Norfolk Southern Corp (NSC) 2005 Q4 法說會逐字稿

I'm David Goode, Chairman of Norfolk Southern Corporation, at least for a few more days.

And it's my privilege to welcome all of you to our fourth quarter 2005 analyst meeting.

As most of you know, I will be retiring soon, so let me make one personal note, which is to express my appreciation for the courtesies and fairness that you and your colleagues have shown to me and to Norfolk Southern over my tenure as CEO.

I haven't always agreed with everything the people in this room and some listening said, but I have to say I've always been impressed with the professionalism and dedication of the people that covered us.

So thank you for your patience, and for your consistent interest in our company through a variety of interesting times.

I appreciate the professionalism and fairness that you've shown us, so thank you.

Those of you who have followed our company for a while know how optimistic I am, and that I rarely skip an opportunity to report good news.

So this is a particularly good quarter, and I asked Wick to let me make a brief report about our recent results before I hand over the podium to Wick and his team for the heavy lifting.

And by any standard, Norfolk Southern posted a strong performance in 2005, and it was capped by a remarkable fourth quarter that set a number of financial records.

For the year, we reported record revenues of 8.5 billion.

We reported total record earnings of $3.11 per diluted share, with the fourth quarter showing $0.87 a share.

The railway operating ratio improved 1.5 percentage points to 75.2% for the year.

That's clearly our lowest since the Conrail integration.

And the fourth quarter was 2.6 points better than a year ago, and also showed a continuing improving trend throughout the year.

And you know how pleased that makes me.

Naturally, I'm pleased to report these results, but more significantly, I'm proud because the challenges we faced in 2005 showcase the strengths of our people and this organization.

We handled powerful business demands throughout the year and, particularly in the last quarter, did so in the face of considerable challenge, and we did it safely and efficiently.

Although service metrics were not and are not what they should be, in the fourth quarter our people produced for our shippers.

And while there were costs to handle the heavy volumes, we produced historically good results that benefit customers and investors alike, and that was illustrated by the Board's decision yesterday to increase our dividend.

So in short, I think my final year was a good indication of the elements that differentiate Norfolk Southern, and I leave you with a lot of pride in our people and in the powerful culture that combined to make a great organization not only endure for 175 years, but also grow and prosper.

So thank you for indulging me in a few comments, and I will now turn the podium over to Wick Moorman, our President and Chief Executive Officer, and soon-to-be Chairman, to talk specifics.

Thank you, David.

Good morning to everyone, and I first of all want to say on behalf of all of us at Norfolk Southern, thank you, David, for all of your leadership and guidance at the head of the Company over the past 14 years.

David, as all of you know, is leaving a great legacy.

He has raised the bar for us; in fact, this quarter he has raised the bar to the point where I look up at it and my heart beats a little faster.

But in all seriousness, I can think of no greater privilege then to assume the role, David, which you have played so well for these years.

Before we proceed, I can tell that part of transition is that I will now go through two pages of material that you've all heard before.

Before we proceed I would like to take a moment to welcome those who are listening by telephone conference call, and I encourage those who are here today when speaking to please take the microphone and please identify yourself, so that the listeners on the telephone can here and identify you.

I would remind our listeners and our Internet participants that the slides of the presenters are available for your convenience on our Website in the investors section.

And as usual, transcripts of the meeting will be posted on the Website and available upon request in a few weeks from our Corporate Communications department.

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.

The 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 our company.

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

Additionally, keep in mind that all references to reported results, including certain adjustments, i.e. non-GAAP numbers, have been reconciled on our Website.

We do have with us today several members of our senior management team, including our Vice Chairmen Hank Wolf, Ike Prillaman and Steve Tobias, whom you all know well.

We're also joined by Bob Fort, our Vice President of Corporate Occasions, sitting somewhere;

Bill Galanko, our Vice President of Financial Planning;

Rob Kesler, Vice President, Taxation;

Marta Stewart, Vice President and Controller, who will answer all of the difficult questions;

Fred Ehlers, the Assistant to the Chairman;

Leanne Marilley, Director, Investor Relations; and [Debbie Malden], who is Hank Wolf's assistant and runs Norfolk Southern.

As David said, 2005 was an extraordinary year for Norfolk Southern, capped by a fourth quarter that reflects the strength of our higher-value transportation products and our strategic focus.

Demand for rail transportation remained strong throughout the year, and our 2005 financial results reflect record levels of performance throughout the organization.

Our railway operating revenues were the highest of any year in Norfolk Southern's history, reflecting continued growth and, importantly, maintaining momentum as the year closed.

We posted our best-ever income from railway operations, net income and earnings per share, we set new carloading records, and we significantly improved the operating ratio.

And I will start with that, because I think it's important.

Our fourth-quarter operating ratio of 73.7% was an improvement of 2.6 percentage points compared with the fourth quarter of 2004.

