Remarks by:
Donald W. Seale
Executive Vice President and Chief Marketing Officer
Norfolk Southern Corporation
Thank you Wick, and good morning.
Slide 2 – Railway Operating Revenue 1Q2009 vs 1Q 2008
During the first quarter, the ongoing recession continued to depress transportation demand, as low-tech industrial production reached its lowest point since the third quarter of 1994, accompanied by weak consumer spending and international trade.
With this unfavorable economic environment, revenue for the quarter reached $1.94 billion, down $557 million, or 22% below the same period in 2008.
This decline was driven by a 20% reduction in volume, which I will address in a moment, coupled with lower fuel surcharge revenue. For the quarter, fuel related revenue was down $226 million versus 2008, and represented approximately 41% of the overall decrease in revenue. This decline was partially offset by a $10 million positive lag effect for fuel.
Continued improvements in yield partially offset volume and fuel revenue declines.
Slide 3 – Revenue Per Unit 1Q2009 vs 1Q2008
With respect to yield, as depicted on slide 3, three of our seven business units posted year-over-year RPU gains, despite lower fuel revenue and the effect of a downward adjustment in the Rail Cost Adjustment Factor contained in certain coal contracts. In total, revenue per unit reached $1,335, falling $32, or 2%, below first quarter 2008.
Gains in Agriculture and Paper were driven by improved pricing and a more favorable mix of longer haul traffic in the quarter.
The remaining business units saw lower revenue per unit driven by declining fuel surcharge revenue and a negative mix effect in the form of reduced volumes of higher rated commodities such as coiled steel, plastics, chemicals, and auto parts.
And finally, overall yield improvement of 7% was realized from a combination of price and traffic mix.
Slide 4 – Railway Volume 1Q2009 vs 1Q2008
Now, turning to volume, as shown on the next slide, in the face of gale force economic headwinds, we experienced declines across our book of business. Total, volume in the quarter reached 1.5 million units, down 372,000 loads, or 20% below the first quarter of 2008. Reduced consumer spending, plant closures, production curtailments, falling international volumes, and increased truck competition were major contributors to the decline.
On a more positive note, revenue ton miles handled in the quarter declined by 18%, compared to the 20% unit decline, reflecting increased payloads in coal and other bulk commodities.
International related volumes continued to feel the impact of the global recession, with export volumes down 31%, principally driven by weakness in export coal, grain, pulpboard and kaolin clay. And, import volumes declined by 33% in the face of weakened consumer demand.
Slide 5 – Coal Variance Analysis 1Q2009 vs. 1Q2008
Now, transitioning to our individual business groups, Coal revenue reached $602 million for the quarter, down $60 million, or 9% compared to first quarter 2008.
Revenue per car of $1,581 was up $30, or 2%. Improved pricing and fewer short haul movements were sufficient to offset lower fuel related revenue and downward RCAF contract adjustment in the quarter.
Slide 6 – Coal Markets 1Q2009 vs. 1Q2008
As shown in slide 6, total coal volume fell by 11% in the quarter as business across all segments of the market softened.
Utility volume declined by 7% due to a 3% drop in electricity demand and several power plant outages. For example, power unit outages at two Southeastern utilities alone reduced volume by approximately 1 million tons in the quarter. And a 6 year low in natural gas prices pressured coal burn at certain utility plants.
During the quarter, metallurgical coal volumes were down 26% both domestically and for export to Europe. Major reductions in steel output in the U.S. and Europe which were down 53% and 43% respectively drove these lower volumes.
Finally, Central App coal production fell by 6% during the quarter, led by the temporary closure of 2 primary met coal producers on our line.
Slide 7 – Intermodal Variance Analysis 1Q2009 vs. 1Q2008
As shown in slide 7, Intermodal revenue for the quarter reached $366 million, down $120 million, or 25% from the same period in 2008.
Revenue per unit of $604 fell $52, or 8% compared to first quarter 2008, driven primarily by a significant decline in fuel surcharge revenue. Additionally, RPU was negatively impacted by volume declines in higher RPU Triple Crown traffic, as well as an unfavorable mix change as we handled less long haul transcontinental business and more local domestic intermodal east of the Mississippi River.
Slide 8 – Intermodal Markets 1Q2009 vs. 1Q2008
Intermodal volumes, summarized in slide 8 were down 18% compared to first quarter 2008. Excess trucking supply and resulting truck competition impacted volumes across all of our business segments.
This impact was most evident in volumes of Triple Crown which ended the quarter down 15% as a result of auto plant closures and lower truck pricing.
On the upside, domestic volumes increased by 2% as highway conversions and new service lanes helped partially offset economy-driven declines in the Premium segment.
And declines in our international business continue to be driven by lower consumer spending and the weak global economy.
Slide 9 – Merchandise Variance Analysis 1Q2009 vs. 1Q2008
Turning to our carload business in slide 9, revenue for our Merchandise sector was $975 million, down $377 million, or 28%.
Recessionary weakness across the board resulted in a 29% decline in total volume.
On the plus side, revenue per car reached $2,083, up $36, or 2% for the quarter driven by gains in Agriculture and Paper.
