Third Quarter Earnings Presentation
Norfolk, VA - October 22, 2008
Questions and Answers
(Question) John Barnes, BB&T Capital Markets. Hey, good morning, guys. You first, Don, in looking ahead as you discuss the various commodity types, you talked about some of the new production ramping up on the auto side. But you did talk about just weakness in automotive. Is there enough of an offset on some of this new business development coming on to the Norfolk Southern rail to offset the other weakness, or is the other weakness with the Big Three just too much to overcome at this point, and therefore auto is going to just be weak for the foreseeable future?
(Mr. Seale) Good morning, John. Certainly across all of our business – as Wick mentioned the diversity of our business base – we’ll see puts and takes. But we will see volume somewhere around the level that we saw in the third quarter going forward, in our view. With respect to automotive itself, the new production that I mentioned with Toyota and Honda, and a third production shift for Honda that will favor us but that I didn’t go into detail on, will help us offset some of the plant closures, but it will not overcome the overall effect of those plant closures.
(Question) More specifically in terms of the balance of your pricing gains and the volume levels – we’ve obviously seen the rail sector as a whole has experienced some decline in total carloads over the last couple of years. You’ve been feeling more of a freight recession between rail and trucks. They’ve been feeling more of a freight recession than the actual economy showed for a couple of years now. At what point does volume begin to dictate what you can do on price? Legacy contracts notwithstanding, that type of thing. At what point would you see enough of a decline in carloads where pricing gains would be much tougher to come by?
(Mr. Seale) At this point we continue to see a pricing environment for our service that continues to improve, and the value of our service in the marketplace continues to move up. We don’t see any significant change in our price position going forward. I mentioned our domestic intermodal conversions were up 18% in the quarter, 26% up within our local network, and those are being done in a collaborative fashion with our motor carriers, IMC, and beneficial owner partners. And that tells us the value of what we’re offering vis-à-vis the motor carriers, where as you well know, most of the intercity freight in this country still dwells. There’s a large opportunity for continued upward pricing as well as conversion of freight from road to rail.
(Question) Okay. Very good. One question on wages and compensation. I just want to make sure I understand that the $28 million paid during the quarter was one-time? That was a catch-up payment? There are not any other lump sum payments to be paid? And secondly, could you kind of walk us through what to expect in terms of labor inflation for 2009?
(Mr. Squires) As you mentioned, the special BLET payments are a one-time phenomenon this year and very early next year, on Jan. 1, in fact. In terms of the inflationary impact of negotiated wage rate increases, the rate is at 4% per the collectively bargained arrangement for the industry. So that’s what you can expect in terms of contract wage increases. Other elements of compensation and benefits obviously also have inflationary elements, but those are somewhat less predictable.
(Question) And the 4% is across all of your union agreements?
(Mr. Moorman) Yes, we‘ll look at that. It’s across all of the union agreements. We think it’s 4% there. It varies by year. We do have 1 year-four coming up, but I think that may be the next year. We’ll double-check that and let you know. But it’s in that range, between 3.5 and 4.
(Question) Are there any other agreements outside of BLET that require any kind of makeup payment like this?
(Mr. Moorman) No. The BLET and then the recent agreement, the recent settlement of the machinists, which did not require catch-up payments, really have concluded this round of collective bargaining.
(Question) Very good. Nice quarter. Thanks for your time.
(Question) William Greene, Morgan Stanley. Good morning. You had some positive comments and have had those in the past as well about export coal and your conviction that the strength there can continue. The financial markets would seem to disagree. So can you talk a little bit about maybe how much is already contracted where you have confidence in both the volume and the price for 2009 or what other items give you that kind of confidence?
(Mr. Seale) Good morning, Bill. We have visibility into 2009 with respect to the business we expect to handle in the export market, and I would point out that the EIA this year is projecting total U.S. export coal to be in the range of 84 million tons, and their forecast, based on the collective research that they do, for next year is somewhere in the range of 86 million tons, going up another 2 million tons. But it’s notable that metallurgical coal, which as you know is the majority of what we handle into the export market, is projected to grow another 4.5 million tons next year. That backdrop, as well as the visibility we have with our contracts and with the arrangements that we have with transshippers as well as receivers, give us comfort that our 2009 numbers will look fine.
