Norfolk Southern Corp (NSC) 2002 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Glad to see you here. There are enough of you I don't have to make my band of brothers speech this morning.

We welcome you all here. We know that Norfolk Southern is one in what I think of as an exclusive group of people who are actually here in person this quarter and we're glad to be here hope we can be of service to you.

We are constantly evaluating that so this is a good quarter for you to think about whether you would like to see us in person or not and let Hank and Lee Ann know about that.

But I also would like to welcome those who are listening by telephone conference call and as usual, I will remind everybody to get a microphone when you ask questions.

And for those Norfolk Southern people answering, please stay close to a microphone so we can make the telephone work as efficiently and clearly as possible.

I'm also asked to to remind listeners and participants on the internet that the slides of the presenters are available now for your convenience on our web site in the Investing in the Thoroughbred section.

And we urge you to make use of that.

Let me just I think you know all of the folks that are here this morning. Let me just quickly introduce the remaining members of our management team.

Ike Prillaman, our CMO, and our Chief Operating Officer Steve Tobias are here on the front row, and Hank Wolf, our Chief Financial Officer.

We also have John Rathbone, Bill Romig, Bob Fort, Bill Galanko, and Lee Ann McGruder.

And Debby Malbon is in the back of the room and expect most of you work regularly with Hank know Debby, too.

Let me start by saying that I'm very encouraged with our 1st quarter results. You had [INAUDIBLE] you have them [INAUDIBLE]. They show a 41% increase in earnings year over year. I'm even more pleased that we were able to achieve improvement both from a financial and operating perspective.

We produced these in spite of general economic slowness and in particular, weak coal traffic through the throughout the quarter which suffered as utility stockpiles piles built up. Our net income was $86 million or 22 cents a share. Compared with net income of $61 million or 16 cents a share in last year's 1st quarter and you may recall that reported earnings last year in this quarter included that additional 3 cent gain from the sale -- from an adjustment on the sale of North American Van Lines from prior years.

We continue to make solid progress in improving our service rebuilt and operating efficiency.

This quarter, we reached full implementation of our enough scheduled merchandise network which we call the Thoroughbred Operating Plan or TOP and I've asked Steve to take a few minutes to tell you more about TOP and our operating data later in the program since this was an important factor in helping us get the significant efficiency and productivity gains which were in an important key in the bottom line for this quarter and also this service and velocity improvement and reliability improvement reflected in that are and continue to be a key to our gross initiative and plans.

I think the 1st quarter illustrates that we now have in place at Norfolk Southern a powerful engine for continuing to move traffic from the highways to Norfolk Southern tracks.

The quarter I believe illustrates that we can improve profitability in this company even in soft conditions which we found this quarter. Best of all, as the economy recovers and volumes increase, we can handle the volumes without major new costs and we can keep our system fluid and efficient and naturally improved volumes will do wonders to greatly improve our margins.

I also am pleased to say that while we made the significant operating improvements this quarter that our employees again set the industry safety standard.

We have the lowest ratio of reportable industries for the railroad rail industries and as usual at this time of the year I can't say anything about the Harriman or Gold Awards but some of us will be in place next week when those awards or handed out.

Safety continues to be a great source of not only pride but it creates a climate where labor and management or able to work together to improve our service and safety and efficiency and I will continue to call attention to our safety numbers.

We're striving to bring the same kind of concentration everywhere throughout our business operations. On the revenue side for 1st quarter, here I need to report to you that railway operating revenues were $1.5 billion down 3%. While most of that decline was attributable to reduced coal volume, revenue was also down.

Largely as a function of an elimination of fuel surcharges. Our general merchandise revenues were generally even despite a decline in car loads in the general merchandise area.

And Ike is going to take some time to discuss what we see or maybe what we think we see in these numbers.

Recovery though slow is happening but it was pretty hard to see last quarter.

You had to look hard for it and we do. The really good news is on the expense side where our operating expenses declined 6% from the 1st quarter of 2001.

This reduction reflects not only our rigorous cost controls but also a decrease in diesel fuel expenses and also benefits from the improved network efficiency. For the quarter despite the revenue weakness in the coal declines we were able as a result of a lot of hard work by a lot of people, we were able to improve our operating [INAUDIBLE] year 2.5 points to 84.2%.

I think this improvement is important and we're proud of it as I've said before, we're not at all satisfied with the ratio and I don't like the number that the ratio starts with but we're focused on continue incremental improvement going forward.

We continue our NS-21 initiatives and are well into the launch of our 6 Sigma efforts all of which are focused on improvements in margin as well as improvement in general operating efficiency.

I do think that the 1st quarter shows you that even in relatively soft economic conditions we're capable of moving this number in the right direction and we -- we'll not let up in our efforts to do that.

As we look to the 2nd quarter in the balance of the year we expected continued improvement in operations and we think they will produce additional efficiency gains and improve our customer service as we go along.

