Norfolk Southern Corp (NSC) 2004 Q4 法說會逐字稿

We've got a full agenda so we'll move ahead.

Good morning.

I'm David Goode, Chairman and Chief Executive Officer of Norfolk Southern and I'm happy to welcome you to our fourth-quarter 2004 analyst meeting.

I welcome all of you, including those who are listening by telephone.

And as I'm always urged to do, I'll remind everybody to use mikes wherever they can so that everybody can hear.

And as usual, you can get transcripts from our Public Relations department and they'll be posted on our website.

And the slides of the presenters are going to be available for everybody's convenience on our website in the Investor section.

Now, the lawyers, as usual, have asked that I remind you to please be advised that any forward-looking statements made during the course of this presentation represent our best good-faith judgment as to what may occur in the future.

And actual results may differ materially from those projected and will depend on a number of variables, some of which may be outside the control of the Company.

But please refer to our annual report or Form 10-Q filed with the SEC for a discussion of those variables.

Having made that formal statement, I'll quickly introduce -- we have several members of our management team here, including Wick Moorman, our President; and our Vice Chairman, Hank Wolf;

Steve Tobias and Ike Prillaman are here.

You'll hear from Wick, Hank, and Ike, and I'll be maybe a little briefer than unusual.

Steve's going to hold off for questions in this one.

Also, we have Jim Hixon, our Executive Vice President of Finance is here; and Bob Fort, our Vice President of Public Relations;

Bill Galanko is here somewhere, our Vice President of Taxation.

And Marta Stewart, our Vice President and Controller is here.

Where is Marta?

Not here -- will be here.

Leeanne Marilley, Director of Investor Relations is over in the corner.

I hope you all know Leeanne.

And Debbie Malvin, Hank Wolf's assistant, who will help you in the back of the room with anything you need.

Now, having made the introductions, let me start with a few comments about the tragic accident that occurred earlier this month in Graniteville, South Carolina.

As all of you know, nothing takes higher priority at Norfolk Southern than the safety of our employees and the communities we serve.

I have expressed and want to express again the most profound sorrow and apologies for this accident and the problems it's caused for the people of Graniteville and beyond.

We believe that deeds count more than words, and we've been doing everything we can, applying every resource at our disposal, working with all relevant agencies to determine the cause and to remediate the damage to the town, its businesses and the people involved.

A lot of progress has been made, but our efforts will continue as long as needed.

I'm proud of the response of our people in a very professional way to the incidence and its aftermath.

Our safety, environmental, operating, and claims groups continue to respond in a professional way.

At the same time, we've been cooperating and will continue to cooperate fully with federal agencies, the National Transportation Safety Board (technical difficulty) while they conduct their investigation into the accident and the EPA and state and local on remediation.

We appreciate the expertise, cooperation, and patience of all of those involved, residents and responders alike.

We are still in the process of assessing the financial impact of this tragic incident, but preliminary indications are that we'll have a charge of between 30 and $40 million in the first quarter of this year.

As you can imagine, we've already had several lawsuits filed as a result of the incidence.

And so we are reluctant to say much more than what I have at this time and what we have issued in the press release that came out a couple of days ago.

We will try to provide you with any further guidance as we can as it becomes appropriate.

We'll learn as a Company from this accident and redouble our efforts to ensure the safety of our people at Norfolk Southern and throughout the areas we serve.

You know our safety record and how much safety means to us.

After this tragedy, we will as a Company and as individuals in the Company look anew at what we can do to live up to our objectives to be the safest transportation company.

Now, having said that, now let's turn to our 2004 financial results, which are a good story indeed.

Our fourth quarter provided a strong finish to a strong year and gives a suggestion of what can be done with higher values, transportation products, and operating efficiency.

Our 2004 financial results show record levels of performance throughout our organization.

Business and momentum held strong as the year finished and continuing into the early part of this year.

While we certainly don't anticipate the same level of extraordinary growth experienced in 2004, we do see continued growth through 2005 and we're planning to handle it.

And as you have seen, our Board yesterday increased our quarterly dividend by 1 cent to 11 cents, following the previous increase in July.

Our fourth-quarter net income was a record 264 million or 65 cents a share.

And that was on revenues which were up a strong 16 percent.

As you recall, 2003 included several significant items, both up and down.

I'm going to let Hank Wolf provide you with the full details and comparisons, but I do want to emphasize that our operating ratio for the fourth quarter was 76.3, which is a 4-point improvement over the fourth quarter of 2003.

Now also note that it was not quite as low as the third quarter was, and Hank will address the components of the operating ratio in his presentation.

But I want to emphasize that our efforts in continuous improvement are working, and the consistent improvement in the operating ratio is a reflection of that.

For the full year, we reported net income of $2.31 a share.

That was up 69 percent compared with our reported net income of $1.37 a share for the previous year.

The record revenues for the year of 7.3 billion were up 13 percent over 2003.

And the operating ratio for the year was 76.7, nearly 7 points better.

Now, you will quickly note that combining these two results achieved our goal of 7 and 7.

That is, annual revenues beginning with a 7 and an operating ratio that starts with a 7.

This was widely seen as a very ambitious goal, both inside the Company and out.

Exceeding the goal as we did this year shows what can be done when business conditions coincide with an operation network that is fluid and efficient.

Significantly, when customers gave us an opportunity, as they did this year, we were able to take advantage by moving the goods and acceptable quality.