And as David also mentioned, for 2005 the operating ratio improved a full 1.5 percentage points to 75.2%.

As all of you know, lowering the operating ratio on a consistent basis has always been and continues to be a primary goal for us, and we are very clearly focused on making that happen.

For the fourth quarter, net income was $362 million, or $0.87 per share, an increase of 37% compared with $264 million, or $0.65 per share for the same period of last year.

For the year, reported net income was $1.3 billion, or $3.11 per share, an increase of 35% compared with reported net income of 923 million, or $2.31 per share for 2004.

Let me remind you that our 2005 results included a $96 million benefit from the effects of Ohio tax legislation, and our 2004 results include a gain -- a $53 million gain on the Conrail corporate reorganization.

Excluding both of those items, 2005 net income would have been 1.2 billion, or $2.88 per share, an increase of 36% compared with net income of $870 million, or $2.18 per share in 2004.

As I mentioned, railway operating revenues set records for the quarter and the year.

Fourth-quarter railway operating revenues of 2.3 billion were up 16%, and for the year railway operating revenues increased 17% to 8.5 billion compared with 2004.

You'll hear all the details about our financial results and our revenues in a moment from Hank and Ike, but clearly, the value of our expanded thoroughbred operating plan was reflected in the fourth quarter as we continued to adjust to changing business conditions.

As we have already discussed, 2005 had a number of operating challenges for us, and the fourth quarter was no exception.

In the context of record volumes, the effects of the hurricanes lingered longer than we had anticipated.

And later in the year there were several significant weather and accident-related disruptions on both our property, as well as the properties of some of our connecting carriers.

The results were that, as David also said, our fourth-quarter metrics weren't everything that we would hope they would have been; they declined somewhat from earlier levels.

But it's important to note that even with all of these disruptions, our overall operations remain fluid and the service impacts to our customers were limited.

We are continuing to work aggressively to add resiliency and capacity to the network, and our metrics coming out of the holidays are improved over the fourth quarter.

We also remain optimistic about the health of the industrial economy.

For January, overall carloadings are up year-over-year, led primarily by intermodal, coal, and metals and construction.

There are, however, some downward pressures being exerted on the automotive and chemical sectors.

As we move forward, we will continue our commitment to [value-based] pricing, and we strongly believed that our service efficiency gives us a very competitive and valuable product going forward.

2006 will pose some challenges for us similar to those we tackled last year, including cost pressures in the form of increased wages and health and welfare benefits for our employees, and a rise in diesel fuel prices.

In addition, we plan to continue the more aggressive locomotive and car overhaul programs we initiated in 2005, to ensure that we can continue to respond to customers' demand.

Still, we remain steadfast in our concentration on signing more cost-effective ways of doing business while always improving our safety and our service.

I have every confidence that Norfolk Southern will continue to successfully push ahead, and that we will gain new business and margin expansion as we do so.

I will now turn it over to Hank to review our numbers, and then Ike will talk to you about the specifics in the market, and then David and I -- David doesn't get off the hook yet -- will return to answer your questions.

Thank you.

Thank you, Wick, and good morning.

As David and Wick indicated, record railway operating revenues and income from railway operations produced very strong financial results for the fourth quarter and the full year.

Our net income and earnings per share for the year established new records in Norfolk Southern.

I should point out that the second, third and fourth quarters of 2005 represent the three highest quarters in operating income in our history.

In fact, the last three quarters of '05 produced more income from railway operations then all four quarters of 2004 combined.

Railway operating revenues for the fourth quarter were 2.3 billion, up 308 million, or 16%, and were the highest quarterly revenues in our history.

This quarter was the ninth consecutive quarter of sequential revenue growth.

For the year, railway operating revenues were a record 8.5 billion, an increase of 1.2 billion, or 17%.

Fourth-quarter volumes were up 3%, largely driven by an 8% gain in intermodal units.

Revenue per unit rose 13%, reflecting increased fuel surcharges and higher rates.

For the year, volume increased 4%, a result of intermodal growth of 9%, and a 3% rise in coal shipments.

Revenue per unit was up 13%, again reflecting higher rates in fuel surcharges, and Ike Prillaman will provide you with the details of our revenues in just a moment.

Railway operating expenses for the fourth quarter were 1.7 billion, up 176 million, or 12%, compared with 2004.

For the year, railway operating expenses were 6.4 billion, 800 million, or 14% higher than '04.

The largest increase in railway operating expenses for the fourth quarter was in diesel fuel costs, which rose $88 million, or 64%, and accounted for one half of the year-over-year operating expense increase.

This rise was almost entirely due to higher prices as the average price per gallon increased from $1.07 in the fourth quarter of '04 to $1.76 this year.

Consumption decreased modestly year-over-year from 129.4 million gallons to 128.6 million gallons, despite the 3% increase in traffic volume.

The average price per gallon would have been $1.98 absent the benefit from our fuel hedges.

