CSX Corporation (CSX) Q2 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the CSX Corp.'s Second Quarter 2011 Earnings Call. As a reminder, today's call is being recorded. [Operator Instructions] For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corp. Sir, you may begin.

Thank you, Laurie, and good morning, everyone, and again, welcome to CSX Corp.'s Second Quarter 2011 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 Investors section. In addition, following the presentation, a webcast and podcast replay will be available on the same website. Here representing CSX this morning are Michael Ward, the company's Chairman, President and Chief Executive Officer; Clarence Gooden, Chief Sales and Marketing Officer; David Brown, 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 contain forward-looking statements. You are encouraged to review the company's disclosure and the accompanying presentation on Slide 2. These disclosures then apply forward-looking statements and risks and uncertainties that could cause actual performance to differ materially from that anticipated by these statements. In addition, let me also remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With 32 analysts now covering CSX, I would ask as a courtesy to everyone to please limit your inquiries to one primary and one follow-up question. And with that, let me turn the presentation over to CSX Corp.'s, Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Well thank you, David, and good morning, everyone. Last evening, CSX was pleased to report another record quarter of financial results. Second quarter earnings per share were $0.46, up 28% from the same period last year. With positive results in virtually all markets, CSX increased revenues 13%. Revenues were driven by volume, which grew at a faster rate than the general economy; pricing, that reflects the value of freight rail transportation; and recoveries that offset higher fuel prices. We were encouraged the team delivered another quarter of strong safety performance. At the same time, operations remain fluid, and we're putting additional resources into the field to support higher service levels for our customers and for long-term growth. From a financial perspective, it was an excellent quarter. Operating income was up 21% to a record $926 million, and the operating ratio improved 190 basis points to 69.3%. That represents real progress against our target of achieving a high 60s operating ratio for the year and a 65% operating ratio by no later than 2015. Looking at the full year, we expect the upward trends in markets we serve to continue going forward and for CSX to produce another record year in 2011 for our shareholders. With that, let me turn it over to Clarence to discuss our top line results. Clarence?

Thank you, Michael, and good morning, everyone. With the economy completing its second year of expansion, positive trends continue in the markets we serve, though at a more moderate pace. The ISM's Manufacturing Purchasing Managers Index registered 55.3 in June, indicating a continued expansion of U.S. manufacturing. At the same time, the ISM's Manufacturing Customer Inventories Index registered 47. Although it increased sequentially, an index below 50 indicates inventories remain at levels supportive of manufacturing growth. Overall, the performance of the markets we serve will support profitable growth. As we capitalize on growing demand for rail service, CSX remains committed to delivering the value of rail transportation for our customers through safer, more efficient, more reliable service products. Now let's turn to the next slide and review the results. CSX's revenue increased 13% to over $3 billion. As you could see on the chart, volume increases drove $86 million of year-over-year revenue growth. Also, the combined effect of rate and mix accounted for $150 million of the increase, reflecting yield gains across all markets as we continue to sell the compelling value of rail transportation. Finally, as you look further to the right, the impact of higher fuel costs increased our fuel reimbursement $120 million in the quarter. Let's turn to the next slide and take a closer look at volume growth. Total volume increased 3% versus the same period last year. While the overall rate of volume growth moderated, it continued to exceed that of the general economy with strength across 2 of 3 major markets. As you can see on the chart, merchandise accounts for over 40% of our total volume, and the solid growth reflects gains in 6 of the 8 markets we serve. Intermodal continues to be the fastest-growing market, now accounts for 35% of CSX's total volume. The decline in coal volume continues to reflect the weakness in demand from electric utilities, consistent with our previous comments on this market. Now turning to Slide 9. As you can see on the chart, revenue per unit increased 10% to over $1,800, driven by a combination of price, fuel recovery and mix. Same-store sales pricing increased 7.2% and again exceeded rail inflation, which is currently forecasted at 4.6% for the year. Recall, the same-store sales are defined as shipments with the same customer, commodity and car type and the same margin and destination. These shipments represent approximately 75% of the CSX traffic base. Increased fuel recovery, a result of higher fuel cost in the quarter, also contributed to higher revenue per unit. Finally, partially offsetting these 2 favorable drivers was the effect of mix as our Intermodal business, which has lower revenue per unit, grew at a higher rate compared to the other markets. Now let's take a look at each of the major markets that we serve, starting with coal. Coal revenue improved 15%, driven by an increase in revenue per unit. The increase in revenue per unit reflects improved yield, higher fuel recovery and positive mix. On the domestic side, utility demand remains soft as electrical generation was flat in the Eastern United States. In addition, natural gas prices remained at low levels, leading to continued displacement of coal at some utilities. Export coal volume grew year-over-year as demand was strong for U.S. coal shipments to Europe, Asia and South America. As a result, CSX shipped 10.4 million tons of coal to the export market in the second quarter. Looking at the full year, we now expect export coal volume to be in the range of 42 million to 45 million tons as global demand for coal remains strong. At the same time, while utility stockpiles declined year-over-year, they remain slightly above normal levels, but with gas prices forecasted to remain low, domestic utility demand is expected to remain soft. Overall, coal volumes are expected to grow in the third and fourth quarters. Now turning to our Intermodal results. Intermodal revenue increased 24% to $376 million in the quarter, driven by an 8% increase in volume and a 15% increase in revenue per unit. International volume increased on continued U.S. economic growth and new international customers attracted to our portfolio of service and network offerings. Domestic volumes also grew as the overall truck market tightened and high fuel prices encouraged over-the-road conversions. Intermodal saw improved yields and higher fuel recoveries in both sectors, driving a 15% increase in revenue per unit. Looking forward, we expect to grow with our existing customers through continued import growth and over-the-road conversions and through ongoing strategic investments in new services and markets, such as our new Northwest Ohio terminal, which is expected to be fully operational later this summer. Going forward, this terminal will be a key driver for both domestic and international growth. Turning to the next slide, let's look at the merchandise markets. The merchandise markets delivered revenue growth across all 3 sectors, driven by pricing, fuel recovery and volume growth. Within the agricultural sector, volume growth was driven by increased soybean shipments from the Midwest to the Southeast, where the local crop was weak. In the industrial sector, overall industrial growth drove increased shipments of metals and chemicals. This growth more than offset the decline in automotive shipments, which were down slightly due to production disruptions caused by shortages of Japanese parts. Finally, within the housing and construction sector, volumes grew despite continued weakness in the housing-related markets. Growth in this sector was primarily driven by increased shipments of pulpboard and forest products and increased mineral and waste shipments in emerging markets. Turning to the next slide, let's look at the overall merchandise summary across these sectors. Overall merchandise revenue increased 11%, driven by a 3% volume growth and an 8% increase in revenue per unit. Volume growth was led by forest products, emerging markets and metals. Revenue per unit increased due to higher yields and higher fuel recovery. Looking forward, we expect automotive volume to gradually strengthen as supply chain disruptions ease and production levels recover. Automobile inventories now stand at 54 days, below the target level of 60 days. At the same time, we expect growth to continue in the metals and chemical markets as a result of increased auto production and continued growth in the industrial economy. Finally, while we expect weakness in the housing and construction markets to continue, shipments of pulpboard, minerals and waste will remain strong. Now let me wrap up on the next slide. Looking ahead, discussions with our customers and key leading indicators suggest continued growth in the markets we serve throughout 2011 and beyond. With that as a backdrop, CSX's volume growth will continue to outpace both gross domestic product and industrial production. As such, the volume outlook is favorable across all 3 major markets: intermodal, merchandise and coal. Overall, core pricing gains are expected to exceed rail inflation with gains across all markets. Increased yields are necessary to drive continued investment, rolling stock and infrastructure to meet the current and long-term customer needs and to support long-term growth. We will continue to create compelling value for our customers as they seek transportation providers that deliver solutions that are safe, efficient and environmentally favorable. Thank you, and now let me turn the presentation over to David to review our operating results.

