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- Chairman, President, CEO
Well, good morning, everyone.
I'm Wick Moorman, Chairman, President, and Chief Executive Officer of Norfolk Southern Corporation.
And it's my privilege to welcome you to our third quarter 2006 analyst meeting.
I would also like to welcome those who are listening by telephone and on the Internet.
I remind our listeners and Internet participants that the slides of the presenters are available for your convenience on our website in the investors section.
I encourage those here today to take a microphone and before you speak, please identify yourself, so that everyone can hear you.
As usual, transcripts of the meeting will be posted on our website and will be available in a few weeks upon request 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, including our Vice Chairman, Hank Wolf, Chief Financial Officer; and Steve Tobias our Chief Operating Officer; along with Don Seale, our Executive Vice President and Chief Marketing Officer; we're also joined by Jim Squires, our Senior VP of Financial Planning;
Bill Romig, our Vice President and Treasurer;
Bob Fort our Vice President, Corporate Communications;
Rob Kesler, our Vice President Taxation;
Marta Stewart, our Vice President and Controller; [Trevor Pardee], our Assistant Vice President of Finance; and [Debbie Malban], Hank Wolf's Assistant; [Leane Marilli], our Director of Investor Relations could not be with us today.
Leane became a mother on October 12, when she gave birth to a baby boy and I know that you all join us in wishing both of them well.
This was an excellent quarter for Norfolk Southern.
We continued improving our financial and operating performance, setting all-time revenue records and equaling our best operating ratio in the history of the Company.
The story of this quarter was our ability to generate those strong results in spite of flat year-over-year volume, and historically high diesel fuel prices.
At the same time, we maintained strong service levels, even with the severe disruption caused by a major landslide in the Pittsburgh area.
First, allow me to highlight some of our numbers.
We set several financial milestones in the quarter, with record revenues, and record income from railway operations.
We reported our highest ever railway operating revenues of $2.4 billion, an increase of 11% compared with the same quarter of last year.
And our income from railway operations improved 35% over last year, to $715 million.
Net income of $416 million or $1.02 per diluted share was 38% higher than the third quarter of 2005.
And this would be an all-time record quarter as well.
Save for the second quarter of last year, when as you may recall, we realized a $96 million, or $0.23 per share credit from a change in the Ohio tax law.
We lowered our third quarter operating ratio by a full 5.4 percentage points to 70.1%, matching our previous quarterly record which was set in 1997.
As all of you who follow Norfolk Southern know, improving our operating ratio on a continuing basis is a primary goal for us, and we remain clearly focused on achieving that goal.
Our quarterly results were driven by strength and stability of our operations, and our value based pricing.
We believe our reliable service which continues to be rated at the top of the industry by many of the surveys which the financial community conducts gives us a competitive advantage and represents increased value to the customer in the transportation marketplace.
As I mentioned, our network is operating well, and continues to exhibit an impressive amount of flexibility.
Our third quarter operating metrics held steady during the quarter as we remained focused on providing economical and efficient transportation services to our customers.
Following a major landslide in Pennsylvania, as I mentioned, in September, that led to a service disruption, we were able to reroute our traffic, quickly reopen our primary east/west rail corridor, and recover.
We also just encountered another serious disruption this past Friday on this route.
Some of you may have seen following a derailment west of Pittsburgh, and have again fully restored our operations.
And I think it is yet another example of our operating team's ability to overcome a significant challenge and maintain the service that our customers require and count on.
Volume in the third quarter was flat compared to last year.
But I will remind you that we moved exceptionally large volumes of intermodal shipments and coal shipments during the same period in 2005.
All three of our business segments reported revenue growth in this year's third quarter.
Coal posted all-time high revenue records, and general merchandise in intermodal set -- revenue set third quarter records.
Don will give you the details on all of our markets, but clearly this was a very good quarter for our company.
As an indication of our confidence in the strategic direction of our company, we were actively purchasing our stock during the third quarter.
As you may recall, last year -- as you may recall, last year, our Board of Directors authorized the repurchase of up to 50 million shares of our common stock through the end of 2015.
We initiated our share purchases by purchasing 1.3 million shares in the first quarter and 2.3 million shares in the second quarter.
When our share price fell to $40 a share in the third quarter, we concluded that the market had decided to have a sale on our stock.
And since Hank and I are both value shoppers, we aggressively purchased stock over the balance of the quarter, finishing up by repurchasing 17.1 million shares for about $730 million.
And Hank will fill in a few more details on that in a moment.
Diesel fuel remains the highest expense increase on the cost side.
We continue to benefit, however, from pricing that reflects how attractive good rail service is when energy costs are high.
As you know, the STB has proposed regulating the way that railroads calculate fuel surcharges.
Norfolk Southern along with others in the rail industry was invited by the STB to comment on their proposals.
We strongly believe that imposing restrictions on how surcharges are computed would put railroads at a commercial disadvantage.
We believe that such regulation is unnecessary, is bad public policy, and it will not encourage reinvestment in the rail industry.