As you will recall, the third quarter was an inflection point for our hedge benefit; that is, the hedge benefit in the fourth quarter reflects a decline when compared to the same period in the prior year.

For the next two quarters, the gallons hedged will continue to drop until our hedges are fully settled in May of '06.

The second largest increase in operating expenses was in compensation and benefits which rose 44 million, or 7%, compared with last year.

The increase in compensation and benefits expense was due to higher benefits cost and lower pension income which totaled 14 million, increased wage rates of 11 million, increased T&E and mechanical hours that added 7 million, and higher stock-based compensation, increased salaries, and other miscellaneous items, each of which added $4 million.

Materials, services and rents rose 29 million, or 7% in the fourth quarter.

Within this category, volume-related purchased services increased 22 million, or one half, which was attributable to additional traffic that we handled for FEMA as they responded to the needs of the hurricane-ravaged areas of the Gulf Coast.

Maintenance activities added 15 million and included 6 million in material costs for locomotive overhauls and freight car repairs.

Other operating expenses were 12 million, or 23% higher than '04, principally due to higher sales and use taxes and increased property taxes.

Casualties and other claims rose by 5 million, or 12%, as a result of increased insurance costs.

Depreciation saw a modest increase, reflecting our continued investment in plant and equipment, and these items were partially offset by a $5 million reduction in Conrail rents and services.

For the year, railway operating expenses were up $800 million, or 14%.

As in the case of the fourth quarter, the largest increase for the year was in diesel fuel expense, which rose 278 million, or 62%.

The average price per gallon rose to $1.42 for the year, compared with $0.91 last year.

Our fuel hedges reduced our diesel fuel expense by $148 million for the year, and without the benefit of those hedges, our average price per gallon for the year would have been $1.71.

The remaining fuel hedges that we have in place in 2006 would produce a benefit of approximately $20 million, assuming the current price of NYMEX heating oil.

Therefore, I would remind you that as we move into 2006, we will be facing $128 million diesel fuel expense headwind.

The next largest increase was in consumption -- in compensation and benefits, which increased 221 million, or 10%.

The increase was a result of more T&E and mechanical hours that added 70 million, higher wage rates that added 46 million, increased benefit costs and lower pension income which totaled 43 million, increased stock-based compensation of 22 million, increased salaries and salaried headcount that totaled 20 million, higher payroll taxes of 12 million, and other miscellaneous items that collectively totaled 8 million.

I would like to take a moment to discuss with you the effect of the new stock-based compensation accounting standard which we will adopt in the first quarter of '06.

As you are aware, Statement of Financial Accounting Standards Number 123R, Share-based Payment, requires companies to expense equity-based awards.

It also includes a new requirement that awards granted to retirement-eligible employees must be expensed immediately.

Under the previous accounting standard, such awards were amortized over the stated service period.

And accordingly, that is how this element of compensation was reflected in our pro forma disclosures.

As a result of the implementation of FAS 123R, the expense recognition of grants made to retirement-eligible employees is accelerated, and this acceleration will result in approximately 20 to $25 million of additional compensation expense in the first quarter of '06.

Returning to our expense variance for the year, material services and rents increased 208 million, or 13%.

The same costs that drove the quarterly increase contributed to the rise for the year, mainly higher volume-related purchase services of 82 million, and 74 million more in maintenance activities.

In addition, equipment rents rose 28 million, largely because of the increased traffic volume and lease costs that are reflected in this line following the Conrail reorganization.

Depreciation expense increased by 176 million, or 29% over last year.

But as you will recall, this is principally due to the effect of the (indiscernible) reorganization of Conrail in the third quarter of '04, and you will note that there was a reduction in Conrail rents and services that more than offset the increase in depreciation.

Casualties and other claims expense was 73 million, or 48% higher in '05.

This increase was principally attributable to three factors -- costs associated with the Graniteville accident in the first quarter, the unfavorable personal injury jury verdict in the third quarter, and increased casualty insurance costs.

Other expenses were up 34 million, or 15%, again reflecting higher property taxes and sales and use taxes.

The railway operating ratio for the fourth quarter was 73.7%, compared with 76.3% last year, a 2.6 percentage point improvement.

For the year, the operating ratio was 75.2%, compared with 76.7% in '04, and this represents an improvement of 1.5 percentage points over the prior year.

Fourth-quarter income from railway operations was a record 594 million, up 132 million, or 29% compared with '04.

For the year, income from railway operations was also a record at more than 2.1 billion, up 415 million, or 24%.

Total other income and expense for the fourth quarter was an expense of 90 million, compared with an expense of 87 million in '04.

Interest income rose 10 million due to higher cash balances, as well as higher interest rates.

Gain on sale of property and investments was 7 million below '04, expenses related to tax credit investments were 3 million higher this quarter, and coal royalties were up 2 million.

All other was a decrease in income of 10 million, principally due to lower earnings and corporate-owned life insurance.

