Norfolk Southern Corp (NSC) 2006 Q1 法說會逐字稿

All right.

It's 9 o'clock.

So let's go ahead and get started.

Good morning, ladies and gentleman.

I am Wick Moorman.

I am Chairman, President and Chief Executive Officer of Norfolk Southern Corporation.

It's my privilege and pleasure to welcome you to our first quarter 2006 analyst meeting.

I would like to take a moment to welcome those who are listening by telephone, and I encourage all of you here today, when speaking, to take a microphone and please identify yourself so that listeners who are participating by phone can hear and identify you.

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

As usual, transcripts of the meeting will be posted on our 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 of the control of the Company.

Please refer to our annual report filed with the SEC for a discussion of those variables.

We have with us today several members of our management team, whom I'd like to take a moment to introduce.

First, our two Vice Chairman, Hank Wolf, our CFO; and Steve Tobias, Chief Operating Officer.

As many of you know, Ike Prillaman, our former Chief Marketing Officer, retired at the end of March.

And I am very pleased to officially welcome today Don Seale as our new Chief Marketing Officer and Executive Vice President of Marketing and Sales.

Don, as all of you know, has had held a number of senior marketing positions over the years and brings a great deal of experience, leadership and vision to the Chief Marketing Officer role.

I also would like to introduce Jim Squires, our Senior Vice President of Financial Planning.

Jim was formerly Senior Vice President of Law.

And I encourage those of you who don't know Jim to please introduce yourselves if you haven't had a chance to do so already.

Also present today are Bob Fort, our Vice President of Corporate Communications, there in the back;

Marta Stewart, Vice President and Controller;

Rob Kessler, Vice President of Taxation, Leanne Marilley, Director of Investor Relations;

Debbie Malbon, Hank Wolf's assistant.

I also need to point out that Marta and Rob are here to answer all of those difficult technical questions that you may have, and they are very eager to do so.

So please ask them if you have them.

When we last met, I indicated that we were well positioned to deliver a strong performance in the first quarter despite some increased economic uncertainty.

I am very pleased to report that Norfolk Southern did in fact produces strong results in the quarter, reflecting, we think, the continued strength of our balance franchise, coupled with our higher value transportation products.

From our vantage point, demand for rail transportation has been and remains healthy and our first quarter results reflect both strong demand and solid execution throughout the enterprise.

First quarter railway operating revenues established an all-time record for Norfolk Southern, up 17%.

Income from railway operations increased 37% and set a first quarter record.

First quarter net income of 305 million or $0.72 per share, increased 57% compared with last year.

I am even more encouraged, though, that we were able to achieve a continued year-over-year improvement in our operating ratio.

Our first quarter operating ratio of 76.1% was 3.3 percentage points better than the first quarter a year ago and the lowest first quarter operating ratio we've achieved since the Conrail transaction.

As all of you who follow Norfolk Southern know, improving the operating ratio on a consistent basis has always been and continues to be a primary goal for us, and we remain very clearly focused on achieving that goal.

This quarter benefited from our ability to handle continuing high volumes of business at service levels that met our customers' needs.

Our various operating metrics remain stable or some actually improved slightly even as we safely handled approximately 94,000 additional carloads in the quarter, an increase of 5%.

I say safely handled because, as you know, nothing takes higher priority at Norfolk Southern than safety.

I am proud of our employees who redoubled their efforts to ensure not only the safety of all of the people at Norfolk Southern, but also the communities we serve, particularly in the wake of last year's tragic accident at Graniteville, South Carolina.

Although the official results won't be announced until next month, our safety performance for 2005 indicates that we are well positioned to earn an unprecedented 17th consecutive Harriman gold medal for employee safety.

This accomplishment is a testament to all of our people and their unwavering dedication to our safety process.

In addition to safety, we continue to focus intently on improving our service product and enhancing our operating efficiency.

We are continuing to invest in capacity in the areas that we discussed with you before.

The first is hiring and training -- training engine service personnel.

Our hiring program for 2006, while not as aggressive as it was in 2005, remains strong.

We have significant locomotive and car overhaul programs underway along with the 120 new locomotives in our capital program, all of which should be on the property by the end of July.

Finally, we have, as always, a number of construction projects underway to provide additional capacity at some developing pinch points in our network, and we recently committed an additional $30 million in CapEx for such projects this year.

