Norfolk Southern Corp (NSC) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, I'm David Goode.

And it's my privilege to welcome you to our third quarter 2003 analyst meeting, particularly we think, good results to report.

And I'll thank those hardy souls here in New York who braved the weather.

As usual, I will remind those listening by telephone conference call that we're also glad to have you and everybody today will be as careful as we can to take a microphone so everybody can hear what is being said.

The slides of the presentors, I remind you, are available for your convenience on our Web site in the investor relations section.

You can refer to those as we go through and as usual transcripts will be available from our public relations department and also we will post them on our Web site.

Let me introduce the several members of our management team who are here with us this morning, including our Vice Chairman, Hank Wolf, and also our CFO in the front row and Steve Tobias, our COO, is here.

Don Seale, our Senior Vice President, Merchandise and Marketing, I think all of you know is here today pinch-hitting Ike Prillaman and Ike is in Europe, hope looking hard for business, hope his being successful.

Also we have John Rathbone, our Senior Vice President and controller.

Bob Fort is over here in the corner vice president of public relations, Bill Galanko, our vice president, Taxation is here.

And Leanne McGruder, where are you -- director of investor relations and Debbie Malvin, Hank Wolf's system is in the back should you need anything.

So, everybody is here to help you answer questions.

I hope you will give them a chance.

Our report today is about Norfolk Southern continuing to implement important initiative across the board.

Many of which in and of themselves may not necessarily make the radar screen, but I believe you can see in our third quarter results that combined they're helping us to improve performance.

Our third quarter results show 9% increase in earnings year-over-year.

We've produced these results in spite of stubbornly continuing economic slowness in the quarter, particularly in some parts of our traffic mix.

And we had other challenges in the quarter, like weather and hurricanes, but through it all we were still able to maintain revenues and at the same time improve our net income.

We also improved our operating ratio compared with prior quarters.

In many categories we posted the best operating performance metric in our history this quarter and we continue to push hard on our improved reliability.

Of course, maintaining our focus on improving safety while we're at it.

Our operating ratio progress reflects improvements on the cost side, which came from a number of comprehensive steps, large, and small, some of which I will discuss in a minute.

To be specific for the third quarter, Norfolk Southern net was $137 million or 35 cents a share, which compares with net income of $126 million or 32 cents a share in last year's third quarter.

For the first nine months then, net income before the required accounting changes which you will recall earlier in the year, the net income before those changes was $359 million or 92 cents a share, which compares with net income of $331 million or 85 cents a share in the same period of 2002.

Including the income from the accounting change and discontinued operations, all in our total EPS for nine months are $1.24.

Even though Steve Tobias does not have a formal presentation today, let me give you a brief overview of our transportation performance for the third quarter.

That is that despite Hurricane Isabel who we got to know better than we wanted to, network performance was generally good and our safety record continued to show improvement.

For the third quarter both cars on line and average train speed were slightly improved from the same period last year.

While average terminal dwell deteriorated slightly from 2002 levels.

However, let me be quick to add that in the last several weeks average terminal dwell showed steady improvement.

Third quarter overall on-time train performance was 88%, that showed a 3% improvement over third quarter last year levels.

Two categories, auto parts and premium intermodal have performance in the 90's and we have no category of performance below 80% in the third quarter.

I'm convinced that our results demonstrate the strength and flexibility of our operating plan and show that the potential for continuing improvement, which is what we are concentrating on.

I'm sure Steve would be glad later on to talk to you about this if you have any questions.

For the third quarter, our railway operating revenue of $1.6 billion were consistent with the comparable period last year.

Naturally we'd always like to see increases, Don Seale will demonstrate that despite some headwinds we made nice gains in some areas this quarter.

For the first nine months, our railway operating revenues were $4.79 billion, up 2% compared with the same period last year and a record high through nine months for our company.

Intermodal revenue in the third quarter of $315 million were an all-time record, they increased 2% in the third quarter.

For the first nine months, they also, intermodal office set a record increasing 3% compared with the same period last year.

So, this growth is driven by new truck competitive Trans Continental inter line services and stronger international business.

We continue to emphasize truck conversion of all our lines of business and we are reaping the benefits of that focus and Don will show you some slides on that.

Coal revenue improved slightly in third quarter and were 3% higher for the first nine months.

The growth was driven mostly by increased utility shipments as power companies replenish the stockpiles and export coal, which is benefiting from weakness of the dollar in higher ocean-going rates.

Our general merchandise revenues on the other hand declined 1% in the third quarter compared with the third quarter last year.

For the first nine months they increased modestly compared with the comparable period.

Don will give some details on this.

Now, let me talk about the expense side of the house.

Cost control remains an intense area of focus for us.

Our third quarter railway operating expenses were even with the same period last year.

You will recall that in earlier quarters they've been up.

They were up 3% for the first nine months.

In short, we're making progress in improving our expense side, but naturally we have more work to do.

Our operating ratio at 80.5, which is exactly the same as last year, shows some hard-earned progress since it's been up other quarters this year, as you recall.

It still starts with an 8 and we are continuing to concentrate on more improvement in it.

You know this is a serious matter for us and we have several initiatives underway to improve utilization efficiency and productivity and let me emphasize one now.

We are engaged in our activity-analysis process we've discussed with you before.

The objective is to take work out of our processes, not just reduce head count, although that results from it, in a way that will allow us to continue to provide improved service for our customers.

As part of this, we announced late in the third quarter voluntary separation program, which we made available to approximately 4500 non-agreement employees.

Program was in effort to achieve reduction in overall staff and internal restructuring to permit more efficient and effective utilization of our non-agreement workforce.

We achieved about 560 reductions, effective November 1.

Hank will show you more details on this in a minute.

I will say we are pleased and excited about the program results.

This is for us a significant chance to reduce cost on our non-agreement portion and along with ongoing process improvements in the activity value-added analysis, we're confident it will pay future benefits.

We expect to report the cost of this program by the way, in the fourth quarter and Hank will flesh that out for you somewhat.

Our NS 21 process continues to bear fruit in terms of improved efficiency and asset utilization.

Just a couple examples-We have improved the utilization and fuel efficiency of our locomotive fleet.

