Remarks by:
Charles W. Moorman
Chief Executive Officer
Norfolk Southern Corporation
Good morning. It is a pleasure to join you today. I’d like to thank Ken Hoexter and the entire Merrill Lynch team for inviting us to participate in this event. It comes at a particularly good time of the year, in that we now have a fairly clear picture of the business environment in the first six months and perhaps a better view of what we expect in the second half.
In my time with you this morning, I’d like to talk with you about three topics.The first, and most immediate, is what I just mentioned – our view of current business conditions and an idea of what we think the second half of the year will bring.
Second, I’d like to spend a couple of minutes talking about what we view as some fundamental changes that are underway in the transportation marketplace and where they might lead.
Finally, I want to talk about how Norfolk Southern is responding to all of these changes and challenges, and how we’re thinking about the future.
As to our current business levels and economic results, I’ll lead off by saying that if someone in our company had predicted four or five years ago that the economy would be in at least a near recession, oil would be selling in the range of $135/barrel, and that Norfolk Southern’s earnings would be up and our stock would be trading at its current levels, my first thought might have been to ask to have them checked for illicit substances! And yet, that’s exactly where we find ourselves today.One of the questions that I used to get with great regularity was whether or not the Railroad Renaissance was real. My answer then was that we wouldn’t know until we saw a business downturn. Since the beginning of 2007 we have seen that downturn, a prolonged one with no immediate end in sight, and yet at Norfolk Southern we have continued to handle high traffic volumes (although obviously somewhat lower than our peak), we’ve posted improved year-over-year financial results, and we’ve continued to lower our operating ratio.
All of this, in our belief, bears out that the transportation marketplace has changed fundamentally in ways that favor the railroad business, and, as I will discuss in a few minutes, we think that there is more change on the way.
With that said, the economy in 2008 is turning out to be even a little softer than we anticipated. But Norfolk Southern’s balanced business portfolio and excellent service have helped offset declines in some of our businesses which have been more affected by the economy.
Thus far in the second quarter, and this comes as no surprise, we are seeing continuing strength in coal, agriculture, and metals, and softness in construction, paper and forest products, chemicals, and automotive. Intermodal volumes are down slightly year-over-year, but as I’ll discuss more fully in a few moments, that seems to have stabilized and shows promise of strengthening.
Looking first at coal, as you may recall, coal was our strongest performer in the first quarter, driven by strong export demand which should continue throughout the year. We’ll probably reach 20 million tons over Lambert’s Point in Norfolk, Virginia, and 5 million tons over Baltimore.This would represent more than a 50 percent increase over full-year 2007 export coal tonnage, most of which represents high-quality met coal for steelmaking. But, interestingly, for the first time in many years, we also will move 2.5 to 3 million tons of steam coal to Europe, which is included in our forecast for the year. The dynamics of the export market continue to be in our favor as U.S. producers see increased demand for coal to Europe and Asia. The weaker U.S. dollar along with tight worldwide coal supply and higher transportation costs from Australian producers are all factors driving this surge in demand.
With respect to domestic coal, utility volume in the northern half of our service network continues to be positive and is up 9 percent second quarter to date. We continue to handle longer-haul, higher-rated spot moves from the West due to increased demand and tight coal supply in our service territory, which help to offset declines to southern-based utilities that continue to be at normal stockpile levels. However, in our view, these stockpiles are now reaching levels that will demand higher volumes later this summer and fall.
In intermodal, as I mentioned, our volumes have continued to be under some pressure year-over-year.
Our international volume continues to experience pressure driven primarily by a soft economy and resulting import weakness, as well as the ongoing reduction of inland rail movement of West Coast import containers.
Higher inland transportation costs are prompting several major ocean carriers to restructure the way business is done in North America. We continue to see ocean carriers placing more vessel capacity in the highly profitable Asian-to-European trade, and eliminating less profitable inland transportation service to certain markets in the U.S. In some cases, long-haul transcontinental markets have been replaced with all-water service to East Coast ports. As a result, our total volumes associated with West Coast ports declined 16% in the first quarter, while volumes through East Coast ports increased by 8%. We are seeing a continuation of this trend thus far in the second quarter, and I’ll talk more about this shift a little later.
Our total domestic and truckload volume remains under pressure, reflecting a softer economy and the loss of trucking-carrier business into the Southeast. Intermodal Marketing Company volumes continue to be positive, somewhat offsetting the decline in the truckload and domestic segment. The increase reflects the relative efficiency of intermodal versus over-the-road transportation in a high fuel cost environment.
