Remarks by:
Donald W. Seale
Executive Vice President and Chief Marketing Officer
Norfolk Southern Corporation
Thank you Hank, and good morning.
First, a few comments on the economy. Current economic conditions can best be described as ‘mixed’. Overall GDP growth is expected to track below 3% for the remainder of the year. Main drivers in this moderation are weakness in the housing market and declining auto production and sales.
We all closely monitor the manufacturing industry and the ISM index finished at 52.9 in September, its lowest reading since May 2005. But despite this decline, the manufacturing sector continues to expand, albeit at a more modest pace. With business investment and new orders all relatively strong, manufacturing still has some positive short-term indicators.
And falling energy prices should bolster consumers, while trade is forecasted to remain positive thanks to the expanding global economy and a weaker dollar.
Railway Volume 2006 vs 2005
As seen with the economy, our volumes were mixed for the quarter.
Total volume was flat with last year, the first such comparison since the third quarter of 2003. Slowing markets and difficult comparisons from last year drove this decline. Volume in the third quarter of last year was up 87,000 loads, with all time records set in Intermodal, Coal and Metals & Construction.
For the nine months, strong volumes in the first half offset third quarter weakness with year-to-date volume up 3% over last year.
Looking at the individual markets, Intermodal volume reached a new record of 841,000 loads for the quarter, increasing 2% over last year. For the year-to-date, volume is up 6% primarily due to continued strength in our international business.
In Merchandise, gains in our Agriculture and Metals business nearly offset continued losses in Automotive. For the quarter, volume declined slightly versus last year, and for the nine months, Merchandise volume is up 31,000 units, or 1%.
We faced continued declines in export coal, and some softness in our northern utility business which drove the unfavorable comparison in Coal for the quarter. For the year-to-date, Coal volume is up 9,300 units or 1%.
Railway Operating Revenue 4th Qtr 2003 - 3rd Qtr 2006
In spite of flat volume, our third quarter revenue grew $238 million, or 11% above last year to an all time high of $2.4 billion. This was our twelfth successive quarter of reporting record revenues, with revenue nearly $800 million higher in the third quarter of 2006 than the same quarter in 2003.
Coal, Metals/Construction, Chemicals and Paper all recorded record revenue for the quarter. For the nine months, revenue of $7.1 billion is up $818 million, or 13% over 2005, and for the past 12 months revenue is up $1.1 billion, or 14%.
Revenue Per Unit
Total revenue per unit also reached a new high of $1,202, an increase of $120, or 11% over third quarter 2005. Approximately 60% of the gain in revenue per unit was derived from increased pricing. And for the year, revenue per unit of $1,187 is up $107, or 10% over 2005.
We continue to successfully re-price expiring contract business in all business sectors. As indicated in previous reports, we estimate that about half of our book of business is available for re-pricing during the year, and of that half, approximately 82% has been completed through the first three quarters of 2006.
Coal Variance Analysis 2006 vs 2005
Turning to our markets, Coal generated a record high of $595 million, exceeding third quarter 2005 by $49 million despite 3% less volume. For the year-to-date, revenue of $1.74 billion exceeded 2005 by $147 million.
Revenue per car reached an all time high as well, increasing to $1,362, and for the year, revenue per car of $1,316 is 8% ahead of the same period in 2005. In addition to improved pricing and fuel surcharge coverage, heavier volumes in longer haul service, particularly to southern utilities, combined with a 24% decline in short haul river traffic helped boost revenue per shipment .
Coal Volume � 1st Qtr 2004 � 3rd Qtr 2006
With respect to Coal volume, as shown in this slide our coal traffic has increased in nine of the last eleven quarters. We faced a difficult third quarter comparison from last year as coal was up 6%, or 24,000 carloads. This was a new volume record at the time and a steep hurdle for us to clear in the current quarter.
Coal Volume 2006 vs 2005
Drilling down further, utility coal volume declined 4% for the quarter, but was up 3% for the nine months. Coal burn in our northern region was reduced as cooling degree days fell nearly 11% below last year. As a result, NS served coal fired utility plants received less coal for the quarter. And as I just mentioned, volumes to river docks declined 24% due to dock outages and short term challenges with Northern Appalachian coal production.
Coal Volume 2006 vs 2005
A very weak export market continued to impact our performance as volume fell 17% for the quarter and 22% for the nine months. Pressures on both the demand and supply side are feeding volatility in this sector.
For the third quarter, the lack of business to Asia, along with reduced purchases by India negatively impacted volumes to the port of Baltimore. At Lamberts Point, traffic declined due to competition from alternate supply regions, such as Canada and Australia, which represented coal purchased last year at lower prices.
