Financial Analysts' Meeting
New York, NY - October 25, 2006

Questions and Answers

(Mr. Moorman) Thank you Don and thank you Hank. Those comprehensive reports, despite their comprehensiveness, I'm sure there probably might be a question or two. So, we'll open it up at this time, and we'll start with the person who raised his hand the very fastest in the very back.

(Question) Two quick questions. I wonder if Don Seale might give us an update on the penetration of the surcharge in terms of coverage and maybe give us a little color on what is that -- what it's made up of -- how much might be RCAP versus your own surcharge mechanism, just give us some color on the coverage of the surcharge and where that stands currently?

And the second question would be for Hank, just give us some idea and I know there are moving parts, what might be a rough bogey for a book tax rate we might think about going forward understanding that the syn fuel credits will move that around?

(Mr. Seale) Scott, with respect to the first part of your question, the coverage, we're now at 92 percent. We were at 90 percent at the end of the second quarter, and it's a blend of specific fuel surcharge applications and RCAF. I won't go into the breakout of that -- but most of our fuel surcharge, I will say, is related to our specific fuel surcharge program.

(Mr. Moorman) Hank, the specific tax rate, understanding it moves a little bit?

(Mr. Wolf) Well, actually, when you say it moves a little bit, a percent is not a big swing, but I would say that absent the Section 29 tax credits, we would be looking at a rate of somewhere around 37 percent. So the credits would be, if we get them in the fourth quarter, reducing the 37 percent about like it did in the third quarter. Now, obviously, that's going to be dependent on where the fuel prices go. If they spike up, we will get less Section 29 tax credit. If they continue to roll back, we may get even more.

(Question) Hank, before you sit down. Now that Leanne is out, I think you forgot the forecast slide this quarter.

(Mr. Wolf) I must have.

(Question) On the comp per employee, it looks like it actually decreased this quarter. Maybe it was part of what you were going over with the stock based comp. Can you delve into that a little bit, why, is that a trend that you expect to continue on a per employee comp benefits per employee, actually continuing to remain flat or down a little bit?

(Mr. Wolf) Well, as you point out, the impact of the $32 million swing in stock-based compensation is the largest reason that compensation expense was impacted. But as you parse through the other increases that I mentioned for the full nine months, there seems to be a trend that we have been facing. We have some negotiations going right now on contract renewals. It is not clear where that will come out. So I would say that as you look forward into the fourth quarter, the first thing that you have to do is look at what's happened with the stock price and what's the impact on stock-based compensation as a result of that. And, I expect that the increased wages and salaries will continue to manifest themselves in the fourth quarter, as well as the increased costs of health and welfare benefits. Marta, did I leave anything out?

(Mr. Moorman) I'll just say on Hank's behalf that we don't view these big favorable comparisons in stock-based compensation as an unmixed blessing. Is that fair, Hank?

(Question) Wick, if I could keep going. I guess Don's a little bit cautious on the fourth quarter outlook with fuel prices, with volumes being flattish. Is there something structural now that you've matched your record on operating ratio? Will the impact of volumes or falling fuel impact your ability to continue to improve margins from this point?

(Mr. Moorman) Ken, I'll just say, as you know, we are always driving to lower the operating ratio. That is one of the primary goals of our company. We had clearly an outstanding third quarter OR. Our OR typically is lower in the second and third quarters of the year. The fourth quarter is a little more mixed in terms as the volumes go down, and we never know exactly what winter holds in store for us from an operating standpoint. But when we reached that point in 1997, we didn't think we were finished at the time and we don't think we are finished now.

(Question) My last question, I guess more for Don then. I guess -- I want to understand this right, all things being equal if fuel prices were today versus where they were in the quarter, they have come down dramatically, can you comment on what yields would look like in that environment? And then, I know you don't forecast, but I guess maybe what kind of -- what can rates look like in 2007? I guess maybe the better question then is what percentage of contracts have been untouched so far and still need to be repriced from outdated contract pricing?

(Mr. Moorman) While Don can give you a little more color on the fuel surcharge and the lag effect in particular the fuel surcharge, we clearly don't forecast or really comment on yields as a result of that. But go ahead.

(Mr. Seale) Going forward, as I mentioned in the comments, and I think we've mentioned in previous reports, we estimate that about half of our book of business will be repriced and renegotiated each year, going forward. We've shortened the duration of contracts intentionally. And because of that, and continued demand for transportation in the marketplace, Ken, we see yield continuing to improve. Now, if you look at the lag effect in the fuel, we averaged about $72 a barrel in the cost of West Texas Intermediate crude in the third quarter, and that will drop by about $7 based on the forward curve in the fourth quarter. So, that was what that comment was directed to. But we still see demand in transportation. We still see an opportunity to reprice, as we go forward.

(Question) Can you tell us what percent of pricing contracts haven't been touched yet?

