the quarter primarily due to incremental debt issue over the past 12 months. Next, other income decreased $7 million versus last year driven mainly by lower interest income. Please remember that with the sale of the Greenbrier during the quarter the resorts earnings both historical and current have been moved out of this line other income and are now included in discontinued operations. Finishing out the results on this chart, the below the line items I just discussed along with our lower earnings and lower shares outstanding resulted in EPS from continuing operations of $0.72.

Let's move to the next slide. As you know, fuel price once again played a significant role in our results so let's look at the lag impact in the quarter. As we've discussed in the past, the lag in our surcharge recovery is a benefit in times of falling fuel prices and a head wind in periods of rising prices. After three consecutive quarters of decline, fuel prices leveled off and started to increase. As a result we experienced a $33 million unfavorable lag impact in the second quarter. If you use the current forward curve, we would project the change in fuel prices to result in a neutral to slightly negative lag impact in this upcoming third quarter. Now as a reminder and as you can see from the chart we had a significant favorable lag in the second half of last year totaling close to $200 million, so we will face top year-over-year comparison for the rest of 2009.

Now let's review the key drivers of our expense results on slide 25. Total expenses were down 27% or $587 million as I said earlier. If you move from left to right on this chart the first two bars on the chart reflect the impact of general market forces. Non-fuel inflation of $21 million was more than offset by declining fuel prices which yielded a favorable impact of $219 million in the quarter. As you continue across the chart, the final two bars reflect management efforts over a sustained period of time.

Let me start with the $70 million of year-over-year expense savings due to favorable casualty reserve adjustments in the quarter. As you know our casualty reserves are periodically reviewed with formal semiannual studies in the second and fourth quarters by management and an independent actuary. The majority of this quarters adjustment is due to a production in the personal injury reserve that comes from a sustained multi-year decrease in both the number and severity of personal injury claims. In fact, since 2004, we've almost cut our FRA personal injury rate in half, which shows the focus on employee and public safety that Tony and his team have instilled in the organization. Another key driver in the quarter and it continues to be the positive impact from our right sizing and productivity initiatives. Our team has responded quickly to changing business levels by storing assets, generating labor productivity and driving increased efficiency across the network. These actions have translated into significant savings contributing to a benefit of $319 million in the quarter.

As we move to the next slide let's take a look at our expenses in more detail starting with fuel which was our biggest variance. Total fuel costs declined $352 million or 66% versus last year. As you can see on the right hand side of the slide, the primary driver is of course price of fuel, which decreased expense by $219 million resulting from a $2.06 decrease in the average price per gallon. Adding to this favorability was the $91 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 4% in the quarter and resulted in $22 million of year-over-year savings. The remaining variance in the quarter was driven by a $20 million decrease of non-locomotive fuel expense which also reflects lower fuel prices combined.

Let's continue expenses on slide 27. MS&O expenses declined 28% or $145 million versus last year. The largest driver of this variance was the $70 million in net casualty reserve adjustments I mentioned earlier. We are also able to realize $41 million in volume related savings in areas such as terminal and pier expense and freight car repair. Finally, cycling proxy related costs yielded an $18 million benefit in the quarter and the remaining $16 million variance represents a collection of several smaller items, none of which are significant by themselves.

Let's turn to labor and fringe on the next slide. Labor costs decreased 11% or $79 million from last year. The majority of this variance is driven by labor productivity savings of $70 million as a direct result of the reduction in overtime and headcount we discussed earlier. As you can see from the chart on the left, average headcount for the quarter declined by over 3200 people reflecting our continued focus on adjusting our workforce to current business levels. As Tony mentioned earlier we expect the furlough numbers to decline as business levels improve and normal attrition continues. Finishing out the slide a year-over-year reduction in incentive compensation provided the benefit of $16 million in the quarter and inflation was partially offset by various other cost savings.

On the next slide let me review the remaining expenses. All other expenses collectively decreased 3% or $11 million versus last year. Depreciation was up $2 million year-over-year as the net increase in our asset base was partially offset by lower depreciation rates from the life studies completed in 2008. Rent decreased $14 million due to substantial cost savings driven by the decline in volume year-over-year. Finally, inland transportation expense increased $1 million driven primarily by rate inflation from other rail costs.