We're also pushing ahead with several performance enhancing technology initiatives, notably our unified train control system and our optimized train control platform.

When fully implemented across our network these innovative business solutions will improve our decision-making, our performance management and our train operations, and they will quite literally redefine the way the railroad is operated.

Also on the capacity front, Norfolk Southern and Kansas City Southern recently announced that we have cleared the last regulatory hurdle for our proposed joint venture transaction to increase capacity and improve service on Kansas City Southern's Meridian Speedway between Meridian, Mississippi and Shreveport, Louisiana.

We're eager to move ahead with this innovative joint venture.

We think that the Meridian Speedway project is a creative approach to improve the overall fluidity of the nation's rail network, and it will help us deliver the kind of service that our customers require and deserve.

It goes without saying that all of these efforts require investment, and we will continue to make the investments necessary to ensure that we can maintain and improve our service delivery while increasing traffic levels going forward.

In many ways, we know that our current success is related directly to investments made in past years.

Norfolk Southern has had the good fortune to be managed by leaders who took the long view, and we continue to manage with that perspective.

You will hear more about the details of our financial results and revenues in a moment from Hank and Don, but, clearly, this was a great quarter for our Company, and one that continued to reflect the value of our expanded thoroughbred operating plan as we continue to adjust to changing business conditions.

We remain optimistic about the health of the industrial economy, and we've been watching car loadings carefully up through April.

So far they have shown continued traction with some weakness in autos and chemicals being offset by strength in intermodals -- intermodal, metals and construction and coal.

As we move forward, we'll continue our commitment to value based pricing.

We strongly believe that our service efficiency gives us a competitive and valuable product going forward.

As we move into the remainder of the year, I am confident that Norfolk Southern will continue to leverage our operating momentum to improve service quality, and we will pursue new business and margin improvement.

However, there are challenges ahead, not unlike those we faced last year, including some cost pressure in the form of increased wages and health and welfare benefits for employees and of course, rising diesel fuel prices.

Additionally, the locomotive, freight car, and other maintenance programs, I mentioned a few moments ago, that we initiated last year to ensure that we are able to respond to customers' expectations will continue to be reflected in our expenses.

Against this backdrop of challenges, I am confident that we will continue to successfully press forward, we'll reaffirm our benchmark position within the industry, and we'll continue to improve returns to our shareholders.

Now, I will ask Hank to review the numbers, and Don will tell you some of the specifics about our markets.

Steve does not have any prepared remarks today but we'll be happy to talk about operations, and we'll all be available to take questions after prepared remarks.

Hank?

Thank you, Wick, and good morning.

As Wick indicated, continued business growth, record railway operating revenues, and increased income from railway operations enabled us to post strong first quarter financial results.

We experienced no unusual weather patterns, and there were no significant events that had any unusual impact on financial results.

The only new item was the implementation of FAS123R, accounting for stock-based compensation, and I'll discuss that item in just a moment.

Our railway operating revenues for the first quarter reached a record $2.3 billion.

Our revenues were up 342 million or 17% as merchandise revenues increased 192 million or 18%, coal revenues rose 92 million or 20% and intermodal revenues increased 58 million or 14%.

Total carloads for the first quarter rose by 94,000 units or 5% led by strong intermodal volume.

In addition, the average revenue per unit rose 12%, which when combined with the volume increase resulted in the 17% increase in railway operating revenues.

And Don Seale, will provide you with the details of our revenues in just a few minutes.

Railway operating expenses for the first quarter were 1.75 billion, an increase of 194 million or 12% compared with last year.

The largest increase in railway operating expenses was in compensation and benefits, which rose 117 million or 19%.

This increase was driven by a number of items as depicted on this slide.

First, the implementation of FAS123R, which requires the expensing of stock options over divesting period.

In addition, FAS123R requires the immediate expensing of options grants made to all retirement eligible employees.

So consequently, our expenses under FAS123R includes $27 million representing the accelerated recognition of grants to employees who are retirement eligible and an expense of $4 million for the expense of stock options granted to employees, who are under age 55.

It should be noted that the expense for stock-based grants to those who are retirement eligible for which immediate expensing is required, will only occur in the quarter in which such grants are rewarded.

In the case of Norfolk Southern, stock option grants have historically been made in the first quarter.

The option grants made to those who are not retirement eligible, in our case under age 55 will be expensed over the vesting period and in our case, that's one year.

