Norfolk Southern Corp (NSC) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Norfolk Southern Corporation 4th quarter earnings conference call.

At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following today's presentation.

It is now my pleasure to introduce your host, LeAnne McGruder, Director of Investor Relations for NSC.

Please go ahead.

Good morning.

Before we begin, I'd like to mention that an audio web cast of today's call is available at our website, nscorp.com, under the web's new heading.

In addition, a link to today's presentation materials are also available there so you can follow along.

As usual, transcripts of the meeting will be available upon request in a few weeks from our public relations department and also will be posted on our website.

Let me take a moment to acknowledge those here this morning.

We have David Goode, Chairman, President and CEO;

Hank Wolf, our Chief Financial Officer;

L. Prillaman, Chief Marketing Officer; and SteveTobias, Chief Operating Officer.

Also present are Kathryn McQuade, Senior Vice President of Finance, Bill Galanko, Vice President of Taxation, and Marta Stewart, Vice President and Controller.

At this time, let me introduce Norfolk Southern's Chairman, President and Chief Executive Officer, David Goode.

Thanks, Leanne.

I'm happy to be here this morning.

As Hank just said, I should be happy any time I can report quarterly earnings, this year up 30%.

So, while we have a full slate for you this morning, let me move ahead quickly, I will emphasize that I am pleased with our results for 2003, they reflect new levels of performance throughout our organization.

Our initiatives and consistent focus on safety and service paid off in year, in revenue growth and significantly better returns.

Our railway operating revenues up 3% this year were the highest of any year in Norfolk Southern's history.

That's reflecting continuous growth and more important, picking up momentum as the year closed.

For the full year of 2003, we reported net income of $535 million, or $1.37 per share, compared with $416 million or $1.18 last year.

That's up 16 percent.

Although you're going to hear this again, maybe again and again, the lawyers have asked me to remind you at the outset that 2003 included several significant items, both up and down, including first a $114 million gain, largely due to a required change in accounting for the cost of removing railroad crossties.

And second, a $10 million gain from discontinuated operations at our former motor carrier.

Both on those on the plus side in the first quarter.

And 3rd, a $66 million after tax charge for the voluntary separation program.

And 4th, a $53 million after tax charge for the writedown of telecommunications assets.

Both of those on the minus side in the 4th quarter.

Hank's going to show you details on that in a moment.

Let me say that for the year, our comparable earnings without these items would have been about at 35, which is up 15% year-over-year.

Significantly, however, our 4th quarter net of 13 cents per share was reduced by 30 cents by the charges for the voluntary separation and the two cube asset writedown that I that I mentioned.

So, looking again at our results without these charges, net income in the 4th quarter would have been $171 million or 43 cents per share, compared with 33 cents in last year's 4th quarter.

That's 33% year-over-year.

That is a strong finish to a year that was filled with challenge, as you know.

I'm convinced our results confirm our formula for generating growth and creating value is working.

We were able to achieve significant financial and service improvements in a year in which the rail transportation system in general was stretched to provide strong service, and the economy did not grow until the latter part of the year.

We also overcame significant cost challenges of fuel and high wage and health care costs, and were able to make significant cost progress and improve our operating ratio in the second half of the year.

Value of our Thoroughbred Operating Plan, which is adaptable to changing conditions and shifting business demands, is becoming even more apparent.

As the economy and freight volumes improved in the second half, we improved service as business picked up.

That shows our network is able to support more new business growth.

Our 4th quarter railway operating revenues were up 6%, set a new record for any quarter.

As we noted in our press release, that strength was reflected across all groups.

For the year, our railway operating revenues increased 3% over 2002 levels and, as I mentioned, established a new record.

Clearly, when you track our year with we're seeing considerable positive momentum, and Hank will illustrate that in a minute.

On the expense side of the house, cost control remains an area of intense focus for us.

Our 4th quarter railway operating expenses included the voluntary separation program that we told you about the last time we met.

That has gone well, and we've reduced 500 jobs.

We also are benefiting from the productivity improvements as we press forward with our process improvement initiatives and our value-- our activity value-added analysis process.

We have more work to do, and higher wages and medical costs are an ongoing challenge for us, but we believe our operating ratio is now moving in the right direction, as you know it did not do earlier in the year.

We remain optimistic about the health of the industrial economy.

There continue to be some challenges.

For January overall, car loadings are up modestly, about 2% year-over-year.

They're led primarily by intermodal and metals and construction.

Various weakness in our automotive business, which we believe is temporary.

Coal started a little snow, but will benefit from the cold snap and the kind of weather we're seeing in the northeast today.

And here's increasing demand for export coal.

As we move forward, we'll continue our commitment to pricing that reflects the current market value of our rail service, particularly in today's market, which is marked by trucking challenges and high fuel costs.

Our better service gives us a very competitive and valuable product to sell. 2004 does pose challenges similar to those we tackled last year.

We have cost pressures in the form of increased wages and health and welfare benefits for employees, as well as rising diesel fuel prices from their already high levels.

Still, we are steady in our concentration on finding cost-effective ways of doing business, while we continue to improve safety and service.

It does appear to me that the economy is showing continued strength, and we do have new opportunities as a result.

I have every confidence that Norfolk Southern will continue to successfully forge ahead and will gain business while our margins improve.

Now, I'll ask Hank to review our numbers for the 4th quarter in 2001 3 in some detail.

Then I will tell you about the specifics of the markets, and then we'll be available to take questions.

Hank?

Thank you, David, and good morning.

Moving to the first graphic, there are several significant items reflected in our results that I'd like to call to your attention this morning.

First, you will recall that in the 1st quarter, we recorded an after-tax benefit of $114 million for the cumulative effect of two changes in accounting principles.

Second, the cost of our voluntary separation program reduced net income by $66 million in the 4th quarter.

Third, in December, we recognized an impairment in the value of TQ Telecommunications assets, which lowered net welcome income by $53 million.

Finally, you'll recall that we had a $10 million gain in the first quarter, related to our 1998 sale of North American Van Lines, which is reported as discontinued operations.

In order to provide the most meaningful period-to-period comparison, I will initially exclude these items from my detailed remarks this morning, and then reconcile the totals to our reported results.

Railway operating revenues for the 4th quarter were $1.7 billion, up $95 million, or 6%, and were the highest quarterly revenues in our history.

Merchandise revenues increased $42 million.

Intermodal revenues rose $29 million, and coal revenues were up $24 million, in large measure reflecting favorable adjustments stemming from the STB decisions in the coal rate cases.

For the year, railway operating revenues were a record $6.5 billion, an increase of $198 million, or 3%.

General merchandise revenues were up $81 million.

Coal revenues were $59 million higher, and intermodal revenues increased $58 million.