We will sell that customer improvement hard into an improving economy. We're continue to take a disciplined approach to pricing our rail service and we're keeping our eye on the ball as we actively negotiate rates with customers that reflect what we believe strongly is the I'm proving market value of our rail services in the favorable cost climate that there comparisons show.

We [INAUDIBLE] believe the economy itself is improving.

As business I'm prosecutor, we expect to handle it efficiently with our capacity and to provide consistent and reliable service.

But I still have to emphasize to you that looking ahead, we are still anticipating continued economic uncertainty in spite of my own belief that the upturn is here.

We're seeing increases in diesel fuel prices but they still remain lower than the record highs of 2000 and we have some hedge nothing place which Hank will talk to you about.

But the good thing is our customers are beginning to tell us that they are planning on increased business and we're continuing to see conversions from the [INAUDIBLE]. As you know we have focused sales teams out there working hard to concentrate on improvements in every area. When exactly the economy will begin to cooperate with us fully, I still can't say.

I can tell you that we're beginning to be more confident. Over all, we look for continue improvement in the 2nd quarter in volumes. Revenue realization and we expect further further efficiency gains to be realized from our operating. We're planning on a systematic upturn but we're planning very carefully.

We're ready for higher volumes but we're prepared if they are slower than anticipated. Our NS-21 program has improved our flexibility and our ability to adopt to change.

We're confident in our system and in our ability to improve profitability as the year progresses. Now I'll ask Hank to review our numbers.

Then we'll go through the usual drill with Ike Prillaman will tell you about the specials and then Steve will

take some time to update you in operation and then we'll all return to take your questions. Hank.

Thank you, David, and good morning.

Our 1st quarter results show improvements despite continued weakness in the economy. Coupled with the decline in our coal business that was largely precipitated by very mild winter weather conditions that we experienced in our service territory.

At the same time, we continued to drive for productivity and efficiency improvements as david indicated and are seeing benefits from the implementation of our Thoroughbred Operating Plan. As you are aware in the 1st quarter last year we recognized an additional after tax gain of $13 million or 3 cents per share.

To provide you with the most meaningful comparisons today my remarks will compare this year's 1st quarter results to last year's excluding this item.

Railway operating revenues were just under $1.5 billion which was $42 million or 2.7% less than our operating revenues for the first quarter of 2001.

Total car loads for the first quarter decreased by 47,000 units or 2.9% compared with last year as a result of fewer car loads of coal traffic.

We were nevertheless able to post a modest improvement as the decline was less than in carloadings and Ike will provide you with the details of our revenues in just a moment. Railway operating expenses were $1.26 billion. The largest decrease in the 1st quarter was in diesel fuel expense which improved by $36 million as our diesel fuel expense declined to $81 million.

Improvement was due to a 27% decline in the average price per gallon.

Which decreased from 92 cents per gallon to 67 cents per gallon coupled with a 6% reduction in diesel fuel consumption.

120 million gallons is versus 128 million gallons last year.

As you are aware, we began a fuel hedging program in 2001 consists of little swaps and advance purchases. This chart shows that we've hedged approximately 67% of our 1st quarter diesel fuel requirements.

The second, third and fourth quarters are 73, 53, and 42% hedge respectively.

Using a combination of swaps and advance purchases.

As you can see, we hedge a little over 82 million gallons of fuel in the 1st quarter and have approximately 88 million, 64 million and 53 million gallons hedge respectively in the second, third and fourth quarters.

The average price per gallon ranges especially ranges from 67.5 cents per gallon to 73.8 vents in the 4th quarter. The second largest decrease in operating expenses was in materials, services and rents which declined by $33 million or 9%. While purchase service costs increased by $3 million due to higher joints facility cost and increased expense for automobile handling service, equipment rents declined by $24 million and material costs were $12 million low are than last year.

The $24 million reduction in equipment represents was due to improved foreign car velocity resulting in reduced cycle times for foreign line cars.

This was largely attributable to the preliminary takings of [INAUDIBLE] adherence to the new Thoroughbred Operating Plan.

Materials decreased by $12 million as we slowed our maintenance cycle. Other expense decreased $15 million or 26% largely due to the settlement of prior years property taxes that reduced tax expenses by $9 million and the benefit of a $4 million recovery on a bad debt previously charged off.

Casualties and other claims decreased by $2 million and depreciation remained level year over year.

Partially off setting these improvements compensation of benefits increased by $4 million over the same period in 2001.

Due to increased wage rates and health and welfare benefit costs for contract employees. And higher stock based incentive compensation.

These increases were partially offset by salary and wage safety savings from reduced employment levels which declined year over year from 31,086 to 28,909 in the most recent quarter. Rents and services increased by $8 million or 8% due to lower equity earnings of Conrail which was attributable to the absence of a favorable tax adjustments of $9 million that Conrail made in the 1st quarter of 2001 combined way $4 million increase in Conrail's reserve for casualty claims in the 1st quarter of this year. The improvement in operating expenses more than offset the lower operating revenues.