Our premium business, which includes parcel and LTL carriers, also is down quarter-to-date as LTL conversions from the highway partially offset softer parcel and empty trailer repositioning volumes.
There are clear signs of escalating intermodal demand across our network, and in particular within the eastern half of our market. Five-dollar-a-gallon diesel fuel provides a powerful incentive to ship by rail, and we are introducing new intermodal lanes and products, and we are improving our service performance to take advantage of additional opportunities.For example, in the past eight weeks, we have seen our domestic intermodal volumes pick up as more truckload carriers pursue conversion from the highway to rail.
As for our merchandise business, our agriculture and metals traffic continues to be strong, helping to offset losses in our consumer driven and manufacturing-related sectors.
Our agriculture business, which was up 4 percent in the first quarter, continues to be positive year-over-year. This business group is benefiting from strong growth in ethanol to the Southeast, along with higher export grain and feed volumes due to the weak U.S. dollar and high international demand for agricultural products.
Our metals business also is up in the second quarter as higher volume from new and increased business in metals and machinery are offsetting declines in housing-related commodities.New coil steel business and increased inter-mill volumes are helping to offset weaker demand from the domestic automotive manufacturers.
Looking ahead at the rest of 2008, we don’t see any signs that the businesses which are strong will weaken, and we expect continued weakness in the housing and automotive sectors.
We expect coal volumes and revenues to be robust as export demand remains strong, and domestic utilities move more aggressively to supplement stockpiles in the face of tighter coal supply. One of the good news stories in coal is that coal supply at NS-served mines is expected to improve for the remainder of 2008, generating an additional 6.5 million tons of coal compared with last year.
As you’ve heard us discuss before, project-driven growth in intermodal and our general merchandise markets is progressing as planned, which should bolster volumes over the remainder of the year. Stronger exports throughout both sectors are expected to supplement these gains. Higher fuel prices combined with strong service across our rail network should accelerate truck-to-rail conversions as the year progresses.
And finally, the pricing environment for our high quality transportation service remains solid, and we continue to experience the same strong pattern we saw in the first quarter.Naturally, we’ll provide a clearer picture on all of our markets next month as we report our second-quarter results.
Overall, we are very optimistic about the future, and we continue to plan and invest accordingly. We remain very confident that volumes will resume growing as the economy rebounds.
Let me now step back for a few minutes, and talk about longer-term dynamics of the transportation marketplace and some of the ongoing changes that we believe are occurring. This is particularly important because of the nature of our business. The amount of capital we deploy, the time that it takes to deploy that capital, particularly in assets like infrastructure and terminals, and then finally the long lives of many of our assets, makes it essential that we think in terms of where our business will be not just in six months or a year, but in five years, ten years, or even longer.
The first change that we are continuing to see is one we’ve discussed before, the changing nature of our international traffic flows.
As you may recall, Norfolk Southern’s total import volume in the first quarter fell by 8,000 loads, while export volume increased by 8,300 loads.As part of this changing international landscape, we saw a decline of 17,000 units in the movement of empty containers back to port locations during the quarter, which accounted for our first quarter international decline. Many of these boxes, which previously moved in empty revenue service, are now being used to support growth in exports. Over half of our international traffic in the first quarter moved over East Coast ports, and we are seeing similar trade patterns continue in the second quarter.When the planned widening of the Panama Canal is completed, it may well accelerate this trend.
Our goal is to be able to handle freight as efficiently and profitably as possible whether it’s entering our network from an East Coast port or a Midwestern gateway via the traditional transcontinental routing. We are strategically positioning our network to be coastally agnostic.
The second set of changes which we now see developing are set against the backdrop of what seems to be pervasively high fuel prices and shipping costs, along with what may be a sustained period of a cheaper dollar. They are the growing strength of U.S. exports, the re-emergence or at least strengthening of North American manufacturing, and a focus on what is being called regional production, the idea that goods should be produced closer to the point of consumption in order to reduce transportation costs. We’ve already seen the resurgence in exports, particularly in commodities, as empty containers on both coasts have now become much more sought after. You’ve probably noticed that some of the container stacks over in Newark, which at one point were in the running for the highest mountain in New Jersey, have now disappeared. How far the concepts of more manufacturing and regionalism progress is anybody’s guess, but they are changes that our company can and should be preparing for.