Slide 10 – Merchandise Markets – Agriculture
Drilling down to the individual Merchandise markets as shown on slide 10, Agriculture volume fell 14% in the first quarter. Weakness in fertilizer demand, and lower volumes of export grain and corn to Midwest processors drove this decline. On the upside, ethanol continued its growth trend as shipments increased by 14%.
Slide 11 – Merchandise Markets – Paper
Paper, clay and forest products shipments were down 26% in the quarter as U.S. paper production declined by 18%. In addition, shipments of lumber and wood products declined by 33% in the face of the worst housing market since World War II. Offsetting some of these declines were new shipments of waste which began moving during the quarter from the Northeast to landfills in the Southeast.
Slide 12 – Merchandise Markets – Chemicals
As shown on slide 12, Chemicals volume fell 21% in the first quarter with lower production of basic chemicals and plastics as a result of depressed housing and automotive demand.
Slide 13 – Merchandise Markets – Metals/Construction
Metals and construction volume declined 35% in the first quarter as lower domestic steel production resulted in two permanent plant closures and 16 idled blast furnaces in our service territory. On a positive note, new scrubber stone shipments to coal fired power plants increased by 27% as four additional power plants completed scrubber installation over the past several months.
Slide 14 – Merchandise Markets – Automotive
And finally, Automotive carloads were down 48% in the quarter, driven by the automotive industry’s efforts to realign vehicle production with consumer demand. In that regard, North American vehicle production of 1.8 million units was down 49% compared to first quarter 2008.
Slide 15 – Looking Ahead – Merchandise & Coal
As we move along in the second quarter, there are still no definitive signs of an economic turnaround, but speculation abounds that we may be approaching the bottom of the housing and automotive markets. If so, these are two key economic components that could lead us to economic recovery just as they led to economic recession.
In a more visible sense, the AgriFuels market will provide growth at NS for the balance of 2009 as new ethanol production and distribution terminals generate growth in inbound corn and outbound ethanol.
We also expect continued growth in the construction and demolition debris market, and new shipments of municipal solid waste from the Northeast to southeastern landfills.
With respect to our coal markets, weakened global steel production will continue to suppress export and domestic met markets at least through the second quarter. Utility demand will continue to be affected by lower electricity production along with stockpiles that are either at target or slightly above target levels.
And, natural gas prices below $4.00/mmBTU which are expected throughout the summer will also impact this market.
Slide 16 – Looking Ahead - Intermodal
Within our Intermodal markets as summarized in slide 16, growth from highway conversions in local domestic markets will continue to help buffer the effects of the weakened international market.
In that regard, we are pressing ahead with our corridor initiatives and launching new services to expand market reach for both Intermodal and carload traffic.
I will briefly highlight three of these new projects that saw substantial progress in the first quarter.
Slide 17 – CN-NS MidAmerica Corridor Initiative
First, as shown on slide 17, in February we, along with our partners the Canadian National and West Tennessee Railroad announced our latest initiative, the MidAmerica corridor. This new corridor, which stretches from Chicago and St. Louis to Corinth, Mississippi and beyond will provide shorter, faster routes for Merchandise traffic between the Midwest and Southeast.
Also, new coal flows will be targeted for this corridor from the Illinois Basin to NS served utility plants in the Southeast. And, ultimately this new route could support a new, more direct service for Intermodal between Chicago and the Florida markets.
Slide 18 – Titusville, Florida Intermodal Terminal
With respect to the Florida market, on February 16 we launched a slate of new Intermodal services between Chicago, Atlanta, Dallas, Los Angeles and Kansas City and our new Intermodal terminal at Titusville, Florida which covers the Orlando and Tampa markets. This is a good shot of our new terminal in action with the March launch of the space shuttle from Cape Canaveral as a backdrop.
You could say that we started this new service with a bang!
Slide 19 – Pan Am Southern
And a third major initiative, the Pan Am Southern shown on slide 15 received the required approval from the STB on March 10 and closed on April 9 which will allow us to proceed with our joint venture with the Pan Am Railway to better serve the New England market. This new joint venture will include upgrades of the corridor’s main line to provide for faster and more reliable service along with new automotive, Intermodal and transload terminals along the route.
With projects like the MidAmerica corridor, our new Florida Intermodal service, and Pan Am Southern’s expanded service into New England, when the economy does recover, we plan to be ready to take full advantage of the opportunities that lie ahead.
Slide 20 – Looking Ahead – Pricing Environment
And finally, I will conclude my remarks by restating that as we focus on launching new services and managing through a challenging economy, we never lose focus on what our primary mission is all about. And that’s providing industry leading service in the safest and most efficient manner possible, at price levels that reflect the true value of that service. As we outlined in our call in January, we entered this year with 70% of our book of business priced for the year. At the end of the first quarter, approximately 10% of the remaining book of business has been repriced at levels that reflect this overall value proposition. The remaining 20% of the book will be repriced mostly in the third and fourth quarters of the year.
Thank you for your attention, and I’ll now turn the program over to Mark Manion for our operations report. |
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