Norfolk Southern Corp (NSC) 2002 Q4 法說會逐字稿

Debbie, are we in?

Give Debbie a minute to herd her sheep in the room.

Good morning, ladies and gentlemen.

I'm David Goode and on behalf of Norfolk Southern, I'm pleased to welcome you to our fourth quarter 2002 analysts' meeting.

I missed being with you last time, and I'm glad to be back here.

I assure you that whatever I might say about analysts as a breed, it is definitely more fun being here with you than it is being at Johns Hopkins.

So -- [ Laughter ] As usual, we have several representatives of our management team here.

We have our Vice Chairman, Ike Prillaman, Steve Tobias and Hank Wolf are all here on the front row, as usual.

Also present today, we have Kathryn McQuade, our Senior Vice President for Financial Planning, John Rathbone, our Senior Vice President Controller.

Bob Fort, Vice President Public Relations is there, and Bill Galanko, Vice President, Taxation, Leanne McGruder is here somewhere.

Leanne, our Director of Investor Relations, and Debbie Malvin (phonetic), Hank Wolf's assistant is in the back.

We're all here to assist you and they're here to answer all your hard questions, which I'm confident you will have later.

I'm, as usual, asked to remind everyone that the slides of the presenters are available for your convenience on our website in the Investing and Thoroughbred section, so you can follow along.

I got a relatively full slate this morning, so let me move ahead quickly and say that overall, I'm pleased with our results for 2002.

They show a 23% increase in earnings year over year, and 2002 was a year when Norfolk Southern achieved improvement, I believe, from both financial and operational standpoints in the year that, you know as well as I, was filled with challenges for everybody in business.

It was a year in which the value of expanding our system, diversifying our business base, and the investments we've made in our property and people has made itself apparent.

We improved the results in spite of a flat industrial economy and weakened coal volumes.

We did well in other revenue areas, including Intermodal, Automotive, and Metals, as we'll show you in more detail in a minute.

In summary, though, the story you'll see today is another chapter in our ongoing story of controlling costs, improving our service, increasing revenue yield and providing safe and reliable freight transportation.

We still have work ahead of us, in increasing shareholder value and earning our costs of capital, but I think we made significant progress in 2002 as a whole towards these goals, and we're able to finish the year with a strong quarter.

For the fourth quarter, our net income was $129 million or 33 cents per diluted share, and that compares with net income of 115 million or 30 cents per diluted share last year.

For the year, net income was 460 million, or $1.18 a share.

And for the comparable period in 2001, that net come was 375 million or 97 cents per diluted share.

And I'll remind you, I hope for the last time, that last year includes that after-tax gain of 13 million or 3 cents per diluted share related to the sale of North American Van Lines, which we've explained to you before.

So on a comparable basis, I believe we had a good improvement for the year and the quarter in a challenging economy, and, as I said earlier, that reflected both the cost discipline and progress we've made and to strengthen our operations.

We continue to improve service reliability and operating consistency.

We've talked to you a lot this year about completing the rollout of our Thoroughbred operating plan in the first quarter of 2002.

Since we did that, transit times, on-time performance, and interline service have all improved.

The transit time variablility has been reduced 50%, and on time arrivals for merchandise trains hit 90% and continue to improve.

Steve Tobias, who will not give you a specific report today, but we have distributed slides showing our train speed is up, at 23.4, our cars online have improved and achieved equilibrium, and system terminal dwell time continues to improve.

The fourth quarter improvement in train speed was 4.9%, and dwell time improved 2.9%.

One of the slides also shows our performance metrics, and although they're not yet up to our expectations, you will see that they continue to improve.

The Thoroughbred operating plan is critical to our future business growth and positions us to improve service consistency and reliability, and at the same time post productivity gains.

We found this improvement is magic for us, since it helps sell our service and improves the value of our service and reduces costs all at the same time, so you're going to see us continue to emphasize consistent improvement on this plan.

In 2002, we continued to show leadership and safety and our numbers improved year over year.

Overall, our system continues to run safely and smoothly, the labor and management working closely together to meet our strategic targets.

Ike's going to give you a lot of detail on markets in a minute.

Let me just say that we were able last quarter to produce record-high railway operating revenues, 3% higher than last year's fourth quarter.

Given the conditions in the fourth quarter, we were relatively pleased with that performance.

For the year, our railway operating revenues increased 2% over 2001 levels, and also established a new record high for our systems despite the soft economy.

More important, our revenue growth demonstrates an upward trend, suggesting positive momentum going forward in spite of the uncertain climate we find ourselves in.

For the first half of 2002, railway operating revenues were down 21 million, but in the second half, revenues were up 120 million enabling us to show improvement for the year.

Intermodal revenues climbed 5% in 2002, reflecting increased demand for consumer products and traffic growth from new truck competitive and transcontinental inner line services.

We've announced those throughout the year in the form of partnerships with our major connections.

General merchandise increased 3% for the year, compared with 2001.

Automotive revenues strengthened by the continued strong domestic automobile demand, which you know about, posted the largest gain, growing 9% for the year.

For the year, our highway diversion calculation shows that we generated more than 73 million in net revenue increase, and we entered into new partnerships with all of our major connecting carriers to generate new business during the year.

Coal volumes, on the other hand, declined 5%.

Utility stockpiles remained higher than normal during the first half of the year due to moderate weather.

Utility movements continued slower than expected through the end of the year, as year-over-year coal inventory targets were reduced, and Ike will show you some detail on that in a minute.

On the expense side of the house, we're focused on process improvement using our own NS-21 initiative and the discipline of Six Sigma.

These programs generated considerable momentum for us during the year, and I've asked Katherine McQuade to be here today to give you an update at this meeting, both a report card on NS-21 and some talk about the areas we're targeting in our next phase.

This has been, and will be, a basic tool for us for process improvement, and we want you to hear a little about it.

We were able to improve our fourth quarter operating ratio to 81.8%, compared with 82% in the same period last year, in spite of a less favorable mix and the challenging economy.

For the year, our operating ratio improved to 81.5%, compared with 83.7% last year, that's 2.2 points, is a good improvement in the operating ratio, but you know me well enough to know I'm not at all satisfied with it.

As you know, we did achieve an operating ratio one quarter of this year that began with a seven, and I'm sure you're well aware we're focused on making that seven the normal first digit of our operating ratio.

We have, however, called your attention to this, produced year-over-year improvement in the operating ratio per each quarter since the second quarter of 1999.

Looking ahead, I'm afraid my economic forecast remains uncertain.

I think, like everybody else's in that regard.

But I do expect the continued improvements in operations which we have made to produce enhanced efficiency and improve customer service.

We showed last year that that formula helped us to revenue gains in spite of tough times, and we're counting on that formula to work as tough times continue to improve our operations and service and revenues as a result.

As I've said before, and it's still true, we have the capacity to grow our business.

We've got the technology and infrastructure, both in place now, both to serve existing business better and to get some new customers.

I remain cautiously optimistic about the economic recovery, in spite of all the obvious uncertainty.

For January, so far, overall car loadings are relatively flat.

There are, however, some areas of modest strengths which include chemicals and intermodal volumes, which are both up year-to-year.