And produced a 1st quarter rail way operating ratio of 84.2%.

Which is a 2.5 percentage points improvement. Income from [INAUDIBLE] improved $237 million.

$32 million or 16% above the 1st quarter 2001. Total other income for the first quarter was $100 million compared with $114 million in 2001. This improvement was due to gain on sale of property and investments which was $19 million higher than last year.

The 1st quarter benefited from a $10 million gain on the sale of an investment. In addition to other property sales that added $9 million.

Royalty income was $13 million for the 1st quarter compared to $14 million for the same period last year. Accounts [INAUDIBLE] sales fees were $5 million less than the same period last year due to both a lower principle balance and lower interest rates. All other expense was an expense of $6 million in the 1st quarter compared with income of $10 million last year.

As you may recall in the 1st quarter last year we had the benefit of litigation settlement in favor of the company that added $13 million to other income. 1st quarter income before income taxes was $137 million compared with last year's $91 million or an increase of 51%. The provision for income taxes for the 1st quarter was $51 million compared with $31 million last year and the effective tax rate in the 1st quarter was 37.2% compared with 33% in 2001. For the first quarter, net income was $86 million.

An increase of $25 million or 41% compared to the $61 million that we generated last year. This chart summarizes our results this year compared with last year excluding the 2001 gain from discontinued operations. As you can see, most of the quarter over quarter improvement resulted from improved income from railway operations as the $42 million decline in operating revenues was more than offset by a $74 million decrease in operating expenses. In addition, other income net and interest expense on debt improved by $7 million each. This resulted in 2 $1 million more in income taxes and $25 million more in net income. Earnings per share for the first quarter were 22 cents compared with 16 cents per share earned in 2001.

An increase of 38%. Thank you for your attention and now I'll turn the program

over to Ike Prillaman.

Thank you and good morning.

Our results were achieved despite a weak economy. Before discussing our markets and changes in revenue trends, I will make a couple of comments about the general economy and particularly the manufacturer [INAUDIBLE].

We have all heard favorable economic projections, even from Chairman Greenspan, and sign posts do support these projections.

The consumer confidence level climbed.

And are increased production of automobiles and orders of steel have been announced. Related to that announcement it has promising metrics.

The ISM Former Index rose to 55.6 in March. And the New Order Index for factories rose to 65.3, which is the highest level of increase in 15 years and I would also add that the report indicates that inventory levels declined again in March.

Many of our shippers believe they have -- do believe they have seen the worst but are unsure if these indicators have been supply driven to replenish low inventories or if the indicators are signs of increased demand.

And having said that, and counter to all of these positive economic indicators our loadings for the first quarter indicate otherwise as our year over year comparisons were off 47,000.

Tote 58 loadings declined compared to a year ago and as one analyst report indicated recently, the newspaper cardboard, aluminum parts of the steel industry remain challenged.

I would quickly add that we anticipated the difficult comparison for the 1st quarter and we finished on budget and in fact a little bit above budget. Compared to 2000 volumes, we have 88,000 less merchandise carloadings and 23,000 fewer car loads of coal and as andy and I were talking about earlier, the manufacturing sector is really off from two years ago and obviously this is not the way it should be but it does some speak to our available capacity along with the reduced expense level and it provides us with a lever and opportunities when the economy recovers. 1st quarter revenue for approximately $89 billion.

Merchandise $2 million or just two tenth of 1% of last year while car loads declined 1.8%.

This sector continues to improve-year-old with an increased of $22 per car and I will add a few comments to that later in my discussion. Revenue reached $270 million down $6 million along with a decline in revenue per unit. And our coal business was dismal as revenue declined $34 million or 8.7% while volume was down 40,781 or 9.3 when compared to all the all-time best 1st quarter of 2001. Coal production East of the Mississippi was also down and all of our coal markets were involved in the decline.

Utility stockpiles are above normal levels throughout the system with only a few exceptions.

In the North stockpiles are before 9% above target and in the South stockpiles are about 58% above normal.

And little change in either region stockpile levels occurred during the 1st quarter with continued mild weather utility coal shipments drop significantly in March and turning the so-called shoulder months we do not anticipate improvement for the 2nd quarter. I would add that the 90 plus degree weather in New York last week does not qualify as part of a shoulder month.

Electricity generation in the Southeast region was up 2.5% over March 2001.

And nuclear generation is behind year ago levels keeping coal plants a little more active. Export volume declined about nearly 10,000 car loads or 21.9%.

The market for export coal is forming very slowly this year.

Overseas buyers are moving cautiously after a year in which they's incurred large price increases. Shipments during the 1st quarter and in the near short-term are slow.

Due to negotiations. I would say that there is availability built of U.S. Coals in the near term short age of Australian coal.

U.S. Producers have been reluctant to reduce prices but settlements are beginning to occur and in fact, they will proceed out of necessity and volume should rebound during the 2nd quarter and what we know now our markets should equal or exceed the April to appear coal year.