Infrastructure investments in our rail network are critical to ensure that we are positioned to handle increasing traffic volumes, and to attract new business with improved service levels.
As you know, we have an infrastructure team that identifies and targets investments for our network, during the fourth quarter, we will be increasing the capacity on our line from Memphis through Chattanooga to Atlanta and on down to Jacksonville.
In addition, we decided to purchase 400 new rapid discharge coal cars this quarter, as the first step in what will be be a 10-year program to replace most of our aging fleet of some 33,000 coal cars.
We will continue to purchase new coal cars and increase line capacity in 2007.
At this time, we expect our total capital spending in 2006 will be just above 1.2 billion.
And that our 2007 capital spending will be in the range of 10% higher than 2006.
We are still in the process of formulating our 2007 capital budget, and we will announce the final numbers after our Board of Directors approves them at our November Board meeting.
We have been watching car loadings closely through October, and as of yesterday, they are about even with last year.
Clearly, the rate of volume growth has slowed, and we're continuing our ongoing process of adjusting our top service plan as necessary to reflect some of the changes in our business.
But with the understanding that our first priority is to handle our current traffic volumes fluidly and efficiently.
We see continued strength in coal, offsetting some downward pressures in the automotive sector, caused by cut backs at the big three.
We believe our diverse traffic mix will continue to enable us to produce healthy results going forward.
While there is some uncertainty as to the near-term direction of of the economy, our strategy remains to attract more business by continuing to improve our service.
And from that perspective, demand for rail transportation remains robust, and our third quarter results reflect this.
I'm confident that this positive trend will extend through the remainder of this year and on into 2007.
And I will now ask Hank to review our numbers, and Don will then tell you about the specifics of the markets, and finally, we will all be available to take questions.
Thank you.
Hank?
- Vice Chairman, CFO
Thank you, Wick.
And good morning.
As Wick indicated, our third quarter financial results were truly outstanding as we set several new records.
Railway operating revenues and income from railway operations were both higher than any other quarter in our history.
Our net income and earnings per share established new third quarter records.
In addition, our operating ratio of 70.1% equaled the all-time low operating ratio for any quarter.
As we continue to focus on driving efficiency in our operations.
Railway operating revenues for the third quarter were 2.4 billion, up 238 million or 11% compared with last year.
For the first nine month, railway operating revenues were a record 7.1 billion, an increase of 818 million, or 13%.
Third quarter carloads were about even with last year, while revenue per unit increased by 11%.
For the first nine months, volume increased by 3% while revenue per unit rose by 10%, resulting in the 13% increase in railway operating revenues.
And Don Seale will have the details of our revenues to provide to you in just a moment.
Railway operating expenses for the third quarter were almost 1.7 billion, an increase of 51 million or 3% compared with last year.
For the first nine months, railway operating expenses were 5.1 billion, up 398 million, or 8%, over '05.
The largest increase in operating expenses for the third quarter was in diesel fuel, which was up 68 million, or 36%.
Our third quarter fuel costs rose to 257 million, compared with 189 million last year.
The primary driver of that increase was the absence of the $41 million hedge benefit that was reflected in last year's expenses.
You will recall that our hedging program wound down in the second quarter of this year.
In addition, a higher average price per gallon added 27 million while consumption was flat.
The next largest increase was in material services, and rent which rose 10 million or 2%, largely due to volume-related intermodal costs.
The remaining operating expense categories decreased compared with last year.
The largest decline was in casualties and other claims, down 9 million, or 15%.
As you may recall, in the third quarter a year ago, our casualty expenses included $16 million attributable to an unfavorable jury verdict, as well as $4 million related to expenses associated with Hurricane Katrina.
This year's expenses reflect higher insurance costs, and modestly higher personal injury expenses.
Depreciation expense was down 9 million, or 5%.
And as you will recall, this was primarily due to the depreciation study that was completed in the first quarter of this year, which indicated longer depreciable lives for some of our assets.
Compensation and benefits expense for the third quarter was 5 million, or 1% lower, compared with last year.
This decrease was primarily due to lower stock-based compensation, which declined by $32 million, primarily as a result of the combined effect of a $9 decrease in our stock price in the third quarter, compared with nearly a $10 increase in the share price in the third quarter a year ago.
This reduction more than offset higher salaries and wages that rose 12 million.
Increased health and welfare benefit costs which added 10 million.
And other miscellaneous items totaling 5 million.
Thus far in the fourth quarter, we've experienced an increase in our share price of approximately $4.75.
As our share price goes up, we will need to reflect an increase in our stock-based compensation expense.
Each dollar of increase in our share price will result in about $1.5 million of additional stock-based compensation expense.
Other expense decreased 3 million or 5% compared to last year, primarily due to a favorable adjustment for property taxes.
And Conrail rents and services were 1 million less than they were a year ago.
For the first nine months, railway operating expenses were up 398 million, or 8%.
As in the case with the third quarter, the largest increase was in diesel fuel expense, which added $247 million to our operating expenses.