(Question) What percentage of the business is under contract on the met coal side for you?
(Mr. Seale) We reprice, as you know, our export coal every April. And then we have some other arrangements that are beyond that, but it’s a year-to-year, April-to-April pricing scenario.
(Question) Okay. And then when you look at the automotive business, what percentage of your total carloads, including that which you don’t classify technically as auto, is auto?
(Mr. Seale) Obviously, Bill, the automotive market impacts paints, pigments, plastics, chemicals, and a range of other products. But we don’t track it that way. We look at auto parts and finished vehicles, and certainly as plants are closed, we’re impacted with the loss of inbound auto parts as well as outbound vehicles. But I think the automotive impact to the economy is very visible. It’s playing out, and I’m not sure it has a lot more to play out after the kind of production cuts we’ve seen in the past year, along with the plant closures. So while it has impacted us, I don’t think we will continue to see a comparable level of impact coming into the next year.
(Question) One last question. If you look at carloads being down, RTMs being up, how do you think about the capacity utilization of the network? How full are you?
(Mr. Moorman) I think we have capacity across our network, and clearly as RTMs go up, that’s a measure of efficiency. That means that we’re able to move more tons on a given train and more tons per car, and that’s increasing capacity in the network. That’s a very positive sign of efficiency for us. If you look at our network right now, we are clearly running at volumes that are below where they were a couple of years ago, and we were providing a high service level then. So we think we have room to grow, and we don’t know when it will come, but we know growth will come and we’ll be ready for it.
(Question) Jason Seidl, Dahlman Rose. Morning everyone. Getting to the Crescent Corridor comments about taking freight off the highway system, at what level of WTI do you think that becomes difficult going forward?
(Mr. Moorman) We don’t think that – barring WTI going to levels where it was 6 or 8 years ago – that that’s really a factor. Even as oil prices have come down, we’re seeing the momentum continue in terms of domestic freight wanting to move to rail. When we talk with our trucking partners, they’re telling us that they’re committed to making that move, because over the long term they see energy prices continuing to go up, and they see a lot of other advantages to rail in terms of sustainability, which is important to a lot of their customers as well. So we have felt for a while that would be a trend. I will tell you I think that when diesel did spike a little while ago that provided a little more impetus, but we think the impetus will continue.
(Question) With that spike, did you lose any business back when it came down, or because the rail services were more consistent did you maintain it?
(Mr. Moorman) No, our services have maintained very well, and we have seen the volumes continue to grow even as we’ve seen diesel fuel prices start to soften a little bit. I think that that’s a long-term, very positive trend for us, and I think as long as we can maintain the superior service levels that we’re offering, we’re going to continue to convert truck traffic to the rail.
(Question) Great. Let me hop to export coal in terms of if you’re projecting that to grow still next year off of record levels this year. All things being equal, should we expect a fairly good pricing environment for that come April?
(Mr. Seale) We expect pricing in April will continue to be favorable.
(Question) Ken Hoexter, Merrill Lynch. Great, good morning. Jim, could you clarify for a quick second on the average revenue per car? I know Don was going over numbers before with, if you kind of pull out mix and then the $25 million for high coal volumes and then $22 million for coal gain, if you strip all that out and the 60% that was due to fuel surcharge, what were you looking at on a pure pricing kind of same-store sales basis?
(Mr. Seale) Ken, we don’t track on a same-store sales basis. We don’t publicize that type of a number, but our yield was 9.5% in the quarter.
(Question) Yes, I got the 9.6%. Is that relative to when quarters past you’ve targeted kind of, I believe it was 4% entering this year was kind of the pure pricing rate you were aiming for.
(Mr. Seale) We’ve announced 7%, 9%, and now 9.5% over the past three quarters, so I think you need to look at that trend, Ken.
(Question) I just wanted to make sure those were the same numbers that you were referring to.
