Norfolk Southern Corp (NSC) 2005 Q1 法說會逐字稿

Good morning, everyone.

We understand there are a few late comers here in New York because of another meeting across town that's breaking up.

But in deference to everybody listening on on the Web and the Net and the telephone, we're going to go ahead and - - because we also want to maintain our reputation as an on-time transportation provider.

I'm David Goode, Chairman, Chairman Executive Officer of Norfolk Southern and I welcome everyone to our first quarter 2005 analysts meeting.

And I also welcome those that are listening by telephone conference call.

And as usual I encourage everyone to use microphones so that those who are listening can hear and get the advantage of knowing who's speaking.

I remind our listeners and Internet participants that the slides of the presenters are available on our Website in the Investor's Section.

And as usual transcripts will be available along with any necessary reconciliations to reported financial measures generated as a result of these presentations.

Now, the disclaimer.

You should be advised that any forward-looking statements made during the course of these presentations represent our best good faith judgment as to what may occur in the future.

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.

And as always, please refer to our annual report or Form 10-K filed with the SEC for a discussion of the variables.

I will quickly introduce the members of our management team who are here with us today including: Wick Moorman, our President, and Vice-Chairman, Ike Prillaman, Chief Marketing Officer and Steve Tobias, Chief Operating Officer.

Hank Wolf could not join us today, however, Jim Hixon, our Executive Vice-President Finance Public Affairs is here to carry the financial side.

We also have with us Bob Fort, Vice-President Public Relations, Bill Galanko, Vice-President Taxation, Marta Stewart up here in the front row Vice-President and Controller.

Leanne Marilley Director of Investor Relations in the corner over there.

And Debbie Malbon, Hank Wolf's assistant who is in the back of the room.

Now, with the preliminaries done, let me say that the last time we met I was optimistic about Norfolk Southern's prospects and I am now pleased to report that our first quarter railway operating revenues established an all-time record for Norfolk Southern.

They were up 16%.

And our income from railway operations also set a first quarter record at 403 million, which was up 16% as well.

I'm even more encouraged that we were able to achieve year-over-year improvements in our operating ratio even in a quarter that was punctuated by a number of challenges principally, of course, the tragic accident in Graniteville, South Carolina.

While we also had a few operating issues earlier early in the quarter, we believe that the quarter demonstrates that we can maintain and improve on the momentum generated last year and continue it into this year.

As noted our revenues set an all-time record and carloadings in the quarter were also a first quarter record.

Importantly, the railway operating revenues as you will note were up 16% while carloads were up 6% over the first quarter last year.

This strength in the top line was led by intermodal revenues through up 24% compared with the same period last year.

Obviously that's also a record.

Similarly coal and general merchandise were up 17% and 12% respectively compared with the first quarter of 2004.

Ike will provide greater detail on the revenues in a few minutes but clearly this was a very strong revenue quarter.

First quarter net income was 194 million or $0.47 cents a share compared to 158 million or $0.40 cents a share year last year.

That's up 23%.

And these results I say again include approximately $35 million for expenses related to the Graniteville accident.

Exclusive of those costs, net income would have been up 36% and Jim Hixon is going to show you a lot of detail to parse all of those numbers in a minute.

I will say that our philosophy continues to focus intensely on the basics.

That is, improving safety, service reliability and operating efficiency.

Diverting freight traffic from the highways to rail, improving profitability and strategically positioning Norfolk Southern to capture the opportunities for business growth, which we do continue to see in our markets.

Railway operating expenses for the first quarter; turning to the expense side, increased 16% compared with the same period last year.

However, again I quickly note that that includes the accident-related expenses and also includes 40% higher diesel fuel costs than the first quarter last year; in addition to expenses that are related to normal volume-related increases.

And again, Jim will show you the fuel numbers.

Notwithstanding the expense pressures, our operating ratio for the first quarter was 79.4 compared with 79.6 last year.

While this in itself represents an improvement for the quarter, you will see that the Graniteville accident added 1.7 points to this operating ratio.

Without which our first quarter operating ratio would have been 77.7.

So our mission of continued improvement in margins is still on track.

As you - - all of you who follow us regularly know, I do not subscribe to any theory that we've gone about as far as we can go in margins.

And we expect to continue to lower our rail operating ratio systematically through the year.

We understand that we have work to do.

And I assure you that cost containment and margin improvement remain a priority for us second only to safety and service.

And Wick in a few minutes is going to talk to you a little bit about that subject.

Looking ahead considerable traction continues into April.

Carloadings remain ahead of last year even with the tougher comparisons.

Which all of you know are going to be seen as we go through the year.

So business remains good and the weakness which we are seeing in automotive is being more than offset by strength elsewhere.

As we look to the second quarter and to the balance of this year, we remain optimistic about the health of the economy.

Looking at carloadings through the first few weeks of April, our volume is up approximately 4% led again by I want intermodal, which had its strongest week of the year last week.

We anticipate coal volumes will continue to strengthen as we head into warmer months.

Utility coal is powerful, our only challenge is moving it.

In addition, we are seeing a good export coal market continue after the April contracts.

And always, we remain dedicated to improving margins in all of our business lines, and we're using every opportunity to address pricing improvement for our high value railroad service.

And we are seeing those opportunities.

We're always working on service levels to make sure we keep the value proposition for our customer as we do this.

We also remain committed to investing prudently in the business and keeping the network operating efficiently.

