Remarks by:
Donald W. Seale
Executive Vice President and Chief Marketing Officer
Norfolk Southern Corporation
Transportation Services Demand and ISM Purchasing Managers Index
Thank you Wick, and good morning.
A year long cycle of a weakened domestic economy that began in August 2006 continues to impact freight transportation demand.
During the third quarter, manufacturers appeared to slow production, and in September, the ISM index fell to 52.0. While a number above 50 still represents modest expansion, September marked the third consecutive decline in the index which is at its lowest since March.
Railway Volume 3rd Quarter 2007 vs. 2006
As shown in the next slide, the sluggish domestic economy and changing international trade patterns resulted in total volume in the quarter of 1,909,000 units, a reduction of nearly 82,000 units, or 4% below last year.
Volume declined in five of our seven business groups.
The weak housing market continues to impact our volumes and accounted for the majority of the shortfall. Excess trucking capacity and high coal stockpiles accounted for most of the remaining loss, but lower volumes of imports also came into play.
Norfolk Southern Import and Export Volume 3Q 2007 vs. 3Q 2006
This slide highlights the changing nature of imports and exports in the quarter as the dollar continued to weaken. Total import volume declined by 7% while export traffic grew by 14% as export growth exceeded import declines by some 8,000 loads.
Railway Operating Revenue 3rd Quarter 2007 vs. 2006
With lower volume, total revenue as outlined in this slide, reached $2.353 billion, down $40 million below the record revenue of $2.393 billion in the third quarter of 2006.
Weaker volumes were partially offset by record revenues in our Agriculture sector, growth in Chemicals revenue, and continued improvements in pricing across most of our business segments.
Revenue Per Unit 3rd Quarter 2007 vs. 2006
Accordingly, as noted in slide 6, revenue per unit reached an all time high of $1,232, an increase of $30 or 2.5% over third quarter 2006. This was our 20th consecutive quarter of RPU growth.
Traffic mix impacted revenue per unit growth as volume declines in some higher rated commodities such as utility coal, iron & steel, lumber, and automotive parts traffic, were offset by growth in lower rated river coal, aggregates and municipal solid waste volumes.
However, the pricing environment remains favorable and rate increases across our markets generally offset the effect of shorter haul traffic. And as reported in the second quarter, the timing of repricing, particularly in Coal and Intermodal suppressed RPU for the third quarter.
Merchandise Variance Analysis 3rd Quarter 2007 vs. 2006
Turning to our individual business sectors, Merchandise revenue of $1.291 billion grew $8 million over third quarter 2006, despite a 3% decline in volume due to lower shipments of iron & steel and forest products.
This was the 15th consecutive quarter of year-over-year Merchandise revenue per car growth, which was a record at $1,866. Our Paper, Chemicals and Automotive groups recorded all time highs in RPU, and each of our Merchandise groups benefited from improved pricing during the quarter.
Merchandise Revenue & Volume 3rd Quarter 2007 vs. 2006
In slide 8, you will note that our Agriculture group set a record for both revenue and volume in the quarter. Revenue of $264 million was up $25 million, or 10% over third quarter 2006 while volume grew 2%.
Wheat volumes were higher due to increased export shipments as a weak international crop in Australia, Egypt, and other international regions prompted a spike in demand from U.S. producers.
Also, our integrated AgriFuels markets, which include biodiesel, ethanol, corn for ethanol, dried distillers grain or DDG, soybean meal, and fertilizer grew by 1,500 carloads in the quarter.
Merchandise Revenue & Volume 3rd Quarter 2007 vs. 2006
Turning to Automotive, revenue reached $221 million for the quarter, up $10 million, or 5% compared to third quarter 2006, accompanied by a 4% increase in volume. Easier comparisons to third quarter 2006, which included 47 weeks of downtime versus 26 weeks this year, led to the first year-over-year volume gain since the second quarter of 2004.
Merchandise Volume 3rd Quarter 2007 vs. 2006
As you can see in the next slide, North American vehicle production increased 2% over the same period in 2006.