Now that we've reviewed our expense items in detail I'd like to update you once again on our cost reduction scorecard as we move to slide 30. Now while we've seen some summaries of the bottom in most market segments, the economy is still in a recession and the prospects for a near term recovery are uncertain. As such, it is still critically important that we continue to manage our costs and respond to lower volume levels. With two quarters of cost cutting efforts behind us and response to the downturn, let's review our results within each cost category on the right hand side of the chart.

First, we were able to realize a 47% reduction in short-term variable expenses versus last year. Fuel of course continues to be a large driver in this category due to lower prices and volume and increased efficiency. Next, as you might remember, when we first outlined our cost structure in the fourth quarter of 2008, we said long term variable costs would likely take two to three quarters to effect and as you can see these costs are down 17% roughly in line with our volume decline in the quarter. This performance is accomplished through a sustained focus on adjusting resources including our scheduled network, our yard and local crews as well as locomotives and freight cars as Tony mentioned.

Moving down the slide, our fixed and indirect expenses decreased 14% driven to a main part by reserve adjustments I mentioned earlier. Collectively we were able to reduce our expenses by 27% and when you normalize for a fuel price impact and reserve adjustments, total operating expenses declined 12% in the fourth quarter(Sic-see presentation slides).

Now wrapping up on slide 31, as you look forward to the next quarter, as I mentioned earlier, we continue to project a head wind related to fuel. We will face tough year-over-year comps due to significant favorable lag impacts in the second half of last year. Of course managing our cost structure has been and will continue to be our key focus. We've made significant progress in all areas of the business thus far including the long term variable expenses and we will continue to drive positive results going forward. Equally as important as controlling cost, our balance sheet remains healthy. Our strong liquidity position and solid investment grade profile will continue to allow us to weather the current economic downturn and collectively our focus on expense reductions, sustained improvements in safety and the superior value we provide to our customers allows us to maintain a stable operating ratio despite the challenging economic environment and positions us greatly to emerge as an even stronger Company. So with that let me turn the presentation back over to Michael.

Thank you Oscar. The U.S. rail industry is the model of the world. It's the most cost effective, the most productive and the most efficient, and it ships more commodities and goods than any other rail system on the planet. As such our rail system provides U.S. companies with a unmatched competitive advantage. That advantage is absolutely essential as U.S. companies and their workforces struggle to compete around the world. The American workforce cannot afford for our nation to turn the rail industry back to the days of excessive regulations. In those pre Staggers days one out of every four railroads was in bankruptcy or on the verge of bankruptcy, service to customers suffered and the infrastructure was in a state of disrepair.

So let's talk about how rail infrastructure gets paid for and have a fact based conversation about rail pricing. A recent report showed that in the nearly 20 years since 1990, rail prices on average have increased at a rate of just over 1% per year. In sharp contrast the major customer groups who are demanding rail reregulation have increased their prices they charge their customers by up to seven times that number. Just to be clear, the reregulation proponents are growing their own pricing sharply more year in and year out than we are. Now, they need to deal with inflation, meet payrolls, provide ever better service and invest for safety in the future and so do the U.S. rails. That's why it's so important that we and the rest of the rail industry continue to have a good constructive dialogue in Washington.

Our collective goal should be a transportation policy that fits the need of U.S. industry and the essential freight/rail network over the long term. With a growing population, more and more people will consume more goods and those goods have to be moved. The best way to do that by far is rail transportation. It takes truck off congested highways and is better for the environment. It's projected there will be a dramatic increase in freight/rail traffic over the next 25 years. That expansion will require mostly private funding, sound tax policy, and public/private infrastructure partnerships to make the nations rail system even more competitive.

For all of the right reasons, infrastructure is now a key focus of our Washington lawmakers. I believe there is a growing recognition that investments in rail infrastructure combined with a balanced regulatory environment are essential. Infrastructure is only part of the solutions that railroads provide. We employ thousands of highly skilled and dedicated employees who make America move. In recent months as is the case throughout American industry, our employees have had to make significant sacrifices as we have made the difficult decisions to withstand the headwinds of this economy. To their great credit, CSX employees have improved their safety and on time performance during this tough period. As I said at the beginning of this call, this team has shown in these difficult times that remains highly committed to providing you with significant long term value for your investment. If you look closely at what our people have accomplished in this environment I trust you'll agree we are positioned to do just that. So now we would like to turn it open for your questions.

Thank you. (Operator Instructions). Our first question today comes from Edward Wolfe from Wolfe Research.

Hi. Good morning guys.

Good morning.

Clarence? In the slide where you talk about 6.6% same-store yield net of fuel, you said that's about 75% of your traffic. What are you seeing on the other 25% on new business or changed business? What are rates net of fuel looking like?