This morning there was a decent-size article in the Journal about farmers really cutting forecast for grain production and looking at maybe delaying equipment sales. What are you, Don, looking for as far as the impact on the grain market or the ag market in total as you move forward?
(Mr. Seale) Ethanol is a big driver in agricultural rail shipments, and as I mentioned, our ethanol volume in the quarter was up 55% and our revenues were up substantially higher than that. And then added to the ethanol are the downstream products, the DDGs, inbound corn, and other materials that are generated to haul as a result of that activity. The Federal Renewable Fuel Standards this year will generate about 9 billion gallons of ethanol. That will increase in each of the years ahead, unless that 10% blend in gasoline required by the Federal Renewable Fuel Standards is modified. We don’t see anything on the horizon at this point that will indicate a change in those standards. So I think corn production will continue to target that market, and I think with respect to food demand, that will continue to be a driver for plantings and production as well. So we see good things ahead for the agricultural market.
(Question) A quick question for Wick. Can you throw out some thoughts on the upcoming election and maybe even drill down to what you think the Democratic view is of coal burning and the prospects for growth of coal generation going forward?
(Mr. Moorman) That’s an interesting question but not one that I really think that we’re prepared to speculate on right now. Clearly both political parties have transportation platforms. We look at both of them. We think that each probably offers some advantage to the rail business and maybe also poses some problems as well. But we’re just going to wait like everyone else to see how that plays out.
(Question) Can you at least maybe educate us as to some of the biggest risks on some of the platforms for volumes?
(Mr. Moorman) I don’t know that it’s part of either party’s platform. I will tell you, which we state all the time, that purely from a political/legislative perspective, we have the worries about some of the legislation in Congress that would reregulate the industry. That is something obviously that we’re working hard to make sure doesn’t happen. So we always keep an eye – or maybe an eye and a half on some weeks – on Washington to make sure that we’re active and out presenting the story of why the railroad industry is so important to the economy.
(Question) Ed Wolfe, Wolfe Research. Thanks. Good morning, guys. Don, before you talked about some forecasts for export tons. Clearly, the coal stocks aren’t acting like those forecasts are real. Can you talk a little bit about your visibility, that is, the backlog for export coal that the companies have actually signed up for under their multiyear contracts, the three-year deals that you’ve talked about they have with the mines relative to your one-year deals?
(Mr. Seale) Good morning, Ed. Our export coal volume, as I mentioned, was up 53% in terms of carloads in the quarter. It was up 55% in tons. Just to give you a little more color, I will tell you that it wasn’t evenly distributed through the three months of the quarter. Our export loadings accelerated within our portfolio in September, and that continues in October. And based on the commitments that our receivers are telling us that they have with the transshippers, we’re comfortable that the ongoing current trend in volumes on export will continue with some upward potential going into 2009 as we move forward. The pricing environment, as I mentioned earlier, will continue to be favorable as we reprice. We’re already having those discussions with the transshippers and the receivers, and we will have that wrapped up by April 1 and effective April 1. Now with respect to coal stockpiles, we’re watching those more closely with respect to domestic utility stockpiles. As I mentioned, in the North we’re approaching stockpile targets, but in the southern portion of our system it’s still well below target, probably in the range of 6 to 10 million tons below target, and coal supply has had an impact on that. So at this point we don’t see anything that indicates to us that we will see a material slowdown in current volumes of export coal and see some upward potential in utility coal.
(Question) As to that level, obviously you have some visibility that we don’t when you say we have visibility of it actually accelerating into ’09, so is it fair to say you have at least three months’ visibility? Do you have 6 or 9 months’ visibility based on some of these contracts in the backlog?
(Mr. Seale) Yes, we do.
(Question) Can you give some directional sense, in other words, do you feel like you have 75 or 80% visibility 3 months into export?
(Mr. Seale) No, I won’t try to dissect it that precisely.
(Question) Fair enough. Are there any new export deals from coal companies not under contract that you can see?
(Mr. Seale) We are aware of some of that, and obviously I can’t disclose that.
(Question) Is that in your expectations when you talk about visibility, or is that potentially extra?
(Mr. Seale) That’s in our expectations.