While our metrics have declined somewhat and volumes hit historic highs and we're going to address that a little with you, we still have been able to keep the network fluid and hold service levels generally high.

We expect to be able to keep that up.

While we're careful of what we take on as an organization, we're proud of exceeding our 7 and 7 goal, and you can be assured that we'll reach even higher when I meet shortly with our management team -- there will be some new goals stated.

Anyway you look at it, it was a great quarter capping a great year.

And now I'm going to turn to Wick Moorman for a little more detail and then we'll hear from Hank and Ike.

Wick?

Thank you, David.

The fourth quarter was indeed a very good quarter for us with railway revenues up 16 percent and the operating ratio of 76.3, as David mentioned; and it obviously punctuated a really great year for us.

And to widen the lens on the quarter a little bit and provide some more perspective, I think our recent results are even more significant when you compare them with the fourth quarter 2003, which was the strongest quarter of 2003, with revenues and volumes of that quarter up 6 percent over 2002.

So we had a very strong quarter even in the face of what we thought were some tough comparisons.

The fourth quarter of 2004 and indeed all of the year I think provide more proof, if any is needed, of the two fundamental strengths of Norfolk Southern.

The first great core strength we have is obviously our franchise.

Ike will give you all the details, but it was a year in which we saw exceptionally strong growth across almost all of our portfolio of businesses.

Interestingly enough, the one area of our business that did not grow substantially was automotive, which is usually seen, as you know, as one of the drivers of our profitability.

And clearly part of our overall growth is attributable to the strong U.S. industrial economy.

However, we believe that the shifting international trade patterns in terms of both domestic consumer goods, imports, and global energy sourcing, along with the increasing concerns and issues around domestic highway capacity, are also key structural drivers of that growth.

And to the extent that these trends continue and we do not see anything right now that will stop them in the short-term, they bode well for the continuing strength of our franchise.

The second core strength of Norfolk Southern that was very evident in 2004 is our people.

None of us foresaw the volume growth of 9 percent in 2004 -- more than 600,000 units handled.

And the fact that we were able to handle that volume growth as efficiently and effectively as we did is testimony to the skills and dedication of a lot of members of the thoroughbred team.

As David mentioned, our service metrics weren't as good as we would have liked them to have been in the fourth quarter.

However, none of them were statistically inconsistent with the service metrics we typically see in a fourth quarter, particularly considering all the additional volume that we handled.

And we look for our metrics to improve, particularly as we move past the bad weather of January and February.

While we clearly need to continue to analyze our system capacity and augment it when needed, we're still confident that we can do this incrementally and that we can efficiently handle all of the business that's coming our way.

The real story of the fourth quarter and of the whole year was the work that we've already done in terms of building and refining the thoroughbred operating plan, and adding capacity already at critical pinch points, be they in infrastructure, locomotives, or train crews, and the work we've done in maintaining our infrastructure (technical difficulty) traffic safely and effectively.

All of these factors, along with perhaps most importantly the (technical difficulty) to execute the plan, allowed us to handle the traffic in the fourth quarter without serious delays or disruptions to our customers.

It was a great effort by a great team.

And I also want to point out that there were some positives in the fourth quarter in terms of performance and productivity improvement.

A good example, carloads per crew start -- something we've talked about before -- it's an important productivity measure -- it was up 5.7 percent year-over-year.

And that's what allowed us to handle the 10 percent increase in volume with only 3.9 percent additional crew starts, and that's very powerful leverage for us.

For 2005, we continue to be optimistic about the strength of the industrial economy.

Although we do obviously see some challenges.

For January, our overall car loadings are up 6 percent year-over-year.

And as in 2004, that continues to be led by Intermodal metals and coal.

Stockpiles of utility coal remain low by historical standards and export coal certainly seems to -- continues to be in demand.

Fuel production remains high as well.

And Ike will give you some further insights on the Intermodal story in a few minutes.

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

And we continue to believe that our better service gives us a very competitive and valuable product.

2005 holds some challenges for us as well.

Hank will tell you more about it, but we clearly had some pressure on the cost side in the quarter.

As a percentage of our fuel that was hedged declined, our total fuel costs obviously increased.

And in addition, we were aggressively hiring and training for both train and engine service employees and mechanical department employees.

In addition, we took advantage of the mild weather across much of the railroad for part of the quarter to press ahead with some additional track maintenance.

As in 2004, 2005 will continue to have some cost headwinds.

Still, we remain steadfast in our commitment to find cost-effective ways of doing business while always improving safety and service.

I have every confidence that we'll continue to move ahead and gain business and generate margin improvement as we do, but I want to reiterate something I've said before and I'll say again.

Our first commitment is always to operating the railroad as safely as we can while providing the very highest service levels that we can to all of our customers.

And I think our 2004 results show that if we do that, then increased traffic and improved margins will clearly result.

Steve Tobias often says, quite correctly, that we can't build the church for Easter Sunday.

However, in 2004, the pews at Norfolk Southern were full on a lot of days, and we occasionally had to put a few chairs in the aisles.

Fortunately, if you'll permit me to continue this analogy a little further, we continue to have the ability to add pews without having to build a new church.

And our goal is to continue to have enough seats for all of our customers and to have them recognize the value that we have provided for them when the collection plate gets passed.

It's now my pleasure to turn it over to Hank with the financial details.