Ed, I think they're looking pretty strong as a matter of fact coming in. What we're seeing in the same-store sales is a lot of resourcing of products where some companies have closed down production at some facilities and shifted them to other facilities but where that has occurred and it's not measured as same-store sales we've seen some very strong pricing.

What are you seeing in new business though, in new business that's competitive that doesn't exist in the network, what's the pricing like and what was that looking like say a year ago?

Well, new business I guess is a term that we got to define here. Where we've had business that has been in the highway competitive mode or in some cases barge competitive we've seen on new business some compression from where we have been in general but what we've not done is sacrifice a price overall to bring volume on to the railroad, mainly because we want to stay focused on our need to reinvest, we are having to reinvest both in this infrastructure and in the technology, so there's been some cases where we've just elected not to go after some new business.

But when you say some compression can you just give, was it 6 points a year ago and it's 3 points now? Is there some magnitude you can give to it?

I can't. I wish I could.

All right Clarence? On coal, the domestic utility tonnage down 11%. Can you break it down roughly, how much of that is demand, how much of that is gas substitution, how much of that is high stockpiles? You made the comment that you expect it to be less worse in third quarter. Can you discuss that as well?

The third quarter it will be somewhere between what it was in the first quarter meaning lower than the first quarter and higher than what it was, or better than what it was in the second quarter. What we've seen is when those gas prices fall first below $5 and then below $4, the marginal dispatch units come off line. Secondly, in the southeastern part of our network and then the eastern, general electric generation has been down about 7% and then I don't have the coal burn number right off the top of my head but it's almost double what that is where it's been surpassed by natural gas, so the third factor we're seeing is the utilities are essentially taking what they're contractually obligated to take.

So I don't understand why do you expect it to be less worse and in between first and second? What are you seeing?

Well, we're seeing a couple things that's occurred. Some of the utilities have told us that they are going to have to pick up their deliveries, in the second half of this year versus what they had in the first half to meet their obligations so we're seeing that happen. There's been a little uptick in the export market, not much, but a slight uptick that's come through what our customers are giving us in terms of projections.

Ed, we're going to have to let others have some opportunity. You can come back in at the end if you'd like but we have to let others ask questions as well please.

Thank you. Ken Hoexter from Merrill Lynch.

Great. Thanks for the rundown on the variable cost Oscar, that's very helpful but Mike, if we could wrap up on what you were saying on Washington, is there any, that you can see, is there any kind of timetable as far as the introduction of the Rockefeller Bill or any progress being made on that or is it still kind of ongoing discussions?

Still ongoing discussions, Ken. As you know the coal bill that was dealing with the anti-trust issues being melted in with the Senate Congress committee and Senator Rockefeller's potential Bill. That Bill has not been released. We have no indication of when it will be and obviously there's a lot of things on the plate for Congress with clean air legislation, with, as well, the healthcare debate that's going to occur, so there's some risk that those may not get adequate airing, i.e. the rail Bill may not get out this year but at this point we're not seeing anything coming out but we don't know anything more than that, Ken.

Great and then just some numbers wrap ups. I guess you mentioned the employees furlough. Was there a number on that and then your thoughts on CapEx, when you think about as slow as the market is right now are you looking to pull back more on that CapEx than you did?

Two comments, one on employees we have about 2600 employees on furlough now and we will be calling a few of those back as Tony mentioned for both the regular attrition we're seeing as well as needs for vacation challenges or opportunities I guess whatever the word may be. On the CapEx, we continue to be in the pace that we had said earlier, roughly $1.6 billion this year, continuing to build that infrastructure for the eventual recovery so we're not pulling back further on that.

Great. Thank you.

Tom Wadewitz from JPMorgan.

Yes, good morning.

Good morning.

Wanted to see if you could give a little more perspective on the volume outlook. I think there's some expectation out there that there's a pretty big sequential ramp in auto production third quarter versus second and Clarence, you didn't really comment on that. I wonder if you're expecting that and if that's going to have much of an impact on your volumes in third quarter? And then also in terms of your comments on volumes you said signs of stability were close to a bottom but aside from what you said on coal are there actually customer indications of a pick up in volume or is it truly just the volumes aren't getting worse?