This $247 million increase was mostly due to higher prices which added 138 million.
Benefits from fuel hedging were 101 million less than last year, and increased consumption added another $8 million.
The second largest increase in operating expenses for the nine months was in compensation and benefits expense which rose by 125 million, or 7%.
As you will recall, we implemented FAS 123-R on January 1, of this year and our expenses included $34 million related to this change in accounting.
In addition, the increase includes $34 million of higher salaries and wages. $ $21 million for increased health and welfare costs. $15 million of higher payroll taxes. 13 million related to retirement agreements and waiver agreements with two former executives in the first quarter. 11 million for the cost of the regular annual stock-based grants to former CEO who retired in the first quarter.
And 11 million reflecting the cost of additional hours for train service employees.
Other miscellaneous items reduced these increases by $14 million.
For the nine-month period, material services and rents expense were up 70 million, or 5%.
Purchase services rose 37 million, and materials expense increased 19 million.
Both reflecting higher traffic volume, and increased maintenance activities.
Equipment rents were up 14 million, primarily due to increased volume.
The largest decrease in expenses was in depreciation, which declined by $31 million, or 5%, due to the changes made in the depreciable lives as indicated by the depreciation study that was received in the first quarter.
Casualties and other claims expense was 9 million, or 5% lower than last year, due to the absence of the unfavorable jury verdict that I referred to earlier, offset by higher casualty and property insurance costs that we've experienced.
As you may recall, we experienced higher derailment costs in the first half of this year, that almost equaled the cost of the Graniteville accident in 2005.
The railway operating ratio for the third quarter was 70.1%, compared with a ratio of 75.5% a year ago.
This equals the all-time record quarterly operating ratio reached in the second quarter of 1997.
For the first nine months the operating ratio was 72.6%, an improvement of 3.1 percentage points compared with 75.7% for the same period last year.
Third quarter income from railway operations was a record 715 million, up 187 million, or 35%, over the 528 million produced last year.
For the first nine months, income from railway operations was also a record at $1.9 billion, up 420 million, or 28%.
Total other income and expense for the quarter was an expense of 79 million, compared with an expense of 87 million, in '05.
Interest income rose 12 million over last year, a result of higher invested cash balances, and higher interest rates.
Looking ahead, our interest income will be lower in the fourth quarter, because our cash balances have been reduced as a result of the share purchases that we made in the third quarter.
Expenses related to our synthetic fuel investments were 8 million lower, due to the partial phase-out of the section 29 credits on those synthetic fuel investments.
Equity earnings in Conrail were 5 million lower.
All other items were 6 million lower.
And interest expense on debt was only slightly higher.
As I indicated, expenses related to our section 29 synthetic fuel investments were 8 million lower in the third quarter of this year, reflecting the expected phase-out of a portion of the section 29 credit.
As you know, the realization of these credits is based on the per barrel price of oil.
This slide shows the forward curve for the balance of the year that existed at the end of the second quarter shown in red, and the end of the third quarter shown in green.
With the close of the second quarter, as a result of higher forecasted prices, we were projecting a 62% phase-out of the otherwise available section 29 tax credits.
During the third quarter, oil prices dropped, which lowered the October forward curve for oil prices, as reflected by the green line.
As a result of this shift in oil prices, we projected that there will only be a 36% phase-out of the otherwise available section 29 tax credits for the whole year.
Our accrual of the expenses associated and the tax benefits on our synthetic fuel investments must be made on a projected basis for the full year.
Consequently, with swings in the price of oil that we've experienced this year, we've experienced some volatility in both the investment expense and the section 29 income tax credits that are available.
This slide shows the effect of these investments on our income statement.
As you can see, our first quarter results included a net benefit of 5 million.
At that time, we expected a 45% phase-out of the otherwise available tax credits.
During the second quarter, as oil prices rose, the expected phase-out increased to approximately 62%.
This increased phase-out necessitated a reversal of a part of the benefit recorded in the first quarter, resulting in no net benefit for the second quarter.
During the third quarter, oil prices fell and the expected phase-out declined to 36%.
Accordingly, the third quarter includes a catch-up of benefits related to the activity in the first two quarters, and reflects a total net benefit of $6 million.
If the forward curve proves true, and we do indeed have a 36% phase-out for the year, then we would expect a net benefit in the fourth quarter of about $7 million.
Of course, if oil prices are ultimately lower, there will be even more benefit.
And conversely, if oil prices are higher, there will be less benefit.
As you know, we recently announced the repurchase of 17.1 million shares of our common stock during the third quarter.
This slide shows how we ramped up the purchases of shares under our share repurchase plan, concurrent with the drop in our stock price, and increased daily volumes that we experienced during the third quarter.
As Wick indicated, we saw this as a buying opportunity, and we purchased 17-1 million shares during the quarter at a total cost of 730 million, or an average cost of $42.61 per share.
For the first nine months, total other income and expense was an expense of 252 million, compared with an expense of 330 million in '05.