Fourth quarter car loads increased by about 93,000 units or 5.6%, as reflected on the next slide, compared with last year.

This is driven by a $73,000 or 13% gain in intermodal units.

Revenue yield was up modestly, resulting in an increase in railway operating revenues of 6%.

For the year, car loads were up approximately 140,000 units, or 2%, largely driven by gains in intermodal volume, which increased by 112,000 units or 5%.

Revenue yield was up a little over 1%, and our railway operating revenues improved by 3.2%.

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

Our railway operating expenses for the 4th quarter were $1.3 billion, up $52 million or 4%, excluding the $107 million charge for the voluntary separation program.

For the year, railway operating expenses were $5.3 billion, $185 million or 4% higher than 2002.

On the next slide, as you can see, the increase in railway operating expenses for the 4th quarter was primarily due to increased compensation in benefits expenses, which were up $63 million.

On the next graphic, can you see that the increase in compensation of benefits was driven by higher wage rates, including increased bonus opportunities for locomotive engineers that added $189 million, increased costs for health and welfare benefits, which were up $14 million.

Higher stock-based compensation costs that added $12 million, flowing from the $5 per share increase in our stock price during the 4th quarter, and several other items which cumulatively amounted to $19 million.

The most significant decline in our railway operating expenses, as reflected on the next slide, was in material services and rents, which was down $24 million, or 7%.

That reduction flowed from a $24 million decline in purchased services, reflecting lower expenses for professional and legal fees, lower software licenses and hardware maintenance, and lower costs for intermodal, automotive, and bulk transfer services.

Conrail rents and services increased $9 million, primarily due to lower equity earnings of Conrail.

Other expenses rose $7 million, reflecting higher franchise taxes and other miscellaneous items.

Casualties and other claims were down $3 million, reflecting lower expenses for personal injury claims.

And diesel fuel expenses increased $1 million, as a 3 percent increase in consumption was offset in part by lower average prices.

As you can see from the next graphic, the 4th quarter benefitted from a modest decline in the average price of gallon per diesel fuel, which includes the effect of our fuel-hedging program.

Our fuel-hedging program produced $14 million of cost savings for the 4th quarter.

It should be noted that consumption was up 3% in the quarter, on a 6% increase in traffic volumes.

During the 4th quarter, we hedged almost $97 million gallons of fuel at an average price of 79 cents.

Overall, we hedged about 80% of our fuel purchases in 2003.

The swaps resulted in an average price per gallon of 76 cents for our hedged fuel.

As of the end of this year, we had about 63% of our expected 2004 fuel requirements hedged at an average price per gallon of 78 cents.

Our railway operating expenses for the year totalled $5.3 billion, up $185 million or 4 percent.

As in the case of the 4th quarter, the largest increase for the year was in compensation of benefits expense.

In 2003, we experienced $146 million, or 7% , increase in compensation of benefits expense compared with 2002, principally as a result of higher wage rates, which added $45 million, including the higher BLE bonus, increased health and welfare costs, which were up $44 million, lower pension income which was down $34 million, and other items which were up $23 million and included higher management incentive compensation and stock based compensation.

For the year, diesel fuel expense was $38 million or 11% higher, reflecting a rise in the average price per gallon from 72 cents in 2002 to 81 cents, as consumption was essentially flat.

Other expenses were up $16 million or 8%, reflecting the absence of a favorable bad debts settlement that had benefited 2002, coupled with higher franchise taxes and a number of smaller items.

Casualties and other claims for the year rose $10 million, or 6%, principally due to adverse personal injury claims development and derailments that we had experienced earlier in 2003.

Conrail rents and services increased $7 million or 2% because of lower equity earnings in Conrail.

And materials, services and rents declined $30 million or 2%, as less equipment rents and purchased services were offset in part by higher expenses for materials.

Turning to our railway operating ratio, the railway operating ratio for the 4th quarter was 80.3%, excluding the costs of the voluntary separation program.

For the full year, the operating ratio was up slightly to 81.9%. 4th quarter income from railway operations was $331 million, or $43 million higher.

That's a 15% increase.

For the year, income from railway operations was nearly $1.2 billion, up $13 million or 1%.

Total other income in expense for the 4th quarter was an expense of $78 million, excluding the TQ debts in impairment, compared with an expense of $102 million in 2002.

Gain on sale of property and investments was $18 million higher than last year, while coal royalties decreased by $2 million and all other increased by $4 million.

Interest expense on debt was $124 million, which was $4 million lower than last year, due to less outstanding debt.

For the year, total other income and expense was an expense of $394 million, again, excluding the TQ charge, as compared with an expense of $452 million in 2002.

Gain on the sale of property and investments was about even with 2002.

Coal royalties declined by $9 million, and accounts receivable sales fees were $4 million lower, due to the unborrowed capacity in our securitization program.

All other was income of $19 million, compared with an expense of $24 million in 2002, primarily due to a credit for interest on tax deficiencies flowing from a favorable income tax audit settlement, and increased income from corporate-owned life insurance.

Fourth quarter income before income taxes was $253 million, compared with $186 million last year, a 36% increase.

For the year, income before income taxes was $777 million, up 10 percent compared with $706 million in 2002.

The provision for income taxes for the 4th quarter was $82 million, compared with the $57 million provision in the 4th quarter of 2002.

And the effective tax rate was 32.4%, compared with 30.6% last year.

For the year, the provision for income taxes was $247 million, about even with the $246 million recorded in 2002.

The effective tax rate for the year was 31.8%, compared with 34.8% in 2002.

The lower effective tax rates for both periods were primarily due to the favorable resolution of prior year's tax liabilities.

Fourth quarter net income was $171 million, $42 million or 33% higher than the $129 million reported last year.

For the year, net income was $530 million, up $70 million, or 15%, above the $460 million earned in 2002.

This next slide highlights the components of the change in net income for the 4th quarter.

Railway operating revenues increased $95 million, while railway operating expenses rose $52 million.

Other income, net, rose $20 million, and interest expense on debt declined $4 million, which, when combined with $25 million more in income taxes, produced a $42 million increase in net income.

For the year, $198 million increase in revenues was largely offset by $185 million of increased expenses.

Other income net was $37 million higher.

Interest expenses on debt was $21 million lower, and the provision for income taxes was $1 million higher.

Combined, these items generated $70 million more in net income.

Earnings per share for the 4th quarter were 42 3 cents, compared with 33 cents per share in 2002.

A 30% increase.

For the year, earnings per share were $1.35, which was 14% above the $1.18 per share earned in 2002.

This next slide reconciles the net income and earnings per share, excluding the four significant items that I noted at the beginning of my presentation, with our reported net income, and earnings per share.