The plight of the domestic integrated steel market continues to affect our metal large call coal markets.

Or 14% compared to the 1st quarter 2001.

Battery closures have occurred including the bankruptcy of National Steel and the closer of New Boston.

However, steel production is up and we will hall either the imported slabs to make the steel. Coal revenue per car is up slightly in the 1st quarter of 2002 reaching $901. The increase in coal revenue per car has moderated due to less export coal and additional new short haul business to the river docks.

Shipped 3.6 times more of their short haul business to Alicia dock there. For 2002 two, a new mine load out in Southern Ohio is under construction and will be completed. This new business will increase significantly and this will impact our over all revenue per car going forward.

Looking forward we're optimistic about the utility market as well as coal production and improvements in our equipment efficiency.

And once it reaches full production, it will be the largest producing mine in the East and this will improve availability in the East.

With our new internet base manage end system, the coal car fleet will be organized into train [INAUDIBLE] and this equipment will be used on customer needs and efficiency and we expect this to produce significant coal car fleet utilization improvements and will also provide increased visibility and reliability for both the utility and produce.

On a business development side, we have a new rail direct utility plant coming on line in the 3rd quarter.

This plant was river served, and as I previously mentioned, we also have a substantial increase in short haul traffic to the river docks coming as well as a [INAUDIBLE] of the keystone build out project.

All total this represents about 9 million tons of new business on an annual basis starting with the short haul business next month and late this year or early next year, the keystone project will be completed.

[INAUDIBLE] reached $720 million which is $6 million down.

Increases in container and trip call [INAUDIBLE] Crown volume is offset. Our ability to grow in this weekend economic climate is due to our three new terminals added last year and in addition our new interline service products which are truck competitive have also helped to offset the decline in our base business or if you will our same store sales.

Our premium business volume was down 6%.

Postal business was down 18% while ups was down 2%. International business exceeded expectations while domestic container business increased 1%.

Intermodel equipment is also improving and we expect that to continue. Several factors were involved in the $17 revenue per unit decline for the quarter. 1st quarter 2000 revenues were supplemented by $4.5 million fuel surcharge which added $8 to the revenue per unit and that was obviously in 2001.

But I would add as a note we have initiated a surcharge two weeks ago as fuel prices rose. Another factor in the decline was the completion of our two year initiative to convert our higher revenue per unit trailers on containers.

Also I've mentioned higher revenues per unit premium business was down as these two market mix changes drove a $4 decrease and we did secure additional freight from truck conversions to our new terminal.

This short haul truck traffic was moving from Chicago to Cleveland. We were also aggressive in pricing short-term business away from the highway and these conversion reduced revenue per unit by $5 and these are shorter haul and drove the changes away from the decline of our premium business.

Since 1999, we've opened four new terminals.

And we have increased our double stack clearances. Our network is complete with capacity and our focus going forward will be on growth as more and more shippers will face increase truck pricing due to higher insurance cost and other emerging restrictions for that industry. As in the 4th quarter 2001, our automotive and ag groups produced the overall gains in revenue. Automotive revenue reached $228 million increasing $14 million.

While car loads rose by 11,000 or 7.4%. This increase was beyond our expectations as auto makers ramped up production during the quarter. General Motors announced a production increase of 1.5% versus their original plan due to stronger than anticipated SUV and truck sales.

Despite announced plant closures, Ford increased its 1st quarter production by 7.2%.

Vehicle inventories at the end of March were reported at a 58 day supply which is about seven days below historical norm, and recently both Ford and GM have announced increased production for remainder of the year. The 2002 North American production has increased its forecast from 15.5 million to 16.1 million units and this compares to the 2001 production of 15.5 million units.

A -- this is despite a nearly 4% decline in car loads.

Which were principally the increased long haul corn shipments added to revenues.

The short-term outlook for the ag business is good. We expect to see demand for corn to the Southeast as well as Pennsylvania and the [INAUDIBLE] markets to increase as supply begins to tighten. The chemical revenue reached $186 million declining $2 million while volume fell 3.1%. Revenue per car increased by $43 and we expect these favorable year [INAUDIBLE] to continue.

All of our chemical markets experienced year over year declines.

They do believe they've seen a turn for some of their more troublesome markets. Metals and construction revenue declined by $5 million despite this, [INAUDIBLE] that there are signs of improvement emerging for the industry.

Our iron and steel shipments posted a gain over last year due to increased imported slab business.

In distribution [INAUDIBLE] the cyclical paper market continues its unfavorable year over year comparisons.

Downturn is in its second year. Revenue reached $141 million down $13 million while units declined by 11,000 or 9.6%.

Traffic continues to suffer due to weak paper and paper board demand. Total merchandise revenue per car reached its all-time highest level at $1,319.