Interest income increased 35 million, again as a result of larger cash balances earlier in the year, and higher interest rates.
And as I just indicated, these balances will be lower for the rest of the year, and will result in less interest income in the fourth quarter.
Expenses related to our total syn fuel investments were 33 million lower than last year, again reflecting the expected phase-out of a portion of the section 29 tax credits available on our synthetic fuel investments due to higher oil prices that we've seen this year.
Gains on sales of real property, and investments were 13 million higher.
Equity in Conrail earnings was 8 million less, and all other items were 7 million lower than a year ago.
Interest expense on debt for the first nine months was 12 million lower than last year, largely due to less outstanding debt.
The provision for income taxes for the third quarter was 220 million, compared with 140 million last year.
The effective tax rate was 34.6%, compared with 31.7% last year.
The catch-up adjustment resulting from the change in the projected section 29 credit phase-out reduced the effective rate by about 2 percentage points.
For the first nine months, the provision for income taxes was 595 million, compared with 274 million last year.
Last year, the provision for income taxes was positively impacted by the $96 million noncash tax benefit associated with the changes in the Ohio tax laws.
The effective rate this year was 35.2% compared with 23% for the first nine months of '05.
The Ohio tax law change reduced last year's rate by 8 percentage points, and the remaining difference in the effective rate reflects the expected phase-out of the section 29 credits available this year.
Third quarter net income was 416 million, an increase of 38% over the 301 million earned a year ago.
For the first nine months, net income was a record 1.1 billion, compared with 19 -- 919 million last year.
An increase of 177 million, or 19%.
Diluted earnings per share for the third quarter were $1.02, compared with $0.73 per share last year, an increase of 38%.
For the first nine months, diluted earnings per share were a record $2.62, 17% above the $2.24 per share reported a year ago.
Last year, I provided you with a comparison of our net income and earnings per share, excluding the effects of the change in the Ohio tax laws.
On that basis, this year's net income for the first nine months of 1.1 billion would have been 273 million, or 33% higher than the same period in '05.
Similarly, our year to date diluted earnings per share of $2.62 would have been 30% higher than the $2.01 per share earned last year, excluding the Ohio tax law change.
This slide reconciles the net income and earnings per share for the first nine months, excluding the Ohio tax legislation in '05, to our reported net income and earnings per share this year.
This reconciliation is posted on our website for your reference, and I want to thank you for your attention and now I will turn the program over to Don Seale who is going to give you an in depth view of our operating revenues.
- EVP, Chief Marketing Officer
Thank you, Hank.
And good morning.
First, a few brief comments on the economy.
Current economic conditions can best be described as mixed.
Overall GDP growth is expected to track below 3% for the remainder of this year.
The main drivers in the moderation are weakness in the housing market, and declining auto production in sales.
Now, we all closely monitor the manufacturing industry and the ISM Index finished at 52.9 in September, its lowest reading since May, 2005.
But despite this decline, the manufacturing sector continues to expand, albeit it at a more modest pace.
With business investment and new orders all relatively strong and manufacturing still has some positive short-term indicators looking ahead.
And as we know falling energy prices should bolster consumers while trade is forecasted to remain positive thanks to the expanding global economy and a weaker dollar.
Now, as seen with the economy, our volumes as well were mixed for the quarter.
Total volume was flat with last year, the first such comparison since the third quarter of 2003.
Slowing markets and difficult comparisons from last year drove this decline.
Volume in the third quarter of last year was up 87,000 carloads, with all-time records set in intermodal, coal, and metals, and construction.
For the nine months, strong volumes in the first half offset third quarter weakness with year to date volume up 3% over last year.
Now, turning to our individual markets, intermodal volume reached a new record of 841,000 loads for the quarter, increasing 2% over last year.
For the year to date, volume is up 6%, due to continued strength in our international business.
In merchandise, gains in our agriculture and metals business nearly offset continued losses in automotive.
For the quarter, volume declined slightly versus last year, and for the nine months, merchandise volume is up 31,000 units or 1%.
We faced continued declines in export coal in the quarter, and some softness in our northern utility business, which drove unfavorable comparisons year-over-year.
For the year to date, coal volume is up 9400 units or 1%.
Now, in spite of flat volume, our third quarter revenue grew $238 million, or 11% above last year, to an all-time high of 2.4 billion.
This was our 12th successive quarter of reporting record revenues, with revenue nearly 800 million higher in the third quarter of 2006 than the same quarter in 2003.
Coal, metals, construction, chemicals, and paper all recorded record revenue for the quarter.
For the nine months, revenue of 7.1 billion is up 818 million, or 13%, over 2005.
And for the past 12 months, revenue is up 1.1 billion, or 14%.
Total revenue per unit also reached a new high of $1,202, an increase of $120, or 11% over third quarter last year.
Approximately 60% of the gain in revenue per unit was derived from increased pricing.
And for the year, revenue per unit of 1187 is up $107 or 10% over 2005.
We continue to successfully reprice expiring contract business in all of our sectors, as indicated in previous reports, we estimate that about half of our book of business is available for repricing during the year.