We are targeting the least fuel-efficient locomotives that improve fuel cost and gets us more usable locomotive time.

We have a field education program on fuel efficiency and have achieved rigorous compliance of policies regarding shutdown of locomotives.

I will just mention that in the third quarter we improved our usage measure by gross ton-miles per locomotive hour by 1.8%, which naturally helps us offset the higher fuel costs.

We also have seen improvement with our equipment in the quarter as we work aggressively to better manage our railcar fleet and thus reduce rents.

New monitoring systems support our fleet management initiatives.

The new local operating plan adherence system, which rolls out our scheduled railroad to yard work is now in effect.

It improves customer delivery, it improves service and it is contributed to our ability to return foreign cars to other railroads more quickly, which also result in reduction in car higher expenses.

You will see these effects in Hank's presentation.

We are applying Six Sigma tool to evaluate yard efficiency across system, the cross-functional teams examining all local operating plans to look for further cost savings and asset utilization opportunities consistent with our Thoroughbred Operating Plan.

We continue to be very pleased with the results of our Thoroughbred Operating Plan.

When you see our operating ratio improve, you're seeing the results therefore of a lot of separate initiatives like these.

We have a long record of cost discipline and productivity and we will continue to take straightforward steps to improve efficiency without naturally sacrificing either safety or service.

TOP continues to be the catalyst driving our improved service consistency and reliability.

I'm particularly pleased that the third quarter when there were a lot of challenges to operations, it showed the power of our plan, it showed the power of improvement in safety, service and operating metrics and it also showed the benefit of those on the cost side.

Looking at October's traffic numbers, which are better in almost every commodity group, I remain reasonably optimistic and convinced that our investments continue to pay off.

I can say that we yet see a strong recovery in the industrial sector.

But, our October loading, we believe will be a record for us in October.

And we're certainly seeing good signs at the same time we continue to have challenges in some areas.

This is not a hockey stick recovery.

It's one that requires concentration and care in attracting business and discipline pricing.

We are adhering to our schedules and our plan and will continue to sell our service to customers at rates that appropriately reflect the current market value of rail service and the associated costs.

So, our story is that Norfolk Southern is pushing initiatives in all areas of our business to improve service.

We're growing revenue base and driving efficiencies throughout the enterprise.

We think that the third quarter shows this is taking hold and therefore we posted year-over-year improvement in earnings in a very challenging environment.

I think we will continue to improve.

Now, let me ask Hank to review numbers for third quarter in detail, then Don will talk about specifics of our markets and after that we'll all be available to take questions.

Hank.

Thank you, David.

Good morning.

Thank you for joining us on this rainy morning.

As David indicated, the window of our voluntary separation program closed last Friday.

The program was offered to 4317 salaried employees, with at least two years of service.

Of these, 681 were 55 years or older with 10 or more years of service which allowed them the option of separating from service and retiring under our normal early-retirement benefit.

While all of the numbers had not yet been finalized, as of this morning, 563 applied for separation, including 300 who are eligible to retire and have indicated that they would retire.

We're accepting most of the applications, including all of those who indicated that they would retire.

The voluntary program offered three weeks of salary for every week of service up to a maximum of 100 weeks.

It also included free outplacement services and continued medical coverage for one year for those who are not retiring.

Of course, the retirees will receive medical coverage under our regular retiree medical benefits program.

We're still work our actuarial and accountants to calculate the total cost of the program.

However, it appears pre-tax charge for the program will amount to approximately $100 million.

This cost will be reflected in our fourth quarter results and we will issue a press release once the numbers have been finalized.

I should note that the fourth quarter charge would consist of a cash and non-cash component.

The cash component will be approximately $65 million for severance benefits and the remainder will be non-cash accounting charge under FAS 87 and FAS 106 for pension and other post-retirement benefits.

Turning to our results for this quarter, I would remind you of the first quarter items that impacted our reported earnings year-to-date.

In the first quarter we reported a credit of $114 million to reflect the cumulative effect of two changes in accounting principles.

We recognized a gain from discontinued operations of $10 million related to the 1998 sale of North American Van Lines.

In order to provide you with the most meaningful comparisons to last year, I'll exclude these items from the rest of my remarks this morning.

Railway operating revenues for the third quarter were $1.6 billion, equaling the record for third quarter revenue set last year.

A modest increase in intermodal revenue and very slight gain in coal were offset by small decline in general merchandise revenue.

Year-to-date railway operating revenue were 4.8 million, an increase of 103 million -- 4.8 billion, increase of 103 million or 2% and a record for revenues generated in the first nine months.

Year-to-date revenues reflect increases in all three major revenue categories, general merchandise, coal and intermodal.

Third quarter car loads decreased by almost 14,000 units or about 1% compared with last year due to lower general merchandise and coal traffic.

Higher revenue yield offset the carload decline to produce revenues equal to those of the third quarter of 2002.

For the first nine months carloads increased approximately 47,000 units or about 1%, a result of higher intermodal and coal traffic in part offset by reduced general merchandise traffic.

Revenue yield was up 1.3% and revenues improved 2.2%.

Don Seale will provide you with the details on our revenues in just a moment.

Railway operating expenses for the third quarter were 1.3 billion, the same as last year.

For the first nine months railway operating expenses were 3.95 billion, 133 million or 3% higher than last year.

As you can see, lower expenses for material, services and rents, casualties and other claims and depreciation were offset by higher expenses for compensation of benefits, diesel fuel, Conrail rental services and other.

The largest decrease was in material services and rent expense, which was down $40 million or 10% compared with 2002.

That decrease was primarily due to $22 million less in equipment rents and a $16 million drop in purchase services.

The decline in equipment rents is primarily attributable to reduced auto motive traffic and favorable settlement of equipment bills due.

Purchase service cost benefited from our strategic sourcing initiative, lower automotive volumes and several other miscellaneous items.

The largest increase in railway operating expenses was in compensation of benefits, which was up $42 million or 9%.

The increase in compensation of benefits was driven by higher wage rate, which added $15 million, and includes the increased bonus opportunity for locomotive engineers.

Lower pension income, which was down $12 million due to lower investment returns, both experienced and assumed future returns.

Higher cost for health and welfare benefit were up $10 million and other items which added $5 million, largely due to higher stock-based compensation.

