Remarks by:
Donald W. Seale
Executive Vice President and Chief Marketing Officer
Norfolk Southern Corporation
Thank you Wick and good morning.
During the 1st quarter, we continued to deal with the effects of a slower overall economy led by softness in housing related commodities and the automotive market.
In spite of these challenges, I am pleased to report that we generated record revenue in the quarter of $2.5 billion, up $253 million, or 11% over the first quarter of 2007.
Merchandise revenue was up $124 million in the quarter as new records were set in Agriculture and Chemicals.
Coal revenue increased by $105 million, or 19%, which also represented a new record high.
And Intermodal revenue was up $24 million, or 5%, despite excess trucking capacity and shifting global trade patterns.
The two primary drivers of the revenue increase across our markets in the first quarter were improved yield and fuel revenue. Of the total increase of $253 million in the quarter, a little more than half of the gain came from pure pricing, with the balance attributed to higher fuel revenue.
Revenue Per Unit 1st Quarter 2008 vs 2007
With respect to yield, as shown in slide 3, revenue per unit reached an all time high, up $166, or 14% over the same period last year. This was our 22nd consecutive quarter of year-over-year RPU growth, and each of our major groups except Automotive reached an all time high.
Continued strength in pure pricing, which averaged 7% for the quarter, combined with higher fuel revenue generated these record results.
NS Volume 1st Quarter 2008 vs 2007
Turning to volume on slide 4, you will note that we handled 1.8 million units in the quarter which was 2% below last year, as weakened economic conditions continue to suppress rail freight transportation. Increases in Agriculture, Coal and Metals traffic could not offset losses in our consumer driven and manufacturing related sectors.
It is also worth noting that volume gains were posted in the first two months of the quarter, which were offset in March as one less working day and the timing of the Easter holiday impacted loadings.
Finally, the continued weakness in the U.S. dollar helped drive volume gains in export products such as coal, grain and machinery. Total export volumes surged by 14% in the quarter while total import volumes declined by 7%.
Intermodal Variance Analysis 1st Quarter 2008 vs 2007
Now turning to our individual markets on slide 5, Intermodal revenue reached $486 million for the quarter, up $24 million, or 5%, as higher average revenue per unit overcame lower traffic volume.
Record revenue per unit of $656 was driven by a more favorable traffic mix, improved pricing, and fuel surcharge revenue. Higher-rated IMC, LTL, and Triple Crown traffic grew, while volumes in lower revenue per unit ocean and domestic containers declined. Also, we handled fewer revenue empties for private equipment owners in the domestic market. During the quarter, strong export demand converted empty ocean container movements to loads which also helped boost average RPU. And Triple Crown benefited from additional longer-haul traffic.
Intermodal International Volume
Within the market segments, as depicted on slide 6, our International volume fell 5% for the quarter 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 – European trade, and eliminating less profitable inland transportation service to certain markets in the U.S. In cases such as Maersk Lines and others, long haul transcontinental markets have been replaced with all water service to East Coast ports. As a result of this trend, our total volumes associated with West Coast ports declined 16% in the quarter, while volumes through East Coast ports increased by 8%.
Intermodal East Coast & West Coast Port Volume
Slide 7 illustrates the changing nature of our international flows and the trends just discussed.
For the quarter, total import volume 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 1st quarter. Many of these boxes, which previously moved in empty revenue service are now being used to support growth in exports.
And, as you can see from this slide, over half of our international traffic in the 1st quarter moved over East Coast ports.
Intermodal Volume 1st Quarter 2008 vs 2007
As depicted on slide 8, our total domestic and truckload volume decreased 5% for the quarter, reflecting a softer economy and the loss of Schneider National’s business into the Southeast.
Intermodal Marketing Company volumes grew 2%, 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 was down 2% as LTL conversions from the highway partially offset softer parcel and empty trailer repositioning volumes.
And Triple Crown was up 2% in the quarter due to expansion of our fleet and improved rail service over our network.
With respect to Intermodal demand during the quarter and ahead, there are clear signs of escalating demand across our network, and in particular within the eastern half of our market. Trucking continues to grow more expensive, and as we introduce new Intermodal lanes and products and our service performance reaches new highs, we are seeing additional opportunity.
UPS Service Award
And with respect to service, as shown in slide 9 our strong performance is being recognized by our customers. During the quarter, UPS recognized Norfolk Southern for our commitment and dedication to providing consistent and reliable service throughout our network. UPS requires strong service performance in support of its customers, and we are proud to provide that level of service to UPS and to be recognized accordingly.
Merchandise Variance Analysis 1st Quarter 2008 vs 2007
Turning to slide 10, our Merchandise business sector reached its second highest quarter ever at $1.35 billion, up $124 million, or 10% over the same period in 2007.
Volume fell 3% as lower auto production and continued weakness in manufacturing impacted shipments.
Revenue per unit reached a record $2,047, up $240, or 13% over 1st quarter 2007. Rate increases and higher fuel revenue drove this performance.