Okay, Tom, let me start with the automotive first. Wards Automotive is projecting the third quarter production will be somewhere around 1.5 million, 1.6 million units and that contrasts to about 1.1 million units in the second quarter so we think number one, the inventories are down in general about 35% on a year-over-year basis. Number two, there will be less plant down time and more replenishing of those automotive inventories. Three, we're not quite sure about the fourth quarter yet because it depends on what automobile sales do in the third quarter that will drive those fourth quarter productions. Secondly, on your question about what signs are we seeing that things are near the bottom, steel capacity has moved from about 42% utilization to about 49% utilization and that's the reservicing of the service centers.

Second, in our phosphate and fertilizer business, we've seen the high inventories that were happening in the Midwest are being absorbed, some of the major merchants have had to take some writedowns to absorb those inventories but they've been absorbed over the last 6 to 10 months. We think that the U.S. buyers right now are waiting for the Canadian/Chinese negotiations to finalize for phosphates and fertilizers in third and fourth quarter and somewhere around the fourth quarter to the first quarter we'll see the rebuilding of those phosphate supplies going forward. So all in all, it looks to us like most of these markets are stabilizing, they're at pretty much where they are going to be on the downside barring any unforeseen circumstances.

Okay, great and then just one on pricing and I'll pass it along to someone else. Do you have any preliminary thoughts on kind of a broad framework for how we might look at 2010 pricing? I know it's a little bit early to talk about that but do you think there's much of a change from what you're seeing this year and any thoughts on how we might look at 2010 pricing?

First, Tom, I think what we said on pricing going forward in 2010 and beyond is that we will beat inflation, and as we get closer to the end of this year, 2009, we'll update you on how we think that looks. Haven't said that. We're not going to find ourselves in a situation of where we're sacrificing this price lever. There's too much involved with our Capital Expenditures and technology enhancements that we have to have, so we will expect to have a strong pricing environment in 2010.

Great. Thank you for the time.

Thank you.

Thank you. William Greene, Morgan Stanley.

Yes, hi. Clarence, just quickly to follow-up on the last question there, typically at this time of year what percent of your business is actually already locked in for the next year in terms of a price?

Very little, Bill. We're right now getting into the negotiating phases for the customers for the contracts for next year so we're heavily weighted in those negotiations as you'll recall from last year in the second half of the year. Now in the economic environment we're going to find ourselves in, if you were a customer you'd kind of like want to string this along a little bit here to see where things are going. If you're in our shoes you want to aggressively go after a contract and try to get it tied up, as a substantial price increase so we're sort of like in that dance right now. We'll know more as we move on.

And you mentioned some of the reasons you think things are going to stabilize, is this typically how you see things play out in an economic recovery or do you usually see steel go first or what's the typical rebound look like in terms of where do we see signs of a pick up first?

Well, I don't know that I would characterize this economic downturn as a typical economic downturn. First it was led by housing, second by automotive and finally by a credit market collapse so it was difficult to say where you'll first see it returning. I do believe that once you see consumer spending start to improve, you'll see more of the consumer goods, more of the international goods start to recover, second will be in the steel area which will indicate construction is moving up and then finally it will be in the housing market and that will be the last to pick up.

And are you surprised at how strong your domestic intermodal has been? What's driving that? Is that just new business from tuck load carriers?

It's a couple of factors that's driving it. One is, is one of our truckload partners has increased their shipments significantly between the West Coast and the Central Ohio and between the Kansas City area and Central Ohio. Secondly, one of our truckload partners has increased their market share and use of intermodal between Chicago and our new Chambersburg facility and a third factor that's been driving it is West Coast transloads of international containers into domestic containers has had a significant impact on that domestic business.

Just one quick question for Tony. How many cars per week do you think the network is currently resourced for?

Wow, that's a question. When you say resourced for, are you talking about carloadings or cars online or I'm a little bit--?

I'm basically trying to get at where your volumes are today, so car loadings, is the network over or under resourced for where the volumes are today?

Well, we're way under capacity right now, if that's the question you're looking at. How much we can add to that is probably another 15, 20%, that's the portion that we got down and plus we've added capacity so our network hasn't been tested beyond where we were when the declines started, so there's a lot of capacity. We got 36,000 cars stored, that's about 30,000 serviceable cars. We got about 215,000 cars online this morning that includes a lot of those 36,000 cars, so right now under these present conditions, capacity is our least worry.

