Remarks by:
James A. Squires
Executive Vice President Finance and Chief Financial Officer
Norfolk Southern Corporation
 Presentation Slides
Good morning. My name is Jim Squires and I am the Chief Financial Officer of Norfolk Southern Corporation. Norfolk Southern Corporation is a New York Stock Exchange-listed freight railroad with 2007 sales of $9.4 billion and a market capitalization of $25 billion. Our headquarters are in Norfolk, Virginia, a city on the Atlantic coast of the United States about 300 kilometers south of Washington, DC. I am delighted to be able to introduce our company to all of you at this conference.
Norfolk Southern System Map
Norfolk Southern’s railroad lines are shown on this map. We own and operate 34,000 kilometers of rail lines in the eastern and central United States, serving most major cities, manufacturing regions, and ports. We have the most extensive intermodal network in the eastern U.S., and we are North America’s largest rail transporter of metals and automotive products. Norfolk Southern conducts only freight rail operations, although we do host passenger trains operated by others in some locations.
U.S. Freight Transportation Environment
Let me begin with an overview of the freight transportation environment in the United States.
Railroads’ principal competition is trucks. In recent years, growing freight volumes have strained the United States’ highway network, leading to traffic congestion and delays. At the same time, truck driver shortages and rising fuel prices have increased trucking companies’ costs. As a result, more and more freight has been moving “intermodally” from truck to railroad, which is a more fuel-efficient mode of transportation.
In addition to intermodal trailers and containers, Norfolk Southern transports large quantities of coal, grain, and metals. These bulk commodities are currently benefiting from strong global demand and we are experiencing record business levels.
Lastly, Norfolk Southern, like other freight railroads in the U.S., carries a variety of general merchandise cargoes, such as automobiles, forest products, paper, and chemicals. Demand for some of these products is tied to consumer activity and housing, both of which are currently weak in the U.S. Accordingly, Norfolk Southern’s traffic volumes in these groups is down in recent periods.
Diversified Franchise
Percent of Total 2007 Revenues
This chart shows our 2007 revenue divided into seven major groups: coal, agricultural products, metals, paper, which includes forest products, chemicals, automobiles, and intermodal containers and trailers. As you can see, coal had the largest share of our revenue last year, at 25%, while intermodal was second, at 20%. Other businesses were collectively just over half of our total revenue. We believe we have a well-balanced and diversified franchise, with exposure to many different sectors of the U.S. and global economy.
Diversified Franchise
Intermodal – 2007 Milestones
Next I would like next to present a more detailed review of our various businesses, starting with Intermodal. The chart on this slide gives the breakdown of railcar, or unit, volumes on our railroad in 2007. We carried 3.1 million intermodal containers and trailers, representing 41% of our total units. About half of this intermodal business was international containers for customers like K Line and NYK, while the other half was for U.S. domestic customers like JB Hunt and UPS. Although Intermodal volumes were down last year compared to the year before, looking back over several years, Intermodal has been our fastest growing business. Volumes have increased at a compound annual rate of nearly 6% since 2001, which is rapid growth for rail shipments.
Double-Stack Intermodal Train
This is a photograph of a Norfolk Southern Intermodal train. You can see that the containers are stacked two-high for maximum efficiency. These so-called “double-stack” trains have allowed U.S. freight railroads, including Norfolk Southern, to divert substantial quantities of freight from the trucks.
Intermodal Lift Operation
This is a photograph of an intermodal lift operator loading containers onto a railroad flat car. The transfer from truck to rail typically takes place at a terminal located alongside our rail network.
Rickenbacker Intermodal Terminal
In recent years, Norfolk Southern has made substantial investments in new intermodal terminals. In March of this year, we opened a new terminal in Columbus, Ohio, shown here. Rickenbacker Terminal is a $70 million facility and part of one of the largest logistics complexes in the United States. It has the capacity to handle more than 250,000 intermodal containers and trailers annually.
Intermodal Variance Analysis
Second Quarter 2008 vs. 2007
Turning to our most recent quarterly results, Intermodal revenue was a record $532 million, up 11% versus second quarter 2007, as shown here in green. As you can see in the blue bar, volume declined 3%, continuing the trend of last year. However, revenue per unit, shown in gold, was up 14%. This increase was due primarily to higher fuel surcharges which we collect based on the price of oil and core pricing gains.