Thank you, Wick.

Let me begin by making a disclaimer that I'm not an expert in terms of church pews and collection plates.

Our 2004 financial results reflect significant improvement that was driven by record operating revenues in the fourth quarter and the year.

We were able to generate record earnings and earnings per share for the year as we handled increased volumes carloads that set new records and at the same time, controlled our operating expenses.

Before giving you the details of our results, I need to remind you that we recorded a $53 million gain from the Conrail corporate reorganization in the third quarter of 2004.

In addition, there were several significant items that impacted our 2003 financial results.

In the fourth quarter of 2003, we had charges for a voluntary separation program, which reduced net income by $66 million or 17 cents per share and an impairment in the value of TTT Telecommunications assets that reduced net income by $53 million or 13 cents per share.

In the first quarter of 2003, our results included a $114 million or 29-cent per share after tax benefit from the cumulative effect of two required accounting changes, and a $10 million or 3-cent per share after tax gain from the discontinued operations related to our 1998 sale of North American Van Lines.

In order to provide you with the most meaningful comparisons for both the quarter and the full year, I will initially exclude all of these items from my presentation this morning and then reconcile the totals to our reported results at the end of my remarks.

Now let me turn to our results for the fourth quarter.

Railway operating revenues were 1.95 billion, up 273 million or 16 percent and were record high revenues for any quarter.

Intermodal revenues increased by (technical difficulty) million; merchandise revenues rose 93 million; and coal revenues were up 74 million.

For the year, railway operating revenues were a record 7.3 billion, an increase of 844 million or 13 percent.

General merchandise revenues were up 318 million.

Intermodal revenues increased by 298 million.

And coal revenues rose 228 million.

Fourth-quarter volume increased by nearly 172,000 carloads or 9.8 percent compared with the prior year, driven by a 123,000 or 19 percent gain in Intermodal units, which resulted in our highest quarter ever for Intermodal volume.

In addition, revenue per unit increased by 5.9 percent, resulting in a total increase in railway operating revenues of 16.3 percent.

For the year, carloads were up approximately 603,000 units or 8.8 percent, largely driven by a 425,000 unit or 17 percent increase in Intermodal volume.

Revenue per unit was up 3.9 percent, and total railway operating revenues improved by 13 percent.

And Ike is going to provide (ph) you with the details on our railway operating revenues in just a few minutes.

Railway operating expenses for the 1.5 billion, up 142 million or 11 percent.

For the year, railway operating expenses were 5.6 billion, an increase of 313 million or 6 percent over '03.

As you can see, the largest increase in railway operating expenses for the fourth quarter was in material services and rents, which rose 92 million or 27 percent.

This increase was primarily driven by the increased volumes that were handled during the quarter.

Within this category, purchase services increased by 59 million, primarily due to higher volume related Intermodal costs, such as terminal lifts and drayage, as well as increased maintenance costs.

The $18 million rise in equipment rents was also largely a result of the increased Intermodal traffic volume.

Materials costs were 15 million higher, reflecting more maintenance work on locomotives and freight cars.

The next largest increase in fourth quarter operating expenses was in depreciation, up 60 million or 47 percent.

As you can see by the offsetting decline in Conrail rents and services, this increase was primarily the result of the Conrail reorganization.

Diesel fuel expense was up 41 million or 42 percent compared with last year as a result of higher prices.

The hedges that we put in place helped to constrain our diesel fuel expense as we saw fuel prices surge to record levels.

Consumption of approximately 129 gallons was 6 percent higher on the 10 percent increase in traffic volume.

As you can see, our average price per gallon, even with the hedge benefits, increased from 79 cents in the fourth quarter last year to $1.07 in the fourth quarter of '04.

In the fourth quarter, approximately 60 percent of our diesel fuel requirements were hedged.

We had 78 million gallons of fuel hedged in the fourth quarter at an average price of 84 cents per gallon.

And these hedges produced a savings of $50 million in diesel fuel expense.

We advised earlier that we had suspended entering into new hedges midyear.

And our hedge position remained unchanged in the fourth quarter.

As you can see, our hedge position for diesel fuel will be lower in '05 than '04 in the absence of new hedge transactions.

As a consequence, our diesel fuel expense in '05 will be significantly higher unless we experience a dramatic decline in diesel fuel prices.

The next largest increase in railway operating expenses for the fourth quarter was in compensation of benefits, which rose $16 million to 3 percent.

This increase was driven by increased hours for train and engine employees that were $16 million higher and increased maintenance activities that added 7 million.

During the second half of the year, we increased our employment by more than 700 agreement employees.

As one would expect, these employees are initially in training for a number of months.

And in some measure, the increase in compensation and benefits reflects this training cost.

The increase in our stock price resulted in a $5 million increase in stock-based compensation expense; higher wage rates added another 4 million to expense.

These items were partially offset by favorable variances of $7 million for management compensation and $4 million in bonuses for locomotive engineers.

As you may recall, the fourth quarter of '03 reflected an increase in the accrual for these two items that was driven by improved fourth quarter performance that year.

Casualties and other claims rose 3 percent or 8 percent, primarily due to higher accruals for loss and damage claims; and other expenses declined 2 million or 4 percent.

Railway operating expenses for the year were 5.6 billion, up 313 million or 6 percent.

As was the case for the fourth quarter, the largest increase for the year was in material services and rent.

Purchase services rose 100 million.