(Question) Just generally, more broad based, the 9.5% real pricing, and obviously we’ve seen that improve throughout, as you think about next year in ’09, it’s not fair to assume 9.5 going in obviously, but what’s a visibility to ’09 kind of real pricing level? Is it 4, 5, or is it closer to 9 again?
(Mr. Seale) We’re going to reprice a little shy of 60% of our book of business in the first half. About 58% of the total book will be repriced for the year. About 60% of that will take place in the first half, and the balance of the 40% of the 58% will be concluded in the third and fourth quarter. We’re well along into the pricing for the first quarter, and the visibility is obviously very good there. And as I said earlier, we don’t expect any material change in our pricing outlook. The value of our service and value proposition in the marketplace in our eyes and based on our customer survey continues to move upward. So we see no change in our outlook with respect to pricing at this point in time.
(Question) Jim, just in terms of the incentive comp, how do we think about the fourth quarter? Should it be a similar kind of level or similar?
(Mr. Squires) I’m trying to recall the comparison in the fourth quarter of last year. Generally speaking, you will, depending in part on stock price performance in the quarter, tend to see some additional incentive compensation in the fourth quarter versus last year. But of course with the stock price trend for the quarter to date, at least – we don’t know where it’s going close at the end of the quarter – there could be some favorability in stock-based compensation, that component of compensation and benefits versus last year.
(Question) Nothing gets reset relative to what the goals were in third quarter? It should be similar kind of goals you are trying to obtain and beat and so forth?
(Mr. Squires) I would expect so. Our board has not actually set the performance criteria for next year’s incentive compensation, but I think it will probably be similar benchmarks, similar targets to this year.
(Question) So you’re saying ’09 will be similar to ’08? I was just making sure fourth quarter wasn’t reset.
(Mr. Squires) No.
(Question) One last kind of bigger question. Wick have you or anybody else had a chance to absorb the safety bill impact and look at, between positive training control training, reduced limbo time, all of these different buckets, where the biggest impact could be and how severe the impacts could be to earnings as you go out?
(Mr. Moorman) We’ve clearly been watching this and thinking about it. Steve and his team have been tracking the impacts very closely. If you look at the various components of the bill, we don’t think limbo time has a big impact at all on us. The training provisions, I think, are things that we’re comfortable with. Clearly the big item in it is PTC, and we have been working for quite a while – we, along with the other rails – we have our own train control pilot down in South Carolina. We’ve made some significant breakthroughs, I think, within the past month. You may have seen the press release that we put out with the western carriers about the use of spectrum and interoperability. I think that’s important because it really sets the stage for PTC to move ahead in a meaningful way across the country. Interoperability has always been the thing that we had to achieve before it could move ahead. Having said that, it is clearly an unfunded mandate and something that we’re going to have to figure out how to pay for. There are internal benefits, clearly in terms of safety and operations, but it’s very unclear, in fact, that it has an adequate IRR. In fact, I think it’s fairly clear that it doesn’t. One of the things that we’ll be pursuing with the industry next year with renewed vigor is our infrastructure tax credit which is designed to mitigate the cost of positive train control as well as additions to railroad infrastructure. We think this is an important piece of the campaign for the infrastructure tax credit, the new PTC legislation, and I’m optimistic that we’ll get something done there. PTC rollout for a major portion of railroad has to be done by the end of 2015, and we’ll be digesting the financial impact of that and the capital requirements over the next couple of years.
(Question) Do you think there is a chance that in the new proposed stimulus package Congress is looking at that, that the tax credit bill could sneak its way in there? Have you heard anything about that?
(Mr. Moorman) I don’t know if there’s any chance or not. I think any time we hear something about a bill like that we certainly have our folks in Washington advance that idea. Whether there’s any meaningful chance of that in this stimulus package they’re talking about for the lame duck session, I do not know.
(Question) Chris Ceraso, Credit Suisse. Thanks. Good morning. Quick one on the coal. Are there any limits beyond market forces that will affect your pricing for coal in the export market?
(Mr. Seale) Limits beyond market forces?
(Question) i.e. regulatory?