And this is where you're driving, this is Michael, I mean Tony and his team have really driven the resources to match the demand quite extraordinarily for heavy fixed cost business like ours so we have the resources adequately sized for what's there and when it does rebound, he quickly has the ability to bring out those locomotives out of storage, cars out of storage and recall the employees, so we keep very close eye on making sure we're right sized on the resources and as we've said before, as it does rebound we don't think it necessarily comes back, the costs come back on a one on one basis with the efficiencies we've been bringing out of this.

Thanks that's helpful. Appreciate the time.

Thank you. Chris Ceraso from Credit Suisse.

Thanks, good morning.

Good morning.

Just a couple items here. As it relates to regulation, I'm interested your view on arbitration. We saw an unfavorable result with one of our neighbors to the North who has to deal with arbitration. Do you think that's in the cards for the U.S. rail system?

The dialogue that's been in place so far has not been on Canadian style binding arbitration. It's been much more around what's the appropriate cost of capital, is it replacement cost, what do you do with potentially the bottlenecks or reciprocal switching, so it's been more around those kinds of concepts, streamlining perhaps some of the STB processes as the STB has been doing to make sure that the customers are getting quicker answers to their queries, so no, I've not seen that in the dialogue as of yet.

Okay, good. On the casualty reserve, clearly you've made pretty steady progress on the safety but should we expect improvements of this magnitude to the reserve and then at the same time what do you think is a normal level we should expect on the MS&O line in general either as a percent of sales or in dollars?

Chris, it's Oscar. As, let me see if I can answer it this way. As far as the safety improvement that Tony and his team have driven over the past five or six years, it's been pretty phenomenal and so that rate of decline has been great. We are now leveling off at a point where we are right near industry leadership and so that is a potential area that may limit some of the impact going forward but again, a loss development factor has other things besides just frequency, severity and costs they are in so I think there will be continued adjustments of this magnitude, possibly not but again in a couple of years as the performance continues we'll see something again, but don't know what it is at this point. As far as MS&O--?

We'll continue every second quarter and fourth quarter.

The schedule process and accountability. As far as the MS&O, I don't know that we're giving any specific guidance online items. If you remember, Chris, that is an interesting line because there is materials and supplies which are easily able to forecast. It's the O or Other that's kind of a difficult issue that tends to move with business, with issues like litigation or safety so it's hard to kind of pinpoint a specific run rate on that, so we'll have to continue to give you as much transparency and let you do some of the work.

Okay, thank you very much.

Thank you. [Yeung Kwan] from Barclays Capital.

Hi, good morning. Just a quick question on your core pricing that you talked about on the same-store basis. You said it's around 6.6% in Q2. What would that look like if you had to adjust for mix as well?

Well, that number is already adjusted for mix. It's adjusted for fuel and mix impact so it's measured by the same margin, same destination, same commodity, same car type.

Okay, because I'm just looking at the footnote and it says same-store price increase excludes impact from fuel and mix. Is there something I'm missing there?

That's what I'm saying. It excludes it.

Right. So my question was more along the lines if you had to adjust for the mix impact as well do you know what that same-store price would look like adjusted for the mix?

This is Oscar. It's a very small amount, the predominant factor is fuel. Mix is almost immaterial.

Okay. Great. Thank you.

Thank you. Matthew Troy from Citigroup.

Michael, a question on the legislative front. I was interested in your comments before, obviously you're projecting timing is difficult but curious as to the extent of your dialogue, you've spent a lot of time in Washington. Have those folks gone dark now that they have been asked to merge or marry their agendas or are you still invited to the table and talking is part of the compromised legislation process, are they kind of behind closed doors at the moment?

There's still ongoing dialogue but some of it is them doing their internal deliberations as well and I'm sure when they feel they have a Bill that protects the ability of the railroads to invest for the future as well as address some of the customer concerns, they will bring that out but we have no sense of when that timing is at this point.

Okay but it's your sense there will be another round of negotiations that would include the railroads prior to introduction or are we really kind of white, well, not white knuckling it but is it just a waiting game and they will release whatever draft they choose. What's your sense in terms of process? Is there another round involved or is it kind of locked and loaded and we'll see what they introduce?

I think they've got most of the input they were seeking from both the railroads and the customer base at this point and they are in their own deliberations by and large.

A question for Clarence on intermodal. Obviously, expectations for a sequential pick-up in auto just due to seasonality, if we're bouncing along the bottom here, normal seasonal patterns would probably resemble years past. There's an expectation that there would be a peak shipping season or maybe a mogul shipping season being smaller but are you hearing from customers any internal dialogue about wanting capacity or needing capacity either for back-to-school or start to build into the back half of the year or are those discussions not happening?