Materials were up 41 million and equipment rents were $33 million higher.

As in the quarterly comparison, these increases were primarily related to increased traffic volume and additional maintenance activities.

Compensation and benefits was the second-largest expense increase for the year, up 104 million or 5 percent.

This increase was principally the result of an increase in T&E employee hours of $39 million.

Higher wage rates that added another 27 million; increased stock-based compensation, as our stock price rose, of 24 million; 11 million more in bonus for locomotive engineers; and 9 million increase in incentive compensation for non-agreement employees; 9 million less in pension income; and other miscellaneous items that added $9 million.

These increases were offset in part by a reduced non-agreement workforce that saved $24 million.

Depreciation expense rose 85 million.

The Conrail rents and services declined 100 million, largely reflecting the effect of the Conrail corporate reorganization.

Diesel fuel expense was up 69 million or 18 percent, reflecting a 6 percent rise in consumption, combined with an increase in the average price per gallon from 81 cents in '03 to 91 cents in '04.

Our average price per gallon in '04 would have been $1.17 per gallon absent the benefit of our fuel hedges.

Our fuel hedges produced $140 million in diesel fuel expense savings for the year.

Other expenses were up $11 million or 5 percent, reflecting higher property and sales and use taxes.

And finally, casualties and other claims were 30 million lower for the year.

You'll probably recall that expenses in '03 for casualties and other claims were burdened with unfavorable claims development.

The railway operating ratio for the fourth quarter was 76.3 percent, a 4 percentage point improvement compared with '03.

The railway operating ratio for the full year was 76.7 percent, a 5.2 percentage point improvement compared with the prior year.

While the fourth-quarter railway operating ratio showed significant year-over-year improvement, I should note that it was slightly higher than the 74.7 percent O/R seen in the third quarter.

Having said that, the fourth-quarter operating ratio has historically been slightly higher than the third quarter.

In the fourth quarter, we faced a significant surge in diesel fuel costs, that added $41 million more in expense as our hedge position declined.

In addition, we saw casualty and other claims that were 11 million higher than the third quarter as the result of a derailment.

Finally, we had increased costs for maintenance to help us prepare for the growth in traffic volumes that we're seeing.

Income from railway operations in the fourth quarter was 462 million, up 131 million or 40 percent.

For the year, income from railway operations was a record 1.7 billion, an increase of 531 million or 45 percent.

Turning to our non-operating items, total other income and expense for the fourth quarter was an expense of 87 million compared with an expense of 78 million in '03.

Gains from sales of properties and investments were 31 million compared with 29 million in the prior year, an increase of 2 million.

Coal royalties of 11 million were up 1 million over '03.

All other was an expense of 3 million compared with income of 7 million last year, primarily due to the expenses associated with the synthetic fuel investments that we made mid-year '04.

As you'll recall, the benefits related to these investments are reflected in a reduction of income taxes.

Interest expense on debt was 126 million, which was 2 million higher, but includes the interest on the Conrail debt assumed in the Conrail reorganization as of September 30.

For the year, total other income and expense was an expense of 453 million compared with an expense of 394 million in '03.

Gains from sales of property and investments increased by 1 million, while coal royalties increased by 3 million.

All other was an expense of 52 million compared with income of 19 million in '03.

Again, primarily due to the synthetic fuel investments that reduced returns on corporate and reduced returns on corporate-owned life insurance.

Interest expense on debt for the year was 489 million, 8 million lower than '03, principally due to less debt outstanding.

Our fourth-quarter income before income taxes was 375 million compared with 253 million the prior year, a 48 percent increase.

For the year, income before income taxes was 1.2 billion, an increase of 472 million or 61 percent compared with '03.

The provision for income taxes for the fourth quarter was $111 million compared with $82 million for the fourth quarter of '03.

The effective tax rate for the fourth quarter was 29.6 percent compared with 32.4 percent in the prior year.

For the year, the provision for income taxes was $379 million compared with $247 million in '03.

And the effective tax rate was 30.3 percent compared with 31.8 percent in '03.

The lower effective tax rates for the quarter and the year were largely attributable to the effect of the synthetic fuel investments that we made about midyear.

Fourth-quarter net income was 264 million, which is 93 million or 54 percent higher than the 171 million earned in the prior year.

For the year, net income was a record 870 million compared with 530 million in '03, an increase of 340 million or 64 percent.

This slide highlights the components of the changes in net income for the fourth-quarter railway operating results.

Railway operating revenues increased 273 million, while railway operating expenses rose 142 million.

Other income net decreased 7 million.

Interest expense on debt increased by 2 million.

And income taxes were $29 million higher, yielding a $93 million increase in net income for the fourth quarter.

For the year, an $844 million increase in revenues was offset by $313 million more in expenses.

Other income net was 67 million lower.

Interest expense on debt was 8 million lower.

And the provision for income taxes was $132 million higher.

Combined, these items generated $340 million more in net income.

Diluted earnings per share for the fourth quarter were 65 cents compared with 43 cents in '03, a 51 percent increase.

For the year, diluted earnings per share were a record high $2.18, which was 61 percent above the $1.35 per share earned a year ago.

This slide reconciles 2004 net income and earnings per share amounts, excluding the gain from the Conrail reorganization to our reported net income of $923 million, and earnings per share of $2.31.