(Mr. Seale) We don’t foresee any regulatory hurdles that would impact coal, certainly not visible in 2009.
(Question) Okay. Can you comment at all on pricing in the intermodal business? Revenue per carload there grew slowest of all the other commodities. Has there been any change even at the margins from quarter to quarter in terms of competitiveness of trucks? I know the volume is still strong and you’re still converting from truck to rail, but has pricing held up as well?
(Mr. Seale) Pricing continues to be stable. I would say it’s not escalating at this point, but it’s certainly stable.
(Question) Stable meaning you’re growing it at the same rate, or stable meaning that it’s flat?
(Mr. Seale) Stable in terms of growing at the same pace as we did in the first three quarters.
(Question) Can you give us an update on the Heartland Corridor project?
(Mr. Moorman) It’s moving ahead very well. We have worked, Steve, how many tunnels?
(Mr. Tobias) 9.
(Mr. Moorman) We have work under way now on 9 tunnels. We’re still projecting completion in the first half of 2010. We have, thanks to a lot of hard work by our operating team in terms of planning for this, really had no service issues at all moving across the corridor even though there is a lot of train traffic and we’re shutting it down 4 days a week for 10 hours to do the tunnel work. We’re very pleased so far with how that work is progressing.
(Question) If you can just remind us what sort of incremental volume do you anticipate relative to your overall intermodal business once this corridor is up and running at full rate?
(Mr. Moorman) We certainly expect volume to grow in that corridor as the container volume through the Port of Hampton Roads increases. As you know, we have the big new Maersk terminal now in operation over here, and it’s slowly beginning to ramp up. But remember too, that in addition to volume what Heartland Corridor is really all about is service and operational efficiency. We’ll take a full day in transit time out of our service between the Port of Hampton Roads and our new intermodal facility, Rickenbacker in Columbus, Ohio, and we think that service advantage will be very important in the operational efficiencies that we’ll achieve – will drive the returns for the project.
(Question) Thank you. Tom Wadewitz, JPMorgan. Good morning, and congratulations, results obviously very impressive. I wanted to ask Don or Wick about coal yields. I know you had a lot of yield questions, but I am not sure if you mentioned this specifically on the coal yields. Can you give us any sense of what within that line the breakdown would have been between price and fuel? Was it similar to the 60/40 mix you talked about across the total yield, or was it meaningfully different from that?
(Mr. Seale) Tom, good morning. It would be comparable, and also we had the favorable impact of continued repricing of coal contracts that manifested itself in the third quarter as well, and that will continue going forward.
(Question) If you take out the $22 million from the contract adjustment, it’s like 40% yield growth, and you’re saying you think about 60 of that is fuel and 40 is pricing, or is a lot more of that contract repricing?
(Mr. Seale) No, I think that’s a good ratio to use.
(Question) Okay. What do you think about coal yields in 2009? It seems hard to imagine this type of pace is sustainable, but your comments have been pretty consistent about you don’t see a change in the pricing environment. Any thoughts on that and maybe in terms of how much of your coal book you would touch in ’09 versus what you’ve touched in ’08?
(Mr. Seale) Tom, on the latter question, in ’09 we have about a quarter of the coal book of business that will be repriced in 2009, about 25% of the book. But I would remind you that as we have repriced coal, we have obviously brought the prices to the current market levels, but also we have addressed escalators, as I mentioned in my remarks. And those escalators are more robust, reflecting today’s marketplace.
(Question) So that’s favorable for coal pricing in ’09? Or are you kind of thinking that’s something you’ve already pulled forward and realized in ’08?
(Mr. Seale) We’ve seen the positive impact of the escalators in ’08, and as we reprice the available book we will continue to see the price improvement plus escalators continuing to reflect today’s market.
(Question) Okay, if you can just remind me of how much of the coal book you repriced in ’08?
(Mr. Seale): I don’t have that number right here handy, but we can get that for you.
(Question) I mean, do you think it was a lot different than the 25% in ’09?
(Mr. Seale) Not really.
(Question) Not really, okay.
(Mr. Seale) We’ll get you the specific number.