Diversified Franchise
Coal – 2007 Milestones
Turning to our coal markets, in 2007, coal was 22% of Norfolk Southern’s total carloads and 25% of revenue. Three-quarters of our coal shipments move to electric utilities, with the remainder being for export, U.S. domestic metallurgical uses, and industry. Our utility coal volumes are dependent on electricity demand, and thus tend to rise and fall in response to weather, electricity usage and customer stockpiles. Export coal moving on our railroad is predominantly metallurgical coal. Demand for export coal depends on the level of overseas steel manufacturing, as well as supply from competing regions such as Australia and the strength of the U.S. dollar.
Coal Train
This is a photo of a Norfolk Southern fully loaded coal train on the Keystone Connector in Pennsylvania. The train is moving coal to utility customers who will burn it to produce electricity. Coal is used to generate almost half of all electricity produced in the United States.
Coal Variance Analysis
Second Quarter 2008 vs. 2007
Turning to our second quarter 2008 results, coal revenue of $775 million was up 34% over second quarter 2007. The 3% gain in volume, shown in blue, was due to increased export coal and higher utility volumes. Revenue per car, shown in gold, was up 30% due to renegotiated contracts, rate escalation in existing contracts, and higher fuel surcharge revenue.
Lambert’s Point Coal Terminal
Here is an aerial photo of Lambert’s Point Coal Terminal. In the foreground, you can see all the cars queued up in the yard for loading. In the second quarter 2008, volume at this terminal increased 56%. Infrastructure problems in Australia, the diversion of Chinese metallurgical coal to the Chinese domestic market, and the weak dollar are all propelling growth.
Diversified Franchise
Agriculture, Consumer & Gov’t. – 2007 Milestones
Turning to agriculture, in 2007, agriculture comprised 8% of total carloadings and 11% of revenue. Norfolk Southern’s agriculture business serves customers producing and receiving corn, wheat, soybeans, and other products. In 2007, agriculture revenue was up $53 million, or 5%, compared to 2006, as shipments increased 1%. Pricing gains, along with strong corn shipments, were the reason for the growth. New businesses, like ethanol and bio-diesel also contributed.
Ethanol Train
And here is a photo of a train hauling ethanol in tank cars around Horseshoe Curve, one of the most famous railroad lines in the United States. A 220 degree arc in the Allegheny Mountains, Horseshoe Curve got its name because of its distinctive “U” shape that looks like a horse’s shoe and has been in continuous use since 1854 .
Agriculture Revenue
Second Quarter 2008 vs. 2007
In the second quarter this year, Norfolk Southern reported record agricultural revenue, up 28% versus the second quarter 2007, as shown in the purple slice of this pie chart. This growth resulted from, among other things, a 5% increase in volumes, including ethanol shipments, which were up 20%. Export corn and feed shipments and various new businesses also contributed to the gains.
Louis Dreyfus Soybean Processing and
Bio-Diesel Plant in Claypool, Indiana
Here is an example of a project designed to tap the emerging “Agrifuels” market: a new soybean processing and biodiesel plant in Claypool, Indiana. This facility opened in late 2007 and began producing bio-diesel fuel in early February 2008. We expect to handle a large number of carloads of new business from the facility in the future.
Diversified Franchise
Metals & Construction – 2007 Milestones
In 2007, our metals and construction business was 10% of Norfolk Southern’s total carloads and 12% of revenue. About a quarter of the shipments in this group were coil steel, with another quarter consisting of materials like sand and gravel. Metals shipments have been on the rise, but the other side of this business, construction materials, saw volumes fall due to continued softness in the U. S. housing sector.
Coil Steel Being Transported
Coil steel is used to manufacture automobiles, building materials and many other products. Here we see coil steel loaded into freight cars ready for rail transport.
Metals and Construction Revenue
Second Quarter 2008 vs. 2007
Metals and construction revenue grew 18% in the second quarter 2008, from strong global demand driving higher export scrap metal and domestic steel demand. Increases in metals revenue offset declines in construction.
Scrap Metal Shipping Locations on NS
Scrap metal shipments have been among Norfolk Southern’s fastest growing markets, with volumes increasing nearly 50% in the last six years. In fact, Norfolk Southern is one of the largest handlers of recyclables in the United States, serving hundreds of locations as shown on this map. Scrap metals move via railroad from collection and processing facilities to more than 35 steel mills, foundries, and aluminum smelters served by Norfolk Southern.
Diversified Franchise
Paper, Clay & Forest – 2007 Milestones
Paper, clay, and forest product shipments made up 6% of total shipments and 9% of total revenue in 2007. This group includes products like lumber and wood that are closely tied to the housing industry. Not surprisingly, these products have been under pressure in recent periods due to the U.S. housing market’s continuing weakness. Norfolk Southern has also faced increased truck competition for paper shipments which can be transported by truck or rail.
