Remarks by:
Donald W. Seale
Executive Vice President and Chief Marketing Officer
Norfolk Southern Corporation
Thank you Wick, and good morning everyone.
Despite the current economic headwinds, fourth quarter revenue reached $2.5 billion, an increase of $48 million, or 2%, over the fourth quarter of 2007. This was our best fourth quarter ever and our third highest revenue quarter as well.
The primary drivers of these favorable results were improved yield and higher fuel revenue. With respect to fuel, during the fourth quarter we experienced a positive lag effect in fuel surcharge revenue of $130 million.
For the year, revenue reached $10.7 billion, up $1.2 billion, or 13% over 2007. All of our business groups except Automotive posted record revenues in 2008. Again, with respect to fuel revenue, the positive lag effect realized in the third and fourth quarters was mostly offset by a negative lag in the first half of the year.
Revenue Per Unit 2008 vs 2007
Turning to yield on slide 3, the fourth quarter represented our 25th consecutive quarter of year-over-year revenue per unit growth, and was our third highest quarter ever. Revenue per unit reached $1,450 for the quarter and $1,451 for the year, increases of 10% and 17%, respectively.
With the exception of Automotive, all other business groups produced record revenue per unit for the quarter. For the year, all business groups achieved record RPU.
Revenue per unit for the fourth quarter was up 10% despite the impact of a volume related contract adjustment in the fourth quarter of last year which added $14 to total revenue per unit and $200 per car to Automotive RPU.
During the quarter, approximately 65% of this gain was due to strong re-pricing and higher contract escalators. Increased fuel revenue accounted for the remaining growth which was partially offset by last year’s contract settlement that I just mentioned, along with a negative mix effect of $61 million.
Pricing gains in the quarter averaged 7%, while RCAF rate escalations averaged 2%. For the year, similar results were attained with overall price up 9%, which included the favorable RCAF contract escalations.
Railway Volume 2008 vs 2007
Turning to volume as shown in slide 4, total shipments were down 8% for the quarter and 3% for the year.
Agriculture and Coal both posted record volumes for the year, while Metals, Construction materials and Automotive volumes fell as the year progressed and the economy weakened.
Paper, Chemicals and Intermodal volumes were also impacted throughout 2008 by the downturn in consumer spending, weaker manufacturing and the general decline in international shipping activity.
Railway Volume 2008 vs 2007
As shown in slide 5, volumes that were soft in October accelerated downward in November and December, led by large declines in steel and automotive traffic. Steel production in the quarter fell by 32% and automotive production was down another 24% coupled with the closure of 3 additional assembly plants served by our railroad.
Coal Variance Analysis Fourth Quarter 2008 vs 2007
With the overall revenue and volume results as a backdrop, I will now turn to the quarterly performances of our individual market segments, starting with our Coal business, shown on slide 6.
For the quarter, coal revenue reached $798 million, up $197 million, or 33% over last year’s fourth quarter.
Average yield rose to $1,817 per car, up $376, or 26% driven by continued pricing gains, favorable RCAF contract escalators and increased fuel revenue.
Volume for the quarter was up 5%, led by higher export volume. During the quarter, a new monthly coal tonnage record was set in October, exceeding the prior record set in May 2008 by 4%.
Coal Volume Fourth Quarter 2008 vs. 2007
Export volume was up 16% for the quarter and 48% for the year. Through the third quarter, export shipments were up 60%, prompted by Australian port capacity constraints, and a weaker dollar. During the fourth quarter, growth in export shipments trended lower as global steel production declined.
Volume through our Norfolk export terminal declined 4% in the fourth quarter as demand for coking coal fell. Volumes through Baltimore increased by 7,500 carloads or 94% due to increased coal availability from the Mon production region and new business gains.
Coal Volume Fourth Quarter 2008 vs. 2007
With respect to the utility segment as shown in Slide 8, utility volume was up 5% in the fourth quarter as a result of higher demand due to new business, stockpile growth and improved availability of coal as the export market softened. We also secured additional long haul business from Colorado and PRB mines to our markets.
Coal Volume Fourth Quarter 2008 vs. 2007
Finally, domestic met traffic benefited from the decline in export coal demand which increased coal supply. We also generated new business from the start-up of the Haverhill II coke plant and a spot movement of imported coke.
And, Industrial coal volume declined 12% due to supply constraints and the slowing industrial economy.
Merchandise Variance Analysis Fourth Quarter 2008 vs. 2007
Turning to the carload business, revenue for our Merchandise sector reached $1.2 billion, down $133 million, or 10% in the fourth quarter.
Weakness in the automotive and housing sectors plagued our Merchandise groups throughout the year and contributed to a 19% volume decline in the fourth quarter.
But, on the plus side, each of our Merchandise groups was successful in improving yield over the year. For the quarter, improved pricing and higher fuel revenue drove an 11% increase in revenue per car.
Merchandise Revenue & Volume Fourth Quarter 2008 vs. 2007
Drilling down to the individual markets, as shown on slide 11, Automotive’s year long decline continued in the fourth quarter, with volume falling 31%. During the quarter, two NS-served assembly plants were closed, and Ford’s Michigan Truck plant was closed for a one-year re-tooling. In total, there were 107 weeks of plant downtime during the quarter.
Merchandise Revenue & Volume Fourth Quarter 2008 vs. 2007
Chemical traffic declined 18% in the quarter as volume fell across all of our major chemical markets. Volume losses due to plant closures and production cuts accounted for 25% of the volume decline. And lower volumes associated with the housing sector contributed to 46% of the decrease.