And this slide reconciles our 2003 net income and earnings per share amounts, excluding the four significant items that I noted earlier prior to our reported earnings.

Both of these reconciliations, as well as reconciliations of all affected income statement line items, are posted on our website for your reference.

Reported net income for the fourth quarter was $264 million or 65 cents per share compared with 52 million or 13 cents per diluted share in '03.

For the year, reported net income was 923 million or $2.31 per diluted share compared with 535 million or $1.37 per diluted share.

Thank you for your attention and now I'll turn the program over to Ike Prillaman, who is going to give you an in-depth report on our revenues.

Good morning.

My plan this morning is to outline the key factors that drove our market results in 2004 and what those markets and key factors look like going into 2005.

And after your several meetings this week, I'm sure all of you know there was a dramatic increase in demand for transportation in 2004, and the base reason for that was that the U.S. economy grew an estimated 4.4 percent while the manufacturing sector consistently expanded throughout the year.

And as an example, domestic steel production increased over 6 percent in 2004, and we saw where U.S. coals became the choice for the production of coke by the domestic and European steel makers.

And while also being the choice for increased electricity generation.

Another key factor was fuel prices increased 25 percent for the year.

And at the same time, our improved service levels were enabling us to offer truck-like services and the ability to price to a higher market.

Accordingly, putting all that together and as Wick pointed out, our Intermodal metals and coal markets accounted for 95 percent of the volume increase, which was up 603,000 loads in 2004 or 9 percent.

Reviewing quarterly comparisons, the rate of volume increases remained consistent throughout the year except for the production cutbacks in the automotive industry and the softening ag traffic in the fourth quarter.

And both our coal and paper markets experienced stronger year-over-year numbers in the fourth quarter.

For the last half of the year, our monthly volume increases ranged from 7 percent to 13 percent, while November and December's volumes reached levels that we had only previously seen during the months of October and August.

Those before me have recapped our record results for both the quarter and the year.

And even though I wouldn't mind hearing it over and over again, I will avoid being repetitive, and I thought we would go straight to looking at the specific markets.

Coal carload volume for the fourth quarter totaled 429,000.

And although this wasn't our highest carload quarter, it was our highest tonnage quarter ever, which reflects improved loading efficiencies.

Utility coal volume increased 6 percent for the quarter and 3 percent year-to-date.

And as the expanding economy increased demand for electricity generation in our area of service by 1.7 percent.

And going forward, I think Wick mentioned this, stockpiles do remain relatively low and the pricing is high.

Always dependent on the weather, the utility coal market continues to look strong.

Gas prices do remain high and also volatile.

Coal stockpiles need to be replenished, and it is projected that spring refueling outages will result in the lowest nuclear generation in the East since 2001.

Production in the third and fourth quarters for both Central App and Northern App coals increased, but it appears availability will continue to be a challenge.

Net export volume increased 45 percent for the quarter and 35 percent for the year, as volume through both Baltimore and Norfolk increased dramatically.

Looking ahead, strong international demand for met (ph) coal and the decline of the U.S. dollar, as well as higher shipping costs, have made U.S. met coals more competitive and certainly in demand.

Prices for 2005 will generally exceed $110 per ton, and that may be conservative.

We also have announced price increases for Lamberts Point, for traffic going through there.

Recent projections indicate that the parity between global supply and demand will again exist during 2005, and this should result in the continuing demand for U.S. met coals in Europe, South America, and even Asia.

Higher prices have driven some resource development and multiple (ph) multi-year contracts between coal producers and European steel makers have become a reality.

The availability of U.S. met coals are limited and in turn, this demand will continue to put pressure on the availability of thermal or steam coal.

As I mentioned, there was a significant change in the U.S. steel and domestic met coal market in 2004.

I personally believe this may be structural going forward.

It's certainly a positive for both the U.S. steel industry as it will be for the rail industry.

Volume increased 32 percent for the quarter and 12 percent for the year.

This is resulting from the 6.4 percent increase in the domestic steel production, along with the high demand for met coal used to produce coke.

Looking forward, blast furnaces are expected to run near capacity, as domestic demand for met coal continues to grow.

And even though future steel production will be affected by global events as well as the business cycles, the domestic vertical integrated producers have taken action to ensure they have adequate supplies of iron ore and coking coals, as new investments and raw material sourcing continues.

And in fact, a new heat recovery coke plant and steam generation facility will come online at the end of first quarter 2005, and there are certainly more in planning as well as under construction.

Coal revenue per car increased 9 percent or $87 for the quarter, reaching $1068 and was up $93 or 10 percent for the year.

Great increases, since 2003 increased export coal and a large decline of short-haul river business are the principal drivers of the increased revenue per car.

I also would add, I always talk about the mix revenue -- ton miles were up 12.2 percent while carloads were up only 9.4 percent, which means longer haul business, including coal from Western origins as well as longer-distance sourcing for domestic coking and utility coal did occur.

Looking at the merchandise industrial sector, metals/construction, lead merchandise for both revenue and volume gains throughout 2004.

Revenue was up 19 percent for the quarter and 17 percent for the year-to-date, as this group benefited from the increased domestic steel production, as well as marketing and industrial development efforts.

IPSCO and Newcor, who both began new operations on NS in 2003, had significant increased production while other new businesses can be attributed to a lack of truck availability.

Scrap metal revenue grew 42 percent for the quarter and 32 percent for the year as a result of expanded alliances with some key scrap metal shippers, as well as access to new scrap processors and the ability to price to a higher market.

