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
During the second quarter, further economic contraction continued to depress freight transportation demand. As a result our revenue for the quarter totaled $1.86 billion, down $908 million, or 33% below the same period in 2008.
This decline was driven by a 26% reduction in volume, which represented $711 million of the total revenue decline. Fuel related revenue was down $348 million versus 2008 as a result of lower oil prices and reduced volumes, which represented approximately 38% of the overall decrease in revenue. In addition, we experienced a $35 million negative fuel surcharge lag effect. And negative mix effect in the quarter equated to $53 million.
On the plus side, continued improvements in pricing partially offset volume and fuel revenue declines, and provided a positive offset of $204 million.
Slide 3 – Revenue Per Unit
With respect to yield, all of our groups with the exception of Agriculture posted year-over-year declines. Lower fuel revenue and negative traffic mix impact of $38 per unit drove this result. In total, revenue per unit was $1,315, falling $140, or 10%, below second quarter 2008.
Agriculture revenue per unit was up 2% in the quarter due to re-pricing gains which offset a decline in fuel surcharges.
And overall pricing was up 7% in the quarter as continued progress was made in marketing the overall value of our high quality rail service.
Slide 4 – Railway Volume
Turning to volume, as shown on the next slide, we experienced recession driven declines across our book of business. Total volume in the quarter was 1.4 million units, down 489,000 loads, or 26% below the second quarter of 2008.
Significant declines in steel, automotive, and international Intermodal volumes in the face of weak consumer demand, coupled with production cuts and plant closures led volume declines for the quarter.
Slide 5 – Coal Variance Analysis
Now, transitioning to our individual business groups, Coal revenue was $511 million for the quarter, down $264 million, or 34% compared to second quarter 2008.
Revenue per car of $1,538 was down 11%. Reduced fuel surcharge revenue was the predominant driver, followed by the downward adjustment in the RCAF-U. Lower volumes of export coal also contributed to negative mix which reduced RPU in the quarter.
Slide 6 – Coal Markets
As shown in slide 6, total coal volume fell by 26% in the quarter as business across all segments of the market softened against strong comps from 2008.
Utility volume declined by 16% driven by a 5.5% drop in electricity output in the NS service region. Stockpiles during the quarter remained high going into the summer season. And, further weakness in coal burn was evident from increased generation from natural gas, as natural gas prices fell 65% from a year ago.
Our export business, which is predominantly metallurgical coal for the European steel industry, experienced tough comparisons to second quarter 2008 when a low U.S. dollar and tight worldwide coal supply converged with higher global demand. During this quarter, we saw export volume fall 62%, driven by a 46% decline in European steel production, and stronger competition from Australian coal.
Within the U.S., our domestic metallurgical coal volume fell by 50% as steel production fell 52% in the quarter. And coal shipments to industrial receivers declined by 19% in the face of lower demand.
Slide 7 – Intermodal Variance Analysis
Turning to Intermodal in slide 7, revenue for the quarter was $368 million, down $164 million, or 31% from the same period in 2008.
Revenue per unit of $600 fell $98, or 14% compared to second quarter 2008. The decline was driven by lower fuel surcharge revenue, slightly offset by positive mix effects from a higher percentage of domestic shipments and incremental pricing gains.
Slide 8 – Intermodal Markets
Intermodal volumes, summarized in slide 8 were down 20% compared to second quarter 2008. Weak domestic and global economic conditions and related excess trucking capacity impacted volumes across all of our lines of business.
Within our Intermodal segments, after several quarters of gains, domestic volumes fell 2% in the quarter as highway conversions could not offset declines driven by the economy.
International volume fell 34% as a result of reduced consumer spending and a depressed global economy, while Triple Crown volumes fell 17%, in the face of declines in automotive production.
And premium volume fell 18%, driven by lower parcel volume.
Slide 9 – Intermodal Network Enhancements
Turning to slide 9, I shared our overall corridor strategy with you during our June Investors Day Conference. As part of this strategic initiative, we recently announced the first two terminals to be built as part of our Crescent Corridor project. These new facilities which will be constructed in Memphis and Birmingham, are vital links in the Crescent Corridor and will support growing intermodal opportunity within the Southeast and eastern Seaboard. We expect construction of these terminals to be complete in 2012.
We are also progressing upgrade work on the northeastern extension of Crescent, which encompasses our Pan Am Southern joint venture to Boston. We expect to have 90% of the required track work completed by the end of this year.
During the quarter, we also launched new products and services to further enhance our Intermodal network, including the fastest scheduled Intermodal reefer trailer service available between California and Atlanta in conjunction with Union Pacific over our Meridian Speedway connection at Shreveport.