In coal, in January, we have lost some loadings due to weather and mine issues.

It's not as strong as you would expect the cold weather to produce, but we do expect improvement as a result of the cold weather burn we're now having.

As we move forward, we're going to continue our commitment that we've demonstrated to you consistently to pricing our services, to reflect the current market value of our improved rail service.

Overall, we remain optimistic that we can continue our revenue improvements this year, although clearly the economy is a challenge until we get by the early year uncertainties.

On the cost side, 2003 poses equal or greater cost pressures.

There's reduced pension income, which you know about, and Hank will talk about.

Increased wages and health and welfare benefits for contract employees that are in this year.

And, as you know, the story, rising diesel fuel prices, which we have to face.

Still, our strategy remains to be steadfast in our concentration on process and productivity improvement.

We're committed to improving service consistency and reliability for our customers.

We have found that that reduces costs overall and our strategy is to continue generating free cash flow and reducing our outstanding debt. 2002, our goal was to reduce debt by 300 million.

You may remember, and we exceeded that target.

I have confidence that our recent results show that Norfolk Southern is on course and headed in the right direction.

As we move forward, I'm optimistic we'll post the performance levels that our shareholders expect and that we're committed to delivering.

Now, I'll ask Hank to review our financial numbers for the fourth quarter, then Ike will tell you about the specifics of the market and then Kathryn McQuade will be here to talk more about our process improvement initiatives, and then we'll be here to take any questions that you have.

Hank?

Thank you, David.

Good morning, and thank you for joining us.

As David indicated, we had a good fourth quarter and finished what now looks like a good year in a difficult business environment.

We are, however, still cognizant of the continuing weak economy, and must remain vigilant on cost control, while forging ahead on developing new markets and remaining focused on revenue growth.

As you're aware, in the first quarter of 2001, we recognized an additional after-tax gain of 13 million.

We're three cents per share related to the 1998 sale of North American Van Lines.

Today, I'll focus on our full-year results, excluding this item.

Railway operating revenues for the fourth quarter were 1.58 billion, an increase of 51 million, or 3%, compared with the fourth quarter of 2001.

For the year, railway operating revenues were a record 6.27 billion, 100 million ahead of last year.

Fourth quarter car loads increased by one-tenth of 1%, and revenue per car increased by 3.3%, resulting in a 3.3% increase in railway operating revenues.

For the year, car loads increased by 1.4%, and revenue per car increased by two-tenths of 1%, resulting in an increase in railway operating revenues of 1.6%.

Ike will provide you with the details of our railway operating revenues in just a moment.

Railway operating expenses for the fourth quarter were 1.29 billion, an increase of 38 million, or 3%, compared with 2001.

For the year, railway operating expenses were 5.11 billion, 51 million lower than 2001.

For the fourth quarter, with the exception of materials, services, and rents, and casualties and other claims, all categories of railway-operating expenses remained essentially flat compared with 2001.

As you know, we made an announcement in the fourth quarter that we were decreasing the expected long-term rate of return assumption on pension assets to 9%.

This resulted in a noncash increase in compensation of benefits expense of $10 million pretax.

Absent this, compensation of benefits expense, would have decreased by approximately $12 million for the quarter.

Casualties and other claims increased by 8 million, or 24%, primarily due to unfavorable personal injury claims development, principally a result of the periodic study that was recently completed, and increased loss and damage expense.

Materials, services, and rents increased by 36 million, or 11%, primarily due to higher volume-related and joint facility purchase services, in addition to increased costs per locomotive overhaul materials.

These higher costs were partially offset by lower equipment rents expense.

For the year, railway operating expenses declined by $51 million or 1%, compared with 2001.

The largest decrease was in diesel fuel expense, which decreased by 70 million or 17%, due principally to a lower average price per gallon.

The average price per gallon was 73 cents for the year, compared with 86 cents per gallon in 2001.

Diesel fuel consumption was modestly lower at 472 million gallons versus 478 million gallons in the prior year.

As you can see from this chart, the fourth quarter was the first time that we saw a year-over-year increase in the average price per gallon. 80 cents per gallon compared with 78 cents per gallon in 2001.

Our diesel fuel hedging program generated approximately $10 million in savings in 2002.

In the fourth quarter, approximately 67% of our diesel fuel requirements were hedged with diesel fuel swaps.

The first, second, and third quarters were 68, 77, and 70% hedged respectively, using a combination of swaps and advanced purchases.

We had 80.2 million gallons of fuel hedged in the fourth quarter, and 82.2, 92.3, and 79.6 million gallons hedged respectively in the first, second, and third quarters.

The average price per gallon on the hedged fuel range from 69 cents in the first quarter to 76.8 cents in the fourth quarter.

Looking forward, we've hedged a portion of our 2003 diesel fuel requirement through swaps, such that we are hedged 70% in the first quarter, 68% in the second quarter, 60% in the third quarter, and 48% in the fourth quarter, at an average price per gallon of 73 cents for the year.

For the full year, we estimate that we are approximately 62% hedged.

As we progress through the year, additional hedges will be layered until we reach a point when at any given time, the following month's diesel fuel requirements will be 80% hedged.

At that time, our program will be fully ramped up, and new swaps will replace expiring swaps each month.

Once ramped up, we expect to be about 62% hedged for the ensuing 12 months at any point in time.

The next largest decrease was in other expense, which declined $22 million, or 10%, principally due to lower property taxes and lower sales and use taxes.

Conrail rents and services decreased by 9 million, primarily due to lower shared asset area operating costs and higher equity earnings from Conrail.

For the year, depreciation was essentially flat with 2001.

In contrast, casualties and other claims increased 28 million, or 20%, largely due to the results of a periodic actuarial study which reflected adverse personal injury claims experience, an increased loss in damage expense.

Material, services and rents as a whole was 13 million higher than last year, but there were large fluctuations among the three components.

Purchase services increased by 66 million, primarily due to higher volume-related services, increased legal fees, higher joint facility costs, and increased derailment expenses.

Materials increased 9 million due to increased expense for locomotive overhaul materials.

On the other hand, these increases were partially offset by a reduction in equipment rents of 62 million, or 14%, largely made possible by the improved efficiencies and operations flowing from our new Thoroughbred operating plan.

Compensation and benefits increased 8 million, compared with 2001, primarily due to escalating health and welfare costs, $36 million less in pension income, and higher wage rates that were largely offset by reduced employment levels and lower payroll taxes.

In 2002, our employee head count declined from 29,828 to 28,514 as a result of retirement, attrition and selective furloughs.

While our employee count decreased, productivity continued to improve.

For example, in the fourth quarter, operating revenue per employee improved by 8%, to $55,900 per employee compared to the prior year.

Another measure of productivity, car loads per employee, also continue to show quarter-over-quarter improvement.

Looking at 2003, we expect upward pressure on our compensation and benefits costs due to higher wage rates, increased health and welfare benefit costs and lower pension income, which will decline by approximately $33 million.

The change in pension income is due to changes in our actuarial assumptions announced last November and reduced pension assets reflecting the decline in the equity markets.