One is we have not heard anything from people. Two is our expectation for a Fall peak is very minimum. Three is that as Tony mentioned we've got a lot of capacity not only in CSX but in the rail network in general so any surge that we would possibly get as a country here in the third or fourth quarter we're well adapted and equipped to take care of.

But not hearing anything yet in terms of intentions?

No.

Okay, in terms of the headcount, obviously very good progress there, just matching the crew starts almost point for point with the volume declines. Just curious, in the case we do get a pick up in volumes, what is your historical call back rate, success rate? Is it 70, 80%? What is your hit rate in getting them back and just help me in terms of the process, how quickly can those be brought back online to handle traffic? Just trying to get a sense the headcount issue wouldn't be a bandwidth issue when volumes do pick up?

Well, it's different in different environments. Right now our call back rate would probably be much greater the people that's furloughed than we would be if we were in high economic times. Right now we're probably getting at least 75 or 80% back according to our agreement it's like a 30 day call back. We watch this by location daily and we got a pretty good feel on how that would happen on the call back rate.

And again, the timing once you call someone back, is it a two week retrain? Is it a three week, is it based on seniority, how does that work tactically?

Well, normally it's about a 15 day callback but it's according to how long the person has been off on this training, how long he may have been working at the time we had to relieve him, so it varies and we watch all of that at different locations. Some locations where we had to furlough pretty deep, we got a lot of seasoned people getting those back wouldn't be much of a problem, but some places where we've had to hire and have a lot of young people that we just cutoff, obviously we do a lot of training before we turn them loose so we watch those areas and we do have our training center geared up on a notice to go if we have to do that.

One last quick one then, Clarence and thank you for that. Trying to level set expectations, we've kind of hit the point where the market is out in the weeds parsing weekly traffic data, which can be a tenuous exercise at best. Just in terms of broader expectation you've articulated what you expect business to do in the third quarter but should we be looking for a sequential ramp linearly July, August, September or my expectation is July would be a pretty dead month and the numbers could be bad but then the improvement would be more back end loaded. Not looking for month by month guidance just trying to level set expectations, how do you see the months shaping up vaguely or broadly in terms of the seasonality and where we should expect to see some kind of improvement relative to Q2?

I think you'll start to see it in more loaded to the back half of the quarter than the first half of the quarter. We're already through a couple of weeks here in July. You're in your normal July doldrums or however you want to characterize it but I think it picks up sequentially as we move into the buying seasons of August, for back-to-school and September.

Exactly. Okay thank you for the time.

Thank you. Randy Cousins from BMO Capital Markets.

Good morning. One of the problems you guys have had is that you've been chasing falling volumes and I guess I want to come to Oscar's slide 30. So obviously, the short-term variable matches the volume reductions. As volumes have now seemed to have stabilized and we look at the 452 for long term variable and the fixed at 736, is there some more money to come out in terms of savings if we use that kind of as a baseline given that we seem to now have some volume stabilization?

Hi, Randy, it's Oscar. Again, thinking of that long term variable cost and the two to three quarters to affect it if you think of the timing back in '08 when we sort of said that and the results you're seeing in this quarter which I think are roughly in line with volume, I think the quarter declines you've seen in this particular quarter of Q2, some of those benefits will continue in for instance the third quarter. After that again we'll have to see where volume kind of continues.

So is there like another 50 million or $100 million of costs that come out Oscar as you've now stabilized the volumes in the cost cutting initiatives catch up or is it less than that?

Randy that's probably a little specific and broad for me to answer on an open call sort of thing but just again cost focus that we've had is one that will continue.

Okay. And then one question I guess for Clarence with reference to RPUs. I'm kind of noticing that we seem to have some stabilization in the intermodal RPU, so the second quarter is for the international is 443 versus six months at 444. The domestics is 745 versus 735 for the six months. Would it be fair to say that on a go forward basis Clarence, did you expect RPU in the intermodal business to stay at this level or do you see additional downward pressure coming?

On the international side I do not see additional downward pressure coming. As a matter of fact when you take the fuel surcharge out, it's been very positive story for us. Depends on what happens on the domestic side with highway competition but I think what you're seeing occur there is that the truckers are about as low as some of them is going to be able to go and still survive, so I think it's pretty much stabilized about where it's going to be.

So in terms of our thinking in terms of modeling on a go forward for the balance of this year these are probably pretty good numbers to use as an RPU basis for the intermodal franchise?