(Mr. Seale) This year, out of the half that we had targeted for repricing through the first three quarters, we completed 82 percent of that. So, we have got 18 percent of that 50 percent yet to go in the fourth quarter.

(Mr. Moorman) And next year we will be looking again at about half of our traffic that's either running on private quotes or tariffs or something. That's about 25 percent of our traffic that is available for renewal on an annual basis, then if the average duration of our contract is three years, then for the other 75 percent, then about a third of that or another 25 percent is available on an annual basis, and that's how we get to about half of our traffic annually has some repricing based in it. So. All right. (Question) With regards to your share repurchase program, you've obviously made significant gains in the third quarter, you're about 40 percent of the way done about nine years early, can we expect that you are going to be continuing this pace into fourth quarter, maybe '07?

(Mr. Moorman) I think we'll continue to look at the market and what our stock is trading at, and try to think opportunistically, if you will, about share repurchases the way that we did in the third quarter. I think it is fair to say that it is unlikely that you'll see purchases in the fourth quarter at anything like you saw in the third quarter, but we always, under the program, have the right, the ability, I should say, to go do that. I would say if you asked Hank and I right now, what do we see for the fourth quarter, we certainly don't see anything like another double-digit purchase in millions of shares. Hank, anything you would like to add to that?

(Mr. Wolf) That covers it.

(Question) With regards to coal contracts, we've obviously covered some repricing into the future here, but how many contracts or what percentage of your customer base do you think have not been reprised at all yet and we might see in '07?

(Mr. Moorman) I don't know that we have an exact number on that, Don. It's a fairly low percentage. There are a few contracts out there in the world in coal, and I guess a couple in the merchandise sector, that were longer term that we haven't looked at, had a chance to look at yet. I don't know of anything specific of any magnitude in '07, but it's a reasonably small percentage of our business now that's wrapped up in contracts that we haven't taken a look at since 2003.

(Mr. Moorman) Yes. Below 15 anyway.

(Question) Below 15?

(Mr. Moorman) Yes.

(Question) Where do you see your networks constrained at the moment? Do you think that the slower volume growth you've seen in the third quarter might help you with sufficiency or velocity gains?

(Mr. Moorman) Well, I think that our network, as I said, operated well in the third quarter. I think that's a result of first of all, a lot of planning and hard work on the part of our operating department. And second, it does reflect some of the ongoing infrastructure work that I think it is fair to say, we've already done on some of our critical routes. We are, as I said, continuing to put more capacity into those routes, with the express intent of not only being ready to handle increased volume, but also with driving even more efficiencies out of the service, in terms of velocity, and on-time train performance and things like that. So, one way to look at this, I would say, is that we are today handling volumes that are radically higher than they were three years ago. And we're handling them at service levels that are equal to or better than where we were three years ago. And that's kind of the result of all of this initiative, all of the initiatives we've had going on in terms of things we talked about -- additional hiring, a lot of work on the locomotives and the car fleet, and adding infrastructure. And it is our intention to just keep pushing along with that.

(Question) Do you have any significant projects that are coming online in the fourth quarter?

(Mr. Moorman) I think as I mentioned, we have some more capacity coming online in the Memphis/Atlanta corridor, and I think one -- maybe another siding down towards Jacksonville as well. We've discussed this before. Most of the projects that we have are not in the nature of adding two or three hundred miles of double track in one location -- a big bang kind of project. It's very targeted. It's aimed at specific issues that we need to address. And so we're throughout the course of the year completing projects all the time to make the network run better.

(Question) Thanks Wick. It's Tony Hatch. I've got a question really for Don, and it may be just a single one actually and it may be a little picky given that revenues were up double digit in intermodal. But after being a leader, I don't know how many quarters in a row and at the very top of the tables in growth and volume, you've slowed down. I know you talked about the specifics in this quarter, but if you could look at it on a longer term basis and answer whether any of it has to do with the recovery at CSX?

(Mr. Moorman) Let me try that. I think that Don mentioned that if you look at our third quarter, and you're going to see some of this in the fourth quarter, if you look at our gains in the past years, on the international side in particular, they were driven by the fact that we were able to secure some very good contracts with a number of the big ocean carriers. And a lot of those contracts and a lot of those gains really took place last year. And in particular, some of them in the latter half of the year. And what's really happened, this quarter, all of a sudden, you saw those big gains and we're lagging those big gains, but we haven't added more contracts in the same way, to some extent, because we've got a lot of the business now. Now, we do have at least one other contract set of traffic too, I guess, that is coming on in the fourth quarter that will help us with the intermodal comps. But I think the other piece of that, that Don said very clearly, is we look at our business, and we also just look at the overall import business that's coming into this country, and while the growth is still good, the overall import business is not quite at the same growth rate through the ports. The East Coast ports are still growing well, but at a substantially lower pace year-over-year than they were last year. Same with the West. And that's to some extent reflected in our numbers as well. Just the overall amount of traffic available, if you will. We think competitively. We're poised very well to capture the traffic as it comes to us. Don, anything I should add?