We're bringing on more locomotives, as we announced earlier in the quarter.

And we're making investments in track maintenance and car and locomotive health so we can keep our operating standards and service high and continue the growth of our transportation franchise.

Because we believe that that is our priority.

These investments and expenditures also help us to be more efficient in enhancing our improving returns.

So my basic message is we continue to roll.

And at this time I'll turn to Jim Hixon and then Ike to provide you further analysis of our results.

They'll be followed by Wick who will wrap up today's presentations.

Hopefully leaving question time, as all of us are available to respond to questions.

So Jim, I'll turn to you.

Thank you, David.

I'm pleased to review our first-quarter results in more detail.

Railway operating revenues for the first quarter reached a record 1.96 billion, our revenues were up 268 million or 16% as merchandise revenues increased 119 million or 12%.

Intermodal revenues rose 80 million or 24% and coal revenues climbed 69 million or 17%.

Ike Prillaman will provide you with more details of our revenues in just a moment.

Total carloads in the first quarter increased approximately 106,000 units or 6% compared with last year led by strong intermodal volume.

In addition, the average revenue unit rose 10%, when combined with a volume increase resulted in a 16% increase in railway operating revenues.

Railway operating expenses for the first quarter were 1.56 billion, an increase of 211 million or 16% compared with last year.

Operating expense include approximately 35 million related to the derailment in Graniteville.

For the balance of the year we expect to incur about 6 million of additional Graniteville related expenses, which include higher insurance expenses.

The largest increase in railway operating expenses was a material services and rents which rose 71 million or 19%.

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

Within this category volume-related purchase services increased by 26 million particularly for intermodal services.

Other purchase services were up 15 million.

Locomotive and freight car material costs rose 13 million.

Principally driven by the maintenance work completed to handle the higher traffic volumes experienced in the first quarter and expected throughout the balance of the year.

Equipment rents were up 11 million, reflecting the equipment leases from Conrail which were previously reported in Conrail Rents and Services as well as higher traffic volumes.

The next largest increase was in depreciation of 64 million or 50%.

As you can see by the offset in decline in Conrail Rents and Services this increase is primarily the result of the Conrail reorganization.

Compensation and benefits expense rose 59 million or 11%.

This increase was driven by more hours per train and engine employees, which added 17 million, higher wage rates of 12 million, 10 million more in stock-based compensation expense, increased nontine hours, mostly for maintenance activities to support higher traffic volumes, which added 7 million.

Lower pension income and additional post retirement costs combined for 6 million and higher payroll taxes on increased wages paid added another 6 million.

Diesel fuel expense increased 43 million or 40%, largely the result of higher prices.

Compensation was up 4% on the 6% percent increase in traffic volume.

During the quarter, the NS consumed approximately 133 million gallons of diesel fuel.

The average price per gallon increased from $0.83 in the first quarter of 2004 to $1.12 this year.

Absent hedge benefits the average price per gallon in the first quarter would have been $1.42.

You will recall that we suspended entering into new hedges last year.

You can see here the resulting reduction in percentage of our fuel hedged.

In the first quarter we had approximately 49% of our diesel fuel requirements hedged.

The second, third and fourth quarters are 41%, 32% and 22% hedged respectively.

Notwithstanding the smaller percentage for our diesel fuel requirements being hedged this year; the dramatically higher price of diesel fuel resulted in a $17 million favorable benefit for hedges compared to first quarter last year.

Casualties and other claims expenses increased by 38 million or 95%.

A substantial part of this increase is attributable to the derailment in Graniteville.

In additional, personal injury expenses were higher because of adverse claims development.

As I mentioned we expect the insurance cost to be somewhat higher for the balance of the year.

The railway operating ratio for the first quarter was 79.4% compared with 79.6% in 2004.

While the operating ratio as reported reflects only a modest improvement over last year it does include expenses related to the Graniteville derailment.

Excluding those costs, the operating ratio would have dropped to 77.7, a 1.9 percentage point improvement.

Income from railway operations for the first quarter was 403 million, up 57 million or 16% and was a first quarter record.

Total other income and expense for the first quarter was an expense of 126 million, compared with a expense of 111 million in 2004.

Expenses related to tax credit investments accounted for 23 million in the first quarter of 2005.

As you recall, these expenses are primarily associated with our synthetic fuel investments, which we did not enter into until the second quarter of 2004.

Gain on the sales of property investments was 7 million compared with 1 million last year, an increase of 6 million.

Whole royalties were 12 million a 3 million increase over last year.

All other was 6 million of income in the first quarter compared with 0 last year.

Finally, interest expense on debt was 128 million, 7 million or 6% higher than last year, due to the interest on Conrail debt assumed in the Conrail reorganization.

This interest was formally included in Conrail Rents and Services and now will be included in our interest expense numbers.

First quarter income before income taxes was 277 million compared with last year's 235 million, an increase of 18%.

The provision for income taxes for the the first quarter was 83 million, compared with 77 million last year.

The effective tax rate was 30% compared with 32.8% in 2004.

The reduced effective rate is largely the result of our synthetic fuel investments.

First quarter net income was 194 million, an increase of 36 million or 23% over the 158 million earned over in the first quarter last year.

The cost of the Graniteville derailment reduced net income by 21 million or $0.05 per diluted share.

This chart summarizes the changes in our first-quarter results this year compared with last year.

Railway operating revenues increased 268 million, while railway expenses increased 211 million.