Increasing 2 $2 or 1.7% over 1st quarter 2001. Ag revenue per car had the highest gain at $77. Longer haul corn shipments to the Southeastern mills drove a 6.7 increase in revenue per car. The $43 increase and the $20 increase for paper are attributed to rate increases and changes in traffic mix with the length of haul and metals revenue per car declined due to the traffic mixes some shorter haul shipments began with interplant transfers as they ramp up production.

In automotive was affected by increased shorter haul volume. Over all we still have -- are still having success in improving our revenue per car on our merchandise business.

Ending where I started, our business for the past 12 months running has declined 250,000 loads on a year over year basis while our over all results have improved.

Going forward we have leveraged opportunities [INAUDIBLE] as we do have the [INAUDIBLE] we believe 2002 is an important year.

We are implementing numerous web base systems. Which will provide increased visibility for all shipments including.

Interline and we'll also improve the ease with doing business with Norfolk Southern.

We've focused on improving reliability using our new operating plan and Steve Tobias will share the details with you.

Thank you.

Thank you.

Good morning. The Thoroughbred Operating Plan implementation completed during the latter part of February, I'll begin where David left off.

I'm sure you've seen the recent news coverage of the operational details. Rather than repeat that information I'll focus on the improvements.

Keep in mind that the redesign covers merchandise and intermodal traffic. I'll ask you to pay attention to the blue lines on the first three slides as they indicate this year's performance.

Train speed is 24.5 miles per hour. The highest since the Conrail integration. It exceeds the very [INAUDIBLE] prior to split date.

Cars on align continue to decrease and we continue to see numbers in the 185,000 range. This provides a clarification of the fluidity of the redesign of the network.

Our time is in the 22.5 time range.

This view gives you a quarter over quarter comparison of cars line. Train speed, terminal dwell and weekly ships. As you can see each area shows improvement even though we've been challenged.

Our train operating plan redesign has made what was a complex rail network simpler and much more efficient.

TOP is boosting efficiency. With improved utilization we were able to operate with about 170 fewer locomotives.

This is significant. We continue to evaluate our fleet size relative to business levels and with the scheduled operations we're in a about better position to regulate the fleet.

Another important measurement is fuel efficiency.

Improved utilization also drives fuel efficiency. The reduction in gallons per carload shown in yellow on the graph is a clarification that we're achieving significant cost savings mile producing more reliable and consistent service.

TOP is providing the platform to launch on time train performance.

As you can see from the green bars in this graph, we're continuing to improve in all categories of train operation.

Our on time performance is at an all-time high. TOP is clearly the driver behind this improvement.

The schedule train operation enables us to be more consistent with crew start requirements. This helps deliver improved train performance and work predictability which relates to lifestyle for our train crews.

Here is the measurements of our foreign velocity. Unlike average train speed measure, it reflects road, terminal time and customer time.

We achieved a velocity of 33.03 miles per hour.

This has a significant impact. Here you can see a 28.6 improvement 1st quarter 2000, versus 1st quarter 2002.

Let's look now at our dock improvements. This slide refers to some of our higher volume committed traffic lanes and shows the improved service consistency.

The dock measure compares the actual variation before and after TOP. Once again, the message is clear. Top is generating very favorable results in over all transit time.

And consistency. The next slide shows how we were doing over some of our major gateways.

Again, this is a car measure not just a train performance measure. The red bars remit TOP performance prior to TOP June 2001.

And the green bar indicates our performance to March of '02. Following complete implementation of TOP, Buffalo shows improvement from all five of the highest volume of lanes.

Over Chicago, we're seeing improvement to all of our interchange partners.

As we are in Memphis. At New Orleans and over the gateways of East St. Louis and Salem, Illinois. The key efficiency driver in TOP continues to be reduced car hand links and terminals.

75% of Norfolk Southern's customers are seeing improvement in transit time. Most will experience 10-20%.

Further enhancement to TOP are nearing completion. The operating plan adherence project. A system designed to measure the effectiveness of our operating plan by the end of the seconds quarter, we will be able to measure and monitor in detail at the individual shipment eleven.

For example, did each car operate on the correct train?

On the correct date in the correct block? And was each block represented in the correct order on the correct train?

These addiction to TOP will drive us closer to where we want to be with respect to dock transit

reliability. Thank you, now I'll turn the program back to Dave.

Thank you, Steve.

We'll continue to give you a lot of detail and statistic because it's important to us and I'll take questions.

Scott, you got your hands up in a hurry.

Two questions.

One as I guess for Steve. I just wanted to get some sense. Turning on the last part of TOP with some of the the reconfigurations of [INAUDIBLE] in

February, could you give us some sense of the further tracks you got by turning on the last part of TOP and obviously would we see sequential improvement in some of these measures end as we go further into the 3rd quarter.

Well I think as our discussions at previous meetings have indicated, TOP was an incremental approach rather than a flip the light switch approach and we have incrementally gained in a progress active fashion steadily since we began in June of '01 up through the ends of February essentially.

Keep in mind that TOP's inclusion today is merchandise business and intermodal to include Triple Crown.

There is opportunities. There is upside to what TOP is providing for us. If that covers your issue.

