Financial Analysts' Meeting
New York, NY - April 25, 2007
Questions and Answers
(Mr. Moorman) In the back.
(Question) …competitive market rate (inaudible)
(Mr. Moorman) Let me get you to repeat that. And if you would, give your name.
(Question) Adrian Melly. Can you give me a general sense of how you price by market and by category of shipment, how much of a differential is there between you and trucking for different segments, and just a general sense of where the prices come from?
(Mr. Moorman) Well, I’ll give you a general sense. We do look at it on a segment-by-segment basis, very clearly, and try to have an understanding of what the competitive marketplace for every commodity is, and then we try to price according to the marketplace. Within each market, there are differentiations in terms of the type of service that may be offered and the type of equipment that’s in use. There’s all kinds of variables, but our goal is always to price based on what the market tells us that we can price.
(Question) So, you feel you’re charging the maximum you could in any given market at this current time?
(Mr. Moorman) Well, I would say we also operate clearly under some constraints from a regulatory standpoint, but in general, I think it’s fair to say that we try to price to the point where we know we can get the business and make an adequate profit on it based upon market conditions. Don, is that… okay? In the back.
(Question) Yes, Wick, it’s Tony Hatch. I’ve got a couple of questions. Quick one for Don. I thought it was really interesting how you broke out the impact of the auto and housing slumps on your various components, business components, but I was curious in particular about coal and how it was impacted. Where do you see that and how can we try to measure that in the future? And then what happened in the drop in West Coast international volume, which was the one bright spot on the West Coast intermodal side, and I want to know what happened and how optimistic are you about a second half turn with your new contracts in intermodal in general?
(Mr. Seale) Tony, on the first part, with respect to coal traffic, I think if you look at our quarter in terms of a 3 percent improvement in RPU and basically flat revenue, it reflects the timing of contract repricing. With respect to our book of business, as you know, if you look at 2004, 2005 going into 2006, we had some very substantial and steady improvements in RPU because we renegotiated contracts during those years. So in the first quarter, it was a timing issue.
Going forward in terms of coal outlook, metallurgical coal, we think, will be better. I mentioned two blast furnaces that have restarted in the first quarter; that bodes well for increased demand. And also the increased production of steel domestically which is projected to be up 8 percent for the balance of the year, that also bodes well.
Now with respect to our intermodal traffic from the West Coast. As I’ve mentioned, and as everyone knows, there’ve been some consolidations and mergers in the steamship line industry, and also there’s a timing issue there with respect to when individual steamship lines renegotiate their western railroad contracts. Those that haven’t renegotiated are in a better position than those who have renegotiated at this point. We’re seeing some shifting of sands between carriers as a result of that. I’ll give you a case in point -- Maersk. Maersk has been one of our largest international accounts for a number of years. And as everyone knows, Maersk has announced some redeployment of assets, some transition from transcontinental to all-water to the Southeast, and they’ve also announced some lanes -- intermodal lanes -- that they will no longer participate in. So, that’s having an impact on our volume, Tony, vis-a-vis' the total imports that are coming in.
(Mr. Moorman) Other questions?
(Question) Good morning, it’s Tom Wadewitz from JP Morgan. On the yield breakout, can you give us some perspective on how much we’ve priced of fuel and mix? I don’t know if you gave that within the presentation, but can you give some perspective on that in the quarter?
(Mr. Moorman) You want to go over -- We did give some perspective on that.
(Mr. Seale) Tom, our net pricing gain in the quarter was 4%, and if you look at fuel and mix, as I mentioned in the presentation, both were negative. Fuel was about 3 percent, volume, of course, was a 4 percent negative, and mix was about a negative 1 percent.
(Question) So, if you compare that to what your primary competitor is saying in terms of same store, where they measure same-store price, I think they said something like 7 percent in 1st quarter, I’m wondering is there -- I know you can measure those things differently -- but is there an opportunity for you to be more aggressive on price, giving their stance or is it just a kind of a choice of favoring volume a bit over price? How should we look at that vis-a-vis' what we hear from your primary competitor?
(Mr. Seale) Well, as Wick mentioned with respect to our pricing philosophy, we’re always looking at the market, the individual markets and we price to the market in every segment. So, there is no change in that process or focus. We continue to price to the market in terms of where the market is today with respect to renegotiations that take place. So, we’re not changing our philosophy and have not changed our philosophy in that regard. We still see a very strong pricing environment, and again, it comes back to the timing of when we are able to reprice certain new contracts, or other rate instruments that are out there.
(Question) Okay, and then one more. There’s a lot of noise in this space about interest from potential private equity interest, you know, activity of shareholders, that type of thing. And I’m wondering if you can give us your perspective on whether that type of idea has much merit. And also, in terms of your potential response, you did increase the aggressiveness of your share purchase program, but is that something that you think you could do meaningfully more if you’re, you know, let’s say the pressure increases from some of these parties I mentioned?
(Mr. Moorman) Well, it’s a very interesting question. I think at the end of the day, Tom, that what we try to do is look at our company and the income that we’re going to generate -- the cash that we’re going to generate, and this is something that we’ve said for a long time. Our first thought is always what are the requirements of the business in terms of maintaining the property and preparing ourselves for future growth. And that’s reflected in our capital expenditures. And that will always be the place where we look first to reinvest. Beyond that, we look at how do we return money to our owners, and our owners being our shareholders and then the folks who hold our debt as well. And we think that we have a strong balanced program of doing that. We have a lot of shareholders who are interested in our dividend policy, who are more interested in that than the repurchase program over the long term, and we’re trying, as you saw on the slide, to do what we can in a reasonable, and I think not overly aggressive but strong way, to return money to those folks. There are other folks as well who are interested in repurchases. We’ve, I think, as you can see, been aggressive in repurchasing over the last year, and we have a good program in place and we’re going to continue to be aggressive. In terms of what other folks might think about what we can do in terms of our capital structure or how we might go out and spend our money in a different way, we’re always listening to the people who own our shares. And we try to respond to them as well as we can. But we are trying to balance those three components of what we do with our money so that we don’t short the business. We don’t unnecessarily deprive the business of capital expenditures, which we can’t do and continue to grow in the future. And then balance -- quite frankly -- the desires of shareholders who may have different wants and needs, and try to do something that both will feel is a reasonable and adequate return for them.
(Question) Okay. Thank you.
(Mr. Moorman) Let me ask the man who’s been here 67 times. Hank, is there anything you would like to add to that?
(Mr. Wolf) I’m sure that covers it.
(Mr. Moorman) The piece of your question that I would agree with wholeheartedly is that there’s a lot of noise in this space. So, we’re going to continue to do what we think is the right thing.
Other questions? One more, yes sir.
(Question) You mentioned the regulatory front. Can you give me an update on exactly what the status is of the regulatory front? It was my understanding that you’re currently not regulated. So, I guess I didn’t understand the ….
(Mr. Moorman) It may be a little better for a little fuller explanation offline, because it’s a quite lengthy and complex answer. The answer is that we are partially deregulated. There are components of our business that are really largely unregulated, the primary example of which is intermodal, and then there are parts of our business that are regulated from a rate standpoint. There are also a lot of other places where we’re regulated, and where more regulations may be coming, in terms of things like the transportation of hazardous materials. There’re a lot of regulations around the safety of our operation. So it’s a complex situation, but we still have a substantial amount of regulation that governs our business. But we can give you chapter and verse on that later, if you’d like.
Okay, anything else?
Well, if not, thanks for your patience. It’s good to see everyone, and we look forward to seeing you up here again.