And of that half, approximately 82% has been completed through the first three quarters of this year.
Turning to our markets, coal generated a record high of 595 million, exceeding third quarter 2005 by $49 million, despite 3% less volume.
For the year to date, revenue of 1.74 billion, exceeded 2005, by 147 million.
Revenue per car reached an all-time high as well.
Increasing to $1,362, and for the year, revenue per car of 1,316 is 8% ahead of the same period last year.
In addition to improved pricing in fuel surcharge coverage, heavier volumes and longer haul service, and in particular, to our southern utilities, combined with a 24% decline in short-haul river traffic helped boost revenue per shipment in the quarter.
With respect to coal volume, as shown in this slide, our coal traffic has increased in 9 of the last 11 quarters.
We faced a difficult third quarter comparison this year, from last year, as coal was up 6%, or 24,000 carloads, in the third quarter last year.
This was a new volume record at the time, and a steep hurdle for us to clear in the current quarter.
Now, drilling down a little further, utility coal volume declined 4% for the quarter, but was up 3% for the nine months.
Coal burn in our northern region was reduced as cooling degree days fell nearly 11% below last year.
As a result, NS serve coal-fired utility plants received less coal for the quarter.
And as I just mentioned, volumes to river docks declined 24% due to dock outages and short-term challenges with Northern Ap coal production.
Now a very weak export market continued to impact our performance as volume fell 17% for the quarter and 22% for the nine months.
Pressures on both a demand and the supply side are feeding volatility in this sector.
For the third quarter, the lack of business to Asia, along with reduced purchases by India, negatively impacted volumes through the port of Baltimore.
At Lambert's Point, traffic declined due to competition from alternate supply regions such as Canada and Australia, which represented coal that was purchased last year, at lower prices.
Our domestic steel markets fared better, and in total, our metallurgical coal, coke, and iron ore sectors grew nearly 5,000 carloads or 8% over third quarter, 2005.
For the year these markets are up 10,000 units or 10%.
Gains in metallurgical volume in the quarter were generated from diversification of coal supply and spot opportunities.
Increased iron ore shipments from Ashtabula to various steel manufacturers also contributed to growth in the quarter.
And finally, industrial coal volume declined 6% for both the quarter and the year, due to the combined effects of competition from natural gas, and diversion of industrial coal to utilities at higher market prices.
Looking ahead for coal, we expect coal in the fourth quarter and beyond to be more favorable in part due to easier year-over-year comparisons.
We also expect gains in our utility business to continue, as stockpiles are rebuilt for the winter heating season.
And finally, export coal volume should improve as 2005 carry-over coal contracts from Australia and Canada have now been mostly completed.
We've also had recent discussions about U.S. coal exports replacing lost production from Russia and Eastern Europe into Western Europe due to recent mining difficulties in that region.
Now, turning to our carload business, revenue of 1.28 billion increased 145 million, or 13% over third quarter 2005.
Despite a slight decline in volume.
Year to date revenue reached 3.87 billion a gain of 500 million, over the same period last year.
Excluding automotive, our industrial products business was ahead 3% for the quarter, and year to date.
Revenue per car reached an all-time high of 1799 for the quarter, and 1755 for the year, an increase of 13% for both periods.
Revenue per car gains were driven by price increases, and fuel surcharge revenue.
Looking at the individual markets and merchandise, agricultural revenue reached 239 million for the quarter, and 742 million for the year.
Ethanol revenue doubled for the quarter, accompanied by a 75% increase in ethanol volume.
We currently serve four major ethanol production plants and anticipate that 13 additional plants will be completed by the end of 2007, along with one new biodiesel production facility.
Supporting current and future ethanol and biodiesel production, we currently serve 19 distribution facilities with two of these facilities undergoing expansions this coming year, and three new terminals opening in 2007.
Closely related to ethanol production, increased shipments of corn for ethanol processing, coupled with domestic corn shipments to feed mills and spot exports resulted in an 8% increase in shipments of corn for the quarter.
Metals and construction record revenue of 316 million increased 64 million over third quarter 2005, and for the nine months revenue reached 899 million.
Gains in metals more than offset softness in our construction markets, construction volume fell 6%, as housing construction softened during the third quarter, resulting in declines in brick and general construction commodities.
Growth in U.S. steel production and a strong energy sector continue to drive our metals markets.
The U.S. steel production was up 6%, in the first nine months, while NS iron and steel volume increased 29% for the quarter and 31% for the year..
Growth in domestic and import slab shipments, semi finished intermill traffic along with coil steel and scrap volumes that rose by 10% and 17% respectively drove these gains.
Now, looking ahead near term steel inventories in the U.S. appear to be on the rise but industry fundamentals remain relatively strong driven by global demand which will continue to outpace total production.
In the U.S., mills appear to be adjusting production downward, to manage inventory levels and prices in the face of declines in the automotive and home appliance industries.
But in the energy and public construction sectors which drive demand for pipe, plate and structural steel for oil drilling, highway and commercial construction projects, demand remains solid.