Interest expense on debt was 5 million lower than last year on less outstanding debt.

For the year, total other income and expense was an expense of 420 million, compared with an expense of 400 million in '04.

As you will recall, the Conrail corporate reorganization occurred during the third quarter of '04 and resulted in a gain which contributed $53 million to other income net that year.

Expenses related to the tax credit investments were 39 million higher than '04, which included only seven months of the expenses associated with a synthetic fuel investment that we made in May of '04.

Interest income was 28 million higher as our cash balances grew over the course of the year.

Equity earnings in Conrail, which are reported in other income, net after the reorganization were $26 million higher because they included a full year.

Coal royalties were 12 million more than last year, and gain on sale of property and investments were 5 million higher.

All other increased by 6 million, reflecting a favorable adjustment for deficiency interest from the resolution of taxable years 2000 to 2001, which you will recall we recorded in the third quarter of '05.

Interest expense on debt for the year was 5 million higher, principally due to the addition of interest on Conrail debt that was assumed as part of the Conrail reorganization.

We experienced very little increase in interest expense on debt, even as we saw market rates rise, because most of our outstanding debt is at fixed rates.

Fourth-quarter income before income taxes was 504 million compared with 375 million last year, a 34% increase.

For the year, income before income taxes was 1.7 billion, up 36% compared with the 1.2 billion last year, excluding the $53 million gain on the Conrail reorganization.

Net income for the fourth quarter -- excuse me -- income taxes for the fourth quarter were 142 million compared with 111 million last year.

The effective rate for this quarter was 28.2% compared with 29.6% last year.

For the year, the provision for income taxes was 512 million, excluding the $96 million reduction for the changes in the Ohio income tax laws.

The effective rate was 30.2% compared with 30.3% in '04.

Fourth-quarter net income was 362 million, which is 98 million, or 37%, higher than the 264 million earned last year.

Excluding the $96 million, or $0.23 per share increase in income from the change in the Ohio tax law in the second quarter, this would have been our record-high net income for any quarter.

For the year, net income was a record 1.2 billion, excluding the second-quarter change in the Ohio tax laws, compared with 870 million in '04, excluding the $53 million gain on the Conrail reorganization.

This is an increase of 315 million, or 36%, and is record net income for any year.

Diluted earnings per share for the fourth quarter were $0.87 compared with $0.65 per share in '04, a 34% increase.

Diluted earnings per share for the year, excluding the change in the Ohio tax laws and the Conrail reorganization gain, were $2.88, which was 32% higher than the 2.18 per share earned in 2004.

This slide that you see reconciles our net income and earnings per share, without the effect of the Conrail corporate reorganization in '04 and the Ohio tax legislation in '05, to our reported net income and earnings per share.

These reconciliations are posted on the Website.

Reported net income for the year was 1.3 billion, or $3.11 per diluted share, compared with 923 million, or $2.31 per -- that we reported in '04.

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

Thank you, Hank, and good morning.

As everyone before me has indicated, revenues were the highest ever for both the quarter and the year.

Revenue growth was constant throughout the year and increased 308 million, or 16% for the quarter.

This was our ninth consecutive quarter of record revenues.

And also as indicated for the year, they were up 1.2 billion, or 17%, and reached 8.5 billion.

Merchandise and intermodal revenue reached an all-time high for both the quarter and the year.

And since 2002, revenues have increased 2.26 billion, or 36%.

The growth for 2005 is a result of large increases in revenue per unit from pricing, fuel surcharges and change in traffic mix for all of our markets, as well as increased volume for intermodal, coal, ag and metals and construction.

More specifically, revenue per unit for 2005 was an all-time high for all of our business groups, increasing 12% over 2004.

For the year, 55% of the merchandise revenue per unit increases were attributable to rate and traffic mix, while 68% of the $197 increase in coal revenue per unit was the result of repricing of key contracts, longer-haul business, and also includes a settlement of the rate cases in the second quarter.

Intermodal also had increased pricing, along with an unfavorable mix change that resulted in a 43% net increase in revenue per unit.

And also, information you'd like to know is approximately 50% of our total book of business will be up for renewal or renegotiation during 2006.

Looking at our markets for trends, volume was up 3% for the quarter and 4% for the year.

Our intermodal coal, metals, construction and ag markets reached record volumes for the year, and fourth-quarter volumes for ag and intermodal were all-time highs as well.

Overall, volume for the first half of 2005 increased 5% over 2004, which offset the variability that was incurred during the second half of the year.

Specifically, there was year-over-year growth for merchandise in the first half, which was followed by second-half volumes which moderated, and also had to go against the strong comparisons of 2004.

The largest decline during the second half was that of our chemicals sector, where first-half volume gains were more than offset by second-half declines due to the infrastructure damage from the Gulf Coast storms.

There was consistency.

On the upside, intermodal was the only market sector with year-over-year gains in all four quarters, whereas the automotive business incurred year-over-year declines throughout 2005.