While health care costs have continued to rise dramatically, we're taking action to control the rate of increase and we've made some progress.

First, recent labor agreements have sought to have rail labor share future cost increases through employee contributions or offsets to wage increases.

Second, we have been increasing the contribution of our active non-agreement employees to make an increase contribution to their share of the cost of medical insurance.

Third, we recently modified our retiree medical benefits for non-agreement employees so as to enable us to pass along a portion of future cost increases to those employees who retire in 2004 and thereafter.

Obviously this is an area that has received and continues to receive our attention.

Casualties and other claims expense was $44 million in the third quarter, down $13 million or 23%.

As you will recall, recent quarters have been hit by adverse claims development, derailment cost and the increased cost of insurance.

While this quarter's expenses still remain above the level that we saw two years ago, the trend is moving in the right direction.

Depreciation and other operating expenses were essentially flat while Conrail rent and services and diesel fuel each increased by $5 million.

Third quarter diesel fuel expense reflects a 5% increase in the average price per gallon which rose from 73 cents to 77 cents per gallon.

Our fuel-hedging program produced $11 million in cost savings for the quarter since the average price per gallon would have been 86 cents absent our hedges.

In addition, our fuel consumption was 1.5 million gallons or 1% lower than last year.

We had approximately 84% of our third quarter diesel fuel requirements hedged and the fourth quarter is 77% hedged, based on forecasted consumption.

During the third quarter, we hedged just over 94 million gallons of fuel at an average price per gallon of 75 cents.

We have just less than 96 million gallons hedged for the fourth quarter at average price per gallon of 79 cents.

Looking ahead, 52% of next year's expected consumption is hedged at an average price of 77 cents per gallon and 13% of 2005 is hedged at an average of 76 cents per gallon.

Our third quarter results were impacted although not significantly, by Hurricane Isabel.

We estimate that we lost about $3.5 million of revenue during the quarter because of the storm, of which we expect to recover nearly $2 million of that in the fourth quarter.

We estimate that we incurred about $3 million of additional cost, half of which was expensed in the third quarter and the remainder of which has been capitalized as a replacement of property.

Railway operating expenses for the first nine months were $3.95 billion, $133 million or 3% higher than last year.

The increase was primarily attributable to higher expenses for compensation in benefits, diesel fuel and casualties and other claims.

Year-to-date compensation of benefits increased $83 million or 6% compared with 2002, principally as a result of $34 million less in pension income, health and welfare cost that were $30 million higher and $28 million more in wage rates.

These items were in part offset by lower stock-based compensation and payroll taxes.

Diesel fuel expense was higher by $37 million or 15% for the first nine months, due to higher average price per gallon, which increased from 70 cents per gallon in 2002, to 81 cents per gallon this year.

Consumption decreased by approximately 3.7 million gallons or 1%.

Casualties and other claims increased $13 million or 10% principally due to adverse personnel injury claims development.

Other railway operating expenses increased $9 million or 6% primarily reflecting a bad debt recovery that we had the benefit of last year.

Depreciation and Conrail rents and services were both down modestly year-over-year.

Material services and rents decreased $6 million due to lower equipment rents, which were partially offset by higher expenses for materials.

The railway-operating ratio for the third quarter was 80.5%, exactly even with the third quarter last year.

For the first nine months railway-operating ratio was 82.5% compared with 81.4% last year, 1.1% increase.

Income from railway operations for the third quarter was 311 million, equal to last year.

For the first nine months income from railway operations was $840 million, compared with $870 million in 2002 or decline of $30 million or 3%.

Total other income and expense for the third quarter was an expense of $111 million compared with expense of $122 million in 2002.

Gain on sale of property and investments were $1 million higher than last year.

Coal royalty decreased by a million and accounts receivable sale fees were lower by a million.

All other expense of $2 million for the quarter, -- all other was an expense of 2 million which is $7 million improvement over last year, reflecting income on corporate-owned life insurance in a number of smaller favorable items.

Interest expense on debt was $123 million, which is $3 million lower than last year.

For the first nine months total other income and expense was expense of $316 million compared with expense of $350 million last year.

Gain on the sale of property and investments were $16 million, down $19 million over last year.

I would remind you last year we had the benefit of $10 million first quarter gain on the sale of an investment and $9 million more in gains on the sales of other parcels of property.

Coal royalties were $29 million, $7 million lower due to reduced reduction and accounts receivable sales fees were $4 million lower than last year as a result of lower outstanding borrowings against the receivables.

All other was, income of $12 million compared with an expense of $27 million last year, primarily due to less interest on tax deficiencies following from favorable income tax audit settlement and higher return on corporate-owned life insurance.

Interest expense on debt was $373 million for the first nine months down $17 million due to lower interest rates and less outstanding debt.

Third quarter income before income taxes was $200 million compare wide $189 million last year or 6% increase in a post Conrail record.

For first nine months income before income taxes were $524 million, up 1% compared with $520 million in 2002.

The provision for income taxes for the third quarter was $63 million, the same as the third quarter of last year.

The effective tax rate was 31.5% compared with 33.3% last year.

For the first nine months provision for income taxes was $165 million compared with $189 million last year.

The effective tax rate was 31.5% compare wide 36.3% last year.

Lower effective tax rate for both period, the quarter and first nine months, were primarily due to the favorable resolution of prior year's tax liabilities.

The year-to-date benefited from higher equity earnings of Conrail, which are reported on an after-tax basis.

For the third quarter, net income was $137 million, 9% higher than the $126 million reported in 2002.

For the first nine months, net income was post-Conrail record $359 million, 8% above last year's $331 million.

This slide highlights the components of the change in net income for the third quarter.

Both railway operating revenues and railway operating expenses were unchanged.

Other income net was $8 million higher and interest expense on debt declined by $3 million, which combined with level income taxes, generated $11 million more in net income.

Year-to-date income from operations declined $30 million, as a $103 million increase in railway operating revenues was more than offset by the $133 million increase in year-to-date railway operating expenses.

Other income net was $17 million higher, interest on debt $17 million lower and income taxes were $24 million lower than last year, resulting in a $28 million increase in net income.

Earnings per share for the third quarter were 35 cents compared with 32 cents per share in 2002, a 9% increase.