I think that's right except you got to remember now that the RPU basis on this externally reported number is going to have fuel surcharge in them so the fuel surcharge is going to be significantly different here in the second half of this year versus second half of last year, as Oscar mentioned earlier.

Okay. And then last question was just with reference to the sort of segmented data, again looking at the OR for the intermodal business, again, do you guys see, it's at 87.6 in the quarter. Do you see that as kind of like stabilizing, improving, how should we think about that and if you could offer it up the same way on the rail side, OR is at 71.2. Again there was a bit of the $70 million win, but how should we think about OR trends for the various business units?

Randy it's Oscar. I think at this point in time as we look at the business going forward it's hard to really forecast so we're not prepared to give any guidance at that level.

Okay, thank you.

Thank you. Jason Seidl from Dahlman Rose.

Good morning, gentlemen. Thanks for taking the question. When you look at the 6.6% base pricing that you have, pretty impressive and you're guiding up above your previous range, however do you think there's a little bit of danger in that given the current environment in Washington, understandably that rates are not where they need to be in 1980 but do you think there's a little bit of danger that you might be pushing a little bit too hard right now?

No. This is Michael. I don't think so, Jason because if you look at it, still if you look at the value proposition of what we offer to our customers, we think we have a very good value proposition as we're looking to save money in this environment they're finding rail to be attractive so we do have to price at the value we create and we do, as Clarence said if we're going to make the infrastructure investments that our country and customers need we need to retain the ability to have these kind of returns to allow us to continue to invest the $1.6 billion this year so I think when we talk to the policy makers in Washington they do understand the importance of that and to make sure that we continue to make those kind of investments.

Also, Michael, you brought up replacement costs in terms of the discussions in Washington. How feasible do you think that is to actually be pushed through?

Well, I think it's certainly something that has very good rationale behind it, as you know within large standalone rate cases they basically are on a replacement cost basis. So I think it's not a conceptual challenge, we do need to replace this infrastructure much of which has a number of years on it and the costs have went up significantly to replace bridges in those sorts of infrastructure needs. I think that the challenge is not the conceptual part. It's how do we build a framework, a modeling framework that allows us to adequately capture that and we think that that is possible and should be done.

Okay, as always thank you for the time.

Yes.

Thank you. John Larkin from Stifel Nicolaus.

Yes, good morning gentlemen.

Good morning, John.

I had a more detailed question on intermodal pricing particularly on the domestic side, it's no secret that the shippers rebid a lot of their truckload and LTL traffic as well as their intermodal traffic in the first half of the year. What was your mind set with respect to working with the IMCs and the truckload partners if they chose to perhaps go after a bid aggressively with the price reduction? Did you share in that with them or was it really their decision to make in terms of how much of their own margin they wanted to sacrifice?

John this is Clarence. As you know it goes both ways. We give a little. They have to give a little to get some of the business that they've got and that's one of the reasons you saw some of those domestic numbers over the last couple of quarters decline.

Okay. So you have given some in some cases where you think it's important to hold on to the business. Is that a fair way to think of it?

That's a fair way to think of it.

And back to Washington for just a second. Interestingly some of the same legislators that are talking about the Rail Competition Bill are also involved in the Surface Transportation Bill, and in their initial objectives for that Bill which in theory is going to move forward later this year if they can override I guess the Obama Administrations wish to delay it by 18 months, there was a thought that they wanted to between say 2010 and 2020 shift somewhere between 10 and 20% of the highway traffic over to other modes, presumably mostly to rail, and that there would be some government policy associated with that that would sort of make it more economically attractive to you all to add capacity and so forth. Do you have any clarity as to what they may be talking about? Is it investment tax credits, public-private partnerships, what exactly do you think they have in mind?

I think they are looking at it all, one, I'll applaud to the House Transportation and Infrastructure Committee and Congressman Overstar, for taking that broader perspective of not just a highway funding but looking at all transportation infrastructure that's required and I think that really is reinforcing the fact that we do need to look at that rail infrastructure and I think it will take the form of some public-private partnerships and maybe some specific targeted funding in intermodal movements which helps release some of that highway congestion. We would hope eventually an investment tax credit but it probably wouldn't be in that transportation reauthorization.

The question is does it move through in this Congress because not under the Obama Administration but as well the Senate leadership is under Senator Boxer has also said that they thought an 18 month continuing resolution was the proper vehicle at this point, so I don't pretend to know how they will work that out but clearly, Congressman Overstar wants to move forward but we do applaud the emphasis on intermodal and rail infrastructure within that Bill.