So consequently, the remaining three quarters of the year will also include stock based expense under FAS123R of approximately $4 million in each quarter for the balance of the vesting period.

The remaining items in the compensation and benefits analysis include $14 million resulting from the increase in Norfolk Southern share price, which rose $9.24 during the quarter. 13 million related to retirement agreements and waiver agreements with two former executives, which as you know we're addressed in previously, filed Forms 8-K. 13 million of higher expenses for performance based compensation, 11 million for other stock-based compensation, 9 million for increased medical benefits, 8 million of higher payroll taxes, 6 million of increased wage rates, 6 million of additional hours for train service employees, and 6 million for other miscellaneous items.

The next largest increase was in diesel fuel expense, which rose 81 million or 54%, largely as a result of higher prices.

Diesel fuel expense for the quarter rose to 231 million compared with 150 million in the first quarter of '05.

The largest part of the increase was due to the increase in price of diesel fuel, which added $51 million.

Our benefit from fuel hedging was $25 million less this year than last year, and our consumption was up 5 million or 3% on a 5% increase in traffic volume.

Material, services and rents increased 35 million or 8% over the last year.

Within this category, volume related purchased services increased by 19 million.

The cost of maintenance activities added 10 million, and equipment rents were up 8 million.

There were small decreases in other expenses and Conrail rents and services.

And depreciation expense was down 10 million or 5% as a result of a required periodic depreciation study, which indicated longer lives for some of our assets.

Casualties and other claims expenses decreased by 25 million or 32%.

As you may recall, the first quarter of '05 included $32 million in casualties and other expenses related to the tragic accident in Graniteville, South Carolina.

With a 17% increase in railway operating revenues and a 12% increase in operating expenses, we were able to produce a first quarter railway operating ratio of 76.1% compared with 79.4% in the first quarter of last year.

And this represents an improvement of 3.3 percentage points over '05.

Income from railway operations for the first quarter was 551 million, up 148 million or 37% over last year and represents a new first quarter record for income from railway operations.

Total other income and expense for the quarter was an expense of 85 million compared with an expense of 126 million last year.

Gains on sales of property and investments were 12 million higher this year, largely as a result of a sale of a large parcel of land in Georgia.

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

Expenses related to our synthetic fuel investments were 9 million less than last year.

Due to the recent rise in oil prices, we're estimating that a portion of the tax credits derived from synthetic fuel investments may be phased out this year.

If oil prices persist at new higher levels, we will continue to experience lower expenses associated with the synthetic fuel investments that we have made and also reduced allowable tax credit, which you will see reflected in our income tax expense line.

Finally, interest expense on debt was 8 million or 6% lower than last year, due to less outstanding debt.

First quarter income before income taxes was 466 million compared with last year's 277 million, an increase of 68%.

The provision for income taxes for the first quarter was 161 million compared with 83 million last year.

And the effective tax rate was 34.5% compared with 30% in '05.

And this is primarily due to the reduction in the tax credits generated under our synthetic lease investments, as those credits are phased out as a result of the higher oil prices.

First quarter net income was 305 million, an increase of 111 million or 57% over the 194 million earned in the first quarter of last year.

And diluted earnings per share for the first quarter were $0.72, an increase of $0.25 or 53% over the $0.47 per share earned in the first quarter of '05.

Thank you for your attention.

And I'll now turn the program over to Don Seale who is going to give you an in-depth report on our railway operating revenues.

Thank you, Hank, and good morning.

It's good to be with you, and welcome.

I think on a word against the backdrop of good economy, expanding international trade, certainly stronger manufacturing and robust demand for energy, we had a very successful quarter, another very successful quarter.

The economy expanded at a rate of 4.5% and manufacturing continues to recover, as low-tech industrial production rose 5.5%, accelerating import growth of 12% and increased consumer spending helped drive international trade growth.

Accordingly, these positive market drivers, coupled with our improving service product, generated record first quarter volume of 1.957 million loads, an increase of 94,000 units or 5%.

Merchandise business grew 22,000 units or 3% for the quarter.

Continued weakness in our automotive and chemical sectors were more than offset by record volumes for agriculture and metals and construction business.

It's noteworthy that our metals and construction volume was our first business sector since the third quarter of 2003 to outpace the year-over-year rate of growth of intermodal.