As information, the reconciliation for all affected line item income statement line items is also posted at our website at nscorp.com.

Our reported net income for the fourth quarter was $52 million, or 13 cents per share, and for the year, $535 million or $1.37 per share.

Thank you for your attention, and now I'll turn the program over to Ike.

Thank you, Hank, and good morning.

First of all, a few comment about the projections for the economy, which, as reported recently, the outlook for the manufacturing sector is more optimistic than it's been in four years.

Perhaps more importantly, in which we followed closely, the ISM index was above 60 for both the months of November and December, and this is the first time the index has been above 60 for two consecutive months since 1987.

As everyone knows, the overall general economic indicators are positive, and we have heard recently of increased exports as well as our customers telling us that they're finding room for improved pricing.

In summary, most economic analysts believe the U.S. economy is at the beginning of a strong, sustained economic recovery, and as you know, economic conditions varied hroughout 2003, and our business activity varied throughout the year as well, and at times did not necessarily follow the path of the economy.

Looking at quarterly trends for 2003, our first quarter was strong, with solid growth in merchandising and intermodal volume, and that was despite a stalling economy.

Conversely, the 3rd quarter was very disappointing and that was in spite of a GDP growth of 8.2%.

The second quarter was carried by coal, and the 4th quarter volume of over $1,700 million and 50,000 units was essentially a breakthrough.

Intermodal volume increased nearly 73,000 units or 13% over the last year, while merchandise volume was up across all markets in the 4th quarter.

For the year, volume exceeded 2002 by 2%.

These volumes translated into record revenue for both the quarter in 2003, total revenue rates, $1.676 billion for the 4th quarter, and that's increasing $95 million or 6% over the same period last year, and each of our three business sectors produced favorable year-over-year gains.

Looking at the year in total, revenue increased $198 million or 3% over 2002, and as David pointed out, and Hank, it was the highest revenue ever for five of our seven major market groups.

Merchandise achieved its highest revenue quarter ever, and revenue of $956 million was up 42 million or 5% , while for the year, revenue increased $81 million or 2%.

And intermodal also achieved its highest revenue quarter ever, and that was led by strong truckload and international results.

Fourth quarter revenue was up 10 percent, while for the year it increased $58 million, or 5 percent.

And coal revenue reached $385 million, increasing $24 million, or 7%, for the quarter, and I will discuss that in more detail in just a moment.

For the year, coal revenue was at $59 million, a 4 percent improvement over 2002.

We still have yet to recover volume lost after economic downturn in late 2000. 2000 of course was our first full year following the Conrail transaction.

Merchandise and coal volumes are still off by a combined total of 210,000 car loads, or 4.5% versus 2000.

The 224,000-plus increase in intermodal business, which is not shown here, essentially offsets these declines.

But even with the 4 1/2% decline in volume, combined revenue has increased 4%.

Merchandise revenue is up $124 million, while coal revenue is up $65 million, and obviously, the revenue increases were driven by improved EL (phonetic).

And that's one of the points I'm trying to make here.

The second point being, obvioulsy, we have capacity going up against the head winds of this projected economic recovery.

Looking at the current year yield, total revenue per unit reached $955 dollars for the quarter.

That's increasing $4 over the 4th quarter 2002, and was up $10, or 1% for the year.

I think it's, perhaps, more meaningful to look at the year in total, as the increase occurred even with 80% of our unit volume.

Annual unit volume growth being attributable to intermodal, which is reported, as you know, on a unit basis rather than car load.

Automotive and Ag revenue drove the $4 decline, and overall merchandise revenue unit for the quarter.

The $28 decline in ag revenue per unit was a result of the sharp increase and shorter haul interplant moves that started during the 4th quarter.

And then, we finally saw the decline in longer haul transportation patterns that had developed for corn shipments following the drought of 2002.

The $17 decline in automotive revenue is principally due to the lower ancillary revenues from our mixing center, and was a result of lower production of the tars and other core products.

Chemicals, metals, construction and paper enjoyed year-over-year gains, and most of that is due to pricing improvements, but also some favorable traffic mix changes.

For the year, there were no declines for merchandise revenue per unit ,which increased by $18 or 1% over 2002.

Intermodal revenue per unit declined by $13 to $5.13 in the 4th quarter.

As you recall, the 2002 west coast work stoppage held down last year's international shipments, which have a lower unit pricing, so, therefore, that increased 4th quarter 2002 revenue per unit, and conversely, the large increase in international volume in the fourth quarter this year drove the per unit price down.

Coal's RPU increased to $981 for the quarter, which was primarily a result of the STB's decisions and the rate proceedings, in which two utilities challenged tariff rates in effect since early 2002.

The adjustment made to 4th quarter coal revenues reflects our best estimate of how the cases ultimately will be resolved, recognizing many uncertainties remain, and that subsequent developments in the cases could have a significant effect on the results of operations for the quarter when it's resolved.

Because both cases are still open before the STB, our lawyers have told me that that is all I should say on the matter.

Looking at the year in total for coal, revenue per unit reached $929.

That's increasing $34, or 4%, over 2002.

And in addition to the 4th quarter increases, we also have improved export volume, which gave us a more favorable mix, as well as settled contracts with other utilities during the year that had upside pricing.

Our business groups continue to benefit from the performance of our Thoroughbred Operating Plan.

Reliable service and improved consistency are being marketed, and have produced additional gains and traffic diversions from the highway with annualized diversions totaling $79 million.

During 2003, according to our measurements, our merchandise sector successfully diverted $58.5 million in annualized revenue from the highway, while intermodal diversions totalled $20.5 million.

Looking at our merchandise sector, our markets were excellent for the quarter.

Ag revenues were up $51 million for the year, and that's an 8% increase for the year and 6% for the quarter.

These were new record highs.

The increased demand for shipments of corn to feed mills and poultry producers, come back, the fertilizer industry and the ramp up of the market, accounted for this strong showing throughout the year for Ag business.

Metals and construction revenue increased 10% for the quarter and 1% for the year.

For most of the year, the growth was limited, due to a 2% decline in steel production in the U.S., and a significant decline in imported slabs due to U.S. mills. (phonetic) Our revenue from the shipment of slabs was down 46% versus 2002, due to a combination of a soft U.S. dollar, the imposed tariffs, and an increase in global steel demand, principally from China.

The consolidating steel industry and the changing markets continue to create challenges as well as opportunitis.

On the construction side there, were increased aggregate movements during the second half.

We achieved our 6th consecutive quarter of year-over-year growth in the paper route, as revenue increased 4 percent over the same quarter last year.

As related to construction, lumber revenue increased 9% as home construction activity continued to increase.

And for the year, the revenue increased 5% to make 2003 the highest revenue ever for this business group.