While we will realize a benefit of approximately $21 million from lower payroll taxes as a result of the railroad retirement bill enacted in 2001, that incremental savings will be more than offset by an increase in railroad unemployment tax rates and higher payroll taxes on increased wages and a higher wage base.

Our railway-operating ratio for the fourth quarter was 81.8% compared with 82% last year.

For the year, a 2% improvement in the operating revenues, combined with a 1% lower operating expense level, produced an operating ratio of 81.5%, compared with 83.7% in 2001, or a 3% improvement.

Income from railway operations for the fourth quarter was 288 million, an increase of 13 million or 5% over 2001.

And for the year, income from railway operations increased by 151 million, a 15% improvement.

Total other income and expense for the fourth quarter was income of 26 million compared with income of 32 million in 2001.

Principal difference was due to gains on sales of property and investments, which was $21 million lower in the fourth quarter than last year, which, as you may recall, benefited from an $18 million gain on a single, large property sale.

Coal royalties at 12 million were about even with last year.

Accounts receivable sales fees were less than 1/2 of 1 million dollars versus 3 million in 2001, due to reduced sales of accounts receivable and the lower interest rate environment.

All other income of 3 million for the fourth quarter compared with an expense of 9 million last year.

Interest expense on debt at 128 million was $8 million lower than 2001, reflecting the lower interest rate environment and less debt outstanding.

For the year, total other income and expense was income of 66 million compared with income of 99 million in 2001.

Gains on sales of property and investments were 46 million, $13 million less than the $59 million in gains realized in the prior year.

Coal royalties for the year at 48 million were slightly below 2001.

Accounts receivable sales fees were 4 million, $13 million lower than last year, again due to the decreased accounts receivable sales and lower interest rates.

All other was an expense of 24 million, compared with income of 5 million in the prior year, or a $29 million swing.

As a reminder, we benefited from reduced interest accruals on federal income tax liabilities of approximately $19 million in 2001, and a $13 million litigation settlement in favor of the company.

Interest expense on debt was $518 million, a decrease of 35 million, or 6% compared with 2001, reflecting the lower interest rate environment that we enjoyed in 2002.

Fourth quarter income before income taxes was 186 million compared with 171 million last year, and a 9% improvement.

For the year, income before income taxes was 706 million, an increase of 153 million, or 28% compared with 2001.

The provision for income taxes for the fourth quarter was 57 million compared with 56 million last year.

And the effective tax rate in the fourth quarter was 30.6%, compared with 32.7% in 2001.

The lower effective tax rate was primarily due to higher equity earnings at Conrail, as well as favorable tax adjustments related to prior years.

For the year, the provision for income taxes was 246 million, compared with 191 million in 2001.

The effective tax rate was 34.8%, compared with 34.5% in 2001, just slightly higher.

For the fourth quarter, net income was 129 million, 12% higher than last year's 115 million.

And for the year, net income was 460 million, 27% above the 362 million earned in 2001.

For the fourth quarter, as you can see, railway operating revenues were $51 million higher while railway operating expenses increased 38 million, resulting in a $13 million improvement in income from operations.

Other income net was $6 million less than the prior year, whereas interest expense on debt was 8 million lower, and income taxes were 1 million higher, resulting in a $14 million improvement in net income.

For the full year, railway operating expense revenues increased by $100 million, while railway operating expenses declined by 51 million, resulting in $151 million improvement in income from operations.

A $33 million decrease in other income net was more than offset by a $35 million reduction in interest expense on debt.

The $153 million increase in pretax income resulted in $55 million more in income taxes, and an increase in net income of $98 million over 2001 results.

For the year, earnings per share were $1.18, which was 26% above the 94 cents per share earned in 2001, and that's the highest level since the Conrail integration.

2002 was by all indicators a good year, as can you see from this chart.

Operating revenues increased 2%, while operating expenses declined 1%, producing a 15% improvement in income from operations.

Our operating ratio continues to improve this year, declining by 3%, as we move towards a ratio in the 70s.

Finally, net income increased by 27%, and earnings per share rose by 26%.

I hope that you'll agree that we achieved good results, particularly in a difficult economy, and that the Thoroughbred is moving in the right direction.

Thank you for your attention and now I'll turn the program over to Ike who will give you an in-depth report on our railway operating revenues.

Ike?

Thank you, Hank, and good morning.

Despite a struggling economy and significant declines in our coal business during 2002, gains in automotive traffic and intermodal resulted in an overall increase in volume of 1%.

And supplementing our modest gains in volume were improvements to our net worth and implementation of Thoroughbred operating plan.

These efforts improved our market opportunities, including conversions from the highway and better market value pricing, which I will talk about later.

These successes also helped us offset the effects of a fluctuating general economy which existed throughout the year.

The year 2002 began with annualized first quarter GDP growth of 5%.

However, during the second quarter and fourth quarters, the recovery stalled.

The final quarter of 2002 is expected to post real GDP growth of only 1%.

The two economic metrics that affect us the most are the ISM index for manufacturing activity and consumer confidence, and both had their ups and downs and varied considerably during 2002, and a point I'm making is that economic uncertainty existed throughout the year, and we expect it to continue into 2003.

And against that backdrop, our quarterly year-over-year volume comparisons during 2002 varied as well, especially third and fourth quarters.

Fourth quarter volume was all but flat versus 2001 after an improved second quarter, and a very strong third quarter.

With the exception of coal and metals and construction, all of our markets produced modest year-over-year gains and the fourth quarter volume was affected by the lack of continued improvement in manufacturing activity and from the impact of the west coast work stoppage on our intermodal business.

Intermodal's volume increased only 1% in the fourth quarter, and that's compared to increases of 12% and 11% for the previous two quarters, and this certainly would indicate the effect of these labor disruptions on our intermodal business.

As I mentioned earlier, intermodal and automotive produced year-over-year results throughout 2002, while our coal business struggled against the comparisons of very strong shipments in 2001.

As David indicated, the fourth quarter revenue reached 1.581 billion, an increase of 51 million, or 3% over 2001, while for the year revenue was up 100 million or 2%.

Coal revenues reached 361 million, that's down 6 million, or 2%, when compared to the fourth quarter of 2001, and for the year, coal declined 80 million, or 5%.

Outages at several large utilities and the slow export market affected our coal business throughout the year.

Despite the west coast work stoppage, the fourth quarter was our highest quarter for intermodal.

Revenue exceeded 2001 by 14 million, and 58 million for the year, both represented 5% increases.

And merchandise produced its highest fourth quarter revenue ever, and that is in spite of a struggling manufacturing economy that I earlier described.

Merchandise revenue increased 43 million, or 5%, as all of our sectors produced good year-over-year gains, and for the year, merchandise revenue grew 122 million or 3%.

I'd like to step back for just a moment and compare 2002 with the year 2000, which is an interesting, if not encouraging, comparison.

For 2002, we have 49 million more merchandise and coal revenue than we had in 2000, in spite of 238,000 less car loads.

Including intermodal, our volume is down over 126,000 loads, while revenue is up 111 million.

We believe with help from the economy, a large majority of these 238,000 loads would be there, and represent a real opportunity for us going forward.