Although there was a fourth quarter decline, our coal business had a record year for tonnage.

And as Wick indicated, as an encouraging footnote for the new year, our volumes are up 9% for the first 20 days of January.

Looking at our merchandise sector, ag revenue was up 31%, or 59 million for the quarter and 118 million for the year.

Ag's ethanol market grew 34%, and overall volume gains should continue into 2006.

Our feed mill market also continues to expand, and we are continuing to enjoy growth in the (indiscernible) of that market, and we are also seeing growth in an emerging market, which is the biodiesel.

Metals and construction revenues were up 22% for the quarter and 20% for the year, and have increased 40% since 2003.

Demand is projected to continue into 2006 from both the capital goods and construction markets, coming from both the integrated and electric arc furnace production.

Construction markets should remain favorable during 2006, with the reconstruction of the Gulf Coast, the new highway bill, as well as higher capital spending that is forecast.

Our paper and wood products business completed its third consecutive year of growth in both revenue and volume.

Revenue growth of 16% resulted primarily from increased revenue per unit, while our service did attract additional volume in a paper market that was mixed overall.

Chemicals revenue reached 244 million for the quarter and 973 million for the year, with volume declines of 4% in the quarter and a slight decline for the year, and we do expect volumes to recover as production is being brought back online.

And our automotive sector achieved quarterly revenue of 254 million and record annual revenue of 997 million.

And that's despite a 3% reduction in volume for both periods.

We are all aware of the plight of the domestic automakers.

The 2000 vehicle production of 15.7 million vehicles was flat compared to that of 2004.

A 13% increase in international vehicle production in the U.S., which included expanded production at Honda and Mercedes Alabama plants, as well as increased production at Toyota's two plants -- which we serve all of them -- did offset the 11% decline at Ford and the 9% decline at General Motors.

For 2006, light vehicle production in North America is projected to be 3% above 2005, led by continued increase in production at these transplant manufacturers, as well as DaimlerChrysler.

GM has announced plans to close several plants, as well as removing shifts from others.

And on Monday, Ford announced similar plans for restructuring capacity.

And of the five plants specifically announced for closure, we directly serve the St. Louis and Atlanta assembly plants and the Batavia transmission plant.

And we estimate that the number impacting us next year will approach 40 million -- somewhere between 35 and 40 million could be the impact, if all as described occurs.

I would add as the news -- one news analyst put it, that the news -- the announcement by Ford was actually about taking 1 million vehicles out of their capacity, not out of their production.

So a lot of these declines that have led to this overcapacity has occurred over the last few years.

And it's certainly not prospective.

Our intermodal franchise continued with strong volume growth throughout 2005.

And since 2001, our intermodal business has grown 43%.

The 9% volume increase in 2005 followed a 17% gain that occurred in 2004.

Looking at our international markets, volume grew 18% for the quarter and 16% for the year.

During the fourth quarter, East Coast rail volumes continued to increase, especially at Norfolk Savannah and New York, as more containers are routed via the so-called all-water routes.

Domestic IMC business continued to encounter unfavorable comparisons as volume was down 8% for the quarter and 3% for the year.

Volumes moderated due to the continued reduction in translating the West Coast international freight into domestic containers and, in some cases, the ability to find cheaper pricing.

The remaining lines of business had strong gains during the year.

Truckload volume was up 5% for the quarter and 10% for the year, and intermodal's premium business, which includes UPS or parcel and LTL carriers, was up 15% in the fourth quarter and 6% for the year.

And Triple Crown services volume was flat in the fourth quarter, but grew 6% for the year through an expanded trailer fleet and growth in its geographic coverage.

Revenues were a record-high for Triple Crown for 2005.

Looking at 2006, the factors for continued intermodal growth remain in good standing, as it is projected that driver shortages and higher oil prices will continue, and driver pay is being increased.

Additionally, the international ship lines are projecting a 10 to 11% growth in 2006 of their container business.

Infrastructure improvements will also add to volume as well.

We will open a new terminal -- open new terminals in Kentucky and Pennsylvania, as well as expand existing terminals in Georgia and Ohio, which should improve service as well as increasing capacity.

Our coal markets of nearly 424,000 carloads fell 1% below the fourth quarter of 2004.

And for the year, these markets reached a record volume of over 1.7 million carloads, up 3% over 2004.

Our car-only market was essentially flat in the fourth quarter and up 4% for the year.

Utility volume remains strong, as there was a 4% increase in electricity demand in our service area.

Looking ahead, we are bullish about our utility business.

There is continued growth in demand for electricity.

In addition, natural gas availability and pricing are expected to remain uncertain and more volatile than that of coal.

In the near-term, the weather, obviously, will drive any demand variability.

Despite a decline in coke and iron ore, there was a sustained demand for domestic metallurgical coal throughout the year, as volume grew 3% for the quarter and 8% for the year.