(Mr. Seale) That covers it.

(Mr. Moorman) Okay. All right.

(Question) Kind of piggybacking on Tony's intermodal question -- you brought up the weakness in the truckload spot market, maybe curtailing growth a little bit. What's the delta in that? So, what percent of traffic, do you think, is exposed to the spot market on the truckload side?

(Mr. Moorman) I don't know that we have a specific number for that.

(Mr. Seale) The LTLs.

(Mr. Moorman) Yes. The LTL is primarily where it is. And it's a very dynamic market, as you know vis-�-vis what we do, versus what the truckload carriers do. And in some sense, we also, as you know, have been able to drive, not only our intermodal volumes, but our intermodal margins, substantially higher over the past few years, and we want to be careful to make sure that we are not, if a market gets soft in a few lanes and pricing goes down, we're not going to go necessarily chase the business just from a volume standpoint. We want to make sure that it's business that it makes sense for us to handle.

(Question) One more follow-up question. It's kind of a bigger picture, longer term. When looking at your numbers in the quarter, obviously, your OR was extremely impressive considering your traffic growth was sort of constrained. You've done a lot of capacity improvements on the network. I think you have the ability to handle even more freight. So when you think about it going forward, all things being equal, taking on some traffic growth, there's really no reason we shouldn't see an OR with you guys some point in future with a six on it at one quarter, correct?

(Mr. Moorman) You know we don't forecast.

(Question) I know that.

(Mr. Moorman) Is that? Let me just say this. Would we look at that as a desirable outcome? Yes. And we will leave it at that.

(Question) Can you just comment on the pricing environment, particularly, given that you're talking about perhaps a slightly weaker economy? We've seen fantastic pricing the last few years, and as you're looking at 2007 perhaps you can just talk about the demand-supply dynamics and if things are slowing, do you still expect to see good pricing and maybe a ballpark number of what we should think about?

(Mr. Moorman) I don't know that we have a ballpark number. We talked about this before in this gathering. We've had a very, very strong pricing environment in our industry and at our company for three or four years now. And we don't know from year to year exactly what that environment will look like or what we will be able to do in terms of pricing, and we've always said that one of the tests of our industry, if you will, and what we've seen in the past three years, is what happens when the markets get a little softer. So, I cannot really make a prediction there. To some extent, because we haven't, we don't necessarily have a lot of experience in that environment. I will say, and I will emphasize this, though, that we look at the fundamentals of transportation in this country, and we are, we believe and we believe firmly, that we are going to be in a position where we will have more pricing power on a go-forward basis than you saw in this industry for the period up to 2003, where in effect, pricing, in real terms, was downward. And I think that because of all of the structural conditions that we talk about and everyone else talks about, that we expect that we will be able to continue to generate positive real pricing power on a go-forward basis.

(Question) Yes, thanks. Just a couple quick ones on clarification. First, for Don. You said 60 percent of the change in RPU was core priced. I think historically you'd also clarified what the component was between fuel and mix. If you could give us that, that would be helpful.

And also to piggyback, on the question around pricing in general, I was curious - you know there's a lot going on with repricing, some contracts that are out of date, some that are more current. Is there any way to give us a sense of sort of where the current bar is? So, instead of looking at where you are on a year-on-year basis, looking at as business reprices in the here and now is there any sign of slowing in that -- what's obviously been a very rapidly accelerating trend?

(Mr. Seale) Maybe it's easier for me to answer from here instead of going back up to the front. With respect to the first question, in terms of mix effect for the quarter, the mix effect was nominal in the quarter. So the 60 percent of RPU gain attributable to price was pretty much all price, and 40 percent from fuel. Now with the second part of the question, we don't see any material change in the marketplace, as we reprice expiring instruments, contracts or quotes today versus 90 days ago, or versus six months ago. It's pretty much the same market.

(Question) Sorry to do this to you, Hank. I also wanted to see if we could go back to the stock compensation issue. If I understood your slides and the explanation you gave, you said that there was a $10 drop in the stock price and for every dollar that was about 1.5 million change in that line item, year on year, yet I think you showed a $32 million swing in the quarter?

(Mr. Wolf) Well, in the third quarter of last year, the stock price was up $10. And in the third quarter of this year it was down $9. So that's $19 of swing quarter over quarter. If you apply the 1.5 million, you come up with that number.

(Mr. Moorman) One more there. Mr. Hatch?

(Question) Just a quick one, Wick. Are you guys back at the negotiating table labors, are you guys back talking and what's your forecast? Can you talk anything about what's going on with that?

(Mr. Moorman) No. No.

(Question) Are you at least negotiating now?

(Mr. Moorman) There are always discussions going on with the other side when we're in a round of negotiations, but I can't say any more than that. Okay. Well, thank you all very much for coming and for your questions. And we look forward to seeing you again. Thank you.

Prepared Remarks