And that leads to an attempted analysis of revenue per car to determine change due to traffic mix versus price.

The increase in revenue per car accounted for 69 million of the 122 million dollar increase in merchandise revenue for 2002.

Merchandise obtained its highest revenue per car ever, posting an increase of $25, or 2% for the year, and gains were realized by all of the merchandise groups for both the fourth quarter and the year 2002.

For the fourth quarter, these increases were due to a favorable traffic mix as well as pricing improvements.

For the year, we estimate that the traffic mix overall was neutral or just slightly favorable.

Looking at the fourth quarter, all of our business groups benefited from a favorable mix.

Ag continued to benefit from extended hauls of corn to the northeast and southeast, while the automotive gained new longer haul business.

And we estimate improved pricing to market accounted for approximately 60% of the gain.

Product mix within these business groups affected revenue per unit as well, as estimated at 75% of metals and construction revenue per car increases were the result of favorable change of product.

Metals volume increased 10%, while lower revenue per car construction volume declined 15%.

Improved billing, which equates to less corrections from prior periods and increased ancillary income from and storage also contributed to the overall improvement.

This is our second quarter year-over-year revenue increases for all of our industrial car load groups.

For the year, merchandise revenue was up 122 million, or at 3%.

Reviewing each of the markets, Ag increased 4% for the fourth quarter and 3% for the year, and revenue from those previously mentioned corn shipments drove the quarterly improvements, increasing 29%.

Our 75-car shuttle program has expanded to 20 origin elevators in five southeastern feed mills, and we calculate that this has generated a 60% improvement in equipment cycle time, and because of the drought last year, these long-haul movements we believe will continue until the next grain season.

Metals and construction also had a 4% revenue gain in the fourth quarter and 3% for the year, despite recent weakening steel demand.

This is generally because of marked industry improvements compared to 2001.

Our volume growth resulted from restarted mills which had been closed during 2001, and the increased ramp up in production from recently located mini-mills.

International Steel Group, ISG, purchased LTV and Acme Steel.

And in addition, Newcore Steel purchased and restarted Trico's Alabama mill.

The increase in metal shipments was, as I mentioned, was partially offset by the reduction in state highway construction projects.

The year 2002 was record breaking for our automotive business.

Automotive revenues grew 76 million over 2001 and also exceeded the revenues in the year 2000, where there was record production.

These results were project driven and accomplished through revenue yield enhancements, including new business, conversions from the highways, price improvements on contractual business and continued network improvements.

Our Thoroughbred operating plan was also a major contributor for our automotive rail car fleet productivity.

Revenue per car increased for both the fourth quarter and the full-year 2002, and combined with 11% decline of car days per load, capacity has been created along with value-added service costs have been reduced.

Looking at 2003, light-vehicle production in North America is projected to decline only slightly.

For Norfolk Southern revenue and volume growth will continue to be project driven and will come from the new Honda-Lincoln Alabama plant, as well as the new southeast distribution center for Toyota, as well as Toyota's second Princeton, Indiana plant, and new production capacity coming online at Mitsubishi's normal Illinois plant.

After several quarters of contracting market, our paper business produced its second consecutive quarter of year-over-year gains with revenues increasing 7 million, or 5%.

I think the most promising of these fourth quarter increases were that they were across most lines of business, indicating this industry's production is increasing and on the rebound.

For the year, revenue declined 9 million, or 1%, compared to 2001, but I would add that looking at 2003, there continues to be a great deal of uncertainty going forward.

Chemicals revenues were up 8 million for the quarter, 17 million for the year.

Strong demand for plastics and industrial chemicals and miscellaneous chemicals offset some weakness on the petroleum side, and for the year, weak demand in a cautious economy, resulted in flat car load comparisons with 2001.

Revenues increased as a result of improved pricing to meet the market conditions as well as a favorable product mix.

As I previously mentioned, the implementation of the new operating plan and a focused field sales effort were instrumental in converting traffic from the highway throughout the year.

With reliable service, along with what we call improved visibility and the ease of doing business, it has allowed us to market a truck-like product, and for merchandise alone during 2002, we've successfully converted net of $33 million in revenue from the highway.

Our coal business continues to be unable to hit on all cylinders during any one quarter, and I say that because the fourth quarter coal exports increased 29%, and they were up for the first time since the third quarter of 2000, and that was while our utility domestic metallurgical and industrial business were down 23,000 car loads.

After year-over-year gains for the third quarter, coal volumes for the fourth quarter fell 3%.

Looking at our specific markets, both industrial, domestic metallurgical, were off 16% for fourth quarter.

Industrial declined principally due to lower manufacturing activity, while metallurgical volume was affected by a shorter lake season resulting in fewer fourth quarter tons being shipped.

For the year, utility volume declined 4% below 2001 in the fourth quarter, throughout 2002, volumes were affected by reduction of stockpile inventories, outage per maintenance, and then additional down time for SCR installation and Knox reduction devices.

There are some positives in our utility-coal storage.

The first energy Samus (phonetic) plant continues to ramp up, and during the last two quarters, 900,000 tons were shifted from barge to rail.

Shorter-haul volume to the river was up 4 million tons in 2002, as we successfully diverted that business from truck.

Our utility coal franchise will continue to face challenges as well as opportunities in 2003.

Like the export market, the utility market has been affected by changing dynamics.

Various utilities have efforts under way to lower their carrying stockpile inventory levels and action is under way to place clean-coal technology on current units, which will also cause some down time.

And that's both a challenge for next year, but an opportunity, obviously, going forward.

And it appears the gas plants are continuing to operate even with gas prices above $5.50, and this is on top of uncertainty about the energy bill, air emissions and deregulation.

Of course, the solution for all of this is continued increased electricity generation.

As I've previously indicated, export volume increased by 6,800 loads or 29% in the fourth quarter, and for the year, volume declined 20% compared to 2001.

For 2003, the export market appears to be more dynamic, if not as uncertain, and as I mentioned, the export metallurgical market has a new set of dynamics.

China has become a net importer of metallurgical coal, which has tightened the availability of Australian coals to Europe.

The export of Chinese coke has slowed in favor of consumption, and metallurgical coal and coke availability combine with a weaker dollar and limited shipping capacity has caused the European steel producers to show more interest in U.S. coking coals.

These converging events have resulted in increased volumes through Lambert's Point for December and January, and we do expect that these market conditions will continue to the last quarter of the export year, and that's ending March 31, and on into the next contract year.

Coal fourth quarter revenue per car increased to $892.

This is $11, or 1%, improvement over last year.

For 2002, coal revenue per car declined $2, compared to 2001.

And as I've indicated at previous meetings, the decline of higher revenue per car export business, which has a longer haul, combined with the significant increase of shorter haul shipments, are the principal reasons for the decline.

For the quarter, shorter-haul shipments with pricing less than $250 increased by 10,000 loads, the offsetting increase was due to improved yield in the adjustments.

Intermodal achieved its highest revenue per unit ever during the quarter, reaching $526.

Container and trailer revenue per unit increased by 4% and 5% respectively.