This market should remain strong in 2006 due to blast furnaces coming back online, as well as a planned higher production of coke, and on our part, recent successful contract renegotiations.

Several factors drove the decline of our export business.

Increased demand from the Asian market was temporary, as expected, which impacted our 2005 business through Baltimore.

In addition, during the second half of 2005, the European steelmakers were not buying coal in response to an inventory buildup, as well as waiting for possible lower prices in 2006.

Also, the problems that plagued Consol's Buchanan mine during the year affected low-vol availability by 2.8 million tons, and I would footnote that that's a big number for this market.

Looking ahead, the world is still short of high-quality hard coke and coal, and availability remains the issue for U.S. coals, even with full production at Buchanan.

And finally, I would like to make our annual comment about our real estate efforts.

As indicated, 2005's 48.7 million gain on the sale of real estate was comparable to gains realized in prior years, especially 2004, '03, and '01.

Our portfolio of real estate and the current commercial real estate market would suggest results of recent years should continue.

And in summary, economic projections are that the economy will continue to grow into 2006; the only debate is how much.

I previously have commented about the positive indicators for the coal and intermodal markets, while capital spending is forecasted to be the principal strength of the economy for 2006.

And as we all know, this does drive the merchandise and the industrial products business.

One indication of this is the increased number of industrial development projects that are being reported and progressed.

And looking -- it really supports that point.

Our efforts will continue to provide a reliable and visible service product which can be priced to the market, and we are fully aware that economic growth and a strong product are a great combination for market success.

Thank you.

Thank you, Ike.

At this time, we'd be happy to take any questions you have.

I'll back him up for a few minutes.

First, congratulations on a great quarter; very, very strong and impressive.

I wanted to ask you about capacity.

I had the sense that in '05 you were reloading a bit on capacity, if you will.

I think in prior quarters you had said you were spending more on locomotive rebuilds, finance and track projects and so forth.

And I think there was a little bit of expense pressure.

Headcount was up, and so forth.

Can we think about '06 as being a year where you maybe reloaded a bit, and you could actually see stronger operating leverage, a little better capacity position and less incremental expense as you add volumes?

Is that a fair way to think about things in '06?

Let me ask Steve Tobias to come up and also comment for a minute on capacity.

I think that my comment would be is that while we did a lot of work, as you've pointed out, on capacity, I think we, as I mentioned in my remarks, are going to continue to push ahead this year to add both capacity and what I like to call resiliency to the system, in terms of our overhaul programs for locomotives, which will remain strong.

Our hiring this year will remain strong, probably not quite at the level as last year.

We are -- we have, I think, a good budget again this year on the capital side for capacity.

One of the things that we have found as we look at capacity and look at our system and look at our operating metrics is that -- and this should come as no surprise -- is that our growth is not equal across the network.

And as we analyze where growth is occurring, the rates of growth are different for different parts of the network, and we have to respond accordingly.

So we're in the process of doing that.

But I think where we're looking for operating leverage this year in terms of what we did last year is in our service metrics and in the product that we deliver to our customers.

Steve, do you want to say a little bit about metrics, too?

Thank you, Wick.

Following Wick is a little bit like leaving me a neck and a wing.

I think I would put it in this characterization.

We have worked very diligently in the previous 10 years to put operating systems in place and planning systems in place, and we've talked a number of times about our Thoroughbred operating plan to you.

Those environments give us the ability to adjust our plan on the go, if you will.

And it certainly puts us in a unique position to be able to respond to our customers' needs and to the operating plan in response to the nonstandard events of weather, seasonal changes, unscheduled events.

And I think the response that we have made as a result of a significant event like Katrina is evidence of that.

To that end, we make adjustments in the system that may impact our metrics, but the overall benefit to the customer and to the network as a whole is much greater and much higher than it would have been had we not had the ability and made the investments in those systems in order to generate capacity in other places.

And whether it's a Katrina or something else, we'll always be faced with those kinds of events.

We will methodically weigh, as Wick has touched on, the additions of capital infusion in order to enhance the system in a very judicious and practical way.

The long and short, as you've heard me say before, there is still capacity in our system.

I have a second question and I'll pass it along.

On the pricing side, Ike, you provided a helpful comment in terms of 50% of the book available to reprice in '06.

Can you tell us what that '05 number was, how much you repriced?

And give us a sense -- is it possible to see pricing gains or (indiscernible) yield surcharge as strong in '06 as it's been in '05?

Well, taking the second question first, we certainly hope so.

And we continue to think we have a valued product that we can price to the market.

The percentage for 2005 was also 50%.

Now, as you recall, a lot of our business -- we have estimated as much as one-third -- is rolling each year, or is new business to be replaced to begin with.

So in effect, you don't need but about 22% more of business to be turning to give you that 50%.

So it was essentially 50% for 2005 and 50% for 2006.

Any thoughts on outlook, though, for '06 pricing gains versus what '05 was?