Intermodal volume grew 56,600 units or 8% in the quarter.

And since the first quarter of 2004, intermodal year-over-year growth has averaged 13%.

And our coal business rebounded after a slight decline in the fourth quarter of last year, increasing 15,000 units or 4%.

As Wick and Hank mentioned, we achieved record operating revenue, our 10th consecutive all-time high reporting.

Revenue growth continues to be driven by increased pricing, broader fuel surcharge coverage and volume gains.

For the quarter, revenue rose by 342 million or 17% over the first quarter of 2005.

As a point of comparison, revenue is now up 610 million or 36% over the first quarter of 2004 just two years ago.

With respect to revenue per unit, approximately half of our RPU increase, up 12% or $123 per unit for the quarter, was derived from our fuel surcharge.

In this regard, as you've probably seen, we announced a change in our public tariffs and quotes on April 24th, which will become effective July 1, 2006.

In light of what now appears to be permanently higher oil prices, we have reduced the fuel surcharge applicable to our non-intermodal tariff and public prices.

And we will increase the line haul transportation prices on this business.

Our public priced traffic amounted to approximately 6% of total NS revenues in 2005.

Now turning to our individual business sectors, merchandise revenue grew to a record 1.278 billion, up 192 million or 18%.

With the exception of automotive, each of our carload groups produced record revenues.

This was the 10th consecutive quarter of year-over-year revenue growth for this sector.

Merchandise also achieved significant improvement in revenue per car, which reached $1,731, up 14% versus last year.

The favorable pricing environment that we have experienced the past two years continues as about two-thirds of the revenue per car increase in merchandise resulted from pricing and volume gains, while mix was slightly negative.

Each of the carload groups reached record revenue per car during the quarter except paper.

And volume growth of 3% in merchandise was driven by a 12% gain in metals and construction business and a 4% gain in both agriculture and paper.

The agriculture sector experienced the largest year-over-year revenue increase for the quarter, reaching 267 million.

Our ethanol business continues to ramp-up as volume increased 78% in the quarter.

We now have 16 active ethanol terminals on line, and we had nine new proposed terminals under development.

Expanding ethanol production, in addition to two new Southeastern feed mills that opened during the quarter, contributed to 3% increase in shipments of corn.

We now have 16 unit train feed mills in the Southeast in operation on our network.

Our agriculture group, as you know also include government and consumer products.

During the quarter, volumes gains were supplemented by 6300 shipments of FEMA trailers to the Gulf Coast in response to the hurricane relief effort.

Now, as previously mentioned, our metals and construction rate of volume growth outpaced the rest of the company, resulting in record revenue of $279 million.

Increased imports slab volumes and new domestic intermodal slab shipments drove over 23% gain in iron and steel shipments.

The outlook for this business for the remainder of the year is positive.

China's demand for steel remains strong and therefore the risk of Chinese overproduction and higher Chinese steel exports appear to be minimal.

World capacity is likely to remain tight in the steel market and we've heard from several large suppliers that order books are full through at least September of this year.

On the construction side of our business favorable weather conditions during the quarter and new aggregates business helped growth sand and gravel and cement shipments 30% and 34% respectively in the two markets.

In paper, forest products and waste materials, revenue increased to 214 million, up 27 million or 14% over the first quarter of 2005.

The 4% gain in volume was driven largely by increases in municipal solid waste and construction and demolition debris markets that offset a slight softening in our paper volumes.

Despite a 6% decline in volume, our chemicals business reached record revenues of 256 million or 25 million or 11% over last year.

The improved pricing resulted in revenue per unit gains across the board for our major chemicals market, which more than offset volume losses related to plant closures and lower chemical plant operating rates.

The outlook for this market for the remainder of 2006 will be partially influenced by energy prices.

On a more positive note, plastics processors and producers appeared to be poised to build inventory in the months ahead.

And turning to automotive, our automotive revenue reached 262 million, its second highest revenue quarter ever as volume fell 3%.

Improvements in yields resulted from the successful renegotiation of key contracts and broader fuel surcharge coverage, resulting in an 11 million or 4% gain in revenue.

A 16% decline in auto part shipments in the quarter more than offset a 1% gain in finished vehicle traffic.

The closing of Ford's St. Louis assembly plant and General Motors' Oklahoma City assembly plants during the quarter as well as last year's closing of GM's Baltimore, Linden, New Jersey, and Lansing, Michigan plants also reduced volumes.