Changes in our domestic pricing increased revenue per unit, $10, while changes in traffic mix due to a decline in container traffic contributed $6.

The remaining $3 came from additional fuel surcharges that were collected in December, this past December, that were not collected in December 2001.

And for the year, intermodal revenue per unit was down $5 due to traffic mix, an increase in container business, declines of premium trailer business, and a loss of the 2001 fuel surcharge that was in effect nine months -- first nine months of 2001, and was not in effect for 2002.

Our intermodal volume increased 6% over 2001, and 1% over fourth quarter.

Growth in the fourth quarter, as I mentioned, was negatively impacted by the work stoppage at west coast ports in October, and November and December volume improved only, I would say, improved 3%, despite the lingering effects on our network from that work stoppage.

For the year, international volume increased 10% while domestic volume grew 8%, and triple crown business was up 4%.

New product introductions, David mentioned this, continue to drive our intermodal volume growth in 2002, through conversion of freight from the highways to the railway.

Of the nine new major product launches or expansions, all of them were done in conjunction with other railroads.

Truck-to-rail conversions were also instrumental in volume growth. [INAUDIBLE], Savannah and Maple Heights terminals that were completed in the last two years have contributed nearly 100,000 truck-to-rail conversions since those operations began.

An additional 39,000 converted loads were contributed by the aforementioned inner line service lane alliances we have.

Improved operating metrics are certainly also part of the story, as we strive to optimize capacity.

Equipment costs per load decreased 19%, while revenue was enhanced as platform days per revenue load improved 4%, and revenue units per train increased 10%.

And most everyone agrees that intermodal industry will continue to grow, also the trucking industry is expected to face increasing costs and tighter capacity, and that's an environment that is favorable for increased highway conversions and also yield improvement.

And finally, a few comments about our real estate activities, which generated $78 million in total from all of those activities, including the sale of property rentals and other income.

This was down from 97 million in 2001, which included two large transactions that Hank mentioned that total 33 million, and a year in which the national real estate market was less than robust, we believe that 2002 results were encouraging.

We continue to market aggressively our surplus properties and have instituted a new program to enhance rentals and other real estate-related income.

And in summary, I feel very positive about our service products, our value added trucklike products, in the available capacity, which should result in continued revenue growth and yield improvement.

And to end where I began, the economy and marketplace remains uncertain, and we certainly remain cautious about 2003, and, Katherine now will provide us an update on NS-21 process.

Thank you, Ike.

I'm pleased to be here this morning to talk to you about our NS-21 program.

In October 2000, Norfolk Southern launched its NS-21 program.

We focused on our business processes and how they needed to change to take us into the 21st century.

In 2000, a period of intense change for our company, Norfolk Southern had an 89% operating ratio, and operating expenses of 5.5 billion.

Working in concert with TOP and other improvement initiatives, in two years you can see the progress we've made.

Benefits to be achieved were hard-dollar benefits that would have a direct impact on our bottom line.

There is no single line item in the financials that captures all of NS-21, and NS-21 works in conjunction with other improvement initiatives.

Therefore, isolating and quantifying the savings are difficult.

However, expenses were reduced, cash flows and working capital improved.

How did it work?

We dedicated some of our most talented employees to this effort full time, with the help of outside consultants, a road map was created to allow Norfolk Southern to achieve its financial goals.

Initiatives were designed to have quick hits to the bottom line, less than 18 months.

Our focus was on changing our processes to be more efficient, improving communication and coordination, and eliminating redundant work and overcapacity in our system.

This allowed us to minimize the cost outlays and to achieve benefits quickly.

Some benefits are one-time cash savings, others are recurring expense reductions.

Implementation costs primarily included technology development and labor protection, or severance.

Dollar benefit to dollar costs of this program has been ten to one.

But we're not finished yet.

As you can see, we're in the process of a new phase, version 2.0, of analysis and implementation, with more aggressive targets and more comprehensive involvement from the people in our company.

A bit more about this later, however.

First, I'd like to talk to you about our successes.

We have successfully completed the first three rounds of projects under the NS-21 program.

Over the last two years, we have realized 110 million in benefits, including 45 million of recurring cost savings.

These benefits are net of implementation costs.

Our first round focused on noncore assets, areas while our operating department focused on its efforts on the top implementation.

We prioritize the areas that contain large cost drivers, functions that were labor-intensive and/or required annual cash infusions of maintenance and capital.

We also included areas that touched our customer.

Our first focus was dealing with the overcapacity that resulted from the integration of Conrail assets and changes in our business mix.

We started with engineering and mechanical facilities.

The Birmingham frog shop was leased to a manufacturer of railroad track work and supplies.

All inventory and some capital assets were sold for one time cash benefits.

We now purchase frogs for a savings of $2,500 per frog.

The Atlanta rail welding shop, along with the equipment, was leased to a provider of contract welding services.

We now purchase continuous welded rail at a savings of approximately $20 per weld over 2001 costs.

On the mechanical side, the cost to wield shop was sold to a supplier of rail car facilities and parts.

The total, one time cash benefit from the sale was $5 million, and ongoing savings per wheel set is at $56 per wheel set.

A portion of the [INAUDIBLE] mechanical facility was shut down in 2001, and Holidays for a car shop was closed in 2002.

Savings are expected to exceed $6 million a year.

Over the course of 2001, and 2002, Norfolk Southern reduced its car fleet by 15,000 rail cars, and we have identified another 4,000 cars for disposal.

Cash proceeds from the sale of freight cars were 40.3 million, and another 8 million is expected.

Additionally, we have turned back lease cars and reduced car [INAUDIBLE].

Through improved management tools and information and working with the top operational changes, we expect to focus renewed attention in this area.

In addition to freight cars, we looked at all surplus equipment, including highway vehicles.

By implementing stricter guidelines and increasing the life cycle of the fleet, we were able to eliminate 600 vehicles.

Cash from the sale was just over $1 million and another 2 million achieved through reduced maintenance.

The next area of focus was improving the quality and accuracy of our day-to-day transactions with customers.

Correction instructions and movement reporting are the key to accurate billing to our customers.

We have improved our billing accuracy to 96%, up from 90% and improved our days outstanding.

We rolled out an internet application for small and medium-sized customers.

Combined with increased use of traditional EDI, we are now receiving 79% of customer shipping instructions electronically.

This eliminates manual keying and has been proven to drastically reduce errors in shipping and billing.

These systems have allowed us to reduce labor costs at our Atlanta operation center $830,000 per year.

Our last focused area targeted a variety of support processes.

Strategic sourcing is the use of strategic relationships for sourcing purchasing decisions on large expenditures.

We were able to improve the amount spent on ballast, intermodal services, office expenditures, locomotive materials, Telecom, cell phones and employee travel.

Benefits achieved were 6.6 million in 2002.

This has become so successful that we have established an internal strategic sourcing department.

Joint facilities are areas operated by one railroad that serves multiple carriers.

Improved communication with field personnel on contractual agreements and an ongoing audit process with dedicated audit resources was established.

We recovered almost 6.8 million through this project.

We continue to look at our coal infrastructure, to deal with the capacity changes.