Other income net declined by 8 million and interest expense on debt was 7 million more.

Income taxes were higher by 6 million resulting in a 36 million or 23% increase in net income.

Diluted earnings-per-share for the first quarter were $0.47 cents an increase of $0.07 cents or 18% over the $0.40 earned last year.

This amount reflects the larger number of diluted shares as the result of our increase in our stock price.

Thank you for your attention.

I'll now turn the ram to Ike Prillaman who will give you a in depth report on our revenues.

Ike.

Thank you, Jim and good morning.

Demand for U.S. rail transportation continued to grow as total class one volume was up nearly 5% over the first quarter of 2004.

And underlying this demand was an overall economy which increased an estimated 4% for the quarter.

With housing starts the highest in two decades and as well as continuing growing international trade.

Accordingly, imports, utility coal, and continued global demand for steel drove our intermodal, coal and metals markets.

These sectors accounted for 95% of our volume growth for the quarter.

Overall, our volume was up 6% over last year with merchandise increasing over 13,000 carloads or 2%.

Coal volume was up 4% with high demand for met coal as well as low utility stockpiles.

And intermodal approached historical peak season volume and was up 78,000 units or 12% over last year.

If we would compare first quarter 2005 volumes to first quarter volumes since 2000, I think there are several pointers for our markets.

Intermodal has shown continued growth.

Averaging a 7% gain over the 6 year period and is up 43% compared to the first quarter of 2000.

While coal traffic has steadily ramped up since 2002 but still falls behind first quarters of 2000 and 2001.

Ag has had sustained growth and reached its highest first quarter ever.

While our first quarter automotive market compares favorably only against 2001.

As both David and Jim mentioned, we achieved record revenues.

With the exception of intermodal and automotive, five of our market groups reached all time records.

Overall, March was our highest revenue month ever.

An all-time high revenue per unit was reached for all groups except intermodal.

And that would be because we had less premium business during the first quarter as compared to the holiday fourth quarter season.

We continue with our attempt to price our service product to the market.

A favorable traffic mix, longer haul business and fuel surcharges also contributed to the increases.

Merchandise revenue per car was up 10% for the quarter.

Rate increases taken through the 2004, fuel surcharges, changes in mix and length of haul drove the gain.

Merchandise revenue ton miles grew 5% over first quarter 2004, and that's compared with the 2% carload volume.

And obviously, this indicates an increase in the length of haul as well as a mix change.

Intermodal revenue per unit increased 11% for the quarter due to the earlier rate increases taken on truckload and IMC businesses during 2004.

As well as a favorable traffic mix as higher road rated trailer traffic was up 16% over last year.

And revenue per car for coal increased 13%.

Rate increases, fuel surcharges increased export coal volume as well as declines of short-haul river coal were the primary drivers.

Looking at our coal markets, our utility business was up 3% over last year.

Sourcing and coal available for the utility markets remain a challenge.

Central app appliance coal is at a a premium.

And PRB coal has become a more viable option to meet the increasing demand here in the east.

Imported coal is another alternative and totaled 136,000 tons for us during the first quarter.

Demand will remain strong as there are five nuclear generating plants down for maintenance in the east.

And that's the most since 2001.

And also natural gas prices remain high and coal stockpiles are relatively low.

Our export volume increased 19% compared to last year.

This is the fourth consecutive quarter that exports have exceeded 4 million tons or 40,000 loads.

That has not occurred since 2000.

We believe foreign demand for met coal and coke will remain strong throughout 2005.

And just recently, I think it was a couple weeks ago, a large Australian producer projected that very high global demand will continue for another two years.

As with utility coal, availability is the limitation, and further pressures have been placed on the market after a fire after a fire at [Consol's Bacannon] mines shut down production in mid-February.

A market change that we have not emphasized is the increased domestic production of coke for the North American integrated steel producers.

Domestic met coal volume increased 9% over the first quarter of 2004.

And that's a result of ramped up production at Sun Coke's's new Haverhill plant as well as increased output at U.S.

Steel, [Dafasco] and Indiana Harbor.

With the domestic production of coke occurring instead of importing; the outlook for this market remains strong as volume is approaching the quarterly levels of 2000 and 2001.

For intermodal, this was an all-time high first quarter for both volume and revenue.

Volume was up across all markets.

International movements grew 17% due to the continued increase of imports into the U.S.

And our customers remain very bullish and still project a 10% to 12% increases in their business for the remainder of 2005.

Business alliances for creating intermodal markets between our truckload customers and Norfolk Southern continue to grow as volume increased 15% over last, Senior management of the truckload carriers believe growth of this market will continue as the challenges facing the truck industry are structural.

Domestic IMC business moderated during the quarter and was up 9% and moderating to 9 is probably the key phrase there.

While triple crown increases were attributable partly to a new Minneapolis terminal.

As mentioned in January we are managing intermodal growth and capacity closely in 2005.

And that's by utilizing an automated yield management process as well as creating capacity with increased terminal velocity and improved equipment utilization.

Merchandise revenue reached an all-time high, increasing 119 million or 12% over last year.

All of the groups had year-over-year revenue increases.

Metals and construction again led merchandise for both revenue and volume gains for the sixth consecutive quarter.

Revenue increased 22% while volume was up 5%.

Iron and steel volume increased 16% generated by higher market demand and domestic production.

And even though demand has moderated, steel producers remain positive for 2005.

And using steel industry speak, Norfolk Southern's orders books are full and equipment does remain - - remains sold out.