Now, offsetting these declines, we expect continued revenue growth at Norfolk Southern served European and Asia assembly plants.

This traffic from these NS served plants was 13% in the first quarter.

Volume from these domestic plants grew nearly 7% due to accelerating production at the newly expanded Mercedes-Benz plant near Birmingham, Alabama and assembly plants operated by Toyota, Honda, Mitsubishi, and Subaru.

For the remainder 2006, volumes will continue to be impacted by further cuts in Ford and GM production and the expected fourth quarter closing on Ford's St. Louis assembly plant near Atlanta and Georgia.

These declines again are expected to be primarily offset by increased production at the international producers.

Now, looking beyond 2006, I think everyone has heard Ford has recently announced planned closures in 2008 of its St. Paul, Minnesota, and Norfolk, Virginia assembly plants.

While it's premature to project revenue losses at these two facilities, we do expect to generate revenues from other forward plants that will partially offset the impact of these plant closures as Ford reconfigures production.

Now, turning to our coal -- looking at coal results, revenue of 559 million grew 92 million or 20% over first quarter 2005.

This was our second highest revenue quarter for coal.

And the twelfth consecutive quarter of year-over-year growth.

It was also the second highest quarter for revenue per car.

And revenue oer car reached $1282 and increased with 15%.

Improved pricing, broader fuel surcharge coverage as part of successful renegotiations on contracts that expired in December 2005, and during the first quarter helped drive these positive gains.

Along with pricing, we realized the increased volumes, of harder than average revenue for car business, which more than offset reduced Lambert's Point export volumes.

Strong demand resulted in a 21,000 carload or 7% gain in utility business.

High natural gas prices continued to prompt a shift to coal-fired electrical production in the first quarter.

Moderate weather improved mining conditions, and a softer export market resulted in great coal availability for the domestic utility market.

With the mild weather conditions in the quarter, stockpile levels at our utility plants, improved modestly, but remained below target for many of our utility customers.

Metallurgical volume grew by 6400 carloads or 21% on strong demand for steel production.

A new coke plant in Haverhill, Ohio, which opened in April of 2005, as well as the earlier start of the Great Lakes steel and coal shipping season due to the mild weather contributed to the gains.

We expect NS domestic metallurgical traffic to remain strong in the face of current economic expansion.

Now, we experienced declines in our remaining coal markets.

Industrial traffic was down 930 carloads or 4%, industrial coal users are competing with coal fired utilities for coal supply.

Coke and iron ore volumes were down 2800 carloads or 17%, principally due to the loss of a large iron ore movement caused by the closure of the steel blast furnace at Mittal Steel at Weirton, West Virginia.

And export was down nearly 8600 carloads, or 21% as this sector faced difficult year-over-year comparisons.

In 2005, Baltimore export coal was heavily driven by metallurgical coal sourcing concerns, in Japan, in India.

During this quarter, this past quarter Japan's presence in the market was virtually nonexistent, and India's activity was greatly reduced, allowing this coal to shift to the domestic utility market.

Expectation of lower coal prices in the upcoming export year also resulted in customers reducing first quarter coal purchases and thereby reducing shipments to Lambert's Point.

Uncertainties in this particular market remained.

Most of the export coal contracts are being settled or are now settled for the year.

And domestic utility demand continues to compete for the available coal.

Now we'll turn to intermodal.

Intermodal revenue reached 466 million for the quarter and increase of 58 million or 14%.

This was the second-highest quarter for revenue after the fourth quarter of 2005 and the 16th consecutive quarter of year-over-year growth.

Revenue per unit reached $595, up 6% over last year.

RPU was moderated by the rapid conversion of freight from higher rated railway trailers to private trailers and containers.

But these RPU declines were offset by fuel surcharges strong gains in all container business, both domestic containers and international containers as well as Triple Crown.

Also within the international segment, RPU benefited from a favorable mix change to longer haul traffic from both the east and west coast ports.

Total volume was up 8% as international gains offset a decline in domestic IMC volumes.

International growth remained consistent as volume was up 15%.

Continued increases in Chinese imports along with a 12% gain in volume associated with east coast vessel calls and a 19% increase for west coast volumes they are the gains.

Truckload volumes increased by 14% as we continue to partner with motor carriers to convert traffic from the highways.