Coal Volume 2006 vs 2005
Our domestic steel markets fared better, and in total, our metallurgical coal, coke and iron ore sectors grew nearly 4,600 carloads, or 8% over third quarter 2005. For the year, these markets are up 9,800 units, or 6%.
Gains in metallurgical volume in the quarter were generated from diversification of coal supply, and spot opportunities. Increased iron ore shipments from Ashtabula to various steel manufacturers also contributed to growth in the quarter.
Coal Volume 2006 vs 2005
And Industrial coal volume declined 6% for both the quarter and the year due to the combined effects of competition from natural gas and diversion of industrial coal to utilities at higher market prices.
Picture of Bluefield Yard
Looking ahead, we expect Coal in the fourth quarter and beyond to be more favorable in part due to easier year-over-year comparisons. We also expect gains in our utility business to continue as stockpiles are rebuilt for the winter heating season.
Finally, export coal volumes should improve as 2005 carryover coal contracts from Australia and Canada have now been mostly completed. We have also had recent discussions about U.S. coal exports replacing lost production from Russia and Eastern Europe due to recent mining difficulties in that region.
Merchandise Variance Analysis 2006 vs 2005
Turning to our carload business, revenue of $1.28 billion increased $145 million or 13% over third quarter 2005, despite a slight decline in volume. Year to-date-revenue reached $3.87 billion, a gain of $500 million over the same period last year. Excluding Automotive, our Industrial Products business was ahead 3% for both the quarter and the year-to-date.
Revenue per car reached an all time high of $1,799 for the quarter, and $1,755 for the year, an increase of 13% for both periods. Revenue per car gains were driven by price increases and fuel surcharge revenue.
Merchandise Revenue & Units 2006 vs 2005
Looking at the individual markets, Agriculture revenue reached $239 million for the quarter, and $742 million for the year.
Ethanol revenue doubled for the quarter accompanied by a 75% increase in volume. We currently serve 4 major ethanol production plants, and anticipate that 13 additional ethanol plants will be completed by the end of 2007 along with one new bio-diesel facility. Supporting current and future ethanol and bio-diesel production, we serve 19 distribution facilities with 2 of these facilities undergoing expansions next year and 3 new terminals opening in 2007.
Increased shipments of corn for ethanol processing coupled with domestic shipments to feed mills and spot exports resulted in an 8% increase in shipments for the quarter.
Metals/Construction record revenue of $316 million increased $64 million over third quarter 2005, and for the nine months, revenue reached $899 million. Gains in Metals more than offset softness in our construction markets. Construction volume fell 6% as housing construction softened during the third quarter resulting in declines in brick and general construction commodities.
Growth in U.S. steel production and a strong energy sector continue to drive our Metals markets. U.S. steel production was up 6% for the first nine months, while NS iron & steel volume increased 29% for the quarter and 31% for the year. Growth in domestic and import slab shipments, semi-finished inter-mill traffic, along with coil steel and scrap steel volumes that rose by 10% and 17% respectively, drove these gains.
Looking ahead, near term steel inventories appear to be on the rise. However, industry fundamentals remain relatively strong, driven by global demand which will continue to outpace total production. In the U.S., mills appear to be adjusting production downward to manage inventory levels and prices in the face of declines in the automotive and home appliance industries. But in the energy and public construction sectors, which drive demand for pipe, plate and structural steel for oil drilling, highway, and commercial construction projects, demand remains solid.
Merchandise Revenue & Units 2006 vs 2005
Paper revenue reached an all time high for the quarter at $231 million, up 13%. For the year, revenue of $669 million is $77 million ahead of last year. In this group, we continue to see strong growth in the market for waste transportation, including municipal solid waste and construction and demolition debris.
In conventional paper and forest markets, printing paper led volume increases, growing 21% for the quarter, primarily due to continued growth in import traffic, while lumber shipments declined 2% due to weak housing.
Chemical revenue was an all time high as well, reaching $286 million for the quarter and $813 million for the year. We are seeing moderate improvement in our overall Chemical traffic, as quarterly volumes fell 2%, a marked improvement from the year-over-year comparisons for the first two quarters of the year. Traffic declines in the third quarter are due to plant closings and the slowing automotive and housing market.
Merchandise Revenue & Units 2006 vs 2005
Automotive was our only business group to produce a decline in revenue for the quarter. Revenue of $212 million fell $17 million below last year. North American vehicle production declined 9% below third quarter 2005 levels. These cuts combined with high inventories and plant closures drove volume down 20,000 carloads or 14%.
With respect to production, Ford closed its St. Louis Assembly plant in March 2006 and has scheduled substantial downtime in the second half of this year, with Norfolk Assembly having the largest impact on volume. Volume loss with General Motors was driven by the closing of Oklahoma City in February 2006 and removal of third shift at Moraine Assembly in the second quarter. Additionally, we experienced reduced shipments of auto parts to GM’s Arlington, Texas plant along with lower volumes of parts to Mexico.