Looking forward, we see steel pricing and prospects for the U.S. metals market in 2005, as I mentioned before, will depend on domestic and global demand.

But I would quickly add that most believe at this point that the current market will be sustainable in 2005.

Chemicals revenue grew 14 percent compared to the fourth quarter 2003 and 12 percent for the year.

The decline of the U.S. dollar and the increased worldwide price of oil have actually preempted and enabled the U.S. chemical industry to remain competitive and despite of higher natural gas prices, which everyone knows is their feedstock.

On the forest products side, revenue from wood and paper products increased 14 percent for the quarter and 8 percent for the year, and that was in spite of small volume gains and revenue growth came primarily from price increases.

And as with the chemicals and the market declining dollar, the paper market has been positively affected by imports that lost their competitive edge, as well as with the domestic paper producers regaining some market share.

And we believe this trend will continue into 2005.

Our ag revenue increased 7 percent for the quarter but volume fell 1 percent below last year.

Increased ethanol revenue --which is really ramping up here in the Northeast and is scheduled to ramp up next year and this year in the Southeast -- but increased ethanol revenue could not offset the decline in corn shipments.

And for the year, ag revenue was up 6 percent while volume was up only 2 percent.

For 2005 and forward, we see the ethanol market will continue, as I mentioned, to ramp up, as will the feed mill business, and neither are seasonal.

We have located nine feed mills in the Southeast in the past five years.

And additionally, the 2004 grain crop, which is the largest ever, will begin to move.

Automotive revenue increased 2 percent for the year while volume declined 2 percent.

Fourth-quarter automotive revenue fell 1 percent, and volume was 6 percent below last year.

As a result of slow sales during the fourth quarter, both Ford and GM announced production cutbacks.

And Ford began the closing of their Edison, New Jersey assembly plant, all of which obviously prevented positive comparisons.

These declines, however, were offset with pricing improvements to meet market conditions, as well as increased production at NS-served Toyota and Honda plants.

Looking at 2005, Ford and GM cutbacks will continue, even though light vehicle production is forecasted to be 2 percent above 2004.

And this will occur principally with increased production at transplant manufactures as well as DaimlerChrysler.

I should add that the continued ramp up of the two new Honda Lincoln Alabama assembly plants will continue in 2005.

Merchandise revenue per car rose $106 for the quarter and $63 or 5 percent for the year.

Metals and construction lead increases, growing 7 percent over last year, while paper and chemicals revenue per unit grew 6 percent.

Great increases, fuel surcharges, pricing up new business, as well as a longer length of haul were major contributors to the gains, as merchandise revenue ton miles grew 5.5 percent over 2003, as compared with a 4 percent volume increase.

This is my favorite slide, with a lot of green numbers.

Intermodal experienced strong volume growth throughout the year, driven by an expanding economy, including growth in international trade, as well as ongoing constraints in truck capacity.

International steamship volume was up 19 percent for the quarter, and 15 percent for the year while domestic volume grew 21 percent for both time periods.

Truckload business grew 28 percent for both the quarter and the year, as increasingly, close working relationships with the truckload carriers are driving Intermodal growth for both them and ourselves.

Our premium business was up 12 percent for the quarter and 15 percent for the year.

And Triple Crown continues to grow, as they opened a new terminal in Minneapolis and a second terminal in Detroit.

For 2005, international trade will continue to increase and many of our international shipline customers are projecting a 10 to 12 percent increase in exports to the U.S. this year -- or our imports.

All water service to the East Coast is projected to continue to grow.

And our truckload and domestic customers project another capacity-constrained year with increasing cost.

They believe the driver shortage will continue and that most of the planned increase equipment production and purchases that we're seeing occur represent replacements, and that the costs for increased driver pay will increase perhaps as much as 6 to 10 percent.

Accordingly, the continuing demand for service and improved market pricing appears favorable for 2005.

And I should add in turn we will manage growth and control capacity through pricing and productivity gains at our terminals.

As an example, efforts are underway to decrease dwell and gate time.

In addition, we plan to expand our terminals where it will strategically improve our network.

Intermodal also recorded its best quarterly and annual revenue per unit, which increased 11 percent for the quarter and 6 percent for the year.

Gains were driven by great increases taken during the year on domestic business and pricing to market on new business.

And fuel surcharges also added to the revenue per unit.

International premium revenue declined slightly, as both were impacted by a change in mix as volume did significantly increase in shorter-haul lanes, and this is a result of the continuing increase -- and it's no small increase anymore -- in the all-water service to the East Coast ports.

Once a year, we always provide an update on real estate sales and gains.

Our recognized gains for 2004 is very similar to 2003, and $10 million higher than 2002.

We still have an attractive portfolio of properties that are for sale at the appropriate price and our sales level has been consistent for the past few years and we believe it will continue.

To summarize, we did not anticipate the magnitude of revenue growth that occurred in 2004 and we passed on a commercial plan to our transportation group that in reality nearly doubled.

And I think Wick commented on this.

It is fairly obvious that both our marketing and operating groups, as well as all support groups, did the seize the opportunity that the economy, the markets and unmet demand gave us.

We believe we have a very balanced portfolio of business, including an automotive franchise that did not participate in market growth for 2004.

The opportunities and the growth potential for Intermodal remain huge.