Forest Products
This is a photograph of a train loaded with logs that will be converted into treated landscape timbers to be sold at local retailers for customers to use in gardens.
Paper, Clay and Forest Products Revenue
Second Quarter 2008 vs. 2007
The weak U.S. housing market continued to pressure our paper and forest products business in the second quarter of this year. Revenue was up 7% thanks to revenue per car 14% above last year, while a 25% decline in lumber and construction shipments drove an overall volume decline of 6%.
Diversified Franchise
Chemicals – 2007 Milestones
Here’s a look at our chemicals business in 2007. Major products include industrial chemicals – the building blocks of countless manufactured products – petroleum products, and plastics. Chemicals contributed 6% of shipments and 12% of total revenue in 2007, and in the second quarter of 2008 we recorded our 20th consecutive quarter of year-over-year revenue gains.
Specialized Chemicals Transports
This is a photo of a train pulling tank cars across a bridge in Maryland. Chemicals shipments often move in very specialized, customer-owned equipment. Railroads are the safest way to transport these sometimes hazardous commodities.
Chemicals Revenue
Second Quarter 2008 vs. 2007
Chemicals revenue in the second quarter of 2008 was up 8% despite volume declines. Losses resulting from chemical plant closures accounted for 25% of the decline. Lower demand for construction and paving materials also contributed.
Diversified Franchise
Automotive – 2007 Milestones
Turning to our autos business, U.S. auto manufacturers have spent the last several years rationalizing capacity, and Norfolk Southern’s volumes – in particular our automobile parts shipments – have felt the effects. Norfolk Southern remains the largest rail shipper of automotive products in North America. Thirteen of the last 23 new automobile assembly plants in the U.S. chose to locate along Norfolk Southern’s lines. Our autos business contributed 7% of volume and 10% of total revenue in 2007.
Japanese Auto Assembly Plants
These are the Japanese auto assembly plants on our lines, which include Toyota, Honda, Subaru, and Mitsubishi. Last year, Norfolk Southern assisted Toyota with a $230 million expansion of its manufacturing facility at Lafayette, Indiana.
Toyota Auto Plant
This photograph was taken at the Toyota plant in Georgetown, Kentucky. You can see the automobile being loaded into specialized railcars which are used to safely transport finished vehicles.
Auto Rail Transports
This is a photo of an auto train loaded with finished vehicles bound for destination. The rail cars in which the automobiles are transported are called “auto racks.”
Automotive Revenue
Second Quarter 2008 vs. 2007
The transitioning of the U.S. automotive industry continues to have a negative impact on our results. During the second quarter of 2008, automotive volumes fell by 21% while revenue declined by 11%. Volume was hurt by a 15% reduction in North American light vehicle production.
Toyota President’s Award
Earlier this year, Toyota, which holds its suppliers to rigorous performance standards, awarded Norfolk Southern its 2007 President's Award for overall logistics excellence among rail carriers. This is Toyota’s highest award given to a logistics provider. The award is based on overall customer service, on-time performance, and quality. We are very pleased that this is the fifth President’s award Toyota has awarded Norfolk Southern since the program began in 1996, and we are extremely proud to be a Toyota preferred carrier.
Looking Ahead
As we look ahead, we expect a continuing challenge from the housing and automotive sectors. Housing’s effects on Intermodal and merchandise volumes are widespread, and our Automotive business will be a challenge for some time to come.
On the positive side, we expect further volume and revenue gains in coal, agricultural products, metals, and domestic intermodal shipments. Demand for export coal is projected to be especially strong. We also expect the favorable pricing environment for our high quality transportation service to continue into the foreseeable future. We experienced core price increases of 7% and 9%, respectively, in the first two quarters of the year and we expect a similar range of pricing yield over the final two quarters of the year.
Strategy for the Future
Let me conclude with a few comments on our long-term vision. As I started out saying, we believe one of Norfolk Southern’s strengths is a well-balanced and diversified franchise. The breadth of this franchise helps reduce exposure to cyclical downturns. We are thankful for that in today’s economic environment. However, we are also looking beyond the soft U.S. economy to growth opportunities throughout our franchise. Thus, the basic elements of our business strategy – shown on this slide – remain the same. Our spending plans support this strategy through investments in replacement of our assets and growth. As always, we will focus on improvement in our operating margin from a combination of top-line growth and cost discipline. Our aim now and in the future is to produce rising free cash flow and shareholder distributions.
Thank you very much, and I will now take your questions.
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