Paper revenue reached an all-time high for the quarter at 231 million, up 13%.
For the year, revenue of 669 -- 669 million, and 77 million ahead of last year.
In this group, we continue to see strong growth in the market for waste transportation, including municipal solid waste and construction and demolition debris.
In conventional paper and forest products, printing paper led volume increases growing 21% for the quarter, primarily due to continued growth in import traffic, and while lumber shipments declined 2% due to weak housing.
Our chemical revenue reached an all-time high as well, reaching 286 million for the quarter, and 813 million for the year.
We are seeing moderate improvements in our overall chemical traffic as quarterly volumes fell 2%, which is a marked improvement from the year-over-year comparisons for the first two quarters of the year.
Traffic declines in the third quarter are due to plant closings and the slowing automotive and housing market.
Automotive was our only business group to produce a decline in revenue for the quarter.
Revenue of 212 million fell 17 million below last year.
North American vehicle production declined 9%, below third quarter 2005 levels.
These cuts combined with high inventories, and plant closures, drove our automotive volume down 20,000 carloads or 14%.
With respect to production, Ford Motor closed its St. Louis assembly plant in March, 2006 and has scheduled substantial downtime in the second half of this year.
With Norfolk Virginia assembly having the largest impact on our volume.
Volume loss with General Motors was driven by the closing of Oklahoma City in February, 2006.
And removal of the third shift of production at marine assembly in the second quarter.
Additionally we experienced reduced shipments in the quarter of auto parts to General Motors Arlington, Texas plant along with lower volumes of parts to and from Mexico.
And finally production cuts at five Daimler-Chrysler plants also contributed to the overall decline.
On the plus side, increased volumes from Toyota, Honda, and the other new domestics increased by 915 carloads in the quarter, and we expect to handle added volume from Toyota's new San Antonio plant, commencing late this fall.
Looking ahead, fourth quarter comparisons will be equally difficult for automotive.
Ford's Atlanta Georgia assembly plant is scheduled to close this month, Daimler-Chrysler has scheduled 20 weeks of downtime at various plants while Ford has announced an additional 11 weeks of downtime.
These temporary production cuts are due to high inventories of unsold vehicles.
Now Ford and GM, with the production capacity they've taken out have rationalized their existing excess capacity in terms of production going forward.
Now, with respect to our traffic, we will continue to see year-over-year declines in auto parts, to the closed assembly facilities.
But much of the impact for finished vehicles, has already been realized in the marketplace, and enter our current volumes.
Now, I will turn to intermodal and conclude with that sector.
This market reached its second highest revenue quarter at 515 million, up 10%.
For the year, revenue of 1.48 billion is up 171 million over 2005.
Revenue per unit was $614, up $45 or 8% over third quarter last year.
Intermodal volume was at an all-time high and shipments were up 2% for the quarter, and 6% for the nine months.
Notably, year-over-year volume comparisons have moderated compared to the strong gains that we've seen over the past two years.
Slower revenue growth was due in part to the continued mix effect of transitioning from trailers to containers, and higher volumes of private equipment.
Greater volume of private equipment also increased revenue empty moves as those customers repositioned empty equipment in the quarter.
Increased truckload and international volume more than offset declines in our other lines of intermodal business.
International shipments led gains for both the quarter and the year.
The growth rate of 7% in the third quarter was down compared to the 6% -- 16% gain experienced in the first half of 2006, as we started to lap the start date of new contract business gained in the third and fourth quarters last year.
Our West Coast port volume was up 6%, compared with a 4% increase through East Coast ports.
Both of which represented moderating volumes of international trade.
On the positive side, we've seen continued growth in East Coast port business moving in longer haul, higher revenue lanes, such as New York ports to Chicago, Norfolk to Chicago, and Savannah to Memphis, Cincinnati, and Louisville.
With respect to our outlook for peak season we expect more moderate growth in our international segment, as we've seen seasonal shipping patterns become less pronounced over the past three years.
Truckload and domestic volumes were impacted in the quarter by increased supply of motor carrier capacity in the east and reduced automotive and construction shipments throughout our markets.
Dry band pricing on the spot market has weakened as well the existing pressure on intermodal volumes.
As mentioned previously, shipments with intermodal marketing companies, or IMC's have been hurt by the decline in rail provided trailers and containers.
In the quarter, IMC markets were particularly hard hit by greater availability of motor carrier capacity, and lower spot pricing in the eastern markets.
Our truckload customers were impacted by the same conditions, which tempered their overall growth despite healthy volume with big box retailers.
Our premium volume was flat versus third quarter 2005, and is 2% ahead for the first nine months.
Our LTL volume decline resulted from a general softening in demand, less transloading at West Coast ports and increased competition from regional carriers.
Finally, Triple Crown volume declined 1% for the quarter due to the softening automotive industry in the Midwest, Triple Crown capacity previously dedicated to automotive parts in selected lanes are now being redeployed into general freight service as assembly operations are curtailed or reduced.