Domestic market conditions for paper products do continue to improve, and shipments through our network of our paper distribution facilities were up 27% in 2003.

Our Modalgistics Group markets across the enterprise and engaged in over 20 supply chain projects during 2003.

Modelgistics launched ModalView, a web-based supply chain management application that provides complete end-to-end shipment and product level visibility to customers.

We presently monitor over 100,000 rail shipments and 20,000 truckload shipments per year for our current customers.

Despite higher pricing for natural gas feed stocks, chemicals revenue increased 3% for the quarter and 2% for the year.

Small volume increases as well as improved yield accounted for this increase.

Automotive revenue increased 2% for the quarter, and reached the highest 4th quarter ever.

North American automotive production was up less than 1% in 49th quarter of 2003 versus 2002, while our volume increased at 3%.

Contributing to this increase were the launches of the new Ford f-150 and Daimler-Chrysler's new Durango SUV.

For the year, automotive revenues and car loads declined 3% from 2002 levels, and that's approximately the same rate that North American automotive production declined.

Looking at 2004, automotive market will gain from the fully ramped up production of a second Toyota plant in Princeton, Indiana.

And Honda's shipments from its new assembly plant in Lincoln, Alabama, began in October 2003.

The second plant at Lincoln is scheduled to begin shipping during the latter half of 2004.

Ford's new freestyle cross-over vehicle and the Ford 500 sedan are to begin production for national distribution from its Chicago assembly plant in mid-2004.

Looking at coal, 2003 was another challenging year for our coal franchise.

Volume very considerably throughout the year, and we experienced year-over-year volume declines each quarter except for the 2nd quarter.

However, coal revenue achieved favorable comparisons in three of the four quarters.

Looking at our specific coal markets, utility volume fell 1% below 2002, and we believe stockpiles are below normal levels in our northern service region and, I would assume, getting lower today, and near normal across our southern region.

Volumes in the south were affected by mild weather, and extended power plant outages during the installation of mission control technology at certain of the utilities.

For the year, utility volume increased by 1%.

The first half of the year saw aggressive stockpile rebuilding, and part of the car load volume declined in the second half of the year, was actually due to increased utilization of our equipment as we continued to increase the amount of coal in the cars.

As an example, for the 3rd and 4th quarters. tonnage declined only 1.6%, while car loads declined 2.4%.

The outlook for utility coal remain mains positive.

The units that experienced extended outages in 2003 for installation of emission control technology should be in full operation for 2004, and with the current price of natural gas, coal fired generation continues to be the lowest coal source for electricity, and demand will increase as the economy strengthens and recovers.

On the export side, volume declined by 7% in the 4th quarter after 40% growth in the 3rd quarter.

Our domestic steel markets, which include metallurgical coal, coke and armor, our shipments were about 15 percent for the fourth quarter, and that, of course, is related to the decline in steel production mentioned earlier.

These markets also were impacted by the reduced availability of supply from key metallurgical mines on Norfolk Southern.

There are marked shortages of raw materials in the world, markets for integrated steel production.

We're talking about metallurgical coal and coke, obviously.

Spot pricing for U.S. coals have exceeded $70 in recent weeks.

However, the issue that remains is availability.

For the year, export volume grew by 7500 loads or 7% with most of the volume gains going to western Europe.

Our industrial coal sector produced the only favorable comparison for the quarter.

The industrial market was up 9 % for the quarter.

Moving to intermodal.

Intermodal established new records in the 4th quarter for both volume and revenue.

Fourth quarter volume was up 73,000 units at 13%.

There were gains across all of our markets, and you will note that the business is up 22% for the quarter and 14% for the year for the truckload business.

Truck conversions have continued success with new services and products, contributed to this growth, and our gains in international business were due to favorable comparisons resulting from the West Coast port shutdown in October, 2002.

And I will also add, it was an increase -- continued to increase in the imports entering the U.S.

In the 4th quarter, we also had double-digit growth in domestic IMC business and our international segments, as reliable and consistent service performance generated new business.

We executed a perfect peak season for UPS, which is our most service-sensitive customer, finishing the year with the longest failure-free streak in NS history of over of 100 days, and we have extended the streak through yesterday, to a total of 116 days.

Our premium market did experience the only unfavorable comparison for the year as a result of decline in U.S. postal business.

Intermodal's record 2003 volume was influenced by new service enhancements and improved train speed that enabled over 44,000 units to be converted from truck to rail.

During 2003, we focused on equipment utilization and yield improvement, and both of those objectives were accomplished.

Our equipment rentals were reduced and intermodal contribution was improved.

The focus for 2004 will be to ensure driver velocity through the terminals.

It is maintained, and this certainly is one of the aspects of the IRS's service law that we're monitoring closely.

The other aspect, of course, is market opportunity.

We also received special acknowledgements for service excellence in 2003 from certain intermodal and merchandise customers.

First, Schneider International, the largest trucking company in the United States, awarded Norfolk Southern the Schneider Carrier of the Year award for service, performance, continuous innovation and greater ease of doing business.

And I think this points out the interest in activity that is going on between the truckload carriers and the rail industry.

Second, for a third consecutive year, Triple Crown was the winner of Logistics Management Magazine's the Best intermodal Service Provider Award.

Our merchandise service also received recognition.

The automotive group was awarded the Toyota Logistics Excellence award for both quality, service and on-time performance, while our chemicals group received the Carrier of the Year Award from Eagle Brook Chemical.

The point to be taken is that our improving service continues to create opportunity for more truck conversions and more carriers as customers.

Ending where I began, talking about the projections for the U.S. economy, I would state, if the U.S. economy is at the beginning of a sustained recovery, the markets we serve should flourish.

Our industrial markets, including chemical, steel, paper and industrial coal, are expected to improve with the projected 4.7% increase in production.

And we also have an improved export market and more room for our customers to price.

Our intermodal service, facilities and information systems have never been better and we are monitoring very closely for opportunities concerning the hours of service law.

And our coal markets will gain due to increased electricity production as well as the opportunity to meet increased demand in the world market.

Obviously, I'm very optimistic with the concept of a sustained recovery.

That concludes this portion of our prepared materials.

Would you like to open it up for questions?

Yes, we would.

Thank you.

The floor is now open for questions, if you do have a question, please press the number one followed by 4 on your telephone keypad at this time.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask that while you pose your question, you please utilize your handset to provide optimum sound quality.

Our first question is coming from Thomas Wadawitz of Bear Stearns.

Please go ahead with your question.

Okay.

Good morning, everybody.

I've got two different questions I'm going to give you here.

First, I think this is for Ike.

On the coal rate cases, I know this is a sensitive topic, but I do some kind of the back-of-the-envelope calculations.