Slide 10- Merchandise Variance Analysis
Turning to our carload business in slide 10, revenue for our Merchandise sector was $978 million, down $480 million, or 33%. Continued manufacturing and economic weakness across the board resulted in the 32% decline in total volume.
Revenue per car reached $2,093, down 1% for the quarter as solid pricing gains could not offset the impact of lower fuel revenue.
Slide 11 – Merchandise Revenue & Volume Agriculture
Looking at our industrial carload segments, Agriculture volume fell 14% in the second quarter. Soft fertilizer and export grain shipments along with increased truck competition for soybeans to Southeast processors drove the decline.
Slide 12 – Merchandise Revenue & Volume Paper
Paper and forest products shipments were down 28%. Significant declines in paper and pulpboard production led to lower paper and kaolin clay shipments. And lumber and wood products shipments declined as single-family housing starts in the first half of 2009 hit the lowest level in the 59 years the data has been collected.
Slide 13 – Merchandise Revenue & Volume Chemicals
Chemicals volume fell 23% with weaker housing starts contributing to 38% of the decline, and lower auto production and chemical plant closures accounting for 20% of the quarter’s decline.
Slide 14 – Merchandise Revenue & Volume Metals/Construction
And Metals and Construction volume was down 44%. Domestic steel production fell 52% in the quarter, resulting in the permanent closure of 2 mills and the idling of 16 others in our service territory. Construction volume continued to fall due to softness in housing and highway construction.
Slide 15 – Merchandise Revenue & Volume Automotive
Concluding with the Automotive market on slide 15, carloads were down 48% in the second quarter driven by production cuts by all manufacturers in response to declining sales. Bankruptcy filings and related production cuts at Chrysler and General Motors accounted for 29% of our volume decline for the quarter.
We are seeing positive signs in the automotive industry that hopefully suggest some stabilization in the industry. Toyota recently announced plans to spend approximately $500 million to upgrade its Princeton, Indiana assembly plant. And GM has announced the retooling of its Ft. Wayne, Indiana assembly plant to absorb some of the production cuts at other plants.
Last of all, our strong service product continues to be recognized. We were pleased to receive the 2008 Carrier of the Year Award presented by UPS Autogistics, in conjunction with Ford Motor Company for overall logistics excellence among all North American rail carriers for the transportation of Ford vehicles. And, we just received the top quality ratings in the industry for both origin and destination ramp operations as measured by the AAR audit process.
Slide 16 – Outlook
Going forward, Automotive volumes will continue to see negative year-over-year comps as North American Light Vehicle production is forecasted to fall 16% to 8.5 million units, the lowest level since 1962. On the plus side, the market appears to have hit a low point with most manufacturers planning to increase 2nd half production. For example, Ford recently announced that it plans to increase third quarter production by 10% versus last year.
We expect our Agriculture business to see positive year-over-year comps before the end of the year, with increased ethanol and fertilizer volume.
Metals & Construction comparisons will likely remain negative for the second half but the magnitude of the declines should lessen as steel production is projected to increase by 15% in the second half.
And, in Chemicals we are seeing some restocking of lower inventory levels of plastics and related miscellaneous chemicals. We also have begun to move unit trainloads of fly ash from Kingston, Tennessee to Alabama for disposal, which should add significant new volume and revenue in the months ahead.
Slide 17 – Outlook
Turning to Intermodal, 2009 will be another year without an obvious peak season. Import and export volumes are expected to be soft for the remainder of the year with limited recovery in both U.S. and overseas markets. On the Domestic side, beneficial owners continue to seek more efficient and sustainable modes of transportation which will result in ongoing highway conversions that will offset some of the economic related declines.
With respect to Coal, volumes will remain challenged over the course of the year resulting from mild summer weather and high utility stockpiles. We also face strong comps from 2008 in the third and fourth quarters, as coal volumes set new records last year.
On the positive side, we have recently seen increased activity in the export market over both Lamberts Point and Baltimore. Volumes will not approach 2008 levels, but we do expect improvement versus second quarter 2009 volumes. In addition, we also expect increased shipments of domestic metallurgical coal in the second half of 2009 for two of our large steel customers. And, several NS served utility plants are scheduled to take more contracted coal in the third and fourth quarters.
Slide 18 – Outlook
In summary, economic conditions remain unstable and uncertain for the second half of the year, but it does appear we have experienced a bottom in the economy. Looking at our respective markets, we foresee continued year-over-year declines through the second half for most of our commodities in the face of tough comps.
But, continued project growth will help to offset some of the unprecedented effect of this deep recession.
Last of all, but certainly key going forward, we expect continued pricing improvement ahead as we match market value with our strong service product.
Thank you for your attention, and I’ll now turn the program over to Mark Manion for our operations report. |