Thank you, Clarence, and good morning, everyone. Over the last few quarters, we've talked about CSX employees being mutually accountable for achieving superior results in safety, productivity, reliability and customer service. Looking to safety. CSX once again delivered strong results, reflecting the continued commitment of all employees. To support growing demand and a stronger service product, we added people in locomotives across the system. As a result, overall customer service improved sequentially during the quarter, and there remains a strong focus, with still more work to be done. Now let's review the results in more detail, starting with safety on Slide 17. This slide shows the second quarter FRA personal injury and train accident rates over the last 4 years. In this year's second quarter, the personal injury rate improved 22% versus the prior year to 0.89. This quarterly personal injury rate is the second quarter best and reflects CSX's focus as a leader in one of the nation's safest industries. While these measures indicate excellent progress, we were deeply saddened by the loss of 3 employees. These tragedies underscore CSX's ultimate goal will remain 0 injuries in train accidents. Looking at train accidents, the frequency rate improved 16% to 2.37, significantly better than previous years and again reflects CSX's strong momentum in safety. Now let's turn to the next slide. This chart highlights the operating ratio and the year-over-year changes in both volume and nonfuel expenses over the last 5 quarters. As you see in the boxed area, the operating ratio improved 190 basis points this quarter to 69.3%. The lower section of the chart shows that over the 4 previous quarters, volume growth exceeded the overall increase in nonfuel expenses. Remember that during this time period, CSX strategically redeployed idled assets and absorbed volume growth through operating leverage. As volume has continued to strengthen, further incremental resources were added this quarter. Again, this is reflected in the boxed area to the right and shows nonfuel expenses increasing 4%, which was slightly above the 3% volume growth. This was related to ensuring resources were available to meet growing demand and improve service for customers. These costs were the result of additional crew starts, higher overtime and accelerated hiring and training. Furthermore, strong export coal and intermodal volume growth resulted in increases in both coal pier and intermodal terminal expense. While we will continue to carefully manage resources to balance service and productivity, our priority is to return service to the levels customers have come to expect. To that point, we expect the increase in nonfuel expenses to slightly exceed volume for the balance of the year. Even with this increase, CSX still expects to deliver a high 60s operating ratio for 2011. Moving to Slide 19, let's review the major operating measures. Overall, while the network remains fluid, measures continue to be at levels that are below recent years. On the left side of the chart, on-time originations were down versus 2010, and arrivals were also lower. On the right side of the chart, overall train velocity fell and dwell increased, both contributing to the decline in on-time performance. That said, as you will see in the next slide, measures have improved since March. As you can see on the chart, all measures improved from March levels during April and May. However, in June, improvement in on-time performance and velocity slowed, but remained above March levels. At the same time, dwell continued to recover to more normalized levels as the quarter progressed. Turning to the next slide, let me outline the actions we are taking to ensure service continues to improve. Since the fourth quarter of last year, we have taken actions to properly manage resources in order to handle growth and improve customer service. This approach will continue going forward. In the second half, the aggressive hiring plan CSX put in place in the fourth quarter of 2010 will begin to yield results. About 30 to 40 train and engine employees are coming online each week to offset attrition, increased service levels and support growth. This will result in a net increase of approximately 450 T&E employees deployed across the network by year end. In addition, we'll be adding up to 250 locomotives in the second half through a combination of purchases, leases and rebuilds. These units will enhance the flexibility and recoverability of CSX's network. Furthermore, we expect to take delivery of about 3,800 freight cars through a combination of purchases and leases to enable further volume growth, primarily in the coal and agriculture markets. These actions together will enhance service, improve network flexibility and increase overall capacity for growth, especially in the major quarter supporting export coal shipments. While every opportunity to enhance productivity will be evaluated, returning service levels to previous -- returning service to previous levels remains the team's primary focus. We expect to achieve this, and at the same time, deliver a high 60s operating ratio for the full year. Now let's wrap up on the next slide. Looking forward, CSX will build on its strong safety performance as it pursues its ultimate goal of 0 injuries and accidents. Service improved since the first quarter, and the additional resources being deployed will help continue to drive greater results. I'm confident that network fluidity and efficiency will improve further to levels our customers have come to expect. CSX employees are mutually accountable for providing a high level of service, which is the foundation of success for both customers and shareholders. Now let me turn the presentation over to Oscar to review the financials.