Operations at Lambert's Point are scaled back to five days a week, and we've reduced locomotive [INAUDIBLE], reducing operating costs 5.2 million annually.

NS-21 touches many areas, and as an example of some of the smaller projects, we were able to eliminate 20 positions within the claims department through automation.

Our fourth round of projects were started in the middle of 2002, and are well on their way.

Projected benefits from this group should provide an additional 20 million in either one-time cash savings or annual savings.

In the real estate area, we have outsourced the administration of pipe and wire leases.

Our vendor has increased our income 3.3 million annually.

Additionally land leases are being renegotiated and we anticipate additional rental income, and I think Ike mentioned some of the real estate activity.

Finally, we are reviewing the efficiency and the need for 3,200 field facilities to reduce maintenance expense or eliminate future capital needs.

With our improved customer service and better information systems, our long-term goal and our review of demurrage, is to create a process that is a win-win for the railroad and our customers.

Short-term, the team is working on data issues, which calls customer disputes and corrections.

Their goal is less than 5% corrections of demurrage bills.

Currently, we have 18% of our bills are corrected.

I think Ike also mentioned how demurrage helped with revenue this is quarter.

The NS-21 program provides continuous benefits each quarter that help us achieve our bottom line.

As I've said earlier, we are just getting started.

This program is now a part of our organization.

Using the structure, we will be targeting our most aggressive goals ever.

This will take the commitment of the entire corporation and dedication to this common goal.

NS-21 is refocused, and we are moving ahead.

These are the areas that we intend to focus in the coming year.

Track structure and density team is matching our new network under TOP to our existing track infrastructure, and charged with lowering maintenance costs.

Even though we have made great strides in lowering our labor costs over the last three years, we believe that we can still make marked improvements in employee productivity.

We are looking for improvements both in the agreement and nonagreement areas.

We will continue our relentless effort to reduce equipment costs, focusing on trailers, containers, locomotives, and freight cars.

The yard effort, coordinated through the TOP team, is to restructure our yard capacity to match our changing traffic patterns and provide us flexibility in the future.

And the top line is not going unnoticed.

We will focus on, not just our freight movement revenues, but looking at innovative ways to provide value-added services for our customers, growing our relationship and our business with them together.

As proud as we are of the successes to date, we are more committed to this approach in the future.

We believe that we have the ability to become best in class in every area and to set standards for the industry.

Our NS-21 program will help take us there.

Thank you.

David?

Thank you, Kathryn.

I know that's a lot of data for you, but we want you to have a lot of data.

Yes, Scott, you're first.

Just a couple of quick questions.

Given that Steve made the trek, I was wondering if you might just give us any thoughts in terms of incremental changes or additions that are going on with TOP, maybe a couple of quick comments about where we are and what things might roll out for 2003?

Steve didn't think he'd be able to make the trip without talking so --

Hope springs eternal, however.

I thought there might be a slight chance.

TOP is moving along at a rapid rate.

I think the opportunities for the future still hold as many as maybe we have experienced in the past, and I'm very encouraged by it.

One of the things we are pursuing rapidly at the moment is the population of an operational plan adherence piece at TOP, which will help us do the proactive monitoring we've talked about on the execution side of this.

That will be followed by LOPA, which is a local operating plan adherence, and there are just enormous opportunities for those of you we have spoken to, or had some exposure to it.

I don't want to be too redundant, but that's the piece that allows us to integrate the realities of what we do back into the system, monitor and measure that and improve the system in concert with the requirements and the needs of our customers in order to ensure that we're maximizing our utility, improving our service reliability and consistencies, and, in fact, being able to track what goes on in the field, vis-a-vis, what we have committed to do, and that's in the coming years, so we're very excited about that.

We try to be as innovative in our continuing efforts as we are in inventing new acronyms.

And then one other question for Ike.

I wonder if there's any impact from some of the comments about closures on the river system?

I know, I guess it's -- whether it's high water levels or otherwise, whether there's any positive impact in the short run for some of your shorter haul river business or for the utilities --

That's a good question, and I do think that will impact it favorably as well as the continuing challenges facing the truck industry, even those that carry coal to the river, so I think there will be continuing opportunities.

One of the things we see, as we see strain on some other modes, it seems to us that we're in a good position to step in.

We try to make that clear to our customers and be ready to step in when there are special problems, and then we do the obvious and try to hang onto it.

Yes?

Good morning.

Tom Wattle with Bear Stearns.

A couple of questions.

I think, first, one for -- or two for Ike.

If you can give us a sense on a fuel side, fuel expenses gone up a lot, and I think to your credit, to Hank's credit, you've been very well positioned with fuel hedging, but on the fuel surcharge side, can you take us through the book of business you have, and maybe talk about intermodal, how much of intermodal business do you get a surcharge on, how much of your total book of business can you actually go in and apply a fuel surcharge, just, you know, in some rough terms?

Your timing's perfect.

Effective today, a surcharge went in across all levels of traffic.

Of course, that's not 100%.

If there's, you know, contracts read otherwise.

We estimate overall it's about a $4 million a month, if it all holds, and probably that -- that may be overly optimistic, but it's -- it does -- it does go in, also, for intermodal business.

So that 4 million is what you're getting intermodal and car load?

And coal, yeah.

Where you can --

And I mean, what percentage, maybe, is that 25% of the total book, if you kind of back out long-term contracts where you can't get a surcharge or tack out R-cap business --

I'm not sure I have that number.

It's small overall.

And in percentage.

Okay.

As you well know, most of the business is under contracts, and some of those permit it, others don't.

Okay.

And then maybe if you could talk a little bit more broadly on the pricing side, can you give us a sense of whether there's continued momentum with your pricing actions?

Is that slowing down a bit, as you maybe lapse some of the Conrail business that had been lower prices and had rolled off now?

Or just give us an update on what that looks like.

I think our year results taken as a whole, you know, certainly more indicative than what happened in the fourth quarter.

There were -- there was a lot of seasonal results in the fourth quarter as well as traffic mix, but I see no difference in 2003 as far as opportunities are concerned than what we incurred in 2002.

So I think revenue per car will continue to increase, and we, again, with the value-added services that -- and the discussions that Kathryn shared with you, we think we will, you know, have that opportunity to fairly price to the market.

A difficult economy is always a difficult pricing environment, as you well know, and we're aware of that, and every -- all pricing is -- all politics are local and all pricing is individual.

But we do think -- we do think that we have a more valuable product today than we've ever had, and if we can make that value flow through to our customers, then that benefits both the customers and us, and we try to reflect that in the pricing of our product.

We do this -- we devote a lot of effort on a continuing basis to this, because you've heard me on my soapbox before express the view that our industry needs to be much better at increasing the value of our services and then getting paid for it.

Yes, sir?

Thanks David, Jason Son, Lavondale Partners.

Ike, I want to talk about coal a little bit.

Let's turn to export.

You mentioned that China was just under a huge consumption.

How long do you think that's attainable for at these rates?

Jason, that is very difficult to know.

I mean, it's speculation, you know, throughout the coal industry, including worldwide as to how these changes have occurred, which have been very quickly and sudden, and what was seen last year, you know, importing can suddenly become exporting.