I have no number.

It's not a bad environment though, Tom.

Ken Hoexter from Merrill Lynch.

Again, a great, great job on the quarter.

And not something we're supposed to or usually say, but nice job.

On the -- back to Ike.

On the contracts, what is left to renew?

What contracts haven't hit this pricing renaissance yet?

If you can give us a clue of over the past year and a half, two years -- what contracts haven't been touched yet?

That's difficult to answer without saying publicly who we're negotiating with.

I would suggest that repricing of the coal contracts will be less this coming year than they were in the past.

Intermodal is -- a lot of that runs on a -- as well as merchandise.

So the best I can help you with that is coal is a less proportion of the 50% in 2006 than it was in 2005.

Jim, one thing I would say is that Ike and his team have done a -- have clearly concentrated while we have had a good pricing environment on getting as much leverage as they can.

You've followed us long enough to know that that's been a real priority, and a lot of progress has been made on that.

And they've done a good job of getting the duration of that so that they have pricing flexibility, so we can respond to markets when they give us the opportunity.

And I think that's what you're seeing.

And so I think you're going to see, as long as we have this favorable pricing environment, and people want and really need our services, that Ike and his guys will continue to take advantage of it.

But I think it's both prudent and normal of them not to want to talk too many specifics.

If I could just throw my follow-up question on the auto side, again, probably for Ike again, would be -- I just wanted to clarify -- when you were talking about that $35 million impact, you're saying -- is that a worst-case kind of number?

Is that what the actual impact will be, or is that what the theoretical impact but they've already pulled out that capacity anyway over time, and it shouldn't be that harmful?

It's with some degree of certainty, and I would also say it is the worst-case -- certainly hopeful of that.

Is that just because of the closings and you'll make it up with the transplants, or is that just (multiple speakers)

That is direct -- business directly attributable to the Ford announcement as well as the GM announcement.

And it relates to their business. (multiple speakers).

That's right.

Which we hope and expect will continue to grow.

So you would take the auto number, take out the 35 million, and that's your growth from there, including whatever you get from GM, Ford and transplants growing this year?

That's correct.

Donald Broughton, A.G. Edwards.

I'm just trying to get a better sense on the operating metrics.

I know that you had a coal train derailment in Illinois that hampered your intermodal speeds at one of your intermodal arteries in Illinois in December.

You added the operating metrics had deteriorated slightly; you characterized them as not what you want them to be.

Do you see it as being event-driven or volume-driven?

Let me answer that this way.

All of everything that happens to us is happening to us in the context of higher volumes, which means that we're running more trains out there, and are absorbing some of the resiliency in the system.

Some of the fourth-quarter metrics and incidents which Steve alluded to were event-driven.

Now, let me say this.

In the wintertime they're always cold weather events.

In this case we had some abnormally-cold temperatures and some snow up on the northern side of the railroad.

And that problem was compounded by a particular derailment, which was unusual for us in the sense that we usually get out and clear these things up.

But this thing marked up a lot of rail, which we then had to take a rail gang up and re-lay, and we ran slow orders for a week, and that hurts our intermodal network on that side of the railroad.

And at the same time, I think, two days after that derailment, we had an ice storm on the Piedmont side of the railroad, and froze that thing up for a while.

So that stuff compounds.

We manage our way out of that, but that takes a little while to do it, and that's when you see the metrics reflected.

We are managing the Company to have the capacity and resiliency to handle the volume that comes at us, and to be able to respond to these events, which are inevitable in our business.

So it was -- I would say it's a combination.

Does that make sense?

[I can see the way] adjusted, you're still seeing some deterioration.

I understand Steve has been very kind to point out that every summer you have hurricanes and every winter you have snow, and you manage it through that.

But still, year-over-year, you're off a little bit.

I think year-over-year right now, we are pretty close to where we were coming out of January -- coming out in January, and we expect, barring the Siberian express coming down and hitting us or something like that, that we will continue to see that improvement.

Steve, why don't you comment on that, too?

I think you have to put in context with all the other events that take place when you do a year-over-year comparison, and that's very difficult to do, particularly when you're trying to balance climate, weather, nonstandard events.

Small incremental improvement and small incremental degradation to me is not necessarily significant.

What I think you're hearing us say is we're not happy with where we are, but there are going to be variations in this.

The metrics per se, because of the way they are applied and developed, and what you're working against, year-over-year comparisons, is not an exact science, not incrementally.

We also, I will say, look at a lot of internal metrics beyond the metrics that you see and, I think, have a pretty good handle on the ultimate level of service delivery.

And while we track those, we see those improving certainly.

And we feel comfortable and confident that we are going to continue to improve the service that we deliver to our customers.

And listen, that's why we are in business.

If you get the sense that this team worries a lot about its service metrics, you would be right.

Mr. Hatch.

Thank you, Wick.

I just want to say, first of all, David, if you have to go, it's a great quarter to leave on.