Thank you, David. Before I get into the details of our financial performance, let me step back and reflect on some key takeaways of this quarter. First, it's important to note CSX continues to drive profitable growth across nearly all markets we serve. Strong core pricing above rail inflation, combined with volume growth ahead of the general economy drove outstanding top line results, allowing us to continue to make the right level of investment for our customers. Next, we have been following a very disciplined approach to add resources in support of volume growth and service. Over the back half of this year, we will target further improvements by adding the employees, locomotives and freight cars, as David mentioned. Finally, as we discuss CSX second quarter operating income of $926 million is an all-time quarterly record, and additionally, the operating ratio of 69.3% is the second quarter best and keeps us on target towards achieving a high 60s operating ratio for the full year. So with that as background, let me turn to the detailed financial results, starting on Slide 26. Starting at the top of this slide, revenue improved 13% to over $3 billion on volume growth, strong core pricing and the impact of higher fuel recovery. Our focus on profitable growth drove a 21% increase in operating income to $926 million. It should be noted that due to the 2-month lag in the fuel surcharge program, CSX did experience a $14 million negative lag impact. Now looking at the forward curve, we currently expect the impact of the fuel lag to be neutral in the second half of the year. From below the line, interest expense was flat to last year, and other income was $9 million lower than last year, the details of which are available in the quarterly financial report. While timing of real estate sales can fluctuate, you can expect other income in the back half of the year to be similar to prior year level. Income taxes were $286 million in the quarter for an effective tax rate of 36.1%. This includes a $14 million net tax benefit in the quarter, which is similar to the tax benefit recognized last year. The items in both year were unique, and you can therefore expect our effective tax rate going forward to return to a more normalized 38%. All in, CSX finished with an all-time quarterly record EPS of $0.46, an improvement of 28% versus last year. Now on the next slide, let's start to review the expense details. Labor and fringe increased 6% or $43 million from last year. The impact of health and welfare -- of wage and healthcare inflation in this quarter was $27 million or about 4%. In the back half of the year, you can expect this to increase modestly due to the impact of contract wage increases. Volume and other costs accounted for $9 million of the increased labor expense and was driven primarily by more crew starts. Finally, hiring and training costs to onboard the new train and engine employees David discussed increased $7 million, and you can expect this level of variance to continue at about this pace for the balance of the year. Now on the chart on the left, headcount for the quarter was up 3% to 30,980 employees. Going forward, based on the hiring we just discussed, we now expect full year average headcount to increase about 4% year-over-year. Approximately 1/2 of this increase is to support increased customer demand. The other 1/2 is for maintenance of Way [ph] employees and signal installers for both Positive Train Control and ongoing capital projects. The majority of the employees in this latter group will be capitalized, and therefore, have a small operating expense impact. Now turning to Slide 27 MS&O expense increased 1% or $6 million versus last year. Looking at the table to the right, inflation was $16 million. This is slightly higher than prior quarters and reflects the impact of increased fuel price on items such as crew, taxi and travel expenses. Moving down the table, pier and terminal expense increased $8 million in the quarter, reflecting significant growth in both the export coal and intermodal markets. Volume-related costs drove another $8 million increase, which is in line with what you would expect, given a 3% increase in total volume this quarter. Other costs increased by $4 million this quarter, with the most significant impact being an increase in property tax. Finally, we are cycling a $30 million loss related to the sale of operating property in last year's second quarter, details of which are available in our quarterly financial report. Moving to the next slide, let's discuss the impact of fuel in the quarter. Total fuel cost increased 42% or $127 million versus last year. If you look at the chart on the left, CSX's average cost per gallon for locomotive fuel climbed to $3.21, an increase of 39%. This increase in fuel price accounted for $112 million of higher expense, as you can see on the table on the right. Next, higher volume and slightly lower fuel efficiency accounted for $8 million of incremental expense. And rounding out the table, non-locomotive fuel increased by an additional $7 million. Now let's turn to the next slide and round out our expense review. Depreciation. These costs were up 7% or $16 million due to the net increase in our asset base. Going forward, you can expect this line to average approximately $250 million a quarter in the back half of the year. Moving to rents. Expenses increased 7% or $6 million, primarily reflecting the costs associated with higher volume in the intermodal and merchandise market. Now turning to the full year outlook on the next slide. CSX today reiterated its commitment to grow above both GDP and IDP, while producing core pricing gains in excess of rail inflation. This supports our continued investment in the business, which we recently increased to $2.2 billion for this year. The increase is primarily to purchase railcars to meet the growing near- and long-term demand for export coal . Consistent with this investment, we announced earlier on the call that we now expect to ship between 42 million and 45 million tons of export coal for the full year. Given a strong foundation of growth, core pricing and productivity, we remain on track towards achieving a high 60s operating ratio for full year 2011. And with this as a foundation, let's turn to the long-term guidance we presented on our recent investor conference. CSX continues to deliver outstanding financial result that create value for shareholders and we remain confident in the long-term guidance we presented recently, and we want to take the time to reiterate that guidance today. Now the building blocks of the guidance which we presented is a stated goal to grow to 65% OR no later than 2015. Volume growth above the economy, combined with continued core pricing above inflation and a long-term productivity focus are the key drivers to help attain this target. The compound annual growth rate in operating income of 12% to 14% and an earnings per share of 18% to 20% are the result of the confidence in our ability to execute on these drivers and represent significant growth off a very strong 2010 base. Now if you look at the next slide, this guidance also supports our robust capital deployment for our shareholders. As you know, capital investment is the first priority of our balanced approached. And going forward, you can continue to expect it to average 18% of revenue over the 5-year period between 2011 and 2015. Dividends, our second priority, were increased by 38% in the second quarter. CSX is committed to a payout range of 30% to 35% of trailing 12-month earnings, and this will be reviewed annually every May. Finally, share repurchases represent the third priority. In the second quarter, we repurchased $228 million of shares under the $2 billion share repurchase program. We expect to complete this program by the end of 2012 and anticipate annual buybacks of approximately $1 billion through 2015, funded primarily through free cash flow. So with that, let me turn the presentation back to Michael for his closing remarks.

Well, thank you, Oscar. Over the past several months, our business has stood out as part of the American economy that is really working. We're delivering competitive advantages for American business, higher investment, attractive new jobs and outstanding financial results. That's what's supposed to happen. We're doing all of these things while helping to solve some of the nation's most pressing problems, including air pollution and overcrowded highways. And unlike other modes of transportation, we're paying our own way. CSX's success helps to prove that the current laws and regulations that govern freight railroads are working. We are meeting the goals of U.S. transportation policy, which are to enhance infrastructure, create jobs, spur investment and promote American competitiveness. At just a moment, the government is looking for ways to build the potential for U.S. businesses to grow and succeed, a change in the economic regulation of freight railroads would be a mistake. When June [ph] globally, U.S. railroads haul more freight, more economically for its customers than any rail system on the planet. This is a major competitive advantage for American corporations we serve. As with any business, our efforts to achieve our vision begin and end with our customers. We must do everything we can to help them grow, and we are highly focused on making that happen. In the near term, that includes ensuring we have resources in place. For the longer term, it means taking substantial steps to better align our resources and infrastructure with the needs of our customers. And of course, none of this happens without great employees. I want you to know that we continue to be very proud of their efforts. They are the cornerstone of everything we intend to achieve with our customers now and in the future and the reason we have confidence in the financial guidance we have shared with you. With that, we'd like to now open up for your questions.