And while truckload volumes increased, IMC business declined by 8%.

This was driven by two primary factors, first, the continued downsizing of both the North American container systems program known as NACS and the free running railroad controlled trailer fleet contributed to this decline.

And second, and perhaps foremost, this segment was continued to be impacted by the decrease of transloading international freight into domestic trailers and containers at Pacific Northwest ports.

Finally, a 12% gain in our premium UPS business offset declines in premium LTL volumes for the quarter.

Our LTL business was impacted by a network we designed and increased over the road movement.

Now going forward, our level of intermodal growth over the past few years and expectations for the future required continued adjustment and expansion of our network.

We are planning further capacity enhancements and will complete several terminal projects over the next two years.

Expansions at Austell, Georgia, our terminal near Atlanta.

Landers at Chicago, Illinois, Maple Heights at Cleveland, Ohio and Croxton, New Jersey should be complete by the end of this year.

We will also open new terminals at the Philadelphia Navy Yard in Philadelphia and also a new terminal at Louisville, Kentucky this summer.

And in 2007, we will complete phase II of our expansion projects at Croxton,, New Jersey, Cleveland Maple Heights and we'll open our new mega facility the Rickenbarker terminal and logistics park at Columbus, Ohio.

We continue to see solid opportunity for profitable growth in our intermodal network, and we plan to make the network and terminal enhancements to support that growth.

To wrap up and conclude, we are pleased with our first quarter results, and we remain optimistic going forward.

Domestic economic expansion, increased international trade, and advantages of rail service in today's environment of high energy costs and tight transportation capacity all bode well for continued strong demand.

For the remainder of 2006, we continue to see favorable pricing conditions cross all of our markets and we expect continued revenue as contract expire and become available for adjustment to current market based rates.

Strong project growth in our merchandise markets, continued gains in utility and metallurgical coal, and escalating demand in our intermodel network, all reflect the benefits of our diverse set of markets.

Thank you very much.

Wick.

Thank you, Don.

And I think we'll go ahead and open it up for questions and answers.

Yes.

He's, looking for the mic.

Yes.

Good morning, it's Tom Wadewitz.

I wanted to drill down a little bit on the yield growth side here.

Revenue performance is very impressive once again in the quarter.

And there were a few line items that were quite a bit above what I was looking for.

On the Ag side you had 33% yield growth, chemicals 18%, coal 15%.

Can you give some thoughts on those line items?

What were the major drivers of that?

Was it a big increase in field surcharge coverage or where it, contracts repriced.

And a sense of whether it's reasonable to model some of those gains continuing for the next couple of quarter?

Don, why don't you address the individual markets?

Tom.

We'll start with your, the first part of your question what respect to Ag, and the RPU gain.

As I mentioned we had about 6000 loads, right at 6000 loads of FEMA traffic that was reported in the agricultural consumer and government group, for the first quarter.

That impacted RPU also as in the past we've explained how the southeastern feed network continues to ramp-up.

That's long whole gain from the Midwest into the southeast it's cycling in 75 car unit trains.

That's higher our RPU business as well.

And then the third block at over the third segment of the Ag side is the ethanol story.

Ethanol business is being up 78% is a higher RPU commodity within that particular group.

With respect to chemicals, it's basically mix and price, with respect to contract renegotiations and pricing the current market conditions.

So in essence, if you take merchandise and blend it together, about two-thirds of the RPU gain was strictly from price and from volume.

And on the coal side?

On the coal side, I mentioned that we had some higher longer haul higher per carload movements Georgia power coal to three power plants, actually to four power plants that came into play.

We were up about 7000 carloads of coal, just for that one account, which drove a higher RPU.

And also our metallurgical coal being up to the extent that it was, also drove higher RPU.

And then we've got an effect of some of the renegotiations of contract from '05 it start to January 1st of this year.

That's driving higher RPUs as result of the right renegotiations.

So, if I look through that it sounds like other than the FEMA traffic, most of those others factors are things that would continue and continue to support the strength.

They are recurring and will continue to be part of the book of business, that's correct.

Okay.

And then I have, I got one on the capacity side.

Just wondered if you could give a sense of where you think your at on capacity.

I know you've done somethings, [top two] last fall, clearly continued to invest in ensuring that you have adequate capacity.