At 35 cents, the third quarter equaled our highest quarterly earnings per share since the integration of Conrail.

For the first nine months, earnings per share were 92 cents, which was 8% above the 85 cents per share earned in the first nine months of 2002.

I want to thank you for your attention, now turn the program over to Don Seale who will give you a complete briefing on our revenues and car loading and then David will return to take your questions.

Thank you, Hank.

Good morning.

It's good to be with everyone again.

Leading into economists suggest that the economic recovery is underway and gaining momentum.

Key indicators support this projection as estimates of gross domestic product growth rose about 5.5% in the third quarter, along with signs of increased capital spending and business investment.

The institute for Supply Management Index for September reached 53.7 for the third consecutive months over 50 suggesting some expansion in manufacturing.

But, despite this encouraging economic news our auto motive and metal market in particular were challenged during the third quarter as July and August exhibited year-over-year weakness.

After favorable comparison for first half of 2003, volume declined during the third quarter.

Total volume reached 1.72 million loads, 14,000 units or 1% decline compared to the same period of 2002.

Again, our markets were highly variable during the quarter as model change over at key assembly plant and production decline of domestic and imported steel suppressed automotive and metal volumes.

Our quarterly decline was driven by a 30,000-unit decrease in August volume, which marks the only unfavorable monthly comparison of the year.

Of all the commodity groups only agriculture produced positive comparison for the month.

Automotive had the lowest august carload volume since Conrail, as did coal, which saw 44 unit train cancellation due to power plant outages, higher stock pile and mine production problems.

In spite of less than stellar results for August, we did reach two positive milestones during the quarter as both agricultural and intermodal during the quarter achieved their highest quarters ever in volume.

This business level for intermodal is especially noteworthy since third quarter 2002 volumes were unusually strong in light of pre shipping of in anticipation of the west coast port shutdown.

The combined strength of intermodal and agricultural helped us achieve second highest quarterly revenue ever reaching $1,598,000,000.

However, revenues were even with third quarter of 2002, as increases in five groups were offset by $26 million decline in automotive traffic and $1 million decrease in metal revenue.

Looking at our individual business groups, Intermodal revenue reached $315 million for the quarter, increasing $5 million or 2% over record third quarter 2002 levels.

Coal revenue of $372 million increased $1 million over last year in spite of 5600-carload decline.

Merchandise revenues of $911 million fell $6 million or 1% below last year as again automotive and metals declines offset a $21 million gain in three of the five industrial sectors.

Looking at the nine months, revenues reached $4.792 billion increasing a $103 million 2% while carloads increased by 47,000 units or 1%.

Intermodal revenue of $904 million exceeded last year by $29 million or 3% due to continued success with new products and services.

Coal revenue of $1.115 billion exceeded last year by $35 billion or 3% as a result of more stabilized export coal volume.

Year-to-date merchandise revenue of $2,773,000,000 increased $39 million or 1% while carloads declined by 10,000.

Agricultural led both revenue and car load improvements.

Turning to revenue per unit and yield, total revenue for the quarter reached $928, increasing $7 over third quarter 2002, up $12 or 1% for nine month.

Merchandise revenue per car reached 1325 for the quarter, increasing $12 over last year.

Improvement in merchandise yield was led by our paper sector, paper revenue of $1445 was its highest ever, increasing $66 or 4% over third quarter 2002.

This increase was primary as a result of rate increases in longer hauls.

Year-to-date revenue per car on paper has risen from $1365 to $1428, a $63 or 5% increase.

Chemicals and metals and construction also posted gains for the quarter as well as for the nine months.

Rate increases and lower intermodal steel volume contributed to these increases.

Agricultural revenue per car declined $7 principally as the result of 42% increase in lower rated fertilizer shipments.

Automotive revenue per car declined from $1494 to $1447 due to mixed effects and one-time $7 million favorable adjustment to revenues in the third quarter last year.

Coal revenue per car reached $915, increasing $15 over third quarter 2002, a 40% increase in export volume was the primary driver in the improvement for the quarter.

And intermodal revenue per unit increased from $496 to $502, modest rate increases across all lines of business favorable mix, and which was partially offset by the loss of higher rated U.S. postal service traffic earlier in the year.

Turning to intermodal, intermodal reached its highest quarter ever in units and revenue.

We're pleased with those results in light of a weaker than expected recovery in the economy and comparisons to a very strong third quarter 2002, of course driven by pre-shipped freight relative to last year's west coast port traffic disruption.

Also, as I mentioned, earlier the loss of postal service traffic impacted year-over-year premium traffic comparisons.

Reliable and consistent performance in service drove increased volumes in the truckload and Triple Crown sectors.

Service performance in core lanes also enabled us to launch an addition to our Blue Streak line of guaranteed service from Los Angeles to the northeast.

Looking ahead, we anticipate that the fourth quarter should continue to produce strong growth due to a mix of favorable year-over-year comparisons from the port shut down market share gains and new products.

As David mentioned, October is off to a good start and the AAR reports that the week ending October 18th marked highest weekly total ever for U.S. intermodal volume.

We're counting on a steady recovery in the economy and continued high levels of consumer spending to help drive fourth quarter volume levels.

International business we feel will see significant year-over-year gains compared to depressed 2002 levels and international freight translated into domestic containers on the west coast will continue to drive above average growth in the domestic business, as well.

We are also optimistic that our service quality will continue to generate solid gains in our parcel and truck load business.

Service guarantees are expected to continue to stimulate growth in existing lanes and highway conversions using our Blue Streak service from LA to the northeast.

Turning to the merchandised sector and looking in little more detail, Chemicals revenue reached $196 million for the quarter, increasing $2 million, or 1% over 2002, despite 1300 car load or 1% decline.

Year-to-date revenue of $578 million exceeded 2002 by $11 million or 2%.

Despite weak manufacturing metrics, industry over capacity in this sector and course increased energy cost.

This group continues to produce favorable revenue comparisons.

Petroleum revenue drove the third quarter improvement in part due to asphalt shipments and waste traffic.

Metals and construction revenue of $180 million declined $1 million below third quarter 2002 while volume dropped 6200 carloads or 3%.