Another macro change in our environment that has been underway for several years now and continues to gain traction is the growing recognition of our nation’s infrastructure requirements, and what I would argue is the absolute necessity of accelerated investment in rail infrastructure to help us avoid what is clearly a looming transportation crisis.
Everyday, more and more public leaders are recognizing the benefits that rail offers in keeping the economy competitive while reducing highway congestion and environmental degradation.
Policy leaders, and after some hesitation, rail leaders, are now interested in public-private partnerships to enhance rail infrastructure, and as I’ll describe, NS has been an industry leader in showing how these partnerships can be successfully structured with benefits for all of the participants.
The third and final macro change that will affect our industry can be encapsulated in one word – GREEN. Particularly with what will be a constantly increasing focus on carbon emissions, railroads are clearly the greenest form of surface transportation, and to our friends who don’t particularly take to the carbon discussion, we have an equally compelling case in terms of energy independence. Green/energy credentials are resonating even more strongly with public policy leaders and I believe that we can capitalize on those credentials to our, as well as the environment’s advantage.
Well, with all of these changes advancing upon us, let me take my final few minutes to talk about some of our strategies to address them, along with all of the other challenges of running a large, complex, network business.
I’ll divide the discussion into two sets of initiatives, which I tend to think of as external and internal.
First, the external, by which I mean our focus on strengthening and extending our franchise.Railroads, as all of you know, are very much franchise businesses, and at Norfolk Southern, we have been very focused and, I think, very creative on improving ours.
The first initiative is one that you’ve already heard a lot about: the Heartland Corridor
The Heartland Corridor is our rail line from Norfolk, Virginia, to Columbus, Ohio. It is a successful template of what can be done when the private sector and government at various levels put their minds and resources together. Virginia, Ohio, West Virginia, and the federal government are supporting our project to increase the tunnel clearances through the mountains in order to expand the corridor’s capacity. For the first time, double-stacked trains will be able to travel the route. The project is under way, on schedule and, when complete in 2010, will shave 250 miles -- or a day’s journey -- off the trip from the East Coast to the Midwest. This will provide a significant competitive advantage for Norfolk Southern’s customers and for the United States, especially as global trade patterns continue to shift towards East Coast ports and we strive to be coastally agnostic.
One effect of our public-private partnerships and corridor initiatives will be increased economic development opportunities for the communities and states served by our rail lines. One example is the Rickenbacker Intermodal Terminal, which we developed with the Columbus, Ohio, Regional Airport Authority as part of the Heartland Corridor. The adjacent warehouses and distribution center will be Norfolk Southern’s first fully-integrated intermodal logistics park -- and a strong business partner for the region.
Another of our key corridor projects is called the Meridian Speedway which is now nearing completion. This is where, in partnership with Kansas City Southern, we are improving the 320-mile line between Meridian, Mississippi, and Shreveport, Louisiana. This line offers the shortest, fastest and most direct route for freight moving between West Coast ports and the Southeast, again part of our strategy of coastal agnosticism. The Meridian Speedway project was also important in that we developed a model through which we can effectively extend a component of our franchise and invest to strengthen non-NS routes without resorting to a merger.
Last month in the Northeast, we agreed with Pan Am Railways to form “Pan Am Southern,” a joint venture involving more than 400 miles of Pan Am’s lines in New York and New England. The Patriot Corridor, as we call it, will create a faster, higher capacity railroad for Norfolk Southern to serve the markets from Albany to the Boston area and extend the borders of our franchise.Norfolk Southern will gain an extension of our current intermodal haulage service between Albany and Ayer, Massachusetts, and we will gain Boston-region automotive haulage as well.We will invest $140 million, of which $87.5 million will go toward capital improvements over a three-year period.
Norfolk Southern and Pan Am have submitted the transaction to the Surface Transportation Board, and a ruling is expected within four-to-eight months. Closing will occur after that. Construction is expected to begin thereafter and should take fewer than 30 months to complete.
In another corridor development announced last month, we joined with ten New York-based short line railroads in a plan to convert short-haul truck movements to rail. This innovative program -- known as the Empire Link -- allows participating short line railroads to market the excess rail freight capacity on Norfolk Southern’s Southern Tier main line between Binghamton and Silver Springs, New York, as well as on branch lines.