And it seems to me it's something on the order of maybe $30 million or so that you would have booked in 4th quarter from the rate cases.

And something perhaps on the order of $6 to $7 a ton for the disputed business.

Can you just give me a sense, am I in the ball game in that order of magnitude or am I being too aggressive in saying that might be what you looked at booking in the 4th quarter on those rate cases?

Tom, I just cannot comment on that.

Responding would be exactly what our lawyers have counseled me not to do.

And they are very sensitive cases, and we really have got to wait for the conclusion of them to discuss.

Okay .

Looking beyond the rate cases, presumably, you can be more aggressive with the price increases you asked for in 2004, with the captive customers.

I'm wondering you can give me a sense of what percentage of your totaling coal portfolio would reprice in 2004, and kind of roughly is half of that single serve business, or, again, some kind of rough numbers we might be able to work with?

Tom, we generally -- we have about 70% of our coal under contract, and obviously, the export coal turns every year.

We essentially have annual contracts there.

We're estimating 40% of our business is up for renegotiation in 2004, principally, you know, only utility side if you take out the export.

I haven't done the calculation, I mean, we have a lot more competitive issues, you know, than -- as you described it, we do haul utility coal to the lakes as well as to the river, and competing with barges and others, so I really can't break that 40% down as to how it works.

Tom, I -- this is David Goode, Tom.

I think the important thing for to you remember is our pricing philosophy is always to be competitive and always to be in the market.

But also, in every phase of our business, we are now pricing for the high value-added that our service provides.

We have--the Norfolk Southern philosophy is that we have something to offer in today's transportation market that is absolutely unique,and of a value right now that we have never seen before.

And we are -- we think our customers are happy to obtain the benefits of that transportation service, and we price to fully reflect the value of that to us.

So that's a deep-seeded philosophy that runs throughout our business and one that we will certainly be pursuing in 2004.

Okay.

Great.

I've just got one more on export coal, If I can.

It would seem to be very favorable environment for further gains in export coal.

I guess you might be constrained in terms of what the mines can produce.

But are there any rough parameters you can give us as we look toward 2004?

Do you think export coal can be up a lot, or do you think 4th quarter indicates that maybe there is some concern in how much it can grow?

Tom, I -- I do think the opportunity is there for export coal to be up a lot.

However, there has not been reinvestment in our coal fields for some time, I would say since '99, to bring any new metallurgical on to the market, but metallurgical is bringing more per ton than steam coal.

You could come up with several scenario where's there would be more availability of metallurgical coal in the market, such as importing steam coal and shipping metallurgical out.

We see some reinvestment occurring, that just doesn't happen overnight.

I would say that we're hoping that we'd have as much increase as we did in '03, but a lot of it's riding on permitting in West Virginia, as well as the U.S. -- the former U.S. mine which is called Pinnacle Creek.

It's been down.

It's got $4 million tons that has been taken out of the market.

The decision on reopening that mind is in front of us here.

So we'll find out very soon about those 4 million tons.

That's the best I can answer, because it's unknown.

There's a lot of demand out there, and obviously we're doing everything we can to encourage the availability.

Okay.

Good.

Well, congratulations on the strong revenue results.

Thank you.

Our next question is coming from James Valentine of Morgan Stanley .

Please go ahead with your question.

Good morning.

First, would you expect your coal yields for 2004 to run more at the rate we saw in the first three quarters of 2003 or more at the 4th quarter run rate?

Jim, it's difficult to really give you an answer to that just now.

Obviously as I indicated in the 4th quarter, we did have an adjustment that reflected the decisions in the coal rate cases.

Those cases are actually continuing proceedings because there are motions for reconsideration and stays that are in place in those proceedings.

So I think that, perhaps, at the end of the 1st quarter, or maybe midway through the year, we'll be able to give you a better picture, but we hesitate to try to forecast that now.

Okay.

Does any of the coal accrual reversal - I know it's a sensitive topic, so I'm going to try to ask something that hopefully you can answer - does it have anything to do with future periods of time, or is it only to adjust for what's happened up to this point in time?

Meaning that, based on what all of us can do the math on, the ultimate decision from the STB and what it potentially means for the future, is there anything in the adjustment here that pertains to the future just simply basically that you can shore up or adjust for prior periods?

Well, Jim, we accrue our revenues on a basis that is as the car moves, and that is the acceptable GAAP standard.

So there is nothing in any of our revenues that we've reported to this point in time that reflect anything that we anticipate in the future.

Okay, good, good.

That's what I thought.

I just want to make sure.

I think on slide seven of your presentation you broke out labor, which was really helpful, but there is a pretty big bucket in the fourth quarter here called other items, and I was wondering if you were able to tell us what one or two of the bigger items were in there, unless there were 10 different items, no point going into them, but if there was 1 or 2 big items in there?

There were several different items.

Probably the one or two largest items-- you're talking about the compensation of benefits?

Yeah, but within there, there was this big bucket, like $19 million that was -- the biggest part of inflation, it's just called other.

Right.

There was some increase in the management incentive compensation.

There was some salary adjustment items.

There was an adjustment for the disability plan.

We had an actuarial report from our consulting actuary, who is reviewing our disability plan, and that required an adjustment because of longer anticipated disabilities and more people in the plant.

For modeling purposes, how much of that $19 million was kind of one time versus going to be an ongoing, you said, outlook going forward?

I think that probably most of it can be regarded as one time, but certainly not all of it.

Okay, great.

Thank you.

Thank you.

Our next question is coming from Gary Yablon from Credit Suisse First Boston.

Please go ahead with your question.

Good morning.

How are you?

Good morning, Gary.

Ike, could you talk a little bit about, we've heard recently some chatter about maybe easing up the restrictions on the open-top mining and certain of your territories.

Do you see any momentum to that?

I know part of the problem is getting enough coal out there, not so much the price, but the availability.

Could you talk about that?

Yeah.

And a lot of this is, as you've mentioned, what you hear.

I do think West Virginia is getting the -- they're getting the permits through faster than they were.

It appears that Kentucky has an issue.

There's more production on hold in Kentucky than there is in West Virginia.

How to predict the future on that, because a lot of it's political, is, I guess, pure speculation .

We believe that just the sheer power and the demand for coal and energy is going to bring all that to the proper arena before the year is out, and unless we decide, as a country, to generate electricity with very expensive natural gas, and really create problems on cost of living and economy going forward.

So I -- I'm just, as I have been, very optimistic that sanity will prevail.

Okay.

Fair enough.

Hank, could I ask you from an income point of view, some companies are possibly looking at tail winds going into '04, which is the opposite of what we've seen in the past, can you give us an update there?

I don't exactly see a tail wind.