Agriculture 1st Quarter 2008 vs 2007
Within the Merchandise market segments, as shown on slide 11, Agriculture’s revenue reached $299 million, up $58 million, or 24% over 1st quarter 2007. The 4% volume gain was driven by 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.
Metals/Construction 1st Quarter 2008 vs 2007
Metals and Construction revenue, as shown on slide 12, was up 11% or $30 million for the quarter. Higher volume from new and increased business in metals, machinery, and aggregates offset declines in housing related commodities. New coil steel business and increased inter-mill volumes helped offset weaker demand from the Detroit 3 automotive manufacturers.
Aggregates shipments increased as our electrical utility scrubber stone network continues to ramp up. And growth in machinery volume was driven by export shipments from the Midwest over the ports of Baltimore and Savannah.
Chemicals 1st Quarter 2008 vs 2007
Turning to the next slide, Chemicals revenue reached a record $305 million, up $31 million, despite a 3% decline in volume. Continued pricing improvement and higher fuel drove the increase in revenue.
Volume declines were driven by lower plastics and feedstock carloads linked to housing construction declines. In addition, propane carloads dropped due to lower seasonal demand.
Paper 1st Quarter 2008 vs 2007
As shown in slide 14, Paper revenue of $215 million for the quarter exceeded 1st quarter 2007 by $4 million, or 1%. Volume decreases were driven by the decline in housing related markets, lower volumes of paper, and delayed increases in waste shipments to selected disposal sites due to EPA and permitting issues. These declines were partially offset by stronger export pulpboard shipments.
Automotive 1st Quarter 2008 vs 2007
And Automotive revenue reached $228 million for the quarter, flat versus the same period last year despite a 10% decline in volume. Rate increases and better fuel coverage applied in the second half of 2007 and re-negotiation of a major parts contract in the 1st quarter 2008 drove the improvement in revenue. Volume was negatively impacted by a reduction in North American production to 3.6 million units, which was down 9% compared to 1st quarter 2007, coupled with the impact of the American Axle strike.
Increases associated with BMW traffic in the U.S. markets, along with developing export vehicles from domestic producers to Europe partially offset these declines.
Toyota Performance Award
Despite the challenges in the current automotive market, as noted in slide 16, we continue to maintain the highest level of service to our customers which bodes well for business ahead. During the quarter, Toyota , which holds its carriers to rigorous standards of performance, awarded Norfolk Southern with its 2007 President's Award for overall logistics excellence among rail carriers, its highest recognition given to a logistics provider. The award is based on overall customer service, on-time performance and quality. We are pleased that this is the fifth President’s award that has been presented to Norfolk Southern since Toyota implemented its program in 1996, and we are proud to be a Toyota preferred carrier.
Coal Variance Analysis 1st Quarter 2008 vs 2007
Now, concluding with our strongest performance for the quarter, as shown on slide 17, Coal revenue reached $662 million, up 19% over 1st quarter 2007.
Revenue per unit increased $225 per car, or 17% due primarily to pricing gains and fuel surcharge revenue.
Volume increased by 2% versus the same period last year, driven by strong export demand. Reductions in the other market sectors stemmed primarily from coal availability and sourcing changes.
Coal Volume 1st Quarter 2008 vs 2007
Looking at the individual coal markets, on the next slide, export volume was up 64% over 1st quarter 2007, and reached its highest carload volume since the 2nd quarter of 1998. Carloads through Lamberts Point increased by 16,000 units, or 60%. 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 are driving this surge in demand.
With respect to domestic coal, utility volume in the northern half of our service network increased by 1,700 carloads, or 1%. During the quarter, longer-haul, higher-rated spot moves were handled from the West due to higher demand and tight coal supply in our service territory. But these gains were not enough to offset an 11,000 carload, or 7% decline to southern based utilities.
Volume in our domestic metallurgical coal market was 3% below 1st quarter 2007. Coal supply issues due in part to the strong export market reduced domestic metallurgical volume, while a coal sourcing change drove the decline in coke shipments. New shipments of domestic and import coke helped to offset part of this decline.
And industrial coal volume fell 20%, driven by the shutdown of the Wabash Indiana Mine and shipment delays due to coal availability.
Looking Ahead
Looking ahead, for the remaining three quarters of 2008, we will continue to face general softness in the housing and automotive sectors of the economy, along with a lot of puts and takes in other sectors.
Despite this uncertainty, 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. Coal supply at NS served mines will improve for the remaining three quarters of 2008 as the reopening of Consol’s Buchanan mine, the start of Massey’s new Mammoth operation this month near Charleston, West Virginia, and Trinity Coal’s new mine, in combination, will generate an additional 6.5 million tons of coal over the next three quarters versus the corresponding period of 2007.
And in Intermodal and Merchandise, project growth is progressing as planned, which will bolster volumes over the remainder of the year. Stronger exports throughout both sectors will supplement these gains. And, with higher fuel prices combined with very solid service performance across our rail network, we believe truck-to-rail conversions should accelerate as the year progresses.
And finally, the pricing environment for our high quality transportation service remains solid, and we remain on track to realize a minimum 4% pure pricing improvement for the year as a whole.
Thank you, and now Jim Squires will present our financial report.
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