Year-to-date revenue of $521 million is $9 million below last year.

In the metal sector, iron and steel shipments declined 17% during the quarter primarily due to reduced import slab steel volumes.

During the quarter we ran 53 fewer slab trains compared to last year and year-to-date we handled 137 less trains or approximately 10,000 carloads.

Also, steel industry consolidations have had a negative impact on our inner mill steel volume.

For the first nine months volume from primary integrated steel customers was down 5400 carloads and 6 million.

Looking ahead, we do not see significant improvement in the import slab market in the near term, however, we are encouraged by conversion from the highway in this sector, which remains strong, with $10 million in metal diversion obtained in the third quarter.

Increases in each of our construction markets were able to offset weakness in the iron and steel markets.

Access to new quarries in our service territory have increased sand and aggregate shipments while volume growth from new cement terminals contributed as well.

Strong performances from both agricultural and paper business groups help to absorb the decline in automotive revenue in the quarter.

Our paper, clay enforced products business experienced the fifth consecutive quarter of year-over-year revenue increases.

Revenue reached $163 million, up $8 million or 5% and year-to-date revenue of $475 exceeded 2002 by $25 million or 6%.

Business trends for this industry have been encouraging.

Printing paper shipments were strong in the quarter, revenue increased $2 million or 18% while pulp board revenue was up nearly 5% or approximately $2 million.

Also wet weather in the southeast led to longer hauls as paper mills sourced wood chips from non-traditional sources.

Wood chip revenue increased 26% or approximately $3 million in the quarter.

Turning to agricultural, which has been a strong market all year, agricultural revenue reached $167 million for the quarter, up $11 million or 7% over the same period of last year.

Year-to-date revenue of $510 million increased $41 million or 9% over last year.

Fertilizer led agricultural volume growth to the 5200 carload, 42% increase.

Reopening of major plant in Florida resulted in increased fause fate (ph) shipment and inbound feet stock movements to this plant.

Military volumes continue to improve by 1100 car loads and $2 million in revenue during the quarter.

Also week shipments rose during the quarter increasing 1500 car loads and 3 million.

Finally, Corn shipments were strong, continue to be strong during the quarter and we're even with last year.

As new corn crop enters the market, we expect volume and sourcing of corn to normalize over the remainder of the year.

Turning to our automotive sector, automotive revenues were $205 million for the quarter, down $26 million or 11% compared to last year while year-to-date revenue of $689 million fell $29 million or 4% under 2002.

The story here of course is North American automotive production was down about 6% in the quarter, led by 16% decline in Ford production.

In our automotive network we experienced 19 weeks of plant down time at Ford and Daimler Chrysler assembly plants during the quarter.

Reduced production in model change at Ford's Kansas City and Norfolk plants as well as Daimler Chrysler at Newark, Delaware, drove this decline.

In total, model change down time represented loss of 7600 car loads and $12 million in revenue for the quarter.

Looking forward, after these changes, year-over-year comparisons continue to be difficult in the fourth quarter.

As you will recall, the fourth quarter of 2002 was the highest fourth quarter ever for our automotive business, exceeding the same period of 2000, which was a year of record automotive production.

Ford's announced downtime of 6% for the fourth quarter will be a difficult challenge to overcome, but we do have several new projects coming on stream, which will help us mitigate that effect.

Honda's plant at Lincoln, Alabama began shipping from it's new rail loading facility on October, the 6th.

We expect Honda to ramp up it's second plant at Lincoln by the end of the first quarter next year.

We're also seeing volume increases as Toyota continues to ramp up production related to its expansion at Prince ton, Indiana.

Ford's model change at Norfolk and Kansas City that occurred in second and third quarter have now reached full production and year-over-year monthly sales of the new F-150 is up 16% to 18%.

Finally, Daimler Chrysler, at New York is reporting increased production in the range of 18% first new model of that plant.

We remain encouraged with success in converting auto parts from the highway to our network.

Highway conversion continues to be a key strategy across all of our business groups.

For the first nine months in all seven segments including coal and motor and merchandise, we estimate net highway conversion amount to $52.6 million in revenue.

Now, turning to coal: Volume declined 5600 carloads or 1% compared to third quarter 2002.

We estimate that about two thirds of this decline was attributed to increased lading per car as we continue to work on efficiency improvements in that sector and only about one third was due to reduced shipments.

Industrial and export coal had improved results for the quarter, which helped us offset decline in utility and domestic metrological coal as well as coke and iron ore.

For the year-to-date coal volume increased 18,000 cars or 1%.

Industrial coal volume increased 8% for the quarter, down 6% or close to 5000 cars year-to-date.

We have this market, in July, make a dramatic turn for the better and growth in the second half may be the best that we have seen in the last 4 to 5 years.

Coal remains the fueler choice in the industrial market, inventories have been drawn down, they are low and as industry have gone from stock power form many months to reduce cost.

Looking at export volume we reached 27,000 carloads for the quarter, increasing 40% over weak third quarter 2002 volumes and some 88,000 loads for the nine months, up 12%.

Increases have been the result of blend changes, higher ocean freight rates and weaker US. dollar.

We estimate Australia coals are currently somewhere in the range of $16 per ton over the market.

So, there is opportunity in this area.

The market for US. coals has tightened especially for low volatile coking coals.

Looking at fourth quarter demand for in the price of steam coal under domestic market continues to keep these particular coals out of the export market.

Production problems will serve in mines such as Pinnacle Creek, Blue Stone and Teko, may impact fourth quarter export volume.

Looking at utility, utility volume declined by 10,700 loads or 4% compared to last year.

Cool and wet weather was present in our service territory from June through August, what we are experiencing here today.

There were fewer cooler degree days in the south minimizing expected summer demand and caused stockpiles to increase.

Electrical generation was down 1 and 3-quarters percent, following similar decline in second quarter 2003.

In addition, several utility plants that we serve were down for unscheduled maintenance during this period, as well.

Year-to-date, utility volume is up 18,600 carloads or 2% ahead of last year.

Going forward, we are optimistic on utility business.

Stockpiles are below normal, we know that.

Utility should begin rebuilding inventories in anticipation of winter weather and of course, gas prices remain relatively high, as well.

Looking at our steel markets, our met markets, volume declined by nearly 4500 carloads.