Paper revenue increased 19%, accompanied by a 6% increase in volume.

Revenue growth came primarily from rate increases taken across all the markets in 2004.

And volume has remained constant the past four quarters.

Chemicals revenue grew 14% while volume was up 2% with gains across all commodities.

During the quarter we captured business from the highway which is estimated about 1100 annualized carloads.

And looking ahead, the concern of higher natural gas prices continue even though that the decline of the dollar and a higher price of global oil have maintained a more level playing field for the U.S. producers than was anticipated.

Ag revenue was up 9% with a 3% gain in volume driven by increased ethanol and feed shipments.

Our feed mill network continues to expand with the ramp-up of two new 75 car shuttle feed mill plants.

The outlook for our ag market is good for the remainder of the year.

Demand for corn is projected to be almost just about 5% higher.

March 1 stocks were at 6.7 billion bushels.

And this is the largest recorded inventory in many years if not ever.

So there is a lot of crop to move.

Even though automotive traffic was down for the quarter, revenues rose 1% as repricing for key automotive contracts essentially offset revenue losses that were due to the volume declines.

Volumes from plant expansions for Honda, Toyota, BMW and Mercedes could not offset the 2.8% decline in North American production.

Production cutbacks at Ford and GM will extend into the second quarter while Daimler Chrysler shipments continued to be ahead of last year.

Total vehicle production for 2005 is projected at 15.8 million, which is the same as both 2004 and 2003.

And down slightly compared to 2002 totals of 16.4 million vehicles.

To summarize, we have all heard concerns about slower consumer spending.

Also a recent decline in housing starts and an average 11% decline in the ISM index compared to one a year ago.

These are obvious reasons for caution.

In spite of these signs, many of our customers, I would say after attending a large customer conference over the weekend, I would say all of our customers, that I have talked with recently are optimistic or remain optimistic for 2005.

During the first two weeks of April as David indicated, carloads were up 4% in spite of the decline in automotive production.

While ag, metals and chemicals had their highest loading weeks for 2005 to date.

And intermodal was up 12% with their highest loading last week to date.

Most economists are still projecting increases in capital goods production for 2005.

And this is the market that needs rail transportation services.

Our customers confidence along with increased coal demand, international trade and the continued demand for motor carriers for intermodal services are all reasons that we remain optimistic for the remainder of 2005.

As David indicated, Wick will now wrap it up.

Thank you, Ike.

Well, let me start by reiterating David's initial point that the first quarter demonstrated continued positive traction for us with railway operating revenues up a record 16%.

Our income from operations setting a first quarter record and our operating ratio improving to 79.4; even in the face of some of the challenges that David mentioned.

While we experienced some modest degradation in our average train speed and terminal dwell time quarter-to-quarter, we were able to handle 6% more volume and set a new first quarter record for carloadings.

And I will say that our operating metrics, and these are the key metrics that we look at, for on time train performance, connection performance and shipment performance all improved as the first quarter progressed.

And in fact, have continued to improve through the month of April.

In the first quarter we were once again able to demonstrate considerable operating leverage by handling the 6% volume increase with just 3% additional train starts.

We were able to sustain and build on 2004's momentum in the first quarter while we maintained stable operations.

That's a testaments not only to our thoroughbred operating plants and it's capabilities; and I'm going to talk a little more about top in a couple of minutes, but more especially to our people who continued to make the extra effort to improve service.

Even as we absorbed additional business growth and tackled the first quarter's typical severe weather conditions.

With all of that said our operating metrics are still not at the levels we expect them to be.

And you can be assured that we're maintaining our very disciplined focus on continuous improvement in safety, service and efficiency.

And I'd like to take a few minutes this morning to discuss several areas where we have service improvement initiatives underway.

First, we're working very hard to improve the utilization and productivity of our locomotive and freight car fleets.

As you know, we have ordered an additional 50 locomotives that will be delivered in the fourth quarter of this year.

During the first quarter, we also accelerated our locomotive overhaul and car repair programs.

Both to accommodate increased business demand and to improve service reliability levels and offer a better car product to our customers.

And we plan to continue these programs throughout 2005.

And we think these initiatives are an important step to improving efficiency and productivity overall.

However, they did increase our first quarter labor and material costs, some of which Jim pointed out to you by about $18 million.

And we do expect them to continue some - - to exert some continuing cost pressure in the near term.

Jim, as I said, Jim showed you some numbers already.

But the important point to be made here is that having reliable locomotives and a high quality car fleet are key to providing superior service levels for our customers.

Second, we have increased our overall levels of employment.

Primarily, as a result of our continued hiring of train and engine service employees, along with some additional hiring of mechanical department employees.

Part of the increased hiring is driven by our need to keep up with growth in business volumes and by the increased repair and overhaul programs which I just mentioned.

And another large component of our hiring is just to keep up with the normal attrition of our work force.

The demographics of our work force are these days are such that we expect a fairly high number of retirements.

We've had a significant number of retirements as you know.

We expect that fairly high number of retirements to continue over the next few years.

You'll recall that we saw this trend beginning to develop in 2003.

And when we saw it beginning, we began then to aggressively hire and train new T&E employees.

And while this increased hiring and training do add some costs, which reflected in the T&E and non-T&E costs that Jim showed you; we remain committed to having enough trained and qualified employees to handle our current business at high service levels.

And to accommodate some of the additional business growth that Ike mentioned.