[Operator Instructions] Our first question comes from Ken Hoexter with Merrill Lynch.

If I'll just drop my 2 together. First on the coal, can you talk a bit about, Clarence, on the impact on the new regulatory rules and how that's going to impact the coal flows going forward? And then my follow-up question would be kind of similar, but maybe over to Dave, when I look at the kind of push the hearings that concern of -- the STB hearings that concern of deteriorating metrics, yet with 56% on-time, yet pricing going up 7%. I wonder if more of that equipment that you're putting online is causing some of that congestion, and how your outlook is for that.

Ken, I'll answer the first one, and David will address the second one. With the environmental pressure that you've talked about on our coal fire utilities, as we've said before, we think the impact is going to be on about 15% to 20% of our capacity that's served by CSX. Now the fact is that much of this capacity is already idled, some of the smaller and older plants that are without scrubbers, so from a volume standpoint, it will have a relatively minimal impact.

Okay. Ken, and also as far as our service levels are concerned, really, we have progressively worked on improving our service levels. And when we look at additional equipment being brought online, we averaged about 209,000 cars online during the second quarter. And when we look at where we would be if we were congested, that number will be more up around 240,000 cars online on a sustained basis. And in fact, in recent weeks, we've had some of our record lowest cars online days in history. So we're not seeing congestion being contributed to by any additional equipment. We're actually very fluid, although, again our measures are somewhat below where we expect them to be in our historic highs. Overall, measures are moving back to those high levels now in July, and we expect to be very fluid as we go into the third quarter and continue to be able to perform for our customers as expected.

Our next question is from Tom Wadewitz with JPMorgan.

So I wanted to ask you a question on view on the economy and also your level of confidence in the would seem to be optimistic volume assumptions for second half. How -- so have you seen some slowing in the economy? And when you look at your second half projections, do you think there's risk that the economic forecast you're relying on that maybe that comes in a bit lower?

Tom, this is Clarence. We feel very positive about our economy going forward. I'll give you a couple of 3 indicators of that. First, our export coal. We think will stay very strong and robust, both on a year-over-year basis and as we told you going forward in the range of 42 million to 45 million tons. Secondly, our Intermodal business is strong, both with highway conversions and international freight. We expect a shorter peak this year, meaning it will start later in the year, but we expect a very strong peak there. And then when you look at automobile production, the average age of a car in the United States now is in excess of 10 years. So we think that auto production, particularly in the second half of the year will be stronger than it was in the first half of the year, both due to demand and due to the impact of the Japanese tsunami going away. So -- and finally, I would characterize in the agricultural sector, we expect both heavy fertilizer shipments this fall as well as some of the, as you know, the record grain crops that are coming in. So we think all of that forbodes a good economy.

And then I guess on a follow-up question on coal, you said you expect coal volume growth in second half. The recent trend in volumes, obviously, utility volumes down quite a bit in second quarter, and the recent trend in your coal volumes hasn't been that constructive. So is there -- if you could, I guess, comment a little on that trend and how you see it improving, is there a significant weather impact from connecting business on the Western carriers that may be causes part of the near-term noise? Or what is it that you see that give you confidence in coal volumes moving up year-over-year versus a train currently that's quite a bit weaker than that?

On the utility markets, Tom, you're correct, there has been weakness in those utility markets. The main factor driving that is natural gas prices. Having said that, the natural gas units that are on CSX are operating at capacity. So if these hot days and hot nights continue as it's going now, the utility stockpiles will start to come down. And although that may not impact as much in the third and the fourth quarter, I think it says a lot for what will happen in 2012 in that utility market. Secondly, given what we know has been booked and/or our plans to ship more export coal in the third and fourth quarters, we expect to be very strong, and we feel very positive about it.

Coke and ore?

And coke and iron ore has also been very strong for us this year, and we expect in the second half, it will continue to be strong.

Is there some weather effect though that's hurting the near-term number on utility or not?

No, it's mostly natural gas.

Our next question comes from Bill Greene with Morgan Stanley.

Oscar, I just wanted to follow up on the rail inflation question. So 4.6% kind of suggests x fuel about $300 million in inflation. I think the productivity numbers you'd often talked about is, like you look for about $150 million in productivity. Would that suggest that this year you need to get more, you can get more? How should we think about reconciling those 2?

The way to think about it is, first of all, our long-term guidance has been in the $130 million to $150 million just to make sure. I think as we make the necessary investments in the business for this year, I think we'll probably fall short of that $130 million, probably in the $80 million to $100 million. And again, it's an important investment that we need to make for the long-term growth we see second half growth and the service requirement. And again having said that, we do expect that high 60s operating ratio for the full year. So it's all embedded in our guidance.

And so the fact that we saw a sort of expense growth kind of exceed volume growth for the first time this year. That's a trend that we should think about continuing given these investments? Or how do you think about that?

Yes, I think the way David's outlined it is that you should, for the back half of the year, expect a slight or similar view of the expenses being just -- x fuel being slightly above our volume growth.

So essentially with productivity sort of being challenged by some of these investments and sort of growing expenses, we're going to rely a lot more on pricing at this point?

We're going to rely on all our key drivers. And so yes, that's a -- those are all part of it.

Our next question is from Edward Wolfe with Wolfe Trahan.

It's Scott Group in for Ed. I wanted to follow up on export coal a little bit. Obviously, very strong volumes this year. But as we look out to 2012, is there a way to think about how much of the strength this year was driven by some of the Australian flood issues? And how that should impact next year as the Australian flood issues that should normalize?

Well, Scott, I don't think there's any question that the Australian flood issues were a positive impact on American coals this year. Having said that, on a worldwide basis, as you know, the United States is essentially a swing player in that export coal market. As we talk with our customers and our exporters about it, we expect 2012 to be a very strong export year. I don't want to go out on a limb and say that it's going to be as strong as this year, but I would tell you that all indications are that it will be.

And then on the regulatory side, Michael, we've got now a NIT League proposal on reciprocal switching. That's probably still a couple of years out, but can you talk about the impact to the railroad on either operations or pricing from reciprocal switching? And then separately, with the Highway Bill proposal suggesting that the timing for PTC could get delayed, are you planning to delay any spending on PTC?