A 7% for the quarter.

Year-to-date volume declined 5400 carloads or 3% as steel production was down and industry restructuring continues.

The outlook for domestic met coal in fourth quarter is slightly better.

We see blast furnaces are in full operation and the price of import coal is high and all domestic coal production is beginning consumed internally.

In summary, we're somewhat encouraged by the early signs of economic recovery.

We certainly have the capacity and service to fully participate in rebound in the coal, industrial and consumer markets.

New models are ramping up at key automotive assembly plants and consolidation of the steel industry plays itself out we are optimistic for future growth in these sectors.

Intermodal continues to offer strong potential for growth in both domestic and international sectors.

Year-over-year comparison in the fourth quarter are much easier, as you know, and will become more normalized beyond that point.

Finally, should the winter -- should we get winter, prove to be a cold one with continuation of high gas prices we expect coal business return to a pattern of growth over the next two quarters.

In short, we remain ready to participate in and fully support the nation's economic recovery when it appears and as it goes forward.

Thanks, Don.

As usual we thrown a lot of numbers at you and I would be now prepared to take any questions you may have.

Yes Tom.

Good morning, this is Tom Wadewitz from Bear Stearns.

Question for you on the revenue side.

Looking at the macro picture, you have weaker U.S. dollar, you have doubling in bulk shipping rates and I'm wondering if you can take me through segments and give me a sense, is that a net positive for you?

How do those impacts play out and I guess I'm thinking export coal, but on the steel side, does that help your domestic steel if there is less of a driver for imports?

Or is that neutralized out by loss of import slab?

Can you give me thoughts on that?

I guess I will just say on export coal as I pointed out, we've got folks in Europe working on the export coal market as Don mentioned.

There is considerable opportunity there.

There are some challenges in getting a supply of U.S. coal to meet that market, but clearly that benefits from the dollar and the other factors that Don talked about.

We think there are real opportunities there, there is a challenge in finding the coal to meet the demand and that's we're hopeful we can address some of those and see improvement ongoing in that business.

You want to talk, Don, watches the steel market?

Like a hawk.

With respect to the steel market as Ike has indicated in the past, we have the largest steel franchise in terms of the domestic market in the U.S.

Certainly with a weak dollar in imports tailing off this year, we've got year-over-year comparisons to live with in terms of the slab trains we moved last year.

As an enterprise we are well positioned for coal, iron or coal and the semi-finished and finished steel as domestic steel market complete its consolidation and also competes more effectively with imports.

I think to answer directly, we are a little better off with respect to having domestic steel market that is vibrant and fully utilized.

Are there other places we should look out in terms of impact from currency or impact from higher bulk shipping rates, as well? (inaudible)

Certainly the -- I mean, certainly that has a huge effect on the whole consumer side of the business.

Intermodal, automobiles, I mean all of this is impacted by a lot of factors, including the relative strength of the dollar and other currencies.

You know, Tom, I think what you are seeing is this is not a simple economic recovery where you -- it is not like somebody turning on a light switch here.

There are pluses and minuses and our strategy as we go on here is not to think that we can necessarily influence the course of the business, but our strategy is to be nimble enough to try to be available.

We think we have the capacity available to move and take advantage as we see these shifts which are occurring rapidly.

The steel business over the last year has gone back and forth a couple of times.

What we're doing is making sure we are prepared to respond to it, the same way as intermodal volumes are increasing the business from the west coast is clearly increasing very rapidly.

We want to make sure we are prepared to be the transportation mode of choice to move that as it moves into the east coast.

So, all of this is kind of complex web.

We're not looking for a snap-your-fingers and the economy is dramatically better in the fourth quarter or any time next year.

What we're seeing is that what we think we are seeing is there is -- there are signs there is a steady improvement.

But, for every plus, you've got to work through a minus as you are seeing in the automobile business.

Just one further question to drill on export coal.

As you look out and see what the mine situation is in central Ap and the seams get smaller over time and costs rise and all those issues.

Do you think you can go back to an environment where you are doing mid-20s in terms of million tons of export coal or do you view this as near-term bounce where longer term you still have big issues?

I think we don't know what the market is going to go to in export coal.

I look for it to get better.

I think we are coming out of the trough and what the upside is on it, I think we can't be sure because the supply of coal is an issue.

I think that that is going to improve over time.

But, I'm reluctant to predict what the top of the export market is.

Just as Central AP Coal, we are seeing increased movement of Power River Basin coal into the east.

So, our strategy there is to respect that market as it develops and make sure we are moving that coal.

And moving it profitably and that is the way we respond to that.

We can't necessarily drive the markets, although we do have a big position in it.

But, we can certainly be nimble and make money out of the markets as we see them.

Because coal is going to be burned.

Electricity generation is going to require a lot of coal to be burned in anyway you cut it in the natural gas prices and all the factors that you know about are favorable to this.

Our position with the utility throughout the eastern part of the country helps us benefit from that favorable trend.

Thank you.

Other questions?

Yes, over here.

Yes.

Good morning.

Ken Hoexter from Merrill Lynch.

Quick question for Don.

Can you mention the utility levels at the stockpiles are at utilities right now?

Dave, can you talk about service metrics during the quarter?

It seemed like you outperformed peers relative to velocity and some of the dwell-time metrics.

Are you limit indeed how much more you can improve off of these loads that we've seen recently by how quickly the other carriers are able to fix some of their metrics or is that just something you can do on your own?

Thanks.

Don's crystal ball on the stockpiles.

As I mentioned in my remarks, we know utilities in the north have drawn down inventory and based on the information we've got, it strongly indicates that we've got inventory stockpiles below normal in the northern sector of our utility business.

The southern utilities are slightly above normal because of the wet, cool weather and summer we've had down there.

So, it's a mixed bag.

Gas prices are going to continue to be a driver on this and of course, the type of winter we're going to have.

We do see certainly a delta that needs to be filled in the north with respect to those stockpiles.

Steve, do you want to talk about improving service reliability?

I think, we certainly try to convey the message that there is still a great deal more up to go.

There is no lack of enthusiasm at NS to that particular end, Ken.