But I wonder if you can give us a sense of, how you feel about capacities ability to grow and ability to, sustain cost side performance and fluidity.

We still feel pretty good about our system capacity.

We're doing a lot of modeling of the network.

We've taken on as you know, in the past couple of years a lot of volume.

I think our general feeling about capacity is that with the expanded locomotive programs and the new locomotives coming online and the new train and engine service personnel that we have coming online, we're doing a lot to make sure that we'll have the capacity to continue to take on new business.

I mentioned that we have increased our spending this year to address some pinch points in our networks, and this spending is to primarily for a projects like some increased short exceptions some double tracks some siding upgrade a things like in some of our single track network, we -- those are projects that we'll continue to do as we see, a pinch point starting to develop somewhere.

The biggest single thing that we can do, and this is what Steve Tobias has said for many years and continues to quite rightly say is the -- we just need to continue to invest to make the network run more smoothly and faster.

We create capacity, when we improve system velocity.

And that's a big focus of our -- just to make our network run more smoothly, we'll look at top although we adjusted the operating plan all the time.

If traffic mix changes enough we'll take another clean page look at it which was, what top two was last year.

I think we're developing a lot of initiative we have a lot of initiative underway to insure that we have capacity so that if more business wants to come our way, and we think that it does, we'll be positioned to handle it.

Thank you.

Next, Ken.

Great.

Good morning, Ken Hoexter from Merrill Lynch.

Talk about cars on line and going back to your utilization.

Any specific focuses on trying to get that back down, is that just a function of volume increases?

I guess maybe more a Steve question.

But also, any additional investments needed for all the ethanol traffic as far as that's coming on forward that part of your top to look, had our volumes are coming on.

Let me ask Steve to come up.

I will, I'll preface this by saying that we look at cars online, and clearly it's a number where we think we don't want it to escalate beyond a certain point, but I will tell you quite frankly we're kind of looking, if just at the cars online number, and with the increased volumes that we're handling today over two or three years ago, I don't know that we feel we're uncomfortable with the order of magnitude of cars online thatwe're seeing today.

So that particular metrics, I don't know that we have a lot of discomfort with or feel that it's an anomaly in anyway.

So, but Steve, I'll say -- let me answer, I think Don it's fair to say in terms of ethanol, and investment in ethanol that's just part of our ongoing program to the extent that we're not handling it in unit train service yet.

We're handling a little bit now in unit train services it flows into the top network.

It's not a big new investment item for us.

It's private equipment.

So, yes but Steve, why don't you talk about our service metric a little bit to, and how you look it?

I hate to overuse this, I said this at at the last session following Wick there is not much left for the mechanical wing....

Yes.

....but it's is appropriate.

To cars online, it is a barometric measurement.

It is an indicator.

If our volumes grow significantly and fluidity is impacted, somewhat you might see an increase done it.

It is not something at the levels we are today, that I'm least, we are concerned about.

We have improvements in virtually all of our metrics, current state of affairs.

We are as fluid and as functionally vibrant today, right now, as we have been in sometime.

I think if there is a characterization I would make to you, it is we are not responding to change.

We are creating change.

That is the difference.

Sticking on the metrics the for a quick question.

Comp and benefits for carload increased pretty significantly of it 368 add up from the 324.

Is that because of increased stock comp or are there other things it is kind of jumping up with the compensive?

I would say - Hank, and you may want to amplify on this.

I say there is a lot of what you saw that Hank talked about was with the FAS123 and some other stock based compensation issues and those kinds of issues, which a lot of, which are going to be, as Hank pointed out, first quarter issues for us now with the new accounting rules and issues related to the retirement of former officers and things like that are one time in nature.

So I think to some extent, the first quarter number is an anomaly and won't necessarily be reflected in the quarters to come this year.

Hank is there anything you want to add to that?

That's it.

It was a pretty solid quarter overall.

Just obviously one other nitpicking item, I just want hit on.

But, on shares seem to have jumped pretty significantly last two quarters on a fully diluted basis.

Is there something going on with the share count?

Well, I think what you are seeing with share count is the fact that with the increase in share price -- we have actually just had a lot of folks with stock options including the options that are held under the broad base grant that we gave to everyone in 99.

And with the increase in the share price we are seeing a lot of people exercising those options.

We look at that very closely.

We followed the option overhang, which is - as you might imagine has come down.