Okay, first on the NIT League. We see that NIT League proposal as an open access recommendation that wrongly tries to replace public interest standards with formulas, and it's a clear attempt to change the rules to gain an unfair advantage for those customers. That proposal's nothing new, Scott. As with other open access proposals, there is no reliable evidence supporting this one, and no mention the impact would have on rail operations or infrastructure investment. We really do believe that any final resolutions beyond this scope is [indiscernible] should come through Congress and that the policymakers will decide that we need to continue to invest in the infrastructure, especially as you alluded to, with the potential Transportation Bill out there restricting some of the spending on highways, it's even more important that railroads continue their infrastructure investment going forward. So it's our belief that while that proposal's out there, it's not in the public interest and should not be enacted. On the PTC, I'm sorry I forgot about that one. There is some discussion of potentially extending that. We would not oppose that. We think it would allow more orderly implementation of PTC. But at this time, it's just a proposal. So we are proceeding as if the law, as it exists today to be deployed by 2015, is still the target and we are deploying on that basis. Should they decide an extension does make sense, obviously, we would change that implementation plan.

The next question is from Gary Chase with Barclays Capital.

This is actually Brandon Oglenski. A question for David. Where's the network going to be properly sized from an employee standpoint? Is this an issue where you have a lot of new hires coming on this year, and you're just not able to run as productively as you were last year? Or is there some sort of systematic shift in business mix that has really challenged the network from the efficiency standpoint?

Yes, Brandon. It's a combination of factors. Of course, we are hiring, first of all, to cover attrition, which is pretty substantial not just for us but across our industry. I did mention we bring on 450 incremental additional conductors in the second half of the year, and that's for more volume to handle the business growth we've seen. We were challenged late first quarter and into the second quarter around some weather events, numerous different types of events from winter storms to the, of course, there's flooding that's impacted our gateways, interchanges between the Western railroads and the Eastern railroads, and we had fires in the Southeast. I mean, we could list a number of things that have made us a little bit more -- a little bit slower in our overall velocity, a little sluggish in some areas and it does require more resources to -- when you have that situation to persevere to that situation and return to the high level of performance we experienced in the past, and it's really kind of a combination of all those factors that are leading the way. We had a hiring plan that was, I think, a very good plan that started last August. It was at full speed in the fourth quarter. It delivered additional employees as we needed them, and although we've added additional employees to that, it's to support the growth that Clarence talked about.

Does that mean that at some point, you're actually going to be overstaffed for the level of activity you're seeing right now then? Do you feel that at some point, the network's going to be able to absorb greater level of volume growth without necessarily the same addition of assets and folks that you're bringing on right now?

I think we will scale our hiring in the future to accomplish that. Again, we have attrition requirements in the next several years that are going to require continuing to hire, and we have a very good team that looks at and predicts exactly what we need when we need people as we scale our hiring for volume growth. And I think we're going to be very close to staying right where we need to be in terms of hiring. So we have the right number of people and we certainly don't want to overhire, resulting in having resources that are not efficient and productive.

Our next question is from Chris Wetherbee with Citi.

Maybe first for Clarence on the utility coal side, I just want to make sure I understood. I think it sounded like you said that from a capacity standpoint, there's not a lot left over that could switch over to nat gas. Is that a fair assumption, making it more of kind of a weather and demand dynamic as you go forward through the rest of the year and kind of taking out the cost of the commodity itself?

Yes, Chris that is correct.

Although your anticipation, Clarence, is that the second half, you're going to probably see similar year-over-year comparison as to what saw in the first half, right?

That's true.

Yes. Utility?

That's right.

Okay, okay, that's helpful. And then maybe my second question on the auto side, also for Clarence, just as we see that continue to build, obviously, you have maybe a higher percentage of foreign manufacturers on your network. As you see that ramp up, is that more of a third quarter issue or a fourth quarter issue? It's a little bit spread between the 2. I'm just kind of getting the sense of how that buildup looks like it's coming back online now?

Well, it's the spread between the 2, but obviously, the fourth quarter will be stronger than the third quarter because we've just experienced the model changeover and downtime in the auto network.

Okay, okay that's helpful. And I guess just one final question on price. When you think about the level that you've been able to achieve over the last couple of quarters, probably a good deal boosted from the export coal side. I don't know if you can kind of give us a sense of the order of magnitude of what that has been adding on a quarterly basis to the core price to $7 you did last quarter and the $7.2 you did this quarter. But just get a general sense of maybe what the business x the export coal looks like it's running at. I'm assuming it's probably close to rail inflation or better, but I just wanted to get your sense on that.

Well, Chris, let me say this to you. Our pricing was strong and positive in all of our lines of business, all of our lines of business. Export coal was very strong, but we covered rail inflation in the other -- more than covered rail inflation in the other lines of our businesses this quarter.

The next question is from Chris Ceraso with Credit Suisse.

Is there any reason to expect that yields growth will slow in the second half relative to the pace that you had in the first half?

I think it's fair to say that we're going to exceed rail inflation in the second half of this year.

By any magnitude different than what you've done in the first half?

I'm going to stay with exceeding rail inflation.

Okay. Just a follow-up, the -- with the accelerated hiring and Oscar has talked about this, should we expect the incremental margins in the back half of the year to slow down a bit? You've posted 44% in both the first and second quarters. And then maybe the fuel impact in there is probably weighing on things. If fuel goes sideways from here, is that a partial offset in terms of the incremental margin?

Yes, Chris. Rather than giving you a specific direction on that, I think the incremental margins will remain very strong over the back half of the year, impacted by all those items, both on the-plus and minus side. But we'll just stay with strong for now.

But we're still going to hit the high 60s.

And if we haven't mentioned that a few times, yes. The high 60s for the full year is still very much in place.

The next question is from Justin Yagerman with Deutsche Bank.

A couple of questions, first one just more of a housekeeping. You've got a tough comp in Q4 from a volume standpoint. Part of that's the way your accounting works on the calendar year. When you guys give guidance for volumes exceeding GDP, should we be thinking about that being over last year's number on an adjusted basis or on an absolute basis in Q4?

The extra week does have an impact on that. But I think as we generally talk about our business with you, it's on a similar basis. But be aware that there is an extra week in that last quarter. But when we talk about our business operations exceeding GDP and IDP, that's what we mean on a real comparable basis.

Okay. And then the next question, I guess, for Clarence, on export coal, curious if the raised guidance is related to any new customer wins or if it's just increased business with existing customers. And then curious if that is new business, if it's on a take or pay contract and then last part of that long question, is if you could give us a sense for the quarterly reset on export coal pricing for Q3, that would be helpful.