As I mentioned, we will manage capacity, which will be handled through productivity improvements and pricing, and we do have terminals in development.

To summarize, merchandise will be shaped by the manufacturing economy, which appears to be more competitive with the changed dollar, the restructured steel industry, and we also see continued growth in our ag markets and ultimately, an improving automotive market.

And finally, the coal market for the U.S. producers looks positive and with I think a coming energy bill, it certainly becomes more certain for both coal-fired generation, as well as domestic coke making.

To summarize where we have been and where we are, the markets do appear to be positive.

Thank you.

Thank you, Ike and all.

That's a lot of information, but it's a year we're happy to talk about.

Questions?

Yes, Jennifer?

Thanks.

Good morning.

Jennifer Ritter from Lehman.

In some ways, it feels like you're a victim of your own success.

Things have gone so well; you got your 7 and 7.

And I'm guessing you're not going to tell us the goal today that you're going to get to your management team next week or in the next few weeks.

But are there still some obvious projects that you can tackle to continue to grow your margin?

Or is it going to take a lot of sitting down and thinking through things to find the next place to get more efficiency out of your business?

Well indeed, I think it's been taking sitting down and carefully analyzing and working on it to make the improvements that we have made.

If we're a victim of our own success, this is the happiest victim that you've seen in awhile.

But I think that we believe that we have room for improvement.

I think I might call on Steve, for example.

Steve, make a comment or two about how we're addressing the capacity in our system.

Because we recognize that our continued success does depend upon our ability to continue to do what we were successful in doing last year, and that is, take on the very high and in some ways unexpected volumes of business and operate them efficiently, both in terms of service levels and producing good bottom-line improvements.

And we're certainly managing aggressively internally to continue our ability to do that.

Do you want to say just a (multiple speakers)?

Jennifer, if I can be reflective for a moment, you've heard me -- most of you who have been here in the past have heard me stand before you and tell you that as a result of our top planning and our proactive approach to building our design and our system, that we in fact had more capacity than we had business.

And I think the growth in 2004 clearly points out that that was an accurate position.

I now stand before you and tell you that we still have capacity in our system.

Top program, top system, essentially addresses the merchandise business; and there is more up to go there.

We have continuing enhancements to the system that are going to allow us to reduce handlings and terminals.

And essentially what this design produces for us is the ability to maximize the facilities that we have in place.

We're not facility constrained in the merchandise segment.

We do have the opportunity to proactively design additional physical plant to our process, both in the merchandise side, the Intermodal side, and clearly, we do have capacity left in the coal portion of our business.

We are in a unique position, I believe, as a Company, that we have the opportunity to add what I would describe as flexible resource to put against our potential increases in volume.

And as our planning processes carry us through projections into the future, we will work very diligently to stay ahead of planning those flexible resources, that I would on a service give you an example, being manpower and locomotive.

We have a plant that will sustain more growth.

We also, Jennifer, I might say, have, in addition to continuing to work on our technology and improving our operating plan, we also are constantly looking at the expense side of the ledger.

We've refreshed NS21 a couple of times.

I think one challenge this year will be to rename our expense initiatives as we go into it.

But you're quite right.

There's no low-hanging fruit.

There hasn't been any low-hanging fruit for quite some time, but we've got pretty long arms.

Thanks.

I've got two questions for you.

One, on the Intermodal side, you've just seen fantastic growth in 2004 in the volume side as well as a very strong yield.

I believe that your margins in Intermodal have been very strong and certainly overall margins have improved dramatically.

Can you give us a thought on where you're at with Intermodal margins versus the portfolio?

And if we look at 2005, and let's say that Intermodal is more of the growth, can you still improve the margins overall?

As you well know, I'm not going to address what our margins are on any particular line of business.

But I would just point out that if you look at last year, kind of quarter by quarter, you see that we were able to make improvements in our overall margins at a time of really explosive growth in the Intermodal business, which obviously tells you that we have both some pricing power and ability to improve our handling of the Intermodal business as volumes increase.

So we are constantly focusing on making sure that the margins are good in the areas of business that we're growing.

And that's what Ike signals to you when he talks about carefully managing our capacity and our growth in the Intermodal business; we're going to do that in such a way.

And, obviously, we're fortunate to be in a time when the factors, some of which are outside our control, make our services very desirable from a lot of our partners, including our trucking partners.

So we're pretty optimistic about our ability to continue to grow that business and do it at very acceptable margins.

Can you give any further directional thoughts?

Was there significant margin improvement in Intermodal in '04?

And (multiple speakers) --

The answer to that is yes.

But Ike, unless you want to expand it, I think we probably don't want to be any more specific about margins in Intermodal or coal or metals or any of our other particular lines of business.

Okay.

And then a second one on pricing, are you optimistic that you can see some of the similar level of yield growth continuing through the first couple quarters of '05?

Fourth quarter was particularly impressive that way.

Yes, we think -- as we're successful in continuing to maintain high-quality service, you've heard me talk lots of times about value pricing.

And that's the approach we're taking.

We think right now our business has a lot of value and our challenge is to make sure that our service levels continue to support that kind of high-value product.

And as it is, we're going to continue to price that way.

And we expect to be able to succeed in 2005 as we did in 2004 in those efforts.

Thank you.

Yes, Tony?

Thanks, David.

I just wanted two questions.

One is a follow-up a little bit in a different way what Thomas was talking about.