And we're going to continue to monitor and show you as we show our customers what we're doing is putting our metrics out there for the world to see.

What we've said we're going to do is expose for better or worse and we expect for better but we're going to put them out because we're selling not only to you but more and even more important we're using this to sell our customers.

And then I just had a second question for Ike. Can you give us some flavor -- can you give us some sense as you look at the merchandise category how much in the effect in RPU was you think is pricing is at a stable basis at currents on the on the that 1.7%.

Are you talking -- where is Scott -- you're talking over all of the 1.7?

If you can break it between what was mix and what was price.

Probably a little bit more than half of price.

Now you had some negative mix numbers. But in the the gross up, it

would be about that.

As we -- one thing I want to say about that is I've noticed the intense focus that every one has been putting on this and you're right to do so because we've been communicating to you that we're focusing very hard to value prices.

We believe we have a more valuable service and we are we're trying very hard to price it according to the increased value of our service and I can talk to you on my soap box before and particularly in the reverse years -- so you're right to look at it but I guess identify caution everybody -- the other thing we're doing here as we improve our service levels we're able to go after business that we've never gone after before.

A lot of that is shorter haul business and that's very profitable business in many instances and we assess the profitability of it but it affects the overall numbers. And we're going to try to explain that to you but there is a very customer specific move -- move specific pricing business so the [INAUDIBLE] numbers are important but it's also important that you analyze them so you're not misled because our philosophy is not going to change on this.

Jill you had your hand up?

Can you just give us a summary outlook for coal?

The details are fabulous but all of the moving parts. Are you saying coal volumes

could be up this year?

I said the export coal volumes should be up this-year over year.

But -- which is about 8% of our total coal market. Utility market with the high stockpiles, it all depends on the weather this summer.

We depend on cooling days in the Southeast. That's where the largest stockpiles are on our system right now.

So depending on the summer, it will drive whether or not coal

starts moving at a faster clip by the end of the 2nd quarter into the 3rd quarter.

Okay and then maybe Hank on some nitpicky cost items.

The Conrail rents and [INAUDIBLE] line picked up and you explained that. Do you expect that to come

back down?

Well I think that it was down last year because of the tax adjustment that was made.

That's a one time item.

And perhaps up a little bit this time because of the increase in the accrual of casualties and other claims.

So you expect it to be ongoing?

I was just going to say remember we've got and we and CSX have this Conrail team that's focused on taking the cost of operating Conrail down.

That is a blue chip team and it continues to work actively with the management of Conrail which has made great strides in taking over all cost down and while you'll see things like -- you'll always see tax adjustments and the casualty claim accrue recall that to be made because of an unusual accident situation or will it gage situation this quarter but over all we expect to continue to drive the in hear and the cost in Conrail down.

Okay.

I'm sure Csx would be quick to say the same thing because it's a joints effort along with the management of Conrail and they've done a very good job.

Thank you.

Steve, can you remind us how much equipment is still in storage at this point

locomotives and cars?

Locomotives, we have approximately 24 to 250.

Rolling stock is approaching 10,000.

Okay and some would argue that your service improvements and your ability to successfully integrate TOP this quickly has been to a large function due to lower volumes in the system right now.

And I'm curious from your standpoint how much more volume would you like to see in the system before you can really guarantee a good grasp on have you completed a successful integration of this program and you're ready to proceed to Phase II or are you already there.

Are you comfortable with it? Do you think that there is successful completion.

I would like to see as much volume in the system as the system can bear.

Okay.

And in reality however, I think there is still more up to go. We clearly have benefited to some extent from reduced volume in the system.

But by the same token we have exacerbated that reduced VAM and that opportunity by the fluid tee of the process.

The reduction in handlings and miles and security. It's a bit of a self-fulfilling prophecy to the extent that we've created capacity that positions us for an economic rebound.

The essence of your question is there more up to go and my response is clearly we know there is more to go and we eagerly look forward to the opportunity to find how far we can push this because we are not through improving operations.

We have an 84% on time performance we're clearly going to start that number with a 9.

We're not absolutely certain when we're going to start with it a 9 and then we'll have the second digit be pretty high as well.

We'll create more and more capacity in the system. Ideally you're right that sometimes you have to make -- you have to create a silver lining in your cloud.

We had a cloud over the last year average and certainly we used that opportunities to install a system that we think is an important system for the future and one that worked.

We would have installed it in a booming economy.

Was it easier to get it up and running? Sure, it was but when you go back and look at the charts, Steve put up one chart that showed the reduction in shipments and you'll notice that all of the improvements figures greatly exceeded the reduction in the shipment improvement because we watch everything on that -- we don't want to be misled by doing better just because shipments are a little soft.

We know that we have got a lot of upside and that's -- it's just clear us to that there are upside.

How much upside, we look forward to finding out.

Yes, Tony.

I was wondering if I could do the same summarizing the moving parts on intermodal the outlook for the second half of the year.