One point that I would make is that the attrition rates that we have are such that we do have the ability to adjust our work force levels fairly quickly in the event of a business downturn.

A third important aspect of our focus on service improvement involves our thoroughbred operating plan.

As you know, TOP is the foundation of our transportation network, and it's been integral to our improved financial and operating results over the past years.

TOP has made it possible for us to provide customers with improved service consistency and reliability even as we've handled record traffic volumes.

As we continue to concentrate on handling additional growth and providing customer satisfaction, we're in the process of expanding TOP beyond the parameters of our general merchandise network.

And to give you a little background, TOP was actually launched in the summer of 2001.

In the fall of last year, for the first time since it was implemented our volumes exceeded the fall 2000 volumes, which were the basis for the original design.

Now we've adjusted our network plan and adjusted TOP as our traffic has changed.

But our volumes have grown enough now and equally significantly our mix of business has changed enough with it that we have decided to accommodate - - that in order to accommodate those changes we'll now expand TOP to include not only the general merchandise network but also our intermodal network.

And, of course, from a business standpoint, this makes a lot of sense.

As intermodal is our fastest growing business segment.

And we see a lot of benefits from folding intermodal into the plan.

We anticipate completing this expansion and integration this summer.

The new TOP plan, or TOP 2 as we call it, will provide for better merchandise traffic flows and more efficient utilization of our locomotive cars and crews.

Against this backdrop we're also preparing to implement our unified train control system or UTCS.

This is an advanced train dispatching system which should enhance - - will enhance efficiency and execution of our operating plan.

UTCS will unify and standardize all of our dispatching systems.

It will coordinate and optimize train movements not only over the individual divisions but between divisions.

And it will also provide us with rapid disaster recovery capability.

UTCS is going to take a while to roll out across the system, but we're very optimistic about the operating efficiencies that it promises.

As all of you know, Norfolk Southern has a long track record of innovation and productivity improvement.

And we are continuing to take straightforward steps in every aspect of our business to improve in terms of safety, service and efficiency.

And let me close by reiterating something that I said before and I'll say again.

And that is, that our goal is to offer a premium level of service to all of our customers across our system.

As we offer that service to more and more customers, we're convinced that we can continue to generate increasing traffic growth with ever improving margins.

As with all of 2004, our first-quarter results are showing that our efforts are generating momentum with our record revenues and our improving operating ratio in a challenging environment.

And I'm very confident that we'll continue to improve.

This time I'll turn it back to David for questions.

Easy, Tom, easy.

Thank you, Wick, that's a lot of information but I've never - - I don't think I've never known a time when there were more good things going on around the Company.

And there's certainly a lot to talk about so I'll now be glad to take questions or refer them.

Yes, Tom.

Thanks, Ike.

I've got two different questions.

First, I'd like it pass you're clearly adding some resources, locomotives and crews.

And I'm wondering if you feel like you're doing that in order to catch up with the current strong demand and you're a little bit tight in those areas?

Or do you feel like you're you know doing a leg of resources that you add and then that gives you operating leverage a couple quarters down the road as you fill it up?

And then, I guess the second question is on pricing.

Maybe I can come back to that.

Yes.

I think the answer to your first question is really, really both of the things you mentioned.

We're - - certainly the kind of growth that we experienced late last year was unprecedented.

And as we see it continuing into the first quarter and from all we're able to see, continuing into the year, our planning tells us that we need to be very careful that we can keep ahead of the curve.

Because we believe that the basis of our - - of the success that we have had and are continuing to have depends upon us maintaining high service levels.

And so we're focusing both on the need to maintain the service levels and the momentum in service that we've established.

But also we're listening to what our customers are telling us.

And that tells us that we need to be - - that we need to continue to be preparing for growth and stay on the side of that.

So we're making some of the investments that we're making and the assumption that we're going to see continued growth through the year.

We also being the kind of people that we are at Norfolk Southern, we look at all sides of this and prepare for as many as eventualities as we can.

And so there's no question that we think that the investments we're making will increase our efficiency.

And will benefit us in the bottom line because they'll help us continue to improve the operating ratio and work sort of both sides of the equation.

On pricing, - - Ike, you might as well get up and go ahead.

Right.

The question on prices, yields were very, very impressive in the quarter.

And I'm wondering as you look at portion of the portfolio that you've repriced in a tight rail capacity environment; whether that's starting at the end of '03 or beginning of '04, how much of that has already been repriced and how much more do you have to go?

And '05 or '06, when do you think that yield growth may slow a bit?

Because it's at a very impressive rate but presumably it slows at some point.

Tom, your two questions are related because it starts with the service product.

And in order - - and David has talked to that.

In order to maintain the service product, we have made those investments.

But secondly, we price to the market.

And the market is looking for a quality product and demand has exceeded supply.

Certainly in the metals industry as well as trucking and the intermodal markets.

And we see that we, we do have that ability to go forward.

Now when I say pricing to market, if we price too far and either our customer loses their customer, or we do not get the business, that's not good.

On the other hand, if we leave money on the table during a market like this, that's not what we want either.

So we're - - we have a lot of repricing yet to go.

I would say that all the factors that we've talked about before that have given us some more attractiveness to our customers fuel; prices don't appear to be moderating any time soon.

And with our three to one, approximately, ratio advantage on that, certainly that makes rail attractive to our customers.

Even as we have to raise prices to handle our own fuel costs with everyone else in the same position of having to cover those.