And we have been in fact changed some of our compensation programs to get away from options.

So I think that is - that's what you're seeing, and that is one of the reasons very clearly that we instituted a share buyback program.

[inaudible - microphone inaccessible]

I think that as we go forward, with stock prices higher, you are going to see smaller grants of both options and restricted stock.

But we had a period there of about seven or eight years, where options were granted and where the share price in that initial period moved very, very nominally.

So with the appreciation in share price that we have seen over the last, approximately three years, there has been an increased amount of exercises that have taken place of stock options.

You'll also see that our cash balances are up because as those shares had been exercised, we have been receiving cash.

One of the things that we did last year was announce a new share purchase program for up to 50 million shares over a 10 year period.

In the first quarter, we purchased 1.3 million shares, a little over 1.3 million shares, and you'll continue to see us make those share purchases as we go forward.

If those option exercises and the issuance of restricted stock continue to push that number up, we'll probably get more aggressive on the share purchases.

But it is something that we are mindful of.

We've been talking to lot of our holders about it, and it's something that we are going to move to compensate for.

Donald Broughton, AG Edwards.

I know it is not effective until July 1st, but can you give us a little bit of the reasoning behind the change in the fuel surcharge program on intermodal why did it go to West Texas intermediate as your base.

Well.

Let me -- Don come on up and talk about it.

Let me first say it wasn't intermodal.

It was just publicly -- public tariffs and public quotes and in fact it does not include most of the intermodal business..

Okay.

It's on our non- intermodal .

Non tariff business?

No. non inter -- tariff business that's not intermodal.

Why go to West Texas intermediate?

Why not use diesel?

Well, since the inception of our fuel surcharge in 2000, and then we've had several version of our fuel surcharge since 2000.

For our carload business in Norfolk Southern, we have used West Texas intermediate crude oil as the base.

For our intermodal business, we've used on highway diesel.

So and that's been very consistent over that five-year period.

We have not changed the basis; we're still using WTI, as we have in the past what we are doing.

What we are doing is recognizing that it appears to us that the cost of fuel and the cost of oil today and going forward has reached what we might call a new norm or a new level.

And we are taking a look at our public tariff prices, effective July 1st, we will be increasing those prices to reflect what we think is the current base line and going forward what the current base line really is and readjusting the fuel surcharge.

So there will be more in the base price after July 1st and a smaller fuel surcharge of $64 per barrel as a strike price or basis as opposed to $23 a barrel in the old program that applied since 2004.

So to make it simple for us Wall Street guys, if the price of oil goes down significantly, your base price is in tact and your fuel surcharge goes away, but you don't give that back all that price?

Well, we'll certainly be sensitive to the marketplace.

We price to the market and we'll follow the market.

Thanks.

Tony?

Thanks Wick and thanks for the breakfast.

I just wanted to ask you some sequent questions.

I want to get some sense of what you think is going to happen in 2007 over 2006 generally in terms of intermodal volume and revenue growth, given there is the slight change in what happened in intermodal this quarter.

And also where do you think pricing will be next year over this?

Or if you want to pick '08 over '07, I am just trying to get a sense of beyond the short-term, and the contract load level where you think, you could go in both the intermodal volume stuff and pricing, that's just in intermodal but in general.

Well.

We -- first Let me say that we have in fact ordered a new set of Ouija boards for our planning people.

Tony, I just don't know, I will say what I have said all along, It does seem to us that, the world has changed in terms of surface transportation capacity in this country, and we don't see anything in '07 or '08 that's radically going to change the equations that we were looking at today.

Having said that, we are a company still that is strongly tied to the state of the economy.

So my forecast for '07 or '08 is to some extent depends on what the economy does, we don't I think right now the economy looks very good.

We don't see anything in the cards that's going to change that either if provided, that fuel prices don't absolutely run away, which is what we all always said we are concerned about.

So I mean we will not know, how deep this secular change is, and how fundamentally the world has changed, until we see different economic conditions that test that.

But I would tell you that right now our best guess is that for 2007 and 2008, the world will look much the same that it looks today and has looked in 2004 and 2005.

That's - but my crystal ball is cloudy as anyone's, although I always like to point out that my hindsight is particularly good so.

Any other questions today?

Well, if there are none, thanks for coming, and we look forward to chatting with you and look forward to seeing you next quarter.

Thanks.