But what we're finding with our European steelmakers, who are customers for the export metallurgical coal is that they are looking toward the U.S. and to the possible availability.

There is renewed interest in U.S. coals, and we do think that will continue on past April 1, which starts a new contract year.

Beyond that, it's -- it's difficult.

We're -- we are -- we are beyond the point of predicting -- predicting export coal business.

We've been through a long difficult -- a long, difficult period of decline in that, in which we have fought hard to maintain the markets, because we did -- we do believe that there is a continuing market there, and we want to be in that market in order to realize the benefits of upturns, but we're very cautious.

But what we're conveying to you this morning is, I think Ike is telling you, that we do begin to see some signs of favorable development, certainly the strong dollar, the strength of the dollar is a factor you have to take into account but also the production and the consumption in the Orient has a lot to do with the supply of coal in our European markets, and we're beginning to see some favorable factors, and we're loathe to make predictions, but we did want to express to you our view that there are some -- it does look like there may be some good developments in that area.

Okay.

I hate to get you back up there, but in terms of utility coal, you mentioned that some of the utilities were looking to shorten their stockpiles, what percent are doing to do that, and what's the time frame?

It's variable.

Stockpile inventory levels are a very close number -- is a number that utilities keep very close to them.

There are attempts to, you know -- of course there would be, there are attempts to lower that inventory stockpile.

Those efforts have been under way for sometime.

We -- I really -- you know, speculation again, that some are attempting to go for 25-day carrying stockpile, 35 days has been more on the average, some of the larger utilities you may or may not hear from.

It's an effort under way, and I do think the gas plants do give some options out there as to being able to lower the stockpiles.

Okay, one more question, piggybacking on Tom's question on fuel surcharge.

You said it's $4 million if it all holds.

What are you targeting percentage wise to hold, because I know Burlington noted they get about 50% recovery on fuel surcharge.

We're targeting 100%. [ Laughter ]

Yeah, that -- that would get into --

I'll take care of Ike's target for you.

That's no problem.

Yes?

Thanks, David.

Welcome back.

Ike, just a quick question for you.

What do you see intermodal growing through the cycle?

I know you don't want to predict next year or this current year -- who can? -- what do you think the secular growth rate of your [INAUDIBLE] product is?

I think it's in the high single digits.

There are some offsetting factors including all-water service to the east coast, which could dampen some of the movements transcontinental, say, into New York and some of the coastal areas of the east.

But the -- you know, the best estimates out there are 6% to 8% again on volume increase, all depending on consumer confidence and the general economy going forward.

What the CEO tells the intermodal group is that I've got very accustomed to double-digit annual increases, and I really like to see two digits on that.

And on NS-21on the procurement side, I was just wondering who you were working with, if you brought in one of the outside -- you know, the remaining software firms, you know, e-commerce firms that work on that, and whether those numbers include or exclude numbers that you may have with the -- maybe working with the industry consortium.

How you relate to that.

Yes, we did bring in an outside consultant to help us with it.

They are now no longer involved, and we're doing it all internally, and all of the costs you did, cost savings are net of any of those expenses, and, yes, we are pursuing the e-commerce with Real Industry, but that is an ongoing process.

So -- I wasn't sure who asked that question.

Tony [INAUDIBLE] okay.

Did that answer your -- We didn't fire them, no, no, no. [ Laughter ] They did an excellent job.

It was McKenzie. [Low audio] No.

We always regard consulting as short term.

Yes?

Thank you, David.

Can you give us an idea corporate-goal wise in terms of what you believe you can achieve in productivity improvement on an annual basis for the next couple of years?

No, I -- I -- I would -- naturally, we have goals like that, but I just don't disclose them, and what I -- you know, what we have -- what we have tried to do is show you that we are -- that the way we approach it, we're doing it through process improvement and we're doing it in, we're showing you the kind of big areas that we have, who we're focusing our process improvements on and giving you some idea of what we've been able to accomplish in the past, and I have -- I have very aggressive goals for the future.

We certainly -- we've certainly expressed our operating ratio intentions, and I have -- I've often been pressed to set annual goals and say how long it will take us to get there, and we have -- we have those internally, but I think it is better not to -- our approach is not to -- not to make promises but to -- but to show results and then -- and then invite you to reach your conclusions from the historical results and the kind of things that you either believe or don't believe, we can accomplish.

So I hate to not just -- just not answer a question --

No, that's all right.

- this is one that I won't answer.

No problem.

You did state your goal of debt reduction in '02.

Are you ready to go out and have some kind of goal set, public goal for debt reduction in '03, and how do you -- how do you correspond that with any potential change in your dividend policy, especially if there is potential changes in the tax laws?

I think our goal -- I think we -- we probably don't want to set a specific debt reduction goal.

Hank, you can contradict me if you want to.

Again, we have internal goals.

I think what we have committed to our -- to our investors is systematic reduction in the debt, and we're conveying, I think, this year the kind of thing we're capable of doing, in doing that, and we do have -- we do have a very serious goal, which we've set for ourselves and stated to the -- to our investors that we're going to systematically reduce -- reduce our debt, and that's our -- that really is our top priority.

But we also did increase our dividend this year, and I think that represents a commitment from us to -- acting in that area, again as we see consistent improvement, and on the financial side, certainly we would -- we would plan to continue to address that, but, again, we don't go into specifics.

Yes, over in the corner.

Hi, good morning, Ken Heckster from Merrill.

Dave, could you just talk about the wage arbitrations that are going on that are supposed to be concluded for the unions in January?

And then Hank, if you could follow up with any details on the tax adjustments that you stated earlier.

Yeah, I think there was some -- There has been a lot of activity on the wage side.

We do have with one union a determination on a national basis.

In January, I think -- I would look for -- I would certainly hope that towards the end of the first quarter, certainly early in the second quarter, we'll have all of that resolved and moving forward.

The important thing that's going on is we are seeking to get some improvement in the health benefit side of the equation, and I think there's some reason to believe that we will begin to make some progress in that area, and I think -- I think you'll see some resolution on that around the first of April, and probably will be in a position to lay that out for you better at that time.

Was there a second part?

Yeah, for Hank, on the tax --

Oh, yeah.

Ken, each year, we accrue our taxes based on budgeted numbers.

And as we approach the later months of the year, we're able to make a more definitive assessment of what the tax liability looks like.

That's not unusual.

Last year, 2001, we had approximately $7 million of those adjustments.

This year, the adjustments were 10 million, $3 million difference year over year.

I think the more important story in the effective tax rate in the fourth quarter was the increased equity earnings in Conrail.

So the tax adjustments are kind of normal course for us, periodically we make adjustments in our state tax accruals as cases are resolved or assessments are finalized, and with respect to the federal income taxes, on an accrual basis, towards the end of the year.

And, David, if I can, I'd like to add something to the question on debt.

If you look at what we've done over the past three years, we have reduced debt by approximately a billion dollars since the beginning of 2000.

And as you look at our balance sheet, you will see very clearly that there have been reductions, not only in our outstanding debt, but also in our securitized receivables, which we kind of use as a balancing account, if you will.