Our new domestics volume rose by 6% during the quarter, while “Detroit 3” volume improved by 3%. New business in finished vehicles and parts added to our favorable results in the quarter.
Merchandise Revenue & Volume 3rd Quarter 2007 vs. 2006
With respect to the other three Merchandise sectors, as shown in slide 11, Chemicals, Paper and Metals & Construction continued to feel the adverse impact of the housing market, along with slower consumer spending and reduced imports.
Despite these headwinds, Chemicals recorded its 17th consecutive quarter of year-over-year revenue gains. Chemical revenue reached $297 million, up $11 million, or 4% over third quarter 2006, while volume was down 1% due primarily to weaker plastics traffic.
Revenues for Paper and forest products, along with Metals & Construction materials declined 4% and 9% respectively, as volume declines offset a 4% RPU gain in Paper, while adverse mix in Metals & Construction coupled with weaker demand drove revenues lower. For example, higher RPU imported slab traffic was down 4,500 cars in the quarter and lower RPU aggregates traffic was up 3%.
Intermodal Variance Analysis 3rd Quarter 2007 vs. 2006
Now turning to our Intermodal market, revenue in the quarter of $484 million was down 6% versus 2006, as volume declined 6%, as well.
Revenue per unit fell slightly for the quarter, as contractual and general rate increases were offset by strong East Coast short-haul growth in August. In addition, a 24% decline in higher RPU trailer traffic continued to impact overall RPU.
Truckload Freight Index Supply and Demand
As depicted in the truckload freight index, one of the major drivers shaping current Intermodal volume continues to be the availability of excess trucking capacity. Truckload volumes have declined and the latest index is below 2002 and approaching the recession year of 2001. The trucking industry has been negatively impacted by softer imports and higher consumer products inventories. And, ample capacity in the spot truckload market has ushered in another soft peak season this year.
Intermodal Volume 3rd Quarter 2007 vs. 2006
Within our Intermodal market segments, international volume was down 5% for the quarter. Declines were driven by soft consumer demand and resulting import weakness, as well as some ocean carriers’ ongoing reduction of inland services and changes in vessel ports of call. Our East Coast port volumes grew 16% while West Coast port volume fell 17%, as shifts in business between ocean carriers and a general decline in transcontinental imports impacted Intermodal volumes.
In the combined truckload and domestic IMC segments, volume decreased 9% for the quarter. Domestic IMC traffic loss reflected economic softness and increased over-the-road competition. Truckload shipments were also down for the quarter, due primarily to a loss of business from some asset-based carriers. These losses were somewhat mitigated by over-the-road traffic conversions in local NS markets.
Premium Intermodal volume declined 3%, as increased parcel volume did not fully offset soft LTL traffic.
Finally, Triple Crown volume decreased 1% versus 2006 due primarily to excess trucking capacity.
Coal Variance Analysis 3rd Quarter 2007 vs. 2006
Looking at our Coal markets, Coal revenue was $578 million, down $17 million, or 3% below third quarter 2006, accompanied by a 2% decline in volume.
Revenue per car was down 1%, as higher revenue per car, long-haul volume decreased 5%, and, lower revenue per car, short-haul volume increased 7%.
For example, one of our large short-haul movements to the Ohio River equates to only a 26 mile haul and volume was up over 21% in the quarter. Conversely, long haul utility coal from Central App to the Southeast was down 10% in the quarter. These two movements which are opposite extremes in the length of haul, represent a per car differential of over $1,900.
Coal Volume 3rd Quarter 2007 vs. 2006
Turning to our individual markets, electric utilities ended the 3rd quarter with record demand for power. Cooling demand extended well into September, and continued in October for the NS served southern states. For the quarter, electricity generation in our service area was up 4% over the same period last year, while coal fired generation increased by 2%. High utility stockpiles were able to meet this increased demand for coal, which is reflected in our 4% decline in utility coal volume. In addition, Chesapeake Energy's switch earlier this year from domestic to all water import coal at its Chesapeake, Virginia plant continues to negatively impact year-over-year volume, revenue and revenue per car comparisons.