I think as you know, Gary, our pension income has been reduced over the past couple of years, largely driven by a change in the assumption for returns going into the future, and also because of the performance of the equity markets in particular.

I suspect that, as we move into 2004, that we would expect a further modest decline in pension income, but not of the magnitude that we saw either from 2001 to 2002 or 2002 to 2003.

What was it again from '02 to '03?

'02 to '03 was about 48.

Marta?

About $34 million.

Okay.

$34 million.

And I would expect it would be probably less than a third of that going-forward.

Okay.

And one for David, if I could.

David.

What I wanted to ask you, my understanding, correct me if I'm wrong, is that Norfolk Southern Corporation, for better or worse, has mandatory retirement for CEO and for you.

I think that would be sometime in the first portion of next year, is that correct?

Well, I did just have a birthday, Gary.

I regard myself as a pretty young 63.

Hank likes to remind me that I am temporarily two years older than he is.

He enjoys that period a lot.

I think that is -- I certainly think that is a reasonable time frame for you to be thinking about, and we're certainly thinking about that and are doing what prudent, sensible corporations do, and that is, provide a plan for transition.

We're certainly thinking hard about that and the board of directors I'm sure will be doing that.

There's a lot of talent at Norfolk southern, and we have a lot of talent to work with.

David, could I ask you, what are the -- you're not going to share your deepest, darkest financial goals in terms of your last year at the helm, or so.

What should we think about, that you want to accomplish?

I can't imagine it's got an 8 in front of it.

You know, how far out of the park do you want to hit it?

I don't like to think of this -- I thought I said I wouldn't think of this as my last year, Gary.

Okay.

I think we've got a little -- we've got a ways to go.

We do have some -- I do, for the management team, have a setup of goals naturally, and I've got a set of stretch goals for us.

I'll answer it this way.

I think that I've seen a lot of over my career in the transportation business.

I've seen a lot of ups and downs, and we've had a few of them ourselves.

Right now, it seems to me that there are a lot of reasons to be very optimistic about our portion of the transportation business.

If the economy is moving with the momentum that it did in the 4th quarter, and that it seems to be early in the year, then certainly we have a lot of opportunities, because of things that are going on in other pieces of the transportation world as well.

Certainly, there's some severe head winds in trucking and there are a lot of favorable things in terms of economic factors and highway congestion and energy costs that help us.

So I think that that -- we have some real opportunities and I'm glad that, as it is sort of the end of my career, I'm looking forward to going out on an up note.

Okay.

Fair enough.

Thank you.

Thank you.

Our next question is coming from John Barnes from Deutsche Bank Securities.

Please go ahead with your question.

Thanks.

Just for a second back on the question of pension income.

If the pension legislation that's being debated right now were to pass, have you taken a look at what your assumptions would be under that new legislation, and would we actually see an increase in pension income?

John, I assume that what you're talking about is not pension legislation, but the legislation concerning prescription drug care under Medicare.

Am I correct in that?

No, I mean, the pension legislation that's being debated now where they're talking about using a different discount rates and different return assumptions on fixed income and things like that.

There's a number of issues being debated under one large bill.

yeah, I really don't think that that legislation will have any significant effect on us.

As you probably are aware, our pension plan is not only fully funded, but it's slightly overfunded.

And the performance of that plan in 2003 was very strong.

We continue to have a set of assumptions that we think are reasonable in the context of our liabilities and the outlook going forward.

So we don't think that the legislation would have any effect on us.

It may have on some other companies that have underfunded plans.

Okay.

All right.

Yesterday CSX gave a vague idea of what they believe the timing of the Conrail spin-off could be.

Do you have any further update on that issue?

I think that's pretty hard to predict.

We, along with CSX, are working actively with both the tax lawyers and the general lawyers to get that accomplished.

I think we're both eager to see that done, and we're -- we certainly would hope that it can be done during the year, but where you're dealing with things that require a lot of approvals like that, I'm reluctant to project.

All I would say is that we are working actively to get it done.

Lastly, Hank, on other income, just looking out into 2004, I'm not looking for specific numbers, but just on a magnitude, should we be looking for a little bit better year on property sales, a little bit worse year on property sales, things like that?

Somebody asked me earlier about goals, and one of my goals is to make sure that we are achieving the value out of all of our assets.

So we are -- we do have -- we are reinvigorating an effort to make sure that we're getting value out of that, but I don't think we would want to predict what that would be, because it's very difficult to predict sales.

You just don't know what the timing is, you don't know what the market's going to be, so we're dependent on a lot of forces.

But it is a priority for us to make sure that we're getting the-- realizing the maximum values from all of our assets.

Okay.

Very good, thanks for your time.

Are we running out of questions?

Thank you.

Our next question is coming from Jennifer Ritter of Lehman Brothers.

Please go ahead with your question.

Good morning.

I just wanted to understand the accounting behind the way the revenue will be released if and when you fully resolve these cases.

Is it correct to assume that it will be sort of a one-time boost to coal revenue as the full reserve that you've been reserving for it gets released, and then going-forward a more moderate revenue increase relative to what you've been booking for these two companies?

Jennifer, I think Hank could probably say, I don't know to that.

Jennifer, I think that's exactly the question that we're not in a position to answer, given the fact that the cases are still in some stage of pendency.

Okay.

We understand the appetite for it, but where litigation is involved, we just are restricted in what we can say.

Fair enough.

Thanks.

Thank you.

Our next question is coming from Scott Flowers from Smith Barney, Please go ahead with your question.

Good morning, gentlemen.

Good morning.

I just wanted to maybe try to skin this apple from a factual standpoint, because I don't really want numbers, but I guess what I'd try to like to understand is, in the current quarter, does this adjust back to the beginning of when you went to tariffs as opposed to just the current quarter, i.e., is what's in your estimate purely for the fourth quarter or does this go back to the beginning of 2002?

Again, not trying to get at any of your assumptions or estimates of what's in the numbers.

Scott, I think that as Ike indicated, we have said all that we can say on this subject at this time.

And I understand your thirst for additional information, but we're giving you all that we can legitimately give you at this time, given the fact that there is a continuing proceeding.

All right.

Well, okay, I'll make assumptions then.

I do refer to you our press release on that.

Right.

Well, you said you'd give us further guidance when you did something, so I appreciate that.

Just a couple other quick ones.

Can you give us some sense as we look going-forward where your tax rates may lay?

Obviously, you've done a good job in working with the IRS on your past audits, et cetera, and doing a good job of paying as little as you legitimately need to to the government.

Should we assume somewhere in the low thirties, relative to an income tax rate on a book basis for '04?

During 2003, we had some tax years that were closed, and that resulted in a favorable adjustment, that, over the course of the year, reduced our effective tax rate.