But all of the domestic and premium pieces particularly and curious to know what is going on with the industry trans and your own stance about taking federal money for projects.

I think it was [INAUDIBLE]. Where are are we on that?

I think we're continuing to work on that.

I think the reality is there is very little federal money right now for any projects but we're you know we believe that philosophically I won't speak on behalf of the industry, I'll talk about myself.

I believe that we have something to offer the nation in terms of saving money and building more highways and addressing problems that are deep system stem I can problems.

I believe the rail industry has a lot of ways that we can add to the over all system and do it in cooperative ways with the government and I'm very open to exploring new ways to do that.

And I think that as we work with Congress on project, we're going to be very open to exploring new ways of doing things.

Ike, you can -- I look forward to hearing about that myself.

INAUDIBLE], it's a crystal ball.

Probably the way it would track would be the way that we're seeing it a occur in the 1st quarter. I think domestic is going to be a little slower for us.

Because of the premium side. The trucking companies have to get their driver list up. Have to get their business up so they can turn some of these guys need their business up before they can turn any business over to us. The premium business catalog sales, of which affects mail as well as ups looks like it's still going to be challenged going forward.

We're most bullish on just direct conversions from the highway over to rail.

Which would be the north/south lanes as well as East and West transcon.

And as identify attempted to point out of utilizing the capacity at our four new terminals. On the international side, it will all be according to the economy, consumer confidence.

It's moving at a good clip right now.

The question out there is whether or not this is in anticipation of some work stoppage on the West Coast or

is it truly demand driven and replenishing [INAUDIBLE]. So it's a wait and see particularly on the international side.

We're going to take that to take the economy as we find it but we'll do better than general.

Yes.

Yes for years analyst used to ask you what the break even point for in terms of miles hauld was and it always -- it was an increased number so we stopped asking it and now I detect a slight turn around in this.

Remember, I was the guy that answered that question with the two as the first digit and everybody laughed at me and hooted me out of the rail business.

And you heard I just said that one of the things that he just picked up was is the Chicago to Cleveland business and intense service improvements so I don't know.

I don't think people are laughing like they used to. Maybe they are laughing for different reasons.

I don't know what that number is but we're sure going to push that envelope until we find out.

One of the hauls that was kind one of your [INAUDIBLE] years ago would have been the engines for Honda and in Ohio which I think is like a 90-mile haul and could be done by road rail.

I would be more than happy to handle anything for Honda. I think you're refer to somebody else on that piece of Honda business.

It was near Columbus, Ohio.

Anyway with the Conrail haul. That's right and the other question is when you look at top as service improvements, there are two ways of looking at this.

One is to have goals from where you are going forward and another one is to have a

concept what is achievable? What is the state-of-the-art and what is the difference? Is that latter something that you have in mind?

Well, I mean obviously we don't do this haphazardly.

There is a lot of planning and thought that goes into every move that our intermodal accounting guys go after.

This is a business that we're committed to growing. We're committed to taking it

where we find it and what we're finding is that as highways become more and more congested, it's easier for us to take it shorter and shorter distances and every time that we can assess that we'll do that profitably, we'll do it.

Couple quick questions.

Steve, how many locomotives do you

have in the fleet?

Fleet is just a shade over 3,500, Roy, and storage service able would be just under 100.

Does that 100 include the in the 3,500.

Yes.

Second question.

1st quarter comparison. I'm [INAUDIBLE]. Merchandise and automotive. Are we talking yard to yard or

customer dock to customer dock?

Customer dock.

Okay.

Okay.

58% of the volumes that are in TOP are merchandise. The rest is intermodal.

You say in TOP, this is 58% of the business that's running under the TOP plan.

58% of the business is merchandise and that's all in TOP. There is a bit of a separation between what we trip plan and what we measure from a commitment standpoint dock to dock.

But we're still measuring in a doctor dock performance outside of what we're committed to.

That's good.

And by the end of the 2nd quarter, everything will be measured systematically.

We know [INAUDIBLE] has a commitment to make the trip in X number of hours.

Exactly.

No. Is the short answer. Too early.

Fair enough.

Let's see questions two different questions. One looking at the expense side you did very well with taking out head count. It didn't seem to transplant to the actual labor expense and if you look at a per worker basis for comp and benefit that rose 8%.

I think our strong price went up like 35% from the beginning of the quarter to the end of the quarter.

We have a lot of incentive based compensation so we reflected a significant amount of -- that's the good news.

In that number and we had an increase in I'm sorry to say in health care costs over that period.

That continues to be a difficult issue for us and everybody else in the industry and one that we're trying to address and labor negotiations is a stand here.

Without getting into detail on that but having called attention to those two items, I would expect that those anomalies would not continue for every quarter.

I think Hank has some details on the numbers.

I think you said it was up 8%. It was up 1%. 4 million.

But on a per employee basis because you reduced employees so much.

There were four moving parts in that number.