Looking ahead, we expect continued moderation in intermodal growth in the fourth quarter for the market reasons I've just discussed.
But we remain confident in future intermodal growth.
As such, we're committed to invest not only to improve intermodal service levels but strategic capacity initiatives such as the Heartland Corridor, Columbus Rickenbacker Logistics Center which will look similar to our flagship terminal in Austell, Georgia pictured here, and a planned expansion at our Cleveland intermodal terminal in 2007.
Now to conclude in the face of changing markets and a mixed economy, we are somewhat guarded about the fourth quarter and early 2007.
In addition to market and volume considerations, the impact of lower fuel surcharges will be seen in our fourth quarter revenue, as the 60-day lag in lower WTI and on highway diesel fuel prices are taken into account.
And while we still see economic expansion ahead, it appears to be less robust than what we saw in the first half of this year.
But I will say through our unending focus on delivering excellent service, we're confident in our ability to continue to develop new markets and enhance our current book of business, both of which we believe will generate growth and higher value in the months ahead.
Thank you.
And I will ask Wick to come back up.
- Chairman, President, CEO
Thank you, Don.
And thank you, Hank.
Those comprehensive reports.
But despite their comprehensiveness, I'm sure there probably might be a question or two.
So we will open it up at this time.
And we will start with the person who raised his hand the very fastest in the very back.
- Analyst
Two quick questions.
I wonder if Don Seale might give us an update on the penetration of the surcharge in terms of coverage and maybe give us a little color on what is that -- what it's made up of -- how much might be RCAP versus your own surcharge mechanism, just give us some color on the coverage of the surcharge and where that stands currently?
And the second question would be for Hank, just give us some idea and I know there are moving parts, what might be a rough bogey for a book tax rate we might think about going forward understanding that the syn fuel credits will move that around.
- Chairman, President, CEO
Don, you want to give a little color?
- EVP, Chief Marketing Officer
Scott, with respect to the first part of your question, the coverage, we're at now at 92%, we were at 90% at the end of the second quarter, and it is a blend of specific fuel surcharge applications and RCAP.
I won't go into the breakout of that, but most of our fuel surcharge, I will say, is related to our specific fuel surcharge program.
- Chairman, President, CEO
Hank, the specific tax rate, understanding it moves a little bit.
- Vice Chairman, CFO
Well, actually, when you say it moves a little bit, a percent is not a big swing, but I would say that absent the section 29 credits, we would really be looking at a rate of somewhere around 37%.
So the credits would be -- if we get them in the second quarter, reducing that about like it did in the third quarter.
Now, obviously, that is going to be dependent on where the fuel prices go.
If they spike up, we will get less section 29 credit.
If they continue to roll back, we may get even more.
- Chairman, President, CEO
Now that we handed down -- I think we forgot the forecast line this quarter.
- Vice Chairman, CFO
I must have.
- Analyst
On the comp for employee, it looks like it actually decreased this quarter.
Maybe it was part of what you were going over with the stock based comp.
Can you flesh that out a little bit, why, at that trend do you expect to continue on a per employee comp benefits per employee, actually continue to remain flat or down a little bit?
- EVP, Chief Marketing Officer
Well, as you point out, the impact of the $32 million swing in stock-based compensation is the largest reason that it was impacted.
But as you parse through the other increases that I mentioned for the full nine months, that seems to be a trend that we have been facing.
We have some negotiations going right now on contract renewals.
It is not clear where that will come out.
So I would say that as you look forward into the fourth quarter, the first thing that you have to do is look at well, what has happened with the stock price and what is the impact on stock-based compensation as a result of that.
And I expect that some continuation in the increased wages and salaries will manifest themselves in the fourth quarter, as well as the increased costs of health and welfare benefits.
Marta, did I leave anything out?
- Chairman, President, CEO
I will just say on Hank's behalf that we don't view the big favorable comparisons in stock-based compensation as an unmixed blessing.
Is that fair, Hank?
- Analyst
On the -- I guess Don's a little bit cautious on the fourth quarter outlook with fuel prices, with volumes being flattish.
Is there something now that you've matched your record on operating ration?
And can you -- will the impact of volumes or volume fuel impact your ability to continue to improve margins at this point?
- Vice Chairman, CFO
Again, I will just say, as you know, we are always driving to lower the operating ratio.
That is one of the primary goals of our company.
We had clearly an outstanding third quarter OR.
Our OR typically is lower in the second and third quarters of the year.
The fourth quarter is a little more mixed in terms of the volumes go down, and we never know exactly what winter holds in store for us from an operating standpoint.
But when we reached that point in 1997, we didn't think we were finished at the time and we don't think we are finished now.
- Analyst
My last question is more for Don then.
I guess -- I want to understand this right, all things being equal if fuel prices were today versus where they were in the quarter, they have come down dramatically, can you comment on what yields would look like in that environment?
And then, I know you don't forecast, but I guess maybe what kind of -- what can rates look like in 2007?