(Question) Okay, great. I appreciate it. Just one more and I’ll pass it along if anybody else is left. Volumes have been weak for a while for the railroads, and I guess if you look at prior downturns and you don’t typically see a period where rail volumes are down 10% or anything, it’s maybe 4, 5% when things are typically bad. So, Wick or Don, if we do have a recession that lasts a few quarters, bearing in mind you got some growth initiatives and visibility on ethanol and other things, how bad do you think rail volumes for you could be in ’09 if the economy is particularly weak? Is it down 2 or 3 or is it down 4 or 5?
(Mr. Moorman) I will tell you, Tom, that you’ve heard us say before our crystal ball is never particularly good, and I would hesitate to put a number on it, because no one knows exactly what this economy is going to do. We went into the beginning of this year, as you can remember, thinking that because of our project growth we might actually see volumes up a little bit. We were surprised, as I think everybody else has been, by the downturn in automotive traffic, which has really driven our volume decline. And so next year, we’re just going to watch the economy with everyone else and see where it might go. I think your point is well taken that we do have a lot of buffers in our mixture of businesses, so we would hope we wouldn’t see a radical decline in volumes. But as to whether it’s 1 or 2 or 3, I just think that is purely a function of where this economy goes. We’re like everyone else. We’re just watching, and our major focus here right now is to be ready to react to wherever the economy and our volumes go.
(Question) Gary Chase, Barclays Capital. Good morning everybody. Don, I wonder if you could elaborate a little bit on the answer you were giving to that last question. I think you said that you were addressing escalation clauses to make them more consistent with today’s marketplace. Should we be thinking that is predominantly on the fuel side, i.e., better fuel surcharge mechanisms, instead of relying on RCAF? Or are you sort of enhancing the escalators to be more than we would normally expect?
(Mr. Seale): It is the latter, because as you know, we have developed fuel surcharge coverage that is fairly comprehensive across our book of business. And so our fuel coverage has been there. What I am referring to are escalators that better reflect today’s transportation market, coming off of a 3-year deal or a 4-year deal where the escalator might have been a little more modest in previous cycles.
(Question) Can you give us a sense of the magnitude of change on these? Is it going from a couple of percent to 4 or 5, or is it smaller than that?
(Mr. Seale) I can’t comment on the magnitudes, but I think the sense you should take away from the discussion is that they reflect the current market dynamics, as opposed to what might have been there 2 years to 4 years ago. We continue to see a migration of the value proposition for our service, and we’re tracking that very closely.
(Question) Okay. So you are repricing to market and you’ve got higher escalation in future years?
(Mr. Seale) That is correct.
(Question) Also, I wonder if maybe you could just give a little bit more color. I know you spent some time on this as well, but were there any particularly powerful or significant coal repricings during the quarter? Because the pricing was solid across the board, but that was the one place where we’re very surprised with how strong things were, exclusive obviously of the $22 million. Were there any particular contracts there, or is that sort of the trend we can expect looking forward?
(Mr. Seale): As you’ll recall, as we reported last quarter, export coal certainly plays into that in terms of the length of haul. We average about 440 miles per car on export coal and about 280 per car for utility coal. So that factors into that. The export pricing that went into effect April in 2008, that factors into it. And we did have some renegotiated utility contracts that went into effect in August, which also had a favorable impact in the quarter.
(Question) Okay. Were those August renegotiations a material part of it, or no?
(Mr. Seale) They were a part of the overall mix that I just mentioned.
(Question) Okay. And then just one last quick one, sorry. The new auto business, as you replace some of the plants we’re talking about closing down, is that mix positive from a revenue per unit perspective? Is that more profitable business?
(Mr. Seale) That will be good business for us. They’re new products and products which hopefully will sell better in the current environment. So we think that it’ll be positive with respect to volume, and it will certainly be positive for revenue per unit and contribution.
(Question) Randy Cousins, BMO Capital Markets. Good morning. Jim, I think you mentioned in your remarks that the lag in the fuel surcharge was a $55 million win in the third quarter. Could you give us a sense of oil prices just holding where they are what the magnitude of the favorable variance would be in the fourth?