But on a go-forward basis, let me let Galanko give you some help there, if he can at all.

Bill?

Scott, first of all, if you disregard the potential for spin-off, which would affect the effective rates, so you're comparing apples and apples, it's probably safe to say, it might be somewhat higher.

But whether it's slightly higher or significantly higher, will depend upon things that are really speculative, and depends on the equity income and certain tax contingencies, whether those contingencies are resolved this year, and if so, whether they're resolved favorably or not.

So, I don't think we can give you a lot more help than that.

I think --

Scott, Bill Galanko is a really good tax guy.

Bill Galanko understands that when he has a good year, he sets himself a goal for another one.

Right.

Scott, I think a couple things to bear in mind.

Right now, with Conrail reporting equity earnings that include PRR and NYC, that helps to reduce the rate , the effective rate, on NS and CSX even more than it is likely to after the spin-off is achieved.

So, that's one thing to bear in mind.

The other thing is, that we have had some simple --

Did they just cut us off or --

Please continue with your question.

I can't hear anything.

One moment while the conference call resumes.

Thank you for your patience, please remain on the line.

Your conference call will resume momentarily.

Thank you.

Ladies and gentlemen, we ask that you please continue to hold.

Your conference call will resume momentarily.

Ladies and gentlemen, please remain on the line, your conference will be reconvened shortly, thank you.

Mr. Goode, you may resume your conference.

Scott, we didn't mean to -- we didn't mean to cut you off.

But I gather we did.

Scott, are you there?

Mr. Scott Flowers, can you kindly press 1, 4 on your telephone keypad to re-make your line live.

Hello?

Mr. Flowers, you're live.

Scott, nothing personal.

No problems, no.

You were talking about tax rates.

I'm not sure how far I got.

I guess the three points we were making number one, that obviously, with Conrail reported included PRR and NYC.

The income from Conrail, equity earnings of Conrail is larger, and as a consequence, that's reported on an after-tax basis, and it tends to drive down the effective rate at NS.

The second point is, we have made some investments in section 29 credits, those may or may not produce results on a go-forward basis that would help to, again, reduce the effective tax rate.

The third thing is that, while we did have the benefit of settlement of prior years tax cases in 2003, that's not an event that happens on an annual basis, so the recurrence that have event is unlikely in '04.

Okay.

And then, just one last quick one.

Just to get a little flavor, could you give us some sense of the progress of NS-21 and perhaps if there are any new cases, as we look toward the rollout of 2004.

We're fortunate to have Kathryn McQuade here with us, who has been the leader of the NS-21 projects.

Let me let Kathryn field that one.

Good morning, Scott.

Good morning.

The NS-21 was active this year.

One of the major projects is the AVA project, that was the result of the voluntary separation.

We're moving forward with reducing work scope in service departments to make sure that we keep that employment level out of the future.

We often have ascertains in our equipment and utilization areas, locomotive improvements, and I think you can see some of the results in our diesel fuel usage, where we are showing improvement, year-over-year on the consumption on disease fuel, even with rising volume.

The equipment utilization continues to show results.

We have some excellent IT tools which are allowing us to better manage our pools, and to work toward improvements in that area.

And We are about to launch some additional projects this year, with the main concentration in our materials, services and rents area, at trying to control those costs.

So that's kind of the preview, and we're just getting ready to launch, and we will ensure that the programs that we had in place this year will continue to show benefits in 2004.

Scott, we are pressing for a reinvigoration of this, and redoubling of the effort, you would not be surprised to hear.

Great, thanks very much.

Thank you.

Our next question is coming from Sal Vitale, Fulcrum Partners.

Please go ahead with your question.

Yes.

Regarding the 10% increase in coal, revenue per car load, could you put a little more color on that as far as whether it was in export coal or one of the other sub segments, or whether it was core pricing or a business mix?

Sal, that again largely relates to the adjustment that was made in the 4th quarter, and I think we have said all we can say about that.

Okay.

Thank you.

Thank you.

Our next question is coming from Ken Hexter of Merrill Lynch, please go ahead with your question.

Hi, good morning.

I just wanted to follow-up on the head count reductions.

Are we all completed with the head count reductions?

And then, similar -- ahead of last year, you guys hired engineers going into the year in anticipation that volumes were going to climb, and it ended up being a wise move, although you thought it was a bit early.

Just want to know, kind of your hiring right now, are we you're seeing that kind of scale at the beginning of the year to prepare for this increase in volumes that Ike is talking about?

I'll answer that this way, as far as the -- as far as the chairman is concerned, we're not finished with reductions.

We did, for the year, we did have a total reduction of about 650 total positions, I think, and that was a combination of reductions and an increase in train and engine jobs over the year of about 350 train and engine positions.

So you're right, we are -- we did get a little ahead of the curve, and we are continuing to make sure that we are fully staffed on the train and engine side as business volumes remain strong, which they are at the moment.

So we're doing that, and the NS-21 activity analysis process, which is ongoing on the other side of it, continues to give us opportunities to improve processes and offset some of the P&E jobs in that fashion.

And that's a good formula for us that we hope will address, overall, some of the increases in the compensation line which we have seen, and which clearly is an area of emphasis for us.

So we're working on it, and we're approaching it from both of those angles.

One, we're making sure that we're fully staffed, so we don't leave any business on the table, because we sure want to be able to realize all the benefits that can possibly come our way in that respect.

At the same time, We're pushing productivity increases throughout the organization.

Okay.

Great.

And then I think it was Ike that mentioned quickly, while he was going over the numbers, that coal car loads had decreased, while the tonnage per car obviously increased.

Just wanted to know, is there a car fleet renewal program that is continuing to -- is there a target for increased capacity on a per car basis, are there kind of numbers you've put out there?

Yes.

We have had an effort under way for the last two years, and as I mentioned, to put more coal in the car and more cars on the train, and that -- that's how we improved those metrics.

I's been improving at about a rate of 1% a year,or, if you will, one ton per car a year, by getting a better load-outs.

The producers, and we have been encouraging it, the producers are getting automatic load-outs which are automated and really ensures a more even load, and we're also segregating our cars better, I would say, to get the maximum loads.

And then one quick on -- for Hank, if I may.

Hank, what goals for free cash flow, and is there any Cap Ex pull forward for '05 for the locomotive emission change or the depreciation bonus?

We announced our capital spending budget in December, and that included the acquisition of 100 locomotives in the year, and at least, at this point, there is no intention of accelerating any purchases.

With respect to cash flow, we continue to hope to reduce debt.

We had some substantial debt reductions over the last four years.

One would expect that, with business improving, we'll be able to do at least as well this year as we've done over the average of the last four years, and principally, apply our cash flow to reduce the debt.

