Remarks by:
Donald W. Seale
Executive Vice President and Chief Marketing Officer
Norfolk Southern Corporation
Transportation Services Demand & ISM Index
Thank you Wick, and good morning.
Even though the economy rebounded somewhat in the second quarter, transportation services demand, which is the red line in this chart, has not returned to the robust levels seen in 2006. The primary constraint to GDP continues to be a weak housing market, which, along with higher gas prices, has contributed to a slowdown in consumer spending growth.
Railway Volume 2nd quarter 2007 vs 2006
In view of softer demand, and strong comparisons to last year that reflected record volumes of over 2 million units (2,024,625), volume this quarter declined by 4%, or 82,000 loads across five of our seven business groups.
Automotive & Housing Losses
As in the first quarter, weak housing and domestic automotive production were the largest contributors to the softness in our overall volume. The remaining losses were the result of moderating international trade, higher coal stockpiles, and lower steel production.
Railway Operating Revenue
Total revenue reached $2.378 billion, and was our third highest quarter ever. This quarterly result was $15 million less than record revenue set in the 3rd quarter of 2006 and was achieved with 48,600 fewer loads. Compared to the 2nd quarter of 2006, volume was down 82,000 loads while revenue was within $14 million, or 1%, reflecting continued improvement in revenue yield per unit.
Revenue Per Unit
Revenue per unit improved by 4% for the quarter, reaching $1,224, an increase of $42. This was our 19th consecutive quarter of year-over-year revenue per unit growth and all of our business units produced gains for the quarter, except Automotive, which was flat.
Continued strength in pricing, along with a more favorable traffic mix drove the improvement for the quarter.
Coal Variance Analysis
Turning to our individual markets, Coal revenue of $579 million was down 1% versus 2nd quarter 2006. Carloads declined 3% in the same period while tons were down 2%, reflecting higher average per car payloads.
Revenue-per-unit grew by 2% for the quarter, reaching $1,332 per car. An increase in yield, combined with declines in short-haul river traffic and improvements in tons-per-car boosted revenue-per-unit.
Coal Volume
Within the segments, the utility market was down 6% in carloads in the quarter. Generally, electric generation has remained fairly strong, up 3% in the NS service region for the quarter, but high stockpile levels weakened rail coal demand. Utility stockpiles remained at or above normal levels, which allowed utilities to burn from their inventories during the spring months and transport less coal. The summer cooling season has begun in earnest, and inventory levels are declining, but are still above 2006 levels.
Export coal was strong in the second quarter, increasing 33% over the same periods last year. Demand for U.S. coal is currently higher due to the weaker dollar, as well as vessel loading delays at Australian coal ports and constraints at Canadian coal ports.
Metallurgical coal, coke and iron ore carloads were down 8% for the second quarter. Furnace and coke battery outages, caused by a softer steel market, reduced demand for metallurgical coal and coke.
Industrial coal carloads were up 6% in the second quarter. New business and stronger demand were the primary factors that drove growth in this market.
Merchandise Variance Analysis
Merchandise reached its second highest quarter ever at $1.32 billion, up $9 million, or 1% over the same period in 2006. Volume was down 4% for the quarter, principally due to lower auto production and a weaker manufacturing economy.
In spite of the decline in volume, this was the 14th consecutive quarter of year-over-year Merchandise revenue per car growth, which was a record at $1,822 per car.
Positive traffic mix changes in the quarter, with less lower-rated, short-haul business, the addition of some higher-rated import volumes, and favorable pricing across the commodities drove our performance.
Merchandise Revenue & Volume
Within the group, Chemicals produced a new record for revenue per car in the quarter, principally driven by improved pricing. Chemicals also produced its first year-over-year volume gain since the 2nd quarter of 2005, prior to the gulf storms.
Agriculture volumes also rebounded in the quarter, increasing by 2%.
While Metals and Construction faced tough comparisons to the all-time high volume of 223,000 carloads in the 2nd quarter of 2006, volume of nearly 210,000 carloads this year was the third highest ever for this sector in spite of lower steel production and soft residential construction markets.
Merchandise Volume
This decline in Metals & Construction traffic, coupled with weaker Paper & Forest Products carloads, were large components of the year-over-year decline in Merchandise volume.
Iron & steel shipments declined by 14% and coil steel volumes were down 10%, as the slowdown in auto production reduced our import and domestic slab trains handled. Miscellaneous construction markets volumes were off by 13% due to continued weakness in the housing sector.
Paper & Forest Products volume was down due to lower paper production, coupled with a 17% reduction in lumber as a result of softer housing starts. Also, kaolin clay shipments declined by 8% due to reductions in paper production and the impact of pressures from Brazilian clay.
On the plus side, several of our individual markets achieved strong growth for the quarter. Our scrubber stone business for the utility industry continued to ramp-up, increasing by 1,000 loads in the quarter. We also saw higher volumes of aggregates associated with new highway construction projects.
Also, as I just mentioned, many of our Agriculture markets performed well in the quarter. International trade drove gains in export wheat. Fertilizer volume was up 7% for the quarter due to increased corn acreage related to ethanol production, and ethanol volume increased by 13% in the quarter as the market continues to ramp up.
And the 2% volume gain in Chemicals was partially attributable to increased shipments of soda ash and higher volumes of plastics.