(Mr. Squires) Of course depending on where oil settles this month, I do think you’ll see another favorable lag effect in the fourth quarter, calculated on the same basis as we calculated the 55.
(Question) So, are you saying it’s another 55, or you just saying the methodology is the same?
(Mr. Squires): I would say that, again, depending on where oil settles this month, it’ll be at least that much.
(Question) Okay, at least that much. I guess the other question I have is, this is the best operating ratio number you’ve ever had or you mentioned you’ve ever had. Congratulations. When you look at that OR number, do you think of that as even remotely sustainable, or is it really just a flash in the pan caused by a confluence of favorable events? How do you guys think about that OR?
(Mr. Moorman) We’re very happy with it, but we have been posting operating ratios approaching that for some period of time, and we had a sustained period of doing that back in the ’90s. And I can tell you I’ve said before, our long-term, longer-term goal is to post operating ratios every quarter that begin with a 6. We’re intent upon doing that. That’s why I talked about all of the initiatives that we have under way in Track 2012. Operating ratios vary by quarter because business conditions vary by quarter, but our goal is to continue the operating ratio momentum that we’re showing and post lower numbers as time goes by.
(Question) Okay and then my final question. Gains on sale of property was a negative 20 million bucks. Can you give us a sense, do you have anything in the pipeline in terms of sort of other kind of property sales, or given market conditions right now we should model in a very little from sort of sale of properties?
(Mr. Squires) We traditionally do sell some properties in the fourth quarter, but the real estate market is soft. So I think that was partly to account for the drag in other income from real estate sales this quarter. But it is inherently not smoothed over the course of the year, and you’re going to see variability from quarter-to-quarter in that number.
(Question) So the number in the fourth quarter should be better than the third?
(Mr. Moorman) It depends completely on what ends up closing. We’re like everyone else. We’re constantly in the real estate market. Some deals close in a quarter, and some deals get put off another quarter. So we try to give folks a sense of what we think it will be on an annual basis. But as Jim said, it is not ratable in any way, shape or form. We know the deals that are out there, but we do not know what will close and what won’t yet.
(Question) Arturo Vernon, Macquarie. Good morning. I have a question on coal, and that’s whether you think your coal miners can sustain the increases that we are seeing in the shipments both for utilities and for the export market?
(Mr. Seale) Coal production obviously is a key component of continuing to grow the business. We have some additional supply that is on-stream that continues to improve our coal supply. One, Buchanan, the Consol mine that was down part of last year, is back up and doing quite well. And we have two additional mines and load outs, Mammoth and Page, both in West Virginia, that are doing quite well. So that has supplemented the metallurgical coal as well as utility coal that is originating on Norfolk Southern. But at this point, we see fairly good prospects for continued production that we serve.
(Question) Fantastic, thank you. And a question on intermodal domestic. It has held remarkably well. Do you see any danger of a downturn as the economy softens?
(Mr. Seale) Certainly we’re watching consumer demand and transportation demand overall. But the true source of that growth, in terms of our domestic intermodal, continues to be a very well-planned conversion of highway freight to rail by major truckload carriers that we’re partnering with. Their Class A truck sales are flat or down, their driver recruiting is pretty flat, and part of their overall strategy is to continue those conversions. We are working very closely with them. So we don’t see that conversion opportunity shrinking materially, because trucklod, as I mentioned earlier, is such a large portion of intercity freight tonnage to start with.
(Mr. Moorman) I think the best way to look at it is that even if the number of trucks on the highway comes down somewhat because of economic conditions, it’s still a target-rich environment for the railroads.
(Question) Fantastic, that was my perception, just wanted to check it. And finally a quick question on pensions. How is your pension funding doing?
(Mr. Squires) Like all pension funds invested in the equities market, ours has suffered in the last quarter, particularly in the last month or so. So it is definitely down.
(Question) Will that have any bearing on results in the upcoming quarters?
(Mr. Squires) No, it should not.
(Mr. Moorman) Thanks very much everyone for listening in. Thanks also as always for your questions, and we look forward to talking with you again in the future.