I will say this to you as it relates to the industry, the only thing I am aware of that is more common in the industry other than the standard gauge which is 56.5 inches is the enthusiasm to improve service through the inter lock of our networks.

The most overriding example, that I would give you is, coming together of the industry to create project in Chicago and that is totally driven by desire to improve service.

So, I only see the benefit here on the upside, I don't see a down side to the terms.

We are all different companies.

Well, we all have the same motivations and same desires and come together as such from my perspective.

Our philosophy is to take care of our own situation, make sure our service is as good as we can make it, our metrics are consistently improving and to make sure with all of our partners and we partner with everybody in the industry, one way or the other, that we're not creating any barriers in regards to inter flow of traffic between us and doing what we can to improve that.

This takes hold.

I mean, there are always ups and downs in this.

We are enthusiastic about our own service metrics improving and that reflects in all of our interchange business and I feel pretty good about the industry's ability not withstanding some glitches that we've seen recently to go on a very steady improving curve on this.

Yeah.

Thank you.

Gary with First Boston.

Hank, material services and rents were very strong this quarter, very good cost management.

Could you talk a little bit about may be some of the things you do and where you see that going forward in an environment where volumes start to pick up a little bit?

Well, the material services and rents were the expense component that was showed the greatest improvement this quarter.

That was basically because I wouldn't give them the money to spend.

But, on a more serious note, I think you are starting to see some of the effects of the Thoroughbred Operating Plan, some of the effects of the expansion of TOP into the terminals.

And there is some impact from the reduced automotive traffic because that travels in largely in rented equipment.

So, as we had some decline in our automotive traffic during the course of the quarter, there was less equipment demand.

On a material side, I think that we had seen increases in materials for a number of quarters and that reflects management's attention on trying to control those costs.

And I'm hopeful that we've got our arms around it and will continue to do that.

Gary, we would be happy to see the number go up because of the automobile business going up.

But, what we're -- as we improve the utilization in our equipment and cars and put some discipline into all of our operations there, we're seeing improvements beyond the normal ups and downs that are reflected in things like the automobile business.

Hank, we're not done with you.

Hold on.

Sorry.

Just a couple more.

Hypothetical, if I could throw that out.

The rate case with Duke Energy, hypothetical is you win and you are allowed to charge the rates you are currently charging right now.

What happens accounting wise?

Could you walk us through a little bit of what the puts and takes are accounting wise as to what will occur if that were the verdict?

I will take you also hook on that.

I think-we think it is inappropriate for us to comment on that case while it is pending and litigation is particularly close to a decision as it is, Gary.

I think you understand that the general metrics of that.

But, we're not in a position to make comments.

Hopefully I will say that will be decided soon and then we can answer all those questions.

OK.

In fact if you could wind up and talk about pensions and may be what pension headwinds you might see as it relates to labor expense as we move into 2004, I suspect it is not be near, what it was this year.

But may be could you get a little color on that?

I shouldn't have let you sit down, Hank.

There are a couple of things that are driving the reduced pension income in particular, Gary.

Most principally, the fact that we have seen equity markets and we're heavily invested in equity markets with respect to our pension fund; perform rather poorly over the past couple of years.

That trend has changed more recently and so I'm hopeful as the markets improve that that will relieve some of the pressure on the pension income will continue to produce some favorable numbers there.

Secondly, as those markets declined and we reviewed our long-term assumptions for returns, we reduced the assumed rate of returns and that also had an impact.

It's difficult to predict exactly where we're going to be next year.

I suspect pension income next year will be slightly lower than it is this year and maybe as we get to January, we'll be able to give you a better handle on that, but, until we get an actuarial review on it I can't give you a tight number on it.

We do continue to be fortunate we don't have funding issues, as you well know.

OK.

Thank you.

Yeah, how about hand it up here and then I will get back to you Tony.

Good morning, Jennifer Ritter from Lehman Brothers.

Hello Jennifer.

Hello, looking at your comp and benefits, it's been in the high single digit growth rate range for the last two quarters.

While you gave us some ideas on how you hope to slow that growth or even make salaries and benefit expense decline at some point, it doesn't feel like that is going to happen in the next quarter or two.

Should we expect something like high-single-digit growth rate for this line item going forward?

I certainly don't expect to see that kind of growth rate in it.

Clearly, Jennifer, some of the things we are doing, including the significant reduction in non-agreement workforce, that we talked about, will have an impact on that.

We've got the, we're up against the factors that you know about on that.

Our job is to do everything we can to improve productivity we got the activity value and else, added analysis that will be completed by the end of this year, and we will get that in a lot of that is already going in force as we implement quickly the force reductions we are seeing.

So, I think you will see ongoing favorable things happening with respect to that and we're what you're seeing is we are moving aggressively on this and you will see that sooner rather than later.

Great.

Thanks.

And secondly can you just get us an update on Conrail and how that is proceeding, the integration?

You mean the divisions have split.

Exactly, yes.

That of course requires two things.

It requires the favorable tax ruling and it requires the service transportation board to act on that.

Both of those are proceeding and we are optimistic, naturally about that.

I don't think we've seen any indications, but Bill Galanko, I guess I would be reluctant to predict a time on that if these things take a little time, and we'd like to get it as expeditiously as possible.

But I think we are just not in a position to predict when, Jennifer.

My taxman agrees that I can't say.

I think really, we just don't know.

We're -- we want to move that as quickly, as we can to see effects for obvious reasons.

Scoot -- or Tony, Tony's got the mic.

I just wanted Steve to get back up if he may and talk, I really want to know why you bucked the trend of US. railroads in the service area?

What happened?

What's going on is it NS 21 is it the -

I don't want to give Steve an opening like that, do you?

There is a time limit.

I figured I could start him and also Steve you could talk or somebody if Jim Hixon is here, somebody could talk about the current state of the UTU relationship.

: You are probably as well qualify is any body so go ahead.

Well UTU is not here.

I think He's in Washington it is not a fact.

We have excellent relationship with UTU, Tony.

Trend in the industry, we're all going through different aspects within our own operations.

We're all a little bit different, geography, climate, the business levels within each of the companies.

Everybody responds to them differently.

If I could reflect on Jennifer's question about employment.

We're seeing a bit less of reaction to the 60/30 application on our property.

