Remarks by:
Donald W. Seale
Executive Vice President and Chief Marketing Officer
Norfolk Southern Corporation
Railway Operating Revenue Third Quarter 2008 vs 2007
Good morning,
Despite ongoing weakness in the automotive, housing and retail sectors of the economy, third quarter revenue reached a new record of $2.9 billion, up $541 million, or 23% over the third quarter of 2007. The primary drivers for these record results were improved pricing, higher fuel revenue, which included a favorable lag effect in crude oil prices, and solid transportation service across our diversified business base.
Within the major business sectors, Merchandise revenue increased by $167 million, or 13%, with record revenues attained by Agriculture, Metals & Construction, Paper and Chemicals.
Coal revenue was $298 million higher than last year, an increase of 52% and a new quarterly record. And, revenues were up $76 million or 16% for Intermodal, also a new quarterly record.
Revenue Per Unit Third Quarter 2008 vs 2007
As noted in slide 3, revenue per unit was an all time high as well, reaching $1,527 for the quarter as each of our business groups achieved record performance. We have now produced 6 consecutive years of revenue per unit growth.
Of the 24% RPU growth in the quarter, approximately 60% was due to higher fuel surcharge revenue. Strong re-pricing activity and higher contract escalators accounted for the remaining RPU growth, partially offset by a negative mix effect of $25 million due to higher volumes of Coal versus lower volumes of higher RPU Merchandise traffic. And Coal’s revenue per unit for the quarter was supplemented by a $22 million dollar gain due to a contract volume shortfall payment and increased billing as a result of our new coal inventory management system.
Obviously length of haul and mix of commodities have an implication for revenue per unit as well. For the quarter, revenue ton-miles grew 2.3% compared with a 1% decline in volume, reflecting higher shipments of longer haul bulk traffic which, as you know, contributes to overall pricing yield.
Solid and consistent service across our network is also a driver of our capability to improve price and yield. In that regard, during September we completed the tabulation of our 2008 Customer Survey. This latest survey showed a 22% improvement in our customers’ perception of Norfolk Southern’s overall value for the dollar, based on higher marks for service, ease of doing business, and value of our service versus trucks.
These improved customer service indicators tell us clearly that the value proposition for our service performance continues to move higher in today’s market place.
NS Volume Third Quarter 2008 vs 2007
Now turning to volume on slide 4, the weakened domestic economy continues to impact our shipments, which fell 1% in the third quarter. The performance of the international economy provided some offsets as our overall export volume grew 11%, offsetting a 13% decline in import business.
Agricultural shipments set another quarterly record, while Metals traffic also posted a solid gain. Intermodal volumes improved modestly year-over-year as increased domestic traffic offset weaker international volume.
And Coal tonnage reached a quarterly record due to robust shipments to the export and domestic metallurgical markets.
Coal Variance Analysis Third Quarter 2008 vs 2007
Transitioning to the specific business sectors, as shown on slide 5, Coal revenue reached $876 million, up 52% over the third quarter of 2007, and 13% higher than the previous record set in the second quarter.
Revenue per unit increased by $588 per car, or 43% due primarily to pricing gains, higher fuel related revenue, and the one time adjustment of $22 million in the quarter that I reviewed a moment ago.
And volume increased by 6% as we reached our highest tonnage quarter ever at 49.7 million tons, and second highest carload quarter as well.
Coal Volume Third Quarter 2008 vs 2007
Looking at the individual coal markets, as shown on slide 6, export carloadings were up 53% over third quarter 2007. Global coking coal supply continues to be constrained by Australia’s port and rail capacity problems. In addition, China’s near record level coke prices have kept coal demand high in Europe.
As a result, volume through Baltimore increased by 131%, and Lamberts Point volume increased 40%. Carloadings through the Lamberts Point coal piers exceeded 2007 year-end volume on September 6th and is now almost 12% higher than full 2007 year-end volumes.
As I presented to you last quarter, despite these high volumes, additional capacity exists at our Pier 6 terminal in Norfolk to double the current throughput if coal supply and demand should reach that level.
Coal Volume Third Quarter 2008 vs 2007
Turning to slide 7, third quarter utility volume was flat compared to the same period in 2007. Utility volume in the northern half of our service territory was up 2% despite supply constraints in the Central Appalachian coal fields. Longer haul Colorado coal was handled to several eastern utilities, supplementing tight supply from Central App origins.
Third quarter utility growth was further limited by coal production problems at several mines in the Monongahela district. Volumes were also impacted as higher export demand reduced coal availability for domestic customers.
Looking at the current stockpile situation, coal stockpiles at our southern utilities are below target levels going into the winter season, while stockpiles in our northern service territory are approaching normal targeted levels for this time of the year.
Finally, our domestic met, coke & iron ore volume was up 6% due to the start-up of production at the recently expanded Haverhill, Ohio coke plant, and increased coal shipments to Clairton, Pennsylvania.
And industrial coal volume declined by 4% due principally to weaker demand, and strong competition from exports for available coal supply.
Coal Transportation Productivity Improvements
Turning to slide 8, I will take a moment to comment on some key productivity improvements within our coal network.
As pictured here, we continue to replace older, lower capacity coal cars with new composite, high capacity equipment. As a result of this ongoing transition, we were able to reach a new payload record of 110.2 tons per car during the quarter and a 6% gain in tonnage with 5.5% more carloads.
We also continue to increase the use of distributed power on heavy tonnage coal trains which reduces over-the-road transit times and eliminates the need for pusher crews and power.
And, we are realizing added productivity improvements with 600 cars now equipped with ECP brakes. This braking system allows heavy coal trains to operate at normal track speeds for longer periods of time, which in turn reduces cycle times.