Higher export coal movements more than offset declines in domestic metallurgical coal, coke and iron ore. In the 3rd quarter, export volume was up 11,800 carloads or 44%, while, domestic metallurgical coal, coke and iron ore was down 7,400 carloads or 13%. Export continued to benefit from Australian port congestion and a devalued dollar.
Domestic met coal, coke and iron ore continue to be challenged by weak market conditions which have led to the closure of batteries, and the loss of 2006 spot iron ore shipments. Outages at the Buchanan and Pinnacle Creek Mines, and the closure of Citizen's Gas in Indianapolis, IN, in July are also reducing metallurgical coal shipments on NS.
Finally, Industrial coal carloads were up 1% in the third quarter. New business and stronger demand were their primary factors that drove growth in this market.
Looking Ahead - Coal
Looking ahead, increased global demand for coal and the low U.S. dollar will continue to bolster export markets for U.S. coals. On the other hand, demand for domestic met coal remains less vibrant due to lower U.S. steel production, which may continue into early 2008.
Finally, we expect both the Buchanan and Pinnacle Creek mines to resume production, which will enhance coal supply on NS going forward.
In the longer term, replacing coal sources in the coalfields is an important part of our market strategy as production and coal supply reflect a changing reserve base. We are working on numerous coal sourcing projects that will add new coal volume to our network.
Among these, highlighted here are four new coal sourcing projects that could generate a minimum of 6.0 million tons per year of additional coal volume starting in 2008. Of these four projects, two are in Central Appalachia and two are in Northern Appalachia.
Looking Ahead - Merchandise
In our Merchandise markets, there is significant project and industrial development growth planned. New cement terminals are being developed on NS in Georgia and South Carolina. Our scrubber stone network is poised for continued growth, driven by NS access to high-calcium limestone quarries and coal served utilities. There are an additional 40 utilities who have announced plans to begin scrubbing in the future.
Also, ThyssenKrupp will break ground on its new $3.7 billion steel plant at Mt. Vernon, Alabama on November 2. This new mega-mill should be a major source of new steel related business as it ramps up in 2010.
As described in the next slide, we also expect to see continued gains in our ethanol markets as new plants ramp up and several new distribution terminals open early next year. These include terminals in New Jersey and Georgia.
Finally, we are also excited about the continuing improvements in car utilization and customer service that we are seeing from our new 75-car grain trains which move with dedicated locomotives. This service has improved car turns by almost 50%. In turn, shippers and receivers are developing origin and destination facilities for rapid loading and unloading to take full advantage of this improved product.
Looking Ahead - Intermodal
And in Intermodal, despite soft volumes in the quarter, we remain committed to continuing improvements in service and launching new products for our customers. During the quarter, we launched the westbound Blue Streak service over Shreveport, LA which reduces transit times and offers a service guarantee. We also began a new Savannah domestic Intermodal service to tap growing shipments of import freight in 53’ equipment out of that market.
Our Intermodal service during the quarter improved by 7% versus the first six months of the year, and on-time performance was up 13% versus 3rd quarter 2006. Our guaranteed service over the Meridian Speedway is performing at 95% on time. In short, we are well positioned to convert motor carrier freight as the market improves.
Conclusion
In summary, slower economic conditions across much of our business impacted both volumes and revenue for the 3rd quarter.
We do not foresee a materially different outlook through the 4th quarter and into early 2008 as industrial production, a weak housing sector and excess trucking supply are not expected to improve in the near term.
Taking the longer view however, we fully expect demand for our services to again build as the domestic and global economies expand. We are continuing our clear focus on improving yield and designing new services and products to fully meet the needs of our customers, while generating the appropriate value to our shareholders.
Thank you, and I’ll now turn the podium over to Jim Squires for the financial report.
Remarks by James A. Squires >> |
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