Great job.

I have a couple of -- and I wish you wouldn't, but if you do, this is a good one.

A couple of revenue questions.

The paper growth that was pretty solid in the quarter -- I was just wondering whether that was a rail competitive issue.

And then also, within intermodal, the truckload numbers were still pretty solid, but they were coming down versus the year-over-year growth.

And I was wondering if that reflected anything in the capacity issues out there in the truckload market.

And also, Ike, while you're up there, just some overall color on what you thought intermodal would do next year, given the growth rates of the past few years.

Do you think it can continue a kind of high single-digit blended growth rate in '06?

I know you don't like to give numbers, but if you could give us some color behind that.

Thanks.

Starting with the last first again.

Tony, I think there has been some moderation on the domestic side, but that seems to -- countervailing wins again.

Their driver shortage still remains, as well as increased pay, as well as continued increased energy prices.

So I really have heard over and over again, and more recently, there is no capacity, added capacity coming back into the truckload carrier side.

I think a lot of what happened with the moderation in that number was the transloading from the international side of business.

So one could say our international business was up more than -- was down more than it showed.

But anyway.

What was your first question?

(inaudible)

Paper -- as I mentioned, it was the third year in a row.

Most of the increases in revenue was from a revenue per car side, which part of that was mixed, obviously, but also included price increasing -- increases as well as fuel surcharges.

But we did see the pulp side up, as well as getting some conversions, continuing to get some conversions from the truck side on finished paper.

So it's -- I don't know that we -- we're certainly not chasing any competitors' business.

We're just pricing to the market, and see where we go from there.

Following up a little bit to emphasize one of the points that Ike made about the paper business, the paper business for us, particularly the paper business out of the Southeast, is really a truck-competitive market.

And to the extent -- and we have made gains in that market, that's really a conversion issue much more than a rail competitive issue, and just another place where we see our economics versus the economics of the trucking industry improving.

The other thing I would mention in terms of color is that Don Seale and I were just recently visiting with one of our major truckload partners, and talking about all of the factors that are influencing their business.

And all they did the entire meeting is affirm all of the things that we continue to hear about things like driver shortage and the problems congestion is creating for them.

So we're hearing it very strongly from the people we know in the trucking business that, as Ike said, there's not a lot of capacity coming on.

And they have things that they need -- serious things they need to manage around.

Rick?

Rick Paterson, UBS.

Another one on capacity.

I think everybody expects a strong coal year in 2006, and they're pretty bullish on intermodal as well.

If those are both up, say, 7, 8%, do you guys have the capacity to handle that amount of volume this year?

On coal and intermodal?

Right.

Yes, I think we feel confident about that.

Our primary intermodal corridors are for the most part high-capacity routes, and they're also places where we are spending infrastructure money to add capacity where we need it.

Clearly, most of our coal network is high-capacity.

It was built to handle a lot of capacity, and it continues to.

So I think those -- I think we are confident that we can handle the growth in those markets and not strain our system.

But we are continuing to invest.

And I think one of the points that I've made before to this group that I want to continue to make is that as we look at the Company, and all of us try and think about managing the Company, we want to do it in the same way that David has done it, and that is try not just to look ahead three or six months at what's going to happen -- that's important -- but try and figure out where the business is going long-term, and make the appropriate investments to handle the long-term growth.

I was just going to say, Wick, that if you look back at where we have made investments and continue to make investments, it's centered around the conviction that we're going to see continued strong coal markets and continued growth in the intermodal markets.

At the same time, we handle what is one of the country's great general merchandise franchises.

And if you look back over time, including the capital investments that we have planned for this year and are making right now, what you see is our long-range planning to be able to respond to growth in the markets that we believed in over a long period of time and continue to believe in, like coal, like the energy market, and the continued growth of the intermodal market.

One more quick one for Ike.

Ike, you mentioned that the IMC business was weak in the quarter.

Can you give us some more color on why that was and your outlook going forward?

The IMC business did moderate in the fourth quarter, and I think it was generally an overall market condition.

But my understanding, it relates back to two of our larger customers in that arena not having the conversions on the West Coast from the container off -- that comes off the ship usually have been transloaded to them, an actual load to them, and then they would ship by rail.

What has happened or happened the last half of '05 was that the international container came off the ship, went directly on the rail car, and came east.

And that -- my understanding from our largest IMC customer, that was the reason.

But as I had in my prepared comments, pricing could have been a reason for some of the conversions, too.

The IMCs -- they follow the price.

I think the way we look at it is either way, we handled the business that came in.

And I guess to the extent, Ike, that we handled more of it in 40-foot boxes than in the 53-foot boxes, it would have been transloaded into it, may have even from a volume standpoint been a slight positive for us.

And we're not running fire sales right now.

No, that's right.

Any other questions this morning?

Thank you for your patience.

It's good, as always, to see all of you, and we look forward to talking to you again in three months.