Okay let me see if I can remember all that. Well #1 is that the increase in coal shipments is on existing customer base. #2 is the tariff increases that were announced July, effective July 1st of 3%, will have minimum impact because a relatively small percentage of our business moves on the tariffs, the remaining part is under contract. And the second question was what -- take or pay. We do have a percentage of our Export business that has liquidated damages in it, but we don't expect that to have any impact at all in the third or fourth quarters.

Great, that's helpful.

Our next question is from Scott Malat with Goldman Sachs.

Just a follow-up question on the EPA regulations. I just wanted to understand it. Is there a big overlap on the less efficient plans that are likely to shut down and maybe that have already been announced that they're going to shut. And those that have been most impacted by natural gas switching. So are we really just getting a preview now, given the nat gas switching of what the impact would be kind of post 2014 if you saw a lot of shutdown?

You got it, you did it all.

All right. The second thing was I appreciate the fact you don't complain about the weather. That's always refreshing. Can you help us maybe quantify or just give us an idea of the overall impact of the flood, the forest fires, the tornadoes. It seems like there are a lot going on. Are there certain commodities that were most impacted? And can we expect some of the 2Q volumes actually slip into 3Q?

Okay, Scott, yes, this is David. We certainly were impacted. In a lot of ways, it's frustrating and it's even annoying when you have the succession of events that require a lot of effort to keep the railroad as fluid as possible and then a lot of attention to it for recoverability. But with the financial impact was fairly insignificant, as you can see from a 69.3% operating ratio on a record quarter, there are impacts. We tried to mitigate those as much as possible. It does affect our customers, and we do hear from them about that and work with them to understand exactly how we're going to maintain a level of service, it's higher originations, higher arrivals. We've seen velocity return this month, and 4% year-over-year slower railroad is not a good thing, but it's not horrible, and it's certainly something that we can -- with the great operating team we have in the field, we can -- they're working very hard to return that to the higher levels and we're seeing that succeed.

David, you may want to mention the ag movement issues, where you had to do some different things, just because of the situation?

Right, so you have these events occur and one particular example is we saw the supply chain decisions that are made by our customers influence how traffic flows, and so we did see grain traffic flowing over to Chicago Gateway that we didn't plan to have over that gateway. It wasn't part of what we expected, and that does require additional resources especially cruise, and so we redoubled our efforts around that to make sure we can keep that traffic flowing, but it does create some tightness on our resource base through those specific quarters that are affected, and we just work to resolve that.

And Scott, this is Oscar on your kind of second part of the question with regards with that -- those items, that volume is perishable or not. Actually, a good deal of it can transfer over, and we'll move some of it in the third and fourth quarters if need be.

Okay. But the other thing was just on which commodities were most impacted? Was it ag that was most impacted or intermodal got hit because of Georgia and Florida? Or what are the areas that were most affected?

The major groups that got impacted by weather directly was Plastics. We had one of the largest plastics manufacturing plants in the United States was idle for several weeks as a result of the tornado in Alabama. And then to the point that David made earlier, things slowed down over the Chicago Gateway because of the impact of flooding but the traffic itself continued to move. The ag business that we referred to as a result of the low stockpiles of feed grains that are available, particularly in the Southeast. In fact, the local crops are gone and so we have to bring the feed in from longer distances.

Our next question is from John Larkin with Stifel Nicolaus.

The 4.6% inflation rate that I guess your friends at Global Insight helped you decipher, that seems a little higher than what I would consider the traditional rail inflation number. Given that, that doesn't include fuel, at least I think it doesn't include fuel. What's driving that aside from the labor contracts?

John, I'll take a shot at that. I just said, our friends at Global Insight also had actuals around 4.6% for last year. So not a significant change from where we finished last year, and yes, clearly, labor is a big proportion of that.

Especially health and welfare.

And the health and welfare, which is as you know is close to double digits increases over the last couple of years.

And did they have any clear view as to how that may pan out over the next couple of years? Are they expecting that to pull in a bit or stay about the same? What's their outlook?

I think it drops a little bit, sort of in the 4%, slightly below 4%, but I'd have to check that directly when I last looked at it. Somebody's telling me 3.7%.

For 2012?

Yes, for next year.

And then maybe a follow-on question on the proverbial question regarding capacity with respect to how much incremental capacity you seem to have on the existing train starts? How much wind capacity do you have to maybe add more train starts? How much room you have in the yards to handle more volume? And any kind of technology applications or other changes in operations that might buy you some incremental capacity over the next couple of years?

Sure, John. We maintain capacity in our train network by how we adjust our One Plan. So as we adapt to volume growth and add additional trains or change the trains in different lanes to size our business, which we try to maintain about 10% to 15% capacity in our merchandise network, and intermodal is running about 15% to 20% capacity available for additional business. So again, it's sort of a fluid approach that we are always evaluating our train service offerings, our One Plan and making certain that we keep available capacity in the train network. As far as terminals are concerned, as we see -- as you see dwell improving and you see our throughput improving, our cars online staying reasonably low, in fact, at record low levels in some cases, that has created capacity in our terminals, and we are in the process now of doing an intensive evaluation of all of our terminals, their current utilization rates, their current efficiency rates, productivity and evaluating exactly how much capacity we have in each terminal for volume growth. We're seeing that to be substantial in most areas. Where we see tightness in terminal capacity, we have within our capital plan, plans to invest in the near term, and that's part of the capital that number $2.2 billion includes capital for capacity growth and including our -- all of our terminals where we have those needs as well as in our line of road areas where our corridors for handling trains where we see that we have tightness in capacity, we're investing now for the future.

Our next question is from Cherilyn Radbourne with TD Securities.

First question was I wonder if you could just elaborate a little bit on the comments you made with respect to the peak season being shorter, but strong. I guess last year's peak season started a little bit early. So I'm just wondering if you're implying that you expect a more normal start to the peak season?

It's the latter. We expect a more normal start. If you look at the piers data and some of the Journal of Commerce data on the Trans-Pacific trade in particular, you're seeing a slowing in that business and a decline in the rate structures and that -- but the positive thing is, is those inventories we spoke of earlier in the dialogue that we had shows those inventories are still at historically low levels, and so they'll have to be replenished before the Christmas season comes in, so we expect a more -- a later start in that season.

Okay. And my second question relates to the renewal of your coal car fleet. Presumably, that's going to offer some good productivity benefits because of the higher capacity per car. So I just wondered if you could give some indication as to when you expect to start receiving those new cars?