Okay.

Thanks.

Our next question is coming from Dan Hemme of Prudential Equity Group.

Please go ahead with your question.

Good morning.

Presumably, the change in hours of service regulation is providing a boost for current truck-to-rail conversion rates.

First of all, let me make sure I got the numbers right.

Is it $58 million in merchandising, $20 million in intermodal?

And secondly, what are your goals really for conversion for '04?

Your numbers are correct, Dan, and as I think I mentioned, you know, measuring the conversions for intermodal is a little difficult with as many third parties that are out there as well as the truckload carriers really converting or just adding to their present business, and I think we could have been much more aggressive with that.

As so far as the opportunity with hours of service, as you know, the law was effective January 2nd, has a 90-day transition period, and we really don't know the full impact of that.

I'm somewhat guarded about the opportunity.

If, you know, if the opportunity's too good, which means that the trucking industry has really gone up against some strong head winds, I would look for an effort before Congress, either to extend the transition or to temper the law all together.

So we're watching it very carefully.

As far as putting a lot of resources behind it, we are not, but we are actively talking with numerous potential shippers, but that are concerned about it, and there's a lot of speculation as to what this will do to the markets.

Highway conversion numbers, we give you our -- sort of our best estimate in order to give you a flavor for it.

But it's not an absolute science in counting that.

For example, I know -- I notice that our business was one of our large truckload partners on the intermodal side was up 22% in the 4th quarter.

Well, you know, that could be conversions or not, we don't know.

So that's the statistical thing that requires a lot of analysis, before you jump on it too much.

The other anecdotal point I would make is that we have noticed that we have been getting approaches in business from a lot of people in the trucking business who have not previously been as friendly to rail as they have in the past, and we're suddenly seeing a lot of new opportunities for partnerships, which we believe is a factor of this.

And what appears to be developing, and I think it will be very healthy for both industries, is that, as a result of hours of service and high fuel costs and other factors, we will see a continuing emphasis in development in partnerships in our business, which are profitable, really, for everybody.

Certainly us.

I guess, maybe just on a follow-up basis, appreciating that there's maybe some more to this, the $58 and $20 million is a net number of business potentially lost to the trucking industry as well?

That is a net number.

Thank you.

Once again, if you do have a question, please press the number one followed by 4 on your telephone keypad at this time.

Our next question is coming from Mark Levine of Davenport, please go ahead with your question.

Hi, gentlemen.

Most of my questions have been asked and answered, but I do want to touch upon your eastern competitor.

Clearly, they are having some operational issues, and what I'm wondering is, is are you seeing any opportunity to take share, or are you proactively approaching their customers?

I mean, is there some opportunity that you see as a result of CSX's issues?

Thank you.

Mark, I would say on the contrary we're working very closely with our friends at CSX.

We cooperate with each other, where, if one of us has any issues, we generally operationally work very closely together.

We certainly have been doing a lot of that.

CSX is our largest interchange partner, so we do -- we try to have a fluid operational system for the whole East, and that's our objective.

And, in terms of business, our experience is that there is plenty of business out there that no rail carrier is handling right now, and there are limitless growth opportunities, and we're certainly going after as many of those as we can, because there's a pie out there that's big enough for everybody.

Okay.

Fair enough, and let me direct this question to Hank.

Hank, as you alluded to, you guys have done a wonderful job paying down debt the last three or four years.

And what I'm curious is, do you have an optimal capital structure?

I mean, is there a point where the de-leveraging will stop, and maybe a share repurchase program? (inaudible) dividend the last few years.

I mean, is there an ideal leverage ratio or capital structure you're looking at?

Well, Mark, I was a very happy camper when we had a 27% debt-to-total capital ratio, but I'm not sure that that's where we need to go.

I do think that we made some commitments when we borrowed the funds to acquire our share of Conrail.

Concerning debt repayment, we're trying to live up to those commitments.

We work very closely with the rating agencies and meet with them periodically, so that they're thoroughly informed as to what our intentions are.

I think that that helps to ensure not only that the company will enjoy the highest debt ratings possible and the lowest costs of borrowing, but also to ensure an adequate liquidity, with respect to sourcing funds, even in difficult periods of time.

So I do think we have some additional debt reduction that we will be pursuing as we move through 2004, and then on a go-forward basis, we'll take a look at it from time to time.

Obviously, a capital structure that leaves us with credit ratings that are BBB, BBB-plus.

I might even be able to convince David to try and push it towards an A-rating, would be the things that I aspire to.

The way I look at that, and Hank and I spend a lot of time thinking about this, but the way I look at it is, that we want to be -- we want to get ourselves in the position where we can make the best decisions at all times on what our capital structure is, and I want to have all of the tools in our bag, including debt reduction, dividend increases, stock repurchases, and, you know, anything that is out there that will achieve the optimum returns for all of our constituencies.

We certainly had a very clear focus on debt reduction.

We've, over the last four years, we've reduced our debt over a billion dollars, I believe, Hank, and --

Actually, over $1.4 billion.

And we've got more on the way.

So that kind of progress gives us a lot of options for the future, and that's really where we want to be.

But again, 2004 will be a year where you continue to deleverage the balance sheet?

I mean, if you had to -- who knows where the economy will be, but assuming things progress as they are now, is 2005 sort of an inflection point.

Is that the time where maybe you're moving away from debt reduction and toward other options or is it just too early to tell?

I think we would hope that we have the options certainly in '05, and maybe even in '04.

Our primary objective, we have debt coming due this year, and we certainly expect to -- or we -- our goal is to put ourselves in the position to handle that out of cash flow.

Great.

Appreciate it.

Thank you.

Our next question is coming from Jordan Alliger of Lazard.

Please go ahead with your question.

Yes, hi.

I was wondering if you could give a quick update on the terminal redesign, or LOPA.

Is that going as scheduled from when you talked about it previously?

I'll be happy to answer that.

Yes.

LOPA is proceeding as we had planned.

We're coupling the operating plan adherence piece of that, and the tie system.

We've recently rolled out a modification of that called Yellow Sheet, which systematizes the processes that go on in the yards, and that will be the first or the second quarter this year, before we get that completely rolled out.

So to answer your question in a short, absolutely.

Thank you.

We've done so many great systems that we've run out of acronyms and we're now using things like yellow sheet, real words for it.

That's taken from the old processes in rail yards that used yellow sheets in yard offices that were pre-printed printer forms, and it has some place in history.

Thank you.

Thank you.

There appears to be no further questions at this time.

I will turn the floor back over to you for any further remarks.

It's been a very patient group, and we appreciate your attention, and we'll look forward to either seeing or talking with you next quarter.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

And have a wonderful day.