So, that has a positive impact on a go-forward basis on employment from our standpoint.

Those things are difficult for me to correlate because I am not on their properties.

I can tell you that the response time in the east, I think, commensurate with that particular event on both of the major eastern roads was well done.

As to what is taking place in the west, that is something I suspect would probably be better asked of folks in the West.

That's a non-answer.

I will just comment relative to the crew availability that impact service, we did make a decision, as I reported to you before, that we would do some hiring last year, train some crews, get them in place.

Counting on a frankly a business recovery earlier this year, than we've seen it.

That was not free.

That had a cost and it impacted us in the first quarter and the second quarter and in the third quarter, but it does -- we I think maybe in a way, got a little leg up benefit from that and that hopefully will help us as business does ramp up.

Yes, Scott.

Bear Stearns and Company.

Just a couple questions.

One, start with Don Seal, if you can give us a flavor how you see the impact of the UAW contract with the auto manufacturers, this is one of the times early time when we have seen them actually shutting facilities in U.S. pro forma, and give us some flavor of since Ford is shutting production facilities as is Chrysler and parts and even GM.

If you could give us flavor how you see that playing out and the relative impact might be?

Scott, excuse me.

As you know, that continues to play out.

The UAW negotiations continue with Ford and the others.

Ford has made some preliminary announcements with respect to Lorain, possibly Saint Louis, going to one shift.

That is in New Jersey we knew as a plant was down with one shift they have announced that that will be shuttered coming this--this coming year in the first quarter.

But, what we do see that is a dynamic situation.

As negotiations continue to progress, we wouldn't be surprised to see some of that continue to shift.

Some of the plants that were targeted early on are no longer on that list.

So, I think it is issue of stay-tuned and really to see what the final outcome of particularly Ford's negotiations with UAW.

Looking beyond that, certainly I think that we see an opportunity for a boost in their productivity, boost in the health of Ford and the domestic producers.

So, we certainly will benefit from that once they work through it.

Generally and philosophically, we do treasure our position as an automotive carrier, which we care a lot about and over time and plant locations and other things we've done the best we could to try to maintain our standing in that and that's what we're -- our focus is on an ongoing basis.

We want to be a leader in the industry in that world.

And then if I could just two quick questions for Steve and less quick than I think.

If you could give us more color on LOPA and where you are on the local plant adoption, maybe more color commentary in terms of where we are in the implementation, some of the yards, et cetera?

Secondly, relate to that, where you are in implementation of the remote control locomotives in the different yards, et cetera?

We are getting pretty close to being fully rolled out on LOPA.

The next piece of LOPA will be a work-order report configuration, which will have a great impact on timeliness of the information flow between the crew and the system.

We have a pilot -- excuse me, I'm having little trouble with my voice this morning.

We have a pilot in place and are working through application of those technologies and as you are familiar with what is going on in wireless communication in the last couple of years, anyway, the upside there is significant so we are evaluating our options with regard to that.

Remote control, we have about 73 shifts per day working very successfully with remote control.

We shared the same enthusiasm over remote control as others in the industry do and are continuing steady progression of installation with it.

Our investment in remote control to date has been consistent over the last two years and I suspect we will continue to be those similar levels in the future.

Yes.

Thanks, Dave.

You guys like hosting meetings on rainy day, I take it.

Just a quick follow up to Hank, any plans to pull forward any CAPEX into 2004 from 2005 with the bonus depreciation and any change in the locomotive emission standards?

Thanks.

I think we projected capital expenditures somewhere just north of $800 million for this year.

I think the actual expenditures might be slightly below $800 million.

There is no plan to load up because of bonus depreciation and I think that our emphasis in terms of where we're spending the capital money will remain largely where it has been last year.

We get the same rate of depreciation on investments in track and other track materials as we would in locomotives or equipment.

They all have seven-year lives and so I think the important thing is to go through the process of developing your capital budget on a responsible basis, make sure that you're maintaining the property in good operating order, that Steve has the resources in terms of locomotives that he needs, that the marketing folks have the resources that they need in terms of equipment and facilities, to handle the business opportunities that we think are out there.

So, I don't think you'll see anything unusual as we go forward, although we are just in the process of trying put that capital budget together as we speak.

Remember, we are committed to a systematic, mindful of what we've said before about our systematic reduction of our debt and systematic improvement of returns to our shareholders and that's we're focusing hard on that and building all the factors we can into it.

But, Hank has indicated to you how we preliminarily see next year's capital.

Yes, Tony.

Real quick one, I guess Don you said.

The CN acquisition of the GLT have any impact on the steel results in the near future or strategy long term?

None that we see at this point in time.

It doesn't appear to have an impact on our franchise.

We're going to look very carefully at it, naturally.

And talk with our friends at CN.

But, preliminarily we don't see it as a large factor.

Yes.

Roy Blanchard with Blanchard Company.

Following up on the CAPEX question.

We heard other railroads talk about locomotive acquisitions being pulled into late 200 thereto 3, scheduled for 2004.

We have also heard some discussion about focusing capital expenditures for track on the core routes.

If I know that you have a route structure plan in place that looks at redefining what your core system is.

One of you just offer little more thought on where these two things are going, locomotive purchases and patterns of track rehabilitation?

Well I think-- I will just go ahead and you can respond to that, too, if you want to, Steve.

With respect to-- we're focusing on making sure that quality and capacity of our system is very strong, as it has historically been, in our expenditure looks hard at it and spends that.

We look at where the traffic flows are because that makes the best sense and that's also where you tend to need to spend money.

We approach our capital budget exactly on that basis.

And the on the locomotive purchases, we make the best calls we can as to what business levels are going to be and respond to that.

You know, we look at it on an after-tax basis and are making the decision based on overall business decision because we try not to allow any single factor to determine what we're going to -- how we are going to make our equipment purchases.

So, we look at that along with everything else, but basically we try to predict and we try to do everything we can to improve utilization and efficiency of our existing fleets so that we can control the high cost of locomotive expenditures.

So, as we are working on capital budget now and trying to equate all the figures and come up with the right number, I am confident we will do it.

Any other questions?

You've been very patient and I appreciate you coming out on a rainy day and look forward to seeing you next time, hopefully with good results.

Thank you.