We have an advantage and that gives us, as long as we can maintain the high service levels, a competitive advantage.

And the ability to offer our customers more economical and efficient transportation.

Even at the time that we're able to increase our own yields on this.

So, we see that environment continuing.

Because of energy prices remaining high and the other factors that we've talked about.

While there's a lot going on in the trucking industry and in the transportation industry; generally, we think that the same factors that have given us an advantage over the last couple of years continue to give us an advantage in the marketplace.

Always depending upon our able to maintain that high service level.

So, we don't think that has run its course and we certainly are happy to have the opportunity after a great many years of declining pricing curves, I do feel we've turned that around.

And I think it's important for us as a Company, in fact, it's important for the rails as an industry, not to to be - - to keep up the moment on that to the extent we possibly can.

We think there's more to run on that and that's the approach we're taking.

Thank you.

Yes, sir, just here.

My questions revolve around the property account and investment in freight cars and locomotives and the safety of the rail tracks.

It's been commented that the age of the freight cars is getting more advanced.

And you mentioned that you're reinvesting in locomotives but you don't say anything about freight cars.

The property less accumulated depreciation account on the balance sheet is almost the same as a year ago.

The net investment on cash flows is a little lower than it was year-ago quarter.

And the need for better railroad crossings, electronic switches, et cetera, has been publicized.

Putting all this together I'd like your commence.

And then I have a question in another area.

Okay being Wick that's sort of in line with some of your commence.

You may want to make a supplement to it.

I think we are - - clearly in addition to the locomotives we've talked more about it, we're making investments as our customers need them in cars.

We try to do that as intelligently as we can.

Some of the - - we can get a lot of leverage out of our own maintenance programs on cars and equipment at the same time that we can achieve the benefits of some car additions by - - because other people are willing to make investments in those-for as well.

Wick.

I'll mention a couple of other things, one, of course, on the freight car side is that while we're continuing to invest in our fleet to keep it at a high level of maintenance, we also are very active in the leased car market.

So that's another way that we bring car supply in for a lot of our customers on an as needed basis.

And that's good for us because it gives us some flexibility in terms of assets.

As Dave mentioned, to your point about investments in technology and investments in signaling and things like that, clearly, UTCS, our new dispatching system is a step in that direction.

That will be a significant investment for us over the years, a significant capital investment.

And we're constantly working to improve things like our gate crossing protection and invest in those capabilities.

We're also along with the industry, looking at a lot of different things that are happening in terms of train control systems.

Participating with the Association of American Railroads on some of the testing that they have underway.

And when that technology is a little more mature we'll be doing some things I'm sure aggressively in that arena.

So - - and I guess the other question that I'll answer that I would know sure you were asking though is just a general investment in the fixed plant.

And that - - what I would say there is that we have a significant capital budget as you know, every year, that's for investment in the fixed plant.

Just in terms of rails, ties and ballasts.

And we maintain I think our property at a very high level with regard to the fixed plant.

And we see that as one of the absolute keys in providing reliable operations.

And we invest more every year and we will continue to do that.

Now having said that, I'll quickly remind you that we do - - that we are benefiting from strong cash flows and that's given us the opportunity to make prudent investments in our business including the growth of our business.

At the same time, that we've been able to make significant reductions in debt.

Which remains, as those of you who follow us regularly know, a high priority for us to continue to reduce our debt systematically, as we've done the last several years.

And at the same time and we've been able to increase our dividend and therefore, manage our cash flows overall in a prudent way.

And that's, of course, management 101, that's what we try to do.

I don't want to sound like it's negative.

What is the CapEx for this year compared to last year?

Jim, do you want to address that.

All that's been announced so--

The CapEx is fairly close to - - we're a little behind - - this year it looks like we'll be a little behind from last year.

Because we did have a lot of locomotive purchases in '04 that we don't have in '05.

So we'll be slightly behind the '04 numbers.

But with the additional 50 locomotives that we announced earlier this year the capital will start to approach last year's.

My other question concerns the area of diluted shares outstanding.

I noticed on income statement that diluted shares outstanding increased 4%.

Of which actually reduces your earnings per share.

And I was wondering what accounted for the comparatively large increase in the outstanding?

As you may well have noted our stock price went up sharply last year and it went - - and in the first quarter.

As a result of that there were significant number of option exercises, which including a number with respect to some very broad-based option programs we put in earlier.

Which our people took the opportunity to exercise.

And that increases that number.

We also made a - - in the first quarter there were some additional shares relating to compensation.

So, I think that accounts for most, I guess Jim, all of that increase in diluted shares outstanding.

As the stock price goes up, that increases that number.

Are the number of options issued affected to the issue in '05 where 24% or - -

Oh, no, no, no, no.

Significantly lower than that.

I mean that have been issued in '05.

That's already been issued and I don't remember the number off hand, Jim may.

But Marta, do you recall the the - - it would be in the 10-Q.

But can I say with a that is before we issue the 10-Q or --?

I guess you can.

It would be significantly less than · [Inaudible - microphone inaccessible]

It's a little over 1% is the number.

[Inaudible question - microphone inaccessible]

Beg pardon.

Are you expensing the options?

No, we're not.

We will expense, we will expense the options when that - - that's not a significant number for us.

Yes, we'll stay with you.

Stay in the front row here.

Hi Dave.

Ken Hoexter from Merrill Lynch.