Merchandise Volume
Automotive was the other major component of the overall decline in our Merchandise sector, with volume down 12,900 loads or 8%. Plant closures and production cuts at Ford, GM, and Chrysler resulted in a volume decline of 12% for the quarter. Shipments for the new domestics such as Toyota, Honda, and BMW were up 2,400 loads or 8%.
As we have previously advised, year-over-year comparisons will continue to be impacted by the Big 3 plant closures and production cuts through the second half of 2007 and into early 2008.
Intermodal Variance Analysis
Now turning to our Intermodal market, revenue in the quarter of $479 million was down 4% versus 2006 as volume declined 5%.
Revenue per unit was up 1%, reflecting a combination of fuel surcharge increases and stronger traffic mix in our International and Triple Crown segments.
Intermodal Volume
Within the market segments, international volume was down 5% for the quarter as imports to the U.S. continued to soften compared to 2006. Despite slower imports, our volume was primarily affected by a reduction in empty containers handled compared to last year, while loaded container volume remained virtually unchanged. With weaker demand in the Far East for empty equipment, the shipping lines are opting to move empties that are in East Coast locations via East Coast vessel services, rather than expedite them moving westbound via rail. We also saw increased storage of empty containers in the U.S. during the quarter, again reflecting declining demand for empties in Asia.
As the mix of loaded and empty containers has changed, so to has the mix between our East and West Coast traffic. An 11% increase in East Coast volume was more than offset by a 15% reduction in West Coast volume. The West Coast continues to be challenged by the impact of inland transportation cost increases incurred by a large portion of the customer base. As a result, the shipping lines are terminating cargo at West Coast ports and requiring the beneficial owner to book and route their cargo inland using a third party, as opposed to inland service provided by the steamship line. In turn, this has encouraged customers to use all-water service to East Coast ports.
In the combined truckload and domestic IMC segments, volume decreased 7% for the quarter. Domestic IMC traffic continued to lag behind 2006 levels in the face of softer demand and higher capacity in the marketplace.
Truckload shipments were also down for the quarter, due to the same demand/capacity factors. But, this decline was somewhat mitigated by the continued conversion of over-the-road business to Intermodal by a couple of our large asset owners such as J.B. Hunt.
Our premium Intermodal volume was up 5%. Within the premium sector, growth was due primarily to increased activity with UPS.
Finally, and even though we have seen increased demand for our Triple Crown business as the year has progressed, volume was adversely affected in the second quarter by production cuts at automotive plants and softness in the housing market.
Looking Ahead - Intermodal
Looking ahead, Intermodal comparisons to 2006 become easier in the second half of the year. While trucking capacity relative to demand remains somewhat high, increased fuel costs and projections for improvements in manufacturing and economic output should bolster second half volumes. Additionally, we expect to see a more normalized Intermodal peak season this year, which as you know did not materialize in 2006.
Also on the horizon, two preliminary phases of the Heartland Corridor will be completed later this year as we begin service at our new Rickenbacker terminal in Columbus, Ohio late in the 4th quarter, and Maersk opens its new $450 million marine terminal at the Port of Hampton Roads.
Looking Ahead - Coal
In the Coal sector, utility stockpile levels are declining, but remain above 2006 levels. We are seeing signs that utilities may be interested in additional coal shipments in the second half of 2007, as continued strong electricity demand forces them to run their coal plants at maximum capacity.
In the export market, Australia’s coal port congestion is not improving and we expect to continue to see stronger export coal demand for the remainder of the year.
In the metallurgical market, two primary coke batteries have resumed operations, which should improve inbound coal volume. We expect fewer furnace outages, which should help stabilize volumes for the remainder of the year.
And finally, we expect industrial coal to remain strong for the balance of the year with increased economic activity and industrial production.
Looking Ahead - Industrial Products & Automotive
In our Merchandise markets, we should see increasing volume growth in several segments. Metals shipments are projected to improve, particularly in the fourth quarter when steel capacity utilization is forecasted to be higher. In the Construction sector, housing starts are likely to remain soft, but regional highway projects, commercial construction, and scrubber stone markets for the electrical utility industry are slated to drive volume and revenue growth.
As we shared with many of you in our Investor Conference on June 6, there is significant project and industrial development-related growth on the horizon. Later this year, we expect to begin shipping soybeans to the new Dreyfus 80-million gallon bio-diesel plant at Claypool, Indiana. This facility also presents opportunities for outbound bio-diesel transportation to selected markets.
Four additional ethanol production facilities are scheduled to open in the Midwest on NS or connecting short lines in the second half of the year, totaling approximately 330 million gallons of production capacity. This new capacity will result in nearly 7,000 carloads of corn, ethanol and DDG feed supplement.
Our challenges will be related to the housing impact on lumber and increased truck competition in our paper and consumer products markets. However, on the lumber side, we will benefit from new business to a new distribution center and truss plant scheduled to open in August for Menards at Holiday City, Ohio.
In Automotive, we will continue to see the impact of Ford and GM plant closures in 2006, but year-over-year comparisons should be easier in the second half of the year as new business is added to our network.
Finally, across all groups we see the opportunity for improved pricing and yield as expiring contracts and quotes are re-priced in the second half.
Conclusion
In summary, we are well positioned to see improvements in pricing and volume across our business as economic activity improves here in the U.S., and global volumes pick up this fall. Our continuing focus is to provide our customers with the best possible service in a safe and efficient manner, while fully realizing the increasing value of our service in today’s changing transportation market place.
Thank you, and now Jim Squires will review our financial performance for the quarter.
Remarks by James A. Squires >> |