That's very helpful and then just one last question. Your geographic competitor has had a fairly long list of what I would call strategic marketing initiatives that they've announced over the last few years, the most recent of which might be a move up into New England and the Boston area, a fairly aggressive intermodal move down into Florida, a coordinated effort with one of the Canadian carriers to move freight North/South between Chicago and St. Louis more fluidly. Are any of these projects or are they in total a bit of a threat to you in terms of perhaps losing a little bit of market share and how do you think about protecting yourself from those strategic marketing initiatives?

Well, I think we offer a very good quality product out there. I think a little additional competition we're still going to be offering the great product. We have the better routes in most of those markets so we think we'll be able to compete quite well with those.

Have you seen any pressure so far with respect to some of those projects that have been moving along a little more rapidly?

No, we haven't.

Okay. Thank you very much.

Thank you.

Thank you. Walter Spracklin from RBC Capital Markets.

Thanks very much. Good morning guys.

Good morning.

Just on the -- you guys pointed quite a bit to the great inroads you've had in terms of safety and service gains over the course of this period and of course when we talk about those, some of the pushback that we get is that it's sort of just brushed off as being volume driven and that these gains are certainly achievable in lower volumes, you guys have gone at great lengths to show that it's beyond that but can you give us a little bit more discussion about when volumes come back, what kind of safety, service and efficiency efforts or gains that you've made can you hold on to even in a higher volume environment?

This is Tony. We develop a train plan based on volume and as the train plan is running now, we are running less trains as you well know, it also requires a lot of times making a lot of additional switching moves to make these longer trains. Obviously, if we reduced some trains by 20% you're going to create some volume out there and you're going to do some improvement on your line of road, but we feel like through our one plan, the technology we've added to it, it gives us the better look of how to build trains, how to dispatch trains and how to run trains as well as dispatching the crews and the locomotives so we feel pretty comfortable we can bring a lot of that volume back with very little additional resources or eating up capacity.

As far as our safety performance, we strive our safety performance as far as our strong leadership. Our people are very very cognizant of leading the people, being close to the people, getting them working in a safe manner, running the trains in a safe manner in case we drop a chemical load or something in a neighborhood, we're all cognizant of that type of safety performance so the leadership that we've developed in the last three or four years has been very strong and especially during the time that we had to show that we had a lot of leadership in reducing our cost in this down economy, I think will continue. Now obviously the numbers are not going to be as big as they were because we were in last place and we're pushing first place, but going forward, we'll continue to have those type of leadership and as our leadership gets much more experienced going forward then we should continue the improvements.

Walter this is Oscar. Just an added note to that, the way Tony likes to say it to the team is in essence, expenses will not come back on a one for one basis and Michael mentioned that earlier today. The scorecard and the transparency around that scorecard that we've established is something we fully expect to continue even as the recovery sort of begins. It's not just a downward scorecard but also one on the upside so we monitor those things again to make your life a little easier as you talk to your client around that particular subject.

That's great color. Appreciate that. Switching just over to pricing now in terms of what you've been able to achieve in the last little while and pushing above the 6% range, we're going into a half now where the fuel surcharge is a lot lower, so pushing through and therefore getting that price increase through might be a little bit more difficult. You're guiding now above the 6%. Is that more a reflection of having done better than the 6% in the first half or now that you're going in the back end weighted in your price negotiations are you feeling comfortable that you can continue to get above the 6% range in the back half on your renewals that you achieved in the back half?

Well, I don't want to say I'm going to get above 6% on the back half because our guidance was for the full year we would exceed 5 or 6. Having said that obviously the math in the first half is very favorable for us, secondly, as we've said earlier there, Walter, we expect to continue a good robust pricing environment. We expect to get value for the rail product that we're delivering and given the fact that our prices are still on a historical basis about half of what they've been over the last 29 or so years we think that we could maintain a very strong pricing presence in the second half.

Last question, is there an investment tax credit in lieu of pricing at a minimal to U.S. if it's, if your returns are identical at the end of the day, would you accept a tax credit in lieu of increased pricing?

I think if we had to choose between the two we would take the marketplace pricing that's available to us and the service we provide. I think it would be sound public policy though to also give us the investment tax credit to incent us to invest even more in the future.

That's all my questions. Thanks, very much, guys.

Thank you.

This concludes today's teleconference.

Thank you. See you next quarter.