Just on the - - sort of conflicting messages, so I'm a little bit confused.

It seemed Ike talked a little bit about the equipment being sold out, which could limit the capacity for growth.

Wick talked a little bit about the potential for if there's downturn in the mark you're prepared because your attrition rate can be significantly, or it ramps pretty quickly.

But you're also talking about a very aggressive roll out for '05 and this growth possibly continuing.

So with that conflicting men's, how do you plan this capital budget?

Let's unconflict those messages because I don't there's - - I'll start with the conflict in our minds anyway.

The point I was attempting to make was, for instance, there's a shortage of open-top coal cars and there has been.

In the industry due to the - -, if you will, the booming steam market, metals market.

As with the metals market and the producers themselves, even though demand has moderated, we still see a full market for us.

So, what I was trying to head off was anyone's belief that moderation in the metals market was going to impact our business.

It will not because we remain sold out.

Because of that fuel business.

Yes, we are.

I think the message is that we are anticipating continued growth in the business.

And we are prepared for that.

We believe we have the capacity to handle it.

And are managing in that direction.

So, I'm not concerned that the sold out effect of certain cars is limiting your growth right now?

Not right now.

I think our job is to make sure that it doesn't.

I hope we have that - - well that's the kind of management problem I love to address is - - but

Okay.

A bunch of questions for Jim if I can.

On the other income, the expense trend with the synthetic program, can you talk about what we should see in the next few quarters?

Because it looked like other income was a little bit lighter than we had expected this quarter.

It was.

And you can expect that for part of the second quarter because remember, we entered into the transaction I believe, Bill, was in May or June of last year.

And so you'll see that again for part of the second quarter but that, after that you won't see it any more.

What you're basically seeing is that there were no real estate transactions in the first quarter.

We - - it's very rare for us, as you you know, we almost always have income from real estate transactions of one kind or the other in just about every quarter.

It happened that that was not so in the first quarter.

So what you're seeing in the other income line principally is that there was no real estate activity.

Is that something you expect to catch up - -?

Oh, no, we would expect that to catch up as the year goes on.

And I guess it would be fair to say, we think that'll go at about the level it traditionally has.

[Inaudible - microphone inaccessible] Year end we've had several pending sales which we see, no change in 2005 versus previous years.

Yes.

We think it's reasonable for you to project the levels of real estate income as we've traditionally had, without saying exactly what that is.

What we can't do is tell you that we're going to close them every quarter.

Because the real estate market doesn't operate that way.

But I think that we don't see any moderation in that particular year-over-year.

Okay.

I'm just going to stick with below the line because your performance on the top line actually was quite strong as you noted.

But on the interest expense, it seemed like again with the integration of Conrail it seemed like it was still a bit higher than we anticipated.

It actually went up from the fourth quarter.

So did you take on more debt?

Or can you maybe explain what percentage of your debt is variable versus fixed rate?

And is that a concern as we head into a rising interest rate environment?

Most of it is fixed.

The predominant is fixed.

And we did - - with part of the Conrail reorganization in the third quarter we did assume, a little over 700 million in Conrail debt that went on to our books.

So that's showing up there.

And then we did have the 100 year bond that we issued in the first quarter at 6%, that's showing up there as well.

Okay.

And then perhaps just one quick question for Ike then.

You said the short haul river coal is disappearing.

Where is that going?

Is that - - are you giving that up.

Is it are competitors coming into the market to take that away or is that something you've priced yourself away from?

There's two factors driving that.

Some of the river plants have switched to Powder River Basin coal, which means that it will not go all water.

It will now go rail to water.

And some all rail.

Another reason, and it's temporary, the locks have been - - the water's been up.

And there's been an inability to ship coal on the river like it has been. [Leasha] Dock, south of Pittsburgh, has been particularly affected by that.

AEP has a lot of river plants as well as TVA.

Some of those conversions will be going to CSX, that's already occurred as TVA chooses coal PRB coal.

We - - with longer hauls that, 'not all bad for us.

I mean - - There's a lot of activity in motion in the coal business right now.

Frankly, it's hard for us to find any negatives from our standpoint in the way that business has been moving and appears to be continuing to move.

Because where we have lost - - where we do lose movements we're able to repace them in a sense with more profitable or better yield movements.

So - - I think we are hard-pressed to find any negatives in the coal business for you.

[Inaudible question - microphone inaccessible]

Well, it's - - as always, with the amount of Powder River Basin coal that's moving, we move that in cooperation in connection with Western Railroads.

Those volumes have ramped up a lot and it continues to be challenging to operate them.

Steve, you may want to - - I may ask Steve to make a comment or two.

But we're able to handle that.

And at times like this, in the Pocahontas coal fields when the utilities are building up - - or it seems to me they're clearly building up their stockpiles in anticipation of the summer.

And with some of the nuclear plans going down, you're always very busy and managing through that as continuing challenge.

But I think we're able to - - we believe we're able to handle it and work with our coal customers.

At the same time I think if you had our coal customers lined up here they would all say we need more service.

And they would would be right about that.

But on a broad basis I think we're able to handle that.

And Ken, just one quick comment.

The sourcing is very dynamic.

We've had 7 million tons just on us converted from the thermal market over to the met market.

Which means there's been a scramble to replace those coals.

So some of them are moving from Tyler River.

And as David indicated, they're - - it's very dynamic.

Yes, Tony.

Thanks, David.

I just have one question.

But it's got two parts.