These types of productivity initiatives along with the scheduling of our coal network service have resulted in a 9% improvement in transit times across all major coal lanes from January through September, on top of a 23% improvement realized in 2007.
Clearly, these faster transit times when coal volumes are at record high levels are indicative of a fluid rail network with capacity for growth and improved customer service ahead.
Intermodal Variance Analysis Third Quarter 2008 vs 2007
Now turning to Intermodal, as shown on slide 9, Intermodal revenue reached $560 million for the quarter, up $76 million, or 16%, while volume was flat versus third quarter 2007. Strong domestic volume offset losses in our remaining lines of business.
Record revenue per unit of $708 was driven by increased fuel surcharge revenue and improved pricing. In addition, a more favorable traffic mix contributed to the gains as higher rated IMC, and LTL volume increased, while volumes in lower revenue per unit ocean containers declined. Lower rated international empty revenue movements were also down 17,000 loads for the quarter.
Intermodal Volume Third Quarter 2008 vs 2007
Looking at the market segments as depicted on slide 10, domestic Intermodal volume increased by 18%. Within this market, local, NS-direct volumes were up 26% as highway conversions accelerated.
Early Crescent Corridor traffic gains and improved services contributed to this local growth, which in total represented three-quarters of the overall domestic unit increase. As I have previously indicated to you, our local conversion strategy is focused on both third party shippers and beneficial owners in the heavy volume truckload market east of the Mississippi River.
More than ever, beneficial owners in this market are reviewing ways to reduce their carbon footprint while realizing the efficiency of Intermodal versus truckload service.
LTL volume also saw a substantial gain in the quarter and was up 25%, due primarily to new business within our local network. This gain partially offset a decline in UPS volume within the premium segment, which was down 2% for the quarter.
Finally, Triple Crown volume declined 5%, due to significant cuts in auto production.
Merchandise Variance Analysis Third Quarter 2008 vs 2007
Now turning to slide 11, revenue for our Merchandise business sector reached $1.46 billion, up $167 million, or 13% over third quarter 2007.
Improved pricing and higher fuel revenue resulted in record revenue per car of $2,232 which is an increase of $366, or 20% over third quarter 2007.
Volume declined by 6%, driven by a 30% reduction in Automotive volume and continued softness in the manufacturing and housing sectors of the economy.
Merchandise Revenue & Volume Third Quarter 2008 vs 2007
Looking at our individual Merchandise markets on Slide 12, Agricultural products continued to produce revenue and volume records. Ethanol led growth in this sector, improving 55% for the quarter based on higher volumes to Southeastern destinations. Distillers dried grains (DDGs), a derivative of ethanol, grew 41% in the quarter. We now serve 17 ethanol plants and 45 active ethanol terminals in our region, with 3 additional plants, and 4 terminals scheduled to open over the next few months.
Our Metals & Construction sector reached record revenue as a 5% volume gain in our Metals business effectively offset a 2% decline in Construction materials.
This reduction was partially offset by a 14% gain in limestone shipments to NS served coal-fired power plants. We now serve 18 power plants that are equipped with scrubber technology that will require scrubber stone going forward.
The improvement in Metals volume was driven by a 23% increase in our scrap metals business. Strong global demand resulted in increased East Coast export volumes of this commodity.
Our Paper business continues to feel the impact of the projected 30% decline in U.S. housing starts. Lumber volume fell 21% below third quarter 2007. Printing paper volume declined due to a reduction in imports and kaolin volume continues to be impacted by paper mill shutdowns over the past year as well as weak demand for coated paper. These volume declines were offset somewhat by a gain in pulpboard due to increased export activity.
And record Chemicals revenue was achieved despite a 5% decline in volume as increased petroleum volume could not offset declines in the other chemicals markets. Volumes were impacted by a plant closure in Evans City, Alabama and production problems at another Alabama plant which jointly accounted for a 2,000 carload decline.
Finally, we estimate the impact of Hurricane Ike to be over 1,000 cars in the third quarter, with more than 800 of those shipments expected to be made up in the fourth quarter.
Automotive Results Third Quarter 2008 vs 2007
Turning to Automotive on slide 13, we see the impact of continued production cutbacks in this sector.
This unfavorable trend is expected to continue in the fourth quarter and our volumes will be further impacted by the closure of GM Doraville at the end of September and the indefinite idling of the Chrysler St. Louis South plant in October. GM also recently announced the closure of the Janesville, Wisconsin assembly plant along with the Moraine, Ohio assembly plant on Dec 23, 2008, two years earlier than previously announced.
On a positive note, beginning in the fourth quarter Toyota will begin producing the new Venza at their Georgetown, Kentucky plant and Honda will begin Civic production at their new Greensburg, Indiana plant. We should begin handling rail shipments by the end of the year or early 2009.
Looking Ahead
In conclusion, faced with the current economic backdrop, we are somewhat cautious going forward. As we’ve stated many times, our strong and balanced portfolio of business should continue to help us generate solid results during this prolonged downturn.
With this said, we expect to see further auto plant closures and manufacturing weakness along our Merchandise network. Much of these losses will be offset by project growth in scrubber stone, ethanol and biodiesel.
For Intermodal, we expect to see continued growth in our domestic market as we collaborate with truckload carriers, beneficial owners and third parties to convert traffic from the road to rail. These gains should more than offset weakness in import business.
We also expect our coal business to remain strong due to worldwide demand for U.S. coal. And, domestic metallurgical volume growth will be led by business from the expanded Haverhill coke plant.
And finally, we expect our service levels and overall value in the market place to continue to support pricing improvement through the next quarter and the coming year.
Thank you for your attention and I will now turn the program over to Jim for our financial report.
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