Can you tell us where you are in closing the gaps of the cost of capital and the returns versus the cost of how you did this year?

If you're willing to talk about '05 or beyond.

And then my second question is, there was just reference to an energy bill or energy policy change that would be good for coal.

And I would just like it if you could address what you see coming out of Washington in the next few years; this year starting, in terms of an energy bill and what that might mean.

But also if you see a transportation bill or any kind of attack on -- a re-reg attack via safety also, coming out of some (indiscernible) say The New York Times series of articles and that kind of thing.

Well, I, as always, I'm reluctant to predict what's going to come out of Washington, either in an energy bill or transportation bill, certainly.

We think both of those could be very favorable for our business.

We're hopeful and optimistic.

I don't know, Jim Hixon, would you be hopeful and optimistic?

Or go beyond that?

(inaudible).

I think it's hard to predict what's going to move.

And when it will move in Washington, Tony, as you know probably better than I do, but we are interested in seeing both of those bills moved because we think that they'll help the business in meaningful ways.

We certainly are mindful that events of the past year and recent events have put a focus on safety from a national standpoint and transportation security and questions like that.

And we're sorry that we're in the forefront of that focus.

But certainly, we continue to do internally what I've said.

And that is, we're focusing on what we can do to handle things more safely and address that ourselves as we do it with the industry.

And I think there will be a lot of industry efforts going on to improve safety and to improve the security of the transportation handling of rails are still -- as I'm quick to remind people -- the safest form of transportation.

And we think that's a core advantage for the industry.

But certainly, we've got room to do better and we obviously need to do so.

(Inaudible question - microphone inaccessible)

Cost of capital -- I think you can assume that we did better last year.

If you look at the numbers, we're not there yet.

We're not earning our cost of capital.

But that is clearly one of my goals and one of our goals.

And it will probably be Wick Moorman's goal after I'm retired.

And we're getting closer, but we're not there yet.

You can be assured we're focusing on it, though.

Yes?

Hi.

It's Ken Hoexter from Merrill Lynch.

Dave, I just want to follow up on Jim's question earlier.

It sounded like that was more from the capacity side.

I want to talk about the expense side as it looks at margin going forward.

It sounded like you were a little surprised maybe so by some of the volume strength, especially at the end of the year.

And then I think Hank said some of the expenses, like fuel kind of raced up.

Is there -- it still seems like volumes are running ahead of what you would've expected based on a normal economy even now, quarter to date.

Are there moves that you can make again to bring that operating ratio down even further?

Obviously, incremental revenue didn't add any additional margin to the business in this quarter compared to third quarter.

So is this as good as it gets on the margin side?

Or can you still improve?

No, no, I think, Ken, clearly, we can improve margins.

You know me.

You've watched me for years and you've seen me consistently talk about making incremental improvements in the operating ratio and therefore in the margins.

And we absolutely think that there's room for improvement in that.

And we would love to do that quarter after quarter after quarter.

Fourth quarter is always harder to -- if you look historically, the fourth quarter is always a little harder on margins than -- and our goal was certainly to improve that for the fourth quarter, which we didn't do.

We did have a couple of things, as Hank pointed out, in the fourth quarter, principally, we sort of called your attention to the fact that we are, once again, in a training mode.

We're adding people and there is a time effect on that.

And we are conveying to you that we were adding both train and engine personnel and in our case, mechanical personnel.

You'll recall when we announced our capital budget, one of things we announced was that we had a much more aggressive program of rebuilding locomotives and doing that work.

And we do that, obviously, because that's a good way for us to address the need for additional capacity and an efficient way for us to address it.

We have ramped that up very aggressively because as the business remained very strong throughout the fourth quarter, I mean really right up to the end of the year, which I don't think I have ever seen the last two weeks of the year anything like the last couple of weeks that we saw in terms of business; it just didn't let up.

And the early part of January is looking very strong as well.

So our business is to handle the goods, and what that tells us is that we need to be prepared for the economy doing that.

And we are preparing to handle that and that puts some pressure on margins.

But it also, as you saw last year, if you go back and reflect on it, it also can pay real dividends when the business is there.

Meanwhile, we're good business people, so we understand that we've got to focus continually on the expense side in the areas that we can attack.

And that's why we have an NS21 like program that has gone in to go methodically through there and address areas of cost in the business that we can.

And I've been doing this for a lot of years and there is always room to work on the expense side.

And you can be assured we're going to do it.

Two real quick short answer questions -- follow-up questions.

One, the recent force majeur, based on the weather that we've seen recently, is there any impact that we should be aware of for the first quarter, or is that normal seasonality?

Of course, weather has been an issue for the first quarter.

I don't know that I would anticipate any major -- I mean it's early in the quarter yet.

So you don't know what's going to come.

But I think we're being able to handle the business.

Certainly the disruption that you've seen in some areas, fortunately not -- that's certainly including our areas, but railroading is a highly interconnected business.

So if anybody in the business is having pain, we feel it as well.

And that's certainly true.

But I don't think we see any systemic disruptions on a long-term basis.

Steve, would you agree with that operationally?

It's worth a try as always.

Any chance you'll break out pricing versus surcharge mix and pure pricing?

I'd be surprised if we would do that.

Any other questions?

You're a very patient group here.

Okay.

Well thank you very much.

I hope to see you again in another quarter with equally good or even better results.

Thank you.