Merchandise Revenue & Volume Fourth Quarter 2008 vs. 2007
As shown in slide 13, our Paper and Forest products business also felt the impact of the weak housing market throughout 2008. Lumber volume fell 24% in the fourth quarter, while our paper markets continued to be impacted by production declines.
Merchandise Revenue & Volume Fourth Quarter 2008 vs. 2007
Metals & Construction volume saw year-over-year improvements in the first 3 quarters of the year. However, plummeting U.S. and global steel production drove a 25% decline in volume during the fourth quarter. Iron & steel shipments were down 39%, while coil and scrap metal volumes fell 41% and 29% respectively after posting gains through the first nine months.
Merchandise Revenue & Volume Fourth Quarter 2008 vs. 2007
And as shown on slide 15, Agriculture volume fell 6% in the fourth quarter after posting quarterly records in the first three quarters of the year. Weakness in the export market, and reduced volumes to processors in the Midwest drove grain shipments lower, while fertilizer demand weakened in the face of falling grain prices.
On the plus side, our integrated AgriFuels market continued to be a bright spot. This market includes ethanol, biodiesel and related feed stocks. For the year, this business grew 44% or 27,000 carloads. Within the AgriFuels market, ethanol shipments were up 38% in the quarter, and 33% for the year as we gained access to 32 new ethanol terminals and 8 new plants.
Intermodal Variance Analysis Fourth Quarter 2008 vs. 2007
Concluding with Intermodal, revenue for the quarter of $480 million was down $16 million, or 3% from the same period in 2007.
Volume fell 5% in the quarter as the weakened domestic economy and declining international trade reduced business levels.
Fourth quarter revenue per unit reached $653, an increase of $13 or 2%. Increased fuel surcharge application contributed to most of the gain.
Intermodal Volume Fourth Quarter 2008 vs. 2007
Turning to the market segments as shown on Slide 17, domestic volume was up 11% in the quarter driven by new service lanes and highway conversions.
We continue to secure new highway business in the eastern markets as beneficial owners realize the value that Intermodal provides versus truck. For the full year 2008, Intermodal growth was primarily in local NS lanes, where we gained more than 50,000 new loads.
Of this total, early Crescent Corridor gains from Atlanta to the Northeast, generated a 13% boost in volume. Several other new services, which included the Meridian Speedway, domestic service at Savannah, GA, and new reefer and brokerage business also contributed to this growth.
And, International, Premium and Triple Crown volumes all declined in the quarter in the face of much weaker international trade and reduced consumer demand.
Intermodal Corridor Capacity Projects
As shown in slide 18, we are continuing to work on our major intermodal corridor initiatives that will improve service and add capacity to our network, making us even more competitive with truck between major markets.
Work on the Meridian Speedway has progressed well and is expected to be complete in 2010. During the fourth quarter, we converted our eastbound transcontinental international traffic to the Speedway, as we did for domestic transcontinental traffic in 2007. This change provides customers with the fastest route from the West Coast to the Southeast.
Our new Titusville, Florida terminal opens on February 16 and will provide us with an improved competitive position in the Orlando market.
And, as announced last fall, we are targeting new service and terminal capacity in the New England market as we progress the Patriot Corridor with our Pan Am – Southern joint venture.
Finally, the Heartland and Crescent Corridor projects will directly target highway conversions. We have completed 35% of our tunnel clearance project on Heartland and have been able to progress this work on schedule while handling record volumes of coal, much of which is moving over this route. We expect completion of this project by mid 2010 which will cut a full day off the schedule between the Port of Hampton Roads and the Ohio Valley. And, as I mentioned a moment ago, new business is already flowing from our speed improvements and ongoing development of the much larger Crescent Corridor project.
Looking Ahead
Looking ahead, we all know that 2009 will be a challenging year, but the fundamentals of our diverse set of markets, our strong service product, and new project growth will sustain our business going forward.
The prospects for export coal, while less than 2008, continue to offer promise. Current Lamberts Point tonnage handled in January exceeds the tonnage handled in each of the months of November and December. We see continued opportunity in this market as steel inventories worldwide have diminished and high quality U.S. met coal remains in demand. And, while our utility shipments will be impacted by weather and the economy, coal availability for utility demand will be higher in 2009, which will be a plus.
The outlook for the manufacturing economy through the first half of this year is weak at best. We plan to offset some of this softness with continued project growth in our AgriFuels and scrubber stone markets. And, we foresee upcoming opportunities in steel, cement, aggregates and other construction materials from the economic stimulus package that is pending. We are also seeing inventories of most manufactured products shrink in the face of reduced production. We anticipate that restocking efforts will drive improved volumes as the year progresses.
Looking Ahead
In our Intermodal markets, domestic growth remains solid. We continue to refine our corridor strategy and will announce new projects throughout 2009.
Finally, with respect to pricing, with the decline in oil prices and the lower RCAF index, we do not foresee the robust RPU gains that were achieved in 2008. But, while the pricing environment will be more challenging, we will continue our structured and deliberate strategy to appropriately price our strong service product to fully reflect its value in the market place. In that regard, approximately 70% of our book of revenue has been priced for 2009, with the remaining 30% spread over the balance of the year.
Thank you for your attention and now Jim Squires will present our financial report. |