Cherilyn, it's Oscar. We're receiving some of them and have been over the course of the year. The bulk of the recent announcement obviously will come over the course of this back half of the year and early next year.

The next question is from Jon Langenfeld with Robert W. Baird.

On the intermodal side, can you talk about your capacity there, both at the direct access you have to capacity as well as your third-party providers and how you feel about that as that trends over the next year or 2?

I would divide our capacity in intermodal into 3 areas: One would obviously be on the domestic side of the business, the domestic container fleet. And we are in a very positive situation in our domestic containers, both with ourselves and with our partner in the UMAX program, the Union Pacific. So we feel very good about where that capacity is. Given the capacity and particularly the additional OD pairs that Northwest Ohio has presented for us, we have just a very robust terminal capacity across our network now. And with the expansions that we're doing in places like Louisville, like Columbus, like Charlotte and some of the other terminals around our system, we feel very positive about how that's going. And then as David mentioned, in the train network, we continue to have capacity available in our intermodal network on the train side. So of the 3 major components that are going to drive the capacity in intermodal, they're all positive and moving up.

Great. And then a follow-up on that with regards to intermodal pricing. A couple of years ago, spot pricing became a fairly big part of what you were doing with the intermodal side. How does your business pan out today relative to spot pricing versus contractual pricing on the domestic side?

On the domestic side? I don't have a percentage off the top of my head, but I will tell you that on the domestic side of our business in the second quarter, the spot pricing helped to drive the increase in the yield.

So it's still a notable part of the strategy?

It is a notable part of the strategy, that is correct.

Our next question is from Jason Seidl with Dahlman Rose.

A couple of quick things. One, Clarence, I want to stay on peak season a bit here. You mentioned it's going to be a little bit shorter, and my question to you guys is, is that going to create a little bit of a challenge from an operational standpoint from not only some of your service metrics but also on the equipment side, could we see any shortages again of equipment this time around?

I don't believe so, particularly on the domestic side of the equipment, Jason. And when you look at the capacity, not only that CSX and UP is putting in with the UMAX programs if you look at the capacities at Swift and the capacity that JB Hunt and other companies are putting in for the containers, domestic container side of business which if you recall was the primary problem, if you will, last year in the fourth quarter. I don't think you'll see a repeat of that. And certainly, the car fleet is adequate to do that. And as David mentioned earlier, we have both flexibility on the existing trains to double stack and to fill up, and if necessary, we could run some extra sections of trains to do it. So it's a good problem to have.

My follow-up here also is going to be on the capacity side, but I'm going to look at export coal. You're taking your numbers up a little bit this year. If they go up next year again, what is your comfort level that export coal go to? Is it 15 million tons before you guys have to add some more to the network and other people have to get in the game too?

I think we said at the Investor's Day at Northwest Ohio in May that our capacity last year was in the 30 million to 40 million-ton range 2010 and 2011 it had moved up to the 45 million to 50 million-ton range. And beyond that we have plans that are scalable with investments to increase that capacity. Further, there's private companies now that are working in places such as Charleston, such as Philadelphia, to increase export capacity there, so it's a positive story.

Our next question is from David Vernon with Sanford Bernstein.

Two quick questions for you. One on intermodal. Is there -- Was there a little bit of a mix shift towards more international versus domestic in the quarter relative to last year?

Yes.

And was the drivers of that, was that sort of longer haul, sort of Maersk business? Or was that sort of West to East, East to West? Could you just talk a little bit about what was behind the shift and how long you think that shift will continue?

One is, is we picked up a new account last year that we haven't lapped that growth in it. As a result, we think of our Northwest Ohio facility. And that has shown growth. Our steamship partners themselves have shown growth in their marketplaces that we've been able to enjoy. And then third going forward, we expect that international part of our portfolio to continue to grow, and as you will recall in May again at our Investor's Conference, we announced that we'll be onboarding Maersk in the first quarter of next year and that will bring significant volumes to us.

Great. And then one last question on the coal car fleet. The 3,800 cars that you guys are adding there, is that going to be a net increase to the fleet or will there be some retirements in there as well?

Well that net number is 3,600 in the coal cars and the other 200 there in high-capacity, jumbo covered hoppers, and some of it will result in a net increase. Most of it is to replace fallouts. It also gives us this -- one of the analysts asked earlier increased capacity utilization, if you will. We can simply haul more coal in the same footprint.

The next question is from Matt Troy with Susquehanna.

A question for Clarence. If I could, the volume in intermodal up 8%. Obviously, you're roughly evenly split between domestic and international. I was just wondering if as you have in the past could give us some color in terms of the differential growth rates between domestic and international? Just trying to get a sense of the pace of share gain domestically versus what international trade might be doing?

Well, for competitive reasons, I don't want to give you an exact breakdown of what growth was in either one of those areas, but I would tell you that the international, in general, grew both because of new customers and because of existing lines growing at a rate that was slightly higher than domestic.

The next question is from Walter Spracklin with RBC Capital Markets.

So my question is really just revolved around the risk and any comfort you might be able to give us around the view that when we saw the service levels turn the wrong way, can you give us comfort that the resource ops that you're doing to address this will indeed improve the service and perhaps a little bit of detail in that. And if it doesn't work and if volumes don't come in the same level of the GDP forecast that you've got built into your models, what are the risk to your operating ratio given, that you've resourced up may not have worked and volume hasn't come into the level that you're expecting? I think that's the key from a risk perspective how people will look at them. Any comfort you can give us that perhaps, there's some buffer in there that you've built in or what you might have done to manage that potential risk. Can you give us a little bit of color on that?

Sure, Walter, this is David. Just to talk -- start talking about service levels again, and I kind of reiterate a little bit that I'm very confident in our plan. I think we have a very good plan to size our resources for the volume we're expecting to have come online for -- at the level of service that we expect to achieve. I think we're seeing now that restored now. We're having several good weeks in terms all the conditions around what we're doing. So we're seeing those service levels return. And that same sort of diligent planning is a critical factor toward mitigating any long-term or future risk around volumes and growth projections, and I feel very comfortable and confident in our team in accomplishing that successfully. I think Oscar's going to talk about the risk side.

And given that confidence, but to your point on risk management, clearly, in our projections, we do always establish a bit of a contingency in the back half number-wise, so we do have a little cushion as you called it to make sure that we do get to the numbers that we promised our investors and shareholders.

So can you go a little detail on the cushion like is it -- you don't really need that volume growth to that level or there's some extra expenses that you could come in a little bit better than your low 60s or high 60s that in the event that we don't see the volume recovery then we're still on-side? Where does that cushion come into the financial specifically?