Taking advantage of the short-term rates that are available, and very attractive short-term rates in today's environment, that are available to secure that financing at the lowest possible cost.

One quick follow up, if I may, just, Ike, Jason asked you before about the utilities stabilizing their inventories.

Can you tell us if you're seeing at this time that kind of a rebound with the cold weather we've been having, if you've seen the utilities start to increase those volumes yet, or is it still too early to tell if they've reached that new level?

I think as the chairman indicated, we have a lot of shipments that are being delayed right now in January, so if you looked at our January business, you would -- you would see that they are still lower than one would anticipate for the weather we're having.

But we have about 3,000 loads that are being delayed due to the weather and the frozen temperatures.

So we have a little better January going than we're showing.

It's everyone's estimation that the stockpiles are normal, or lower than, because of recent weather and shipments should start to pick up.

Yes?

Good morning, Jennifer Ritter from Lehman Brothers.

I'm looking at this slide talking about net truck diversions on the merchandise revenue of $33 million.

Over what period was this -- did this occur?

Was it all this year?

Yeah, I think that's an annual figure.

Ike?

Yeah, it's a number that we're reporting to the surface transportation board, and they are net, but I would quickly add -- and I did have a footnote, I think it got lost in the edit -- but it's annualized.

But quickly, it's a net which includes anything we lost to truck from rail.

Right.

And remember the slide that Ike showed was the -- was related to the commodity business, did not include diversions from [INAUDIBLE] there's some and in the intermodal business.

Right.

Do you have that number for last year, or know if it was lower or higher than the 33 million?

I do not.

Can I get it for you.

Okay.

Do you have a goal for next year that you want to share with us?

No.

But higher. [ Laughter ]

Thought I'd try.

Much higher.

You can assume it's considerably higher, though.

Yes?

I think this one's either for Hank or for you, David.

In the fourth quarter --

I couldn't see you at first.

How are you?

In the fourth quarter, revenues up about $50 million, most of that seemed to be yield, car loadings pretty much flat, and operating profit only up $13 million.

You know, the pension issue, I understand the changes in that, but I guess my question is, do you feel like you didn't bring as much of that home down to the bottom line considering a lot of this was incrementally was on the --

you know I always feel that way.

I think we had some -- as Hank's fourth quarter slide shows, we had some -- we had some expense -- expense issues in the fourth quarter that we -- that we dealt with.

You mentioned the big one, and of course, we had fuel costs, we had a number of things, so that I would always like to bring home more of it, and one reason we continue to work on our cost side is to make sure that we can -- we continue to do that.

So you would anticipate --

Given everything that was going in the fourth quarter, though, it's hard for me to be too un happy about the results we did for the fourth third quarter.

Ike, I just want to follow up --

I guess I would say it this way.

We do expect to see continued improvement in our operating ratio, and we did show improvement in the fourth quarter.

We'll certainly show improvement on an incremental basis, and I would like to show more improvement than we did show in the fourth quarter.

Okay, fair enough.

Ike, I just wanted to ask you about the issue, you sounded a little bit surprised maybe that the gas business is doing as well as it is, given that your coal volumes aren't -- haven't shown up to the extent you'd like in January.

Is gas share, as you see it, vis-a-vis coal, a little bit higher than you would have expected at these gas prices?

Yes.

I think they are.

I've just seen preliminary numbers that gas deliveries are way up, not only for heating, but obviously for running some of these plants.

Now, the coal producers and others are puzzled at that fact as well, because at the price the gas is selling for, it economically is about $2 over what you would expect to be seeing.

Do you hear chatter in the market that it's not sustainable?

That would be my estimation, yes.

You hear a lot of talk about that.

I don't think anybody's got the answer exactly.

Okay, thank you.

Yeah?

David, I want to get back to this business of truck diversions, and maybe it's Ike's question.

We've heard some comments from other railroads about how the business they're winning from trucks is better yielding business and better price business than business that they had on the books before, perhaps even lost to truck.

And if you could you talk about the mix of what your -- this business that you're getting, the net truck diversions.

And then following that, I have an operations question for Steve and one for Kathryn.

Roy, there's probably no, you know, one simple answer to the question, when you're taking into a multitude of markets.

In some cases, the traffic managers see challenges arising, and they're making a decision based on that, be it price or just difficulties on the availability going forward for trucking.

And I've also attempted to say in the past that we're not necessarily in all cases competing with the trucking industry.

They have become a very willing customer, to cut their own costs.

And we're seeing a lot of opportunities in that area.

And then, thirdly, with our operating plan, and particularly the information systems that we have out there, when I say a truck-like product, that is the ability to get a quote back and to react quickly, along with that reliable service, along with an information system that can provide monitoring of their shipment like they feel like they have with the trucking industry, and that's all coming together.

But it's -- there's a lot of pressure on the truck industry right now, and we're seeing them, as well, come --

I think the hallmark -- I would say, the thing that's really going on that's exciting in the business right now, is the increasing cooperation between rail and trucking companies in finding the best way, the best, most efficient way to handle the business and producing the highest value -- value-added product for the shipper.

And there's a lot of -- this is an exciting trend that's developing in the business, and I think it improves profitability for everybody.

Steve, we've talked before about the TOP program and rolling it out from, first the core trains, and then into the branch line network.

Where is the TOP program now with respect to running the branch line network as part of that TOP.

The TOP plan is in place.

Okay, so your locals are running --

The TOP plan is in place.

What we're talking about when we talk about operating plan adherence is the application of the measuring system that allows us to manage through that process and it's just an incremental, if you will, an incremental add-on.

So it's running through the entire system --

As we speak.

Raging.

Excellent.

And my final question is for Kathryn.

Very interested in your areas of focus.

Could you talk a little bit about what specifically you're looking at, as much as you can, in the area of track structure and density for Version 2.0?

To be honest, the team is just now beginning to get started, and they're really focusing -- we've had a program for a long time of looking at our track from a core strategic and tactical standpoint, and that will continue in those areas.

But really, the team right now is focusing on looking at the way we maintain our track and how we can reduce the maintenance in those areas.

So that's the primary focus at this point.

I'll add just a little bit to that.

We are developing some new diagnostic tools that will help us get -- we are not in the business of giving up revenues.

We're -- we're -- we are putting ourselves in a growth mode, and one of the things you don't want to do when you do that is give up revenues.

On the other hand, we clearly have less productive parts of our system, and so, we're looking -- we're trying to make sure that we know exactly where the profitability lies in our system, and yet, we're developing internally some diagnostic tools that we think -- and we're going to be a little proprietary about those tools, that we think help us understand the flows of business much better than we have before.

That's what this team is about.

We are -- we have long been in the -- in the business of paring lines and looking at this, and we have a good team doing that, in some ways we might even have a leadership position in that area,.

But it's always good to change, and we're taking some new looks in the business unit approach is one piece of that, and the approach that this team is going to take, it will be very -- we're going to be -- we're going to be quick about this, but we're going to be very careful, and we're going to do it in such a way that we grow our business.

You've been very patient.

Any last -- ?

Thank you very much for being with us.

Look forward to seeing you in a quarter.

Hopefully with good results again.