You've got the increase in wage rates. And health and welfare benefit cost for the union employees. There is a decrease in pension income over last year which also increases your numbers because you didn't have that credit.

There is an increase -- stock based compensation component because the stock price rose during the period of the quarter fairly significantly.

And we're happy about that.

And then just about fully offsetting all of those increases, you have the reduction from the head count.

That head count number is going to vary from quarter to quarter and is also going to be responsive to the business volumes that we're handling.

If business volumes increase, hopefully Steve will have more crews start and that compensation number will go

up. But all have the revenues that those crew starts are going to be responding to.

Can you tell me how much the stock compensation was?

If the stocks flat, god forbid in 2nd quarter, what would --

how much?

Usually we don't break that out.

But I would say to you that if you look at the over all number, about half of it more than half of it was a function of increased wage rates and health and welfare benefits.

And about a little less than a

quarter of it was attributable to the decline in pension credits and a little more than a quarter a associated with the other.

Okay. That's helpful and just one question on the revenue side.

Let me add something that Steve whispered.

Don't forget that we did pay and that did include the incentive bonus that the locomotive engineers received.

Remember, they were under our -- under the same formula as

the management incentive plan. So that incentive was in that.

Usually we'll accrue that at every quarter but -- we had an additional accrual in the 1st quarter related to that.

Okay and the one question on the revenue side.

On the metal or the steel tariffs that will be have been put in place, that could lead to some domestic paths being put on-line.

Do you have any sense that that might come on-line and give you another further

boost?

I've given a lot of thought to that.

The LTV properties that -- they have been acquired and the speculation is that they will be coming back on-line.

Any of the coke closures are permanent. Once they take the heat off the coke batteries, they are closed forever.

So the steel industry, I would go back to what the market looking like as we go forward.

My understanding from most of the big players, their order books are full through the summer. They are feeling real good. There are some soft spots and certain steel products as I mentioned. But the blast furnaces are all up and running. I think the electric art furnace group is doing well also and prices have increased pressure believe so with the strong demand from the auto industry, it looks like metals-thigh they are off and running again. Now the question will be can they sustain their pricing and what happens with slab imports and all of the dynamics that come together and but the market has improved.

Another example of our business is not -- we can't determine how that business is going to move.

It's just our business can figure a way to make money out

of it whatever the mix is.

Hi. Just a quick question for Ike on the pricing. On the agriculture products, you mentioned that long haul corn was one of the reasons prices were up. Is that something that's sustainable and I was under the impression that corn was one of the cheaper products.

The ag business has ebbs and tides where the supplies are diminished.

If the supplies are diminished, we're going on see sourcing from a longer distance and that is what we're seeing right now.

The longer hauls due to where the supplies are diminished. We're not heavily into the export market and the export market for us has always been the shorter haul if you will and and and in some instances but also the volumes come and go.

The export market is declining as we speak.

And it has been a problem for others. We have a good base of business with the feed mills

which the variable there being where the corn is being sourced at and having to be brought in for longer haul.

And we really like fried chicken. laughter ] Hope you do too.

Just a couple for Ike if I could.

Could you just update us on contract role overs timing for the baffle this year for the

merchandise business and the coal business.

Merchandise and the coal business, the coal business gary for the most part or the export contracts are out, they are being worked on this week and should be finalized the end of this month.

We do have negotiations underway with several utilities.

On the merchandise side, we the automotive sector probably has the biggest rollover in contracts.

I think most everyone knows about those.

Otherwise, the chemical and paper business is more fragmented and they occur at a

lot lesser level but we do in aggregate [INAUDIBLE] have a large amount dollars under negotiation right now.

On the domestic coal?

What percentage of the utility

business will OEL rollover?

We've had some cut elements.

I'm having to -- it was a 35% to 40% number going into this year. You know where we are with

several of the contracts. And I would say we're about half settled out.

Okay.

Can I just ask you one more on my understanding is I think it's Southern Company or a Consortium thinking to shift coal.

Are you handling that coal

today? Do you foresee yourselves handling that coal in the future?

That's been the much publicized switch by a plant share as part of the Southern Company's from half PRB and half Central Lab to all PRB. They have not yet made that decision final but it speculation is that that is what will occur.

We will -- we serve that plant.

If it is all PRB coal, it will come over the Memphis gate way. Otherwise it would be source had out of Central Lab.

If it is all PRB coal, we see increases up to 1.5 million to

2 million tons because of the factor giving us more tonnage.

Thank you.

One of the reasons I was given by the coal industry for stockpiles being so high and running into the very high level was that they signed take or pay contracts during the energy spike a year ago and I'm wondering if any of your customers perhaps are in danger of failure because of the take or pay contracts?

Certainly haven't heard that suggestion. Have you, Ike?

Not to our knowledge.

Any final parting shots?

Well THEN, thank you for being with us.

We'll look forward to seeing you again next quarter.

Hopefully with

with a good quarter.

Thank you very much for listening today.

This concludes the program. You may disconnect at this time.