Well, in our projections from a geography on our P&L, it's just an expense item that is determined by a combination of risk assessment on both those fronts, volume revenue and productivity. So it's a number we sort of compute and put in.

The next question is from Jeff Kauffman with Sterne Agee.

Mike, I want to ask a question directed toward you and Oscar. At your testimony to STB about a month ago, you made a statement that some of the things that were being considered and proposed would likely negatively impact financial results, and you would have to revisit the concept of capital deployment because your shareholders would pressure you on that. Kind of a small first shot across the salvo which was the reduction of the filing fees. Oscar, are you basically saying that the guidance you're reiterating says that we're not going to see any impact to financial results because we've made it easier for people to file rate cases?

Let me address that. I think you're quite correct, it's not on the CSX management. I think the industry in general has said if there's regulations that hinder our ability to earn adequate returns, we have to back off on those investments, and we will because that will be our obligations to our shareholders. That being said, I do believe that when this is all said and done, that the decision will be made not to injure our ability to make this critical investments. Obviously, reducing that fee from 20,000 [ph] down to 350,000 [ph], I think, could have some impact. But what we're finding, if you look at our large customer base, high 90s a percent of the time, we were able to sit down with our customers, come to an agreement as to what a fair price for the great service we're providing is, and very few of them end up at the STB and the ones that do, in many cases through the mediation process that's provided by the STB, able to come up with solutions that satisfy both parties. So our view is that we will continue to be able to work with our customer base and that while that fee is down, will not increase tremendously the number of cases that are being filed there.

Okay. And just a follow-up to that, the net leaked [ph] proposal, I think you've addressed that, but the regulators were asking questions of yourself and I think Jim Young, would you be open to a pilot reciprocal switching or a localized reciprocal switching or open access? How dangerous a precedent does that set if the STB was to move that direction?

I think it would be very dangerous, and you may recall my testimony when that question was asked, it was on my view we would not be willing to participate in a pilot program like that. I think the adverse effects on our operation's network fluidity, the collateral impacts on others and our ability to invest would be highly detrimental to the competitiveness of American businesses that we serve. And our view is that such a pilot program would not be a good wise decision.

Okay. And we would concur with that.

The next question is from Peter Nesvold with Jefferies.

My question's a little bit related to one that was asked earlier, but I guess if I take a step back and you've reiterated the high 60s OR several times today and as the years progressed. And I think if I look back to what the base case scenario was back in January when you first put out that target, I mean, I think it's reasonable to say that there've been a number of items that have been a little worse than expected as the years progressed. So headcount, fuel, weather, productivity and volume, just kind of come up with a list and listening to you go through the call. And so clearly, something is backfilling that relative to what your expectations were back in January. So I guess my question is, is the vast majority export coal volumes and therefore pricing? Or is there something else that has backfilled those issues or those items as this year has progressed relative to your base case back in January?

Peter, it's Oscar. Just the premise that you state with regards to January and our projections and that only bad things have happened since, it's just a little quick note. As we project and give guidance for the full year, there's always a level of I think earlier person asked about a cushion, we build in some general cushion in our long-term numbers. So some of the things that happen to our business in the course of the year are expected. We do sort of account for them and build that into the guidance that we provide you. So it's not as drastic a change as you might think. And yes, export coal certainly has been helpful. Intermodal growth has been helpful. The back half economic views in our markets we serve seem stronger in the back half of the year. All those are driving upsides to the cost inputs that we generally tend to expect, but not entirely.

The next question is from Art Hatfield with Morgan Keegan.

Thanks for your time, but all my questions have been answered.

The next question is from John Mims with BB&T Capital.

One quick one for David. The 250 locomotives that are coming in to service, are they -- is that new equipment or are those old units being put back in?

We have returned a lot of our old units that were stored in the downturn back to service. We're actually adding, and within that 250, there are about 50 -- there are exactly 50 new locomotives. The balance the other 200 are primarily leases that we're working on some lease arrangements that will give us something flexibility into the future. And we have begun a rebuild program for 3,000-horsepower locomotives. So we'll bring a handful of those into our fleet before the end of the year, and that will continue into the future also.

Okay, what I'm trying to get a sense of over, I guess, 4 of the last 4 days, you've seen a slide in GTMs per gallon, fuel margin really this quarter is down about 2.5%. As you look at the back half of the year, as this equipment comes online, should you continue to see that 2% decline? Or at what point does that turn positive with new fuel-efficient technologies and whatnot?

I think we will, as we bring leased locomotives into our fleet, they tend to be a little bit less fuel-efficient. It's also there's a mix component so coal is a very locomotive horsepower-intensive [ph] commodity. We liked -- so we like that, but it does require more horsepower to move unit coal trains versus other train types so mix is part of that and the overall fuel efficiency of our fleet is a component as well. We try to mitigate that, and we have been successful in mitigating that in the past through just using technology and education for our locomotive engineers, so they do a better job of being fuel conservative about how they move trains. So there's a lot of sort of moving parts in that we believe will help us stay in a very level state and improving in the future in fuel economy.

One thing that hurt that, I guess, David is the intermodal growing as it is and while it's very profitable business, the GTMs per gallon on Intermodal is going to be less than it is for Coal business. So the mix does get in there as well, John.

The next question is from Matt Troy with Susquehanna.

I guess the second question and a follow-up to that first was, if I look at the Intermodal trends, while they held up relatively well for the first 2 months of the quarter, all the rails, yourself included, saw a notable deceleration. We saw first quarter volumes up in the range of 10% to 11%; second quarter up 8% or so; the last 4 weeks were only up about 1%. You talked about a delay in the peak shipping season. I was wondering if you could point to anything that would explain that sequential decline in the year-over-year growth? I know we've got tough comps. There's some weather out there. I'm just trying to get a sense of should we be more concerned or less concerned about that deceleration more recently?

Matt, I don't know about the other rails. Where we saw some sequential softness mainly was in our international traffic. And as I mentioned to you earlier, to one of the analysts, was the Trans-Pacific trade has shown some weakness recently, both in terms of volume, as well as in terms of rates on the water itself. So that's what we've seen. The domestic side of the business is with highway conversions and with highway fuel costs the way they are now is actually showing a positive for us.

At this time, there are no further questions.

Well, thank you all for your participation and interest today, and we'll talk to you again next quarter. Thank you.

Thank you, everyone. This concludes today's conference. We thank you for your participation in today's call. You may disconnect your lines.