Finally, production cuts at five DaimlerChrysler plants also contributed to our overall decline.
On the plus side, increased volume from Toyota, Honda and the other “new domestics” increased by 915 carloads in the quarter and we expect to handle added volume from Toyota’s new San Antonio plant commencing late this fall.
Looking ahead, fourth quarter comparisons will be equally difficult. Ford’s Atlanta, Georgia assembly plant is scheduled to close this month. DaimlerChrysler has scheduled 20 weeks of downtime at various plants, while Ford has announced an additional 11 weeks of downtime. These temporary production cuts are due to high inventories of unsold vehicles.
Ford and GM have rationalized their existing excess production capacity with announced plant closures and consolidation of production. Going forward, we will continue to see year-over-year declines in auto parts to the closed assembly facilities. However, much of the impact for finished vehicles has already been realized in the marketplace and in our current volumes.
Intermodal Variance Analysis 2006 vs 2005
Concluding with Intermodal, this market reached its second highest revenue quarter, at $515 million, up 10%. For the year, revenue of $1.48 billion is up $171 million over 2005. Revenue per unit was $614, up $45, or 8% over third quarter 2005.
Volume was an all time high, and shipments were up 2% for the quarter and 6% for the nine months. Notably, year-over-year volume comparisons have moderated compared to the strong gains that we have seen over the past two years.
Slower revenue growth was due in large part to the continued mix effect of transitioning from trailers to containers and higher volumes of private equipment. Greater volume of private equipment also increased revenue empty moves, as those customers repositioned equipment in the quarter.
Intermodal Volume 2006 vs 2005
Increased truckload and international volume more than offset declines in our other lines of business. International shipments led gains for both the quarter and the year. The growth rate of 7% in the third quarter was down compared to the 16% gain experienced in the first half of 2006, as we started to lap the start date of new contract business gained in the third and fourth quarters of 2005.
Our West Coast port volume was up 6% compared with a 4% increase through East Coast ports, both of which represented moderating volumes of international trade. On the positive side, we have seen continued growth in East Coast port business moving in longer haul, higher revenue lanes, such as New York ports to Chicago; Norfolk to Chicago; and Savannah to Memphis, Cincinnati and Louisville.
With respect to our outlook for peak season, we expect more moderate growth in our international segment, as we have seen seasonal shipping patterns become less pronounced over the past three years.
Intermodal Volume 2006 vs 2005
Truckload and domestic volumes were impacted in the quarter by increased supply of motor carrier capacity in the east and reduced automotive and construction shipments throughout our markets. Dry van pricing on the spot market has weakened as well, exerting pressure on Intermodal volumes.
As mentioned previously, shipments with Intermodal marketing companies, or IMC’s, have been hurt by the decline in rail provided trailers and containers. In the quarter, IMC markets were particularly hard hit by greater availability of motor carrier capacity and lower spot pricing in the Eastern markets. Our truckload customers were impacted by the same conditions, which tempered their overall growth, despite healthy volume with big box retailers.
Intermodal Volume 2006 vs 2005
Premium volume was flat versus third quarter 2005 and is 2% ahead for the first nine months. Our LTL volume decline resulted from a general softening in demand, less transloading at west coast ports, and increased competition from regional carriers.
Intermodal Volume 2006 vs 2005
Triple Crown volume declined 1% for the quarter due to the softening automotive industry in the Midwest. Triple Crown capacity previously dedicated to automotive parts in selected lanes are being redeployed into general freight service as assembly operations are curtailed or reduced.
Picture of Austell
We expect continued moderation in Intermodal growth in the fourth quarter for the market reasons I have just discussed.
But we remain confident in future Intermodal growth. As such, we are committed to invest not only to improve Intermodal service levels, but strategic capacity initiatives such as the Heartland Corridor, Columbus Rickenbacker Logistics Center which will look similar to our flagship terminal in Austell, Georgia as pictured here, and a planned expansion at Cleveland in the coming year.
To conclude, in the face of changing markets and a mixed economy, we are somewhat guarded about the fourth quarter and early 2007.
In addition to market and volume considerations, the impact of lower fuel surcharges will be seen in our fourth quarter revenue as the 60 day lag in lower WTI and on highway diesel fuel prices are taken into account.
And while we still see some economic expansion ahead, it appears to be less robust than what we saw in the first half of the year.
But through our unending focus on delivering excellent service, we are confident in our ability to continue to develop new markets and enhance our current book of business, both of which we believe will generate growth and higher value in the months ahead.
Thank you.
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