With the escalating price of fuel, the Empire Link is an attractive option for shippers currently trucking freight in New York, Pennsylvania, and New Jersey, part of the regionalism concept I mentioned earlier. The Empire Link provides our New York short line partners with tools and resources to design and offer rail transportation services that are truck-competitive in lanes that are fewer than 500 miles. This initiative represents a creative new way to take advantage of rising transportation prices in a targeted region of our network.
The final, and by far the largest of these initiatives is what we’re calling the Crescent Corridor. The Crescent Corridor will link key markets in the Northeast and New England with producers in the Southeast and Southwest with high-quality truck-competitive intermodal services. The heavy freight flows in this corridor are one of the last not to be penetrated in any meaningful way by rail intermodal. Our share today is less than 5% as compared to a lane like Chicago to North Jersey where ample capacity and high service levels have allowed rail to capture close to 50% of the market.
This Crescent Corridor is expected to yield dramatic results, especially in an environment of rising fuel prices. We calculate that one benefit of the Crescent Corridor is that it will take a million trucks off the severely congested Interstate 81 each year just in its first full phase of completion.
Right now we are developing information to determine specific infrastructure and capacity needs for the entire corridor, and we are talking with the federal and state governments about its significant win-win opportunities. It’s a big project, and my guess is that the total price tag may be north of $2.5 billion. At the appropriate time, we will ask public entities that will benefit from the corridor, such as Pennsylvania, Tennessee, and Alabama, to join us.
We have actually recently began construction on several capacity improvement projects on a key segment of the corridor in Virginia, including double tracking and adding passing track in Front Royal, Allison and Cody. The Commonwealth of Virginia has been visionary in joining Norfolk Southern to fund these upgrades.
In many ways the Crescent Corridor addresses many of the long term trends that I discussed. It clearly addresses the huge capacity problem on I-81 and other interstate highways in the region, along with significantly reducing fuel consumption and carbon and other emissions. As I mentioned before, the Commonwealth of Virginia has already committed $40 million in public funding to get the project underway, and almost every state and federal legislator from the region that we talk to is interested in a public-private partnership to provide project funding. Finally, it positions our company to capture a significant share of growing regional domestic freight traffic in the corridor as well as providing enhanced service for international containers that want to flow into our service territory either over the Meridian Speedway or through East Coast Ports. It’s a big, exciting project!
Finally, let me quickly talk about some of the more internally-driven initiatives we are doing to strategically position our company for the future.
We have lots of initiatives underway in a number of areas, but I want to mention two in particular.
The first is environmental awareness, where we are making significant headway. We have a wide range of corporate sustainability initiatives underway. These include developing the public-private partnerships discussed earlier; focusing on safety to benefit employees and communities, minimizing the use of natural resources; and reducing, reusing, and finding alternatives for commonly used railroad materials.
In addition, our national advertising campaign highlights the environmental benefits of rail, and we have a new sustainability Web site to help spread the word. The Green Machine, our online carbon calculator, shows shippers how they can reduce emissions into the atmosphere as rail becomes a larger component of their supply chains. We are the first railroad member of the Society, Environment, Economy, or “S.E.E Change” initiative of the Business Roundtable. Corporate Responsibility Officer Magazine named us to its list of 100 best environmental citizens for 2008. And, we were the first railroad to appoint a corporate sustainability officer.
The environmental shift in the way we do business is something we are proud of, and we view it as a true competitive advantage.
The other, even more important area of internal focus is what we’re calling Track 2012. Although you’ll hear more about this initiative when we formally announce it in the third quarter, it’s an ambitious five-year program with stretch goals for safety, service, operating, and financial performance.We’ve also kicked off a new innovations team that is encouraging employees at all levels and locations to find creative ways, big and small, to improve the company. It is important to note that everything we do, we try to do against the backdrop of what we call our SPIRIT values, which stands for Safety, Performance, Integrity, Respect, Innovation, and Teamwork. Track 2012 will provide the roadmap and be the focal point for our company to continuously improve over the next five years.
To conclude, we are working in a lot of different areas to keep our business moving on the fast track as we strategically navigate a changing landscape. We set high standards, we strive for continuous improvement, and we never are content. We know that superior service is the key to growing volumes and revenues, and delivering on our promise to stockholders. We plan for a future that we have every reason to believe is bright for our company and our industry.
Thanks for your attention, and I’d be glad to take your questions. |