What do you see going on in Washington these days specifically related to [TLU] or whatever you call it the transportation bill?

And are you concerned about the bunch of bills that have been announced that seem to link safety and security issues as one?

I mean, relative to some of your reason experiences in some of the western carriers, in the "New York Times" and all that stuff is there a movement to - - with Washington, D.C. and the rerouting, is there movement to use safety and security as a way to attack railroad's operating efficiency?

Well, there are two things Jim has public affairs under his wing as well and you may want to correct me.

I think we are - - but we'd be anxious to see [TLU] moving past because there's some good things in there for rail.

Just basically highway bills.

But there are a number of initiatives in there that would be good for us.

So we're anxious to see that move along.

And Jim may be willing to make a prediction on that.

I've given up making predictions on the timing of how that will go.

On the other side, we do - - we continue to monitor activities in Washington very carefully.

Everybody knows that there's a lot of concern about safety and security.

We're concerned too.

And our general strategy is to work with all of the appropriate agencies and Congressional groups in order to make sure that no restrictions, that limit our ability to serve our customers come out of what's going on.

Steve chairs, as I know you know, the industry security task force.

I think it would be fair to say, Steve, that we've had very close relationships and good working relationships there.

And are confident that as an industry, we can address that.

But there's no question that the level of concern that's out there is something that the industry and Norfolk Southern have to keep a close watch on in Washington.

Yes.

Jason Sidel, Credit Suisse First Boston.

Ike, you mentioned a little bit about the current stockpiles for the utilities.

And with some of the nuclear plans going down, do you see those stockpiles at least for the near term even declining some more?

And could you give us some color on how many days you think they are?

Utility stockpiles is usually a metaphysical subject that is hard to keep your finger on but Ike watches them.

I said relatively low, and I guess that would indicate that there're certainly not high.

And I'm not sure they're historically low.

There has been a lot of replenishment going on this quarter.

We think that will continue.

The maintenance on the nuclear facilities should be over by mid-May to first of June.

So that utility market does look strong.

It's with the industrial base demand up and high price of gas, I see that continue.

I mean, what we're hearing both from our coal friends and the utility companies is; be prepared for strong demand for the balance of the year, and into next year and just.

I mean, what we're hearing from them is for goodness sakes be prepared to handle what we're going to be throwing at you.

And that's the good news in the coal markets.

Okay.

And last question I apologize if I missed this.

A number of the other rail carriers are reporting they're increasing the percentage of fuel surcharges that they're recovering.

Can you guys give us the percentage that you guys recovered in the first quarter?

I think we have consistently elected not to be specific with you on that.

Ike, do you want to say any more than that, or Jim?

We maintain that.

I know that's not - - and I know some of the other folks are more specific than we are.

But we regard that as competitive information.

And I think, you know our strategy, which we have stated is; through a combination of hedges and fuel surcharges we endeavor to come as close as we possibly can to recovering the higher cost of fuel.

And as you see, the hedge piece of that goes down.

So it would be a fair assumption on your part that we're having more success with the surcharge program.

And I don't think that's a secret, but we just elected not to be more specific than that.

Thanks.

Other questions, or Steve has a --.

If I may, it strikes me that there is an undue concern about capacity.

Each of the issues that various ones that you've brought up that relate to that topic are not one-off situations.

Car availability, locomotive availability, the condition of those two fleets, human resource application, the condition of track, we have consistently and cyclically spent capital moneys and expense money to maintain all of those areas at acceptable and satisfactory levels to the customer base.

Wick's commentary about TOP 2, the original TOP thoroughbred operating plan that we put in place in 2001; reduced handlings, improved yard capacity, diminished main line volumes.

That gave us the opportunity to add more scheduling.

Run a more scheduled operation.

Not an as schedule as we'd like.

And it's still not as scheduled as we'd like but we built capacity into that plan.

TOP 2 with the inclusion of the intermodal piece is design to do the same kind of thing;

Improve volume, opportunity, reduce handlings, increase velocity.

And all those things are very dynamic.

And we manage all of those things in a integrated, conceptual format and don't treat them as a one-off situation.

We try to hire and train and stay as far ahead of that curve as is prudently possible the same way we do with our capital expenditures.

And to put all these balls if you will in a basket that we can effectively manage to do one thing: And that is, increase the service reliability and the service consistency that we have to offer to our customer base.

We think we receive recognition for that.

That's what we hear from our customers in the past years.

We certainly have no intention of letting that slip away from us.

Philosophically as Steve says, philosophically we believe that maintaining a safe high-service network is number one.

To the extent we can do that, as we have over the last few years, maintaining a relatively level capital expenditure line, investing heavily in technology to improve the utilization of all our cars.

So that we're able to improve our balance sheet systematically over time and increase our cash employees at the same time we're building a growth network, we think is the basis for the way we're operating this.

And we're very optimistic that the equation that we've been able to work on this is one that has a lot of legs to it.

And that's why we're optimistic that we can continue to achieve the growth in the market.

And at the same time, significantly improve all of our financial results and our metrics.

And that's a -- that involves a lot of moving pieces.

But at the moment, those moving pieces are meshing pretty well for it and I think we feel very optimistic about our ability to continue to keep that going.

At the same time that we're putting a lot of management time on how to keep the , as I say, keep the network rolling.

So - - anything else?

You've been very patient.

The kind of the challenges in the quarter that we like to have and we look forward to more of them as the year goes on.

Thank you very much.