I guess maybe the better question then is what percent of your contracts have been untouched so far in [Inaudible] repriced from outdated contract revenue?
- Chairman, President, CEO
Well, Don can give you a little more color on the fuel surcharge and the lag effect in particular with the fuel surcharge, we clearly don't -- we don't forecast or really comment on yields as a result of that.
But go ahead.
- EVP, Chief Marketing Officer
Going forward, as I mentioned in the comments, and I think we've mentioned in previous reports, we -- we estimate that about half of our book of business, will be repriced and renegotiated each year, going forward.
We've shortened the dilution of contracts intentionally.
And because of that, and continued demand for transportation in the marketplace, Ken, we see yield continuing to improve.
Now, if you look at the lag effect in the fuel, we averaged about $72 a barrel, West Texas Intermediate crude oil per cost in the barrel, in the third quarter, and that will drop by about $7.
Based on the forward curve in the fourth quarter.
So that was what that comment was directed to.
But we still see demand in transportation.
We still see an opportunity to reprice, as we go forward.
- Analyst
[Inaudible - microphone inaccessible]
- EVP, Chief Marketing Officer
This year, we, out of the half that we had targeted for repricing through the first three quarters we completed 82% of that so we have got 18% of that 50% yet to go in the fourth quarter.
- Chairman, President, CEO
And next year we will be looking again at about half of our traffic that's either running on private quotes or tariffs or something.
That is about 25% of our traffic that is available for renewal on an annual basis, then if the average duration of our contract is three years, then for the other 75%, then about a third of that or another 25% is available on an annual basis, and that's how we get to about half of our traffic annually is, had some repricing based in it.
All right.
Right here and then there and then this there and we had one more up here, too, I think.
Yes?
- Analyst
[Michael Weiss] JP Morgan.
With regards to your share repurchase program, you've obviously [Inaudible - microphone inaccessible] gains in third quarter and about 40% [Inaudible] continuing that pace in the fourth quarter, maybe yourself?
- Chairman, President, CEO
I think we will continue to look at the market and -- what our stock is trading at, and try to think opportunistically, if you will, about share repurchases and the way that we did in the third quarter.
I think it is fair to say that it is unlikely that you will see purchases at anything like the rate in the fourth quarter that you saw in the third quarter, but we always -- under the program, have the right -- the ability, I should say, to go do that.
But I don't -- if you ask -- I would say if you asked Hank and I right now, what do we see for the fourth quarter, we certainly don't see anything like another double digit purchase in millions of shares.
Hank, anything you would like to add to that?
- Analyst
With regards to [Inaudible - microphone inaccessible] a repricing in future years, but how many [Inaudible] in '07?
- Chairman, President, CEO
I don't know that we have an exact number on that, Don.
It is a fairly low percentage.
There are a few contracts out there in the world in coal and I guess a couple in the merchandise sector that were longer term that we haven't looked at, had a chance to look at yet, and I don't know of anything specific of any magnitude in '07, if there -- but it is a reasonably small percentage of our business now that is wrapped up in contracts that we haven't taken a look at since 2003. [Inaudible - microphone inaccessible] Yes, below 15, anyway.
Yes.
- Analyst
Where do you see the network constraints [Inaudible - microphone inaccessible] do you think that the slower [Inaudible] growth you've seen in the third quarter might help you with sufficiency [Inaudible] going forward?
- Chairman, President, CEO
Well, I think that our network, as I said, operated well in the third quarter.
I think that is a result of first of all, a lot of planning and hard work on the part of our operating department.
And second, it does reflect some of the ongoing infrastructure work that Steve, I think it is fair to say, that we've already done on some of our critical routes.
We are, as I said, continuing to put more capacity into those routes, with the express intent of not only being ready to handle increased volume, but also with driving even more efficiencies out of of the service, in terms of velocity, and on time train performance and things like that, so one way to look at this, I would say, is that we are today handling volumes that are radically higher than they were three years ago.
And we're handling them at service levels that are equal to or better than where we were three years ago.
And that's kind of of the result of all of this initiative, all of the initiatives we've had going on in terms of things we talked about.
Additional hiring, a lot of work on the locomotives, and the car fleet, and adding infrastructure.
And it is our intention to just keep pushing along with that.
- Analyst
[Inaudible - microphone inaccessible]
- Chairman, President, CEO
I think as I mentioned, we have some more capacity coming online in the Memphis/Atlanta corridor, and I think one -- maybe another sighting down towards Jacksonville as well.
So we're -- most of the -- we've discussed this before.
Most of the projects that we have are not in the nature of adding 2 or 300 miles of double track in one location.
A big bang kind of project.
It is very targeted.
It is aimed at specific issues that we need to address.
And so we're -- throughout the course of the year, completing projects all the time to make the network run better.
- Analyst
Thanks.
My name is [Tony Hatch], I've got a question maybe for Don, and -- a single one actually, it may be a little picky given that revenues were up double digit in intermodal, but after being a leader, I don't know how many quarters in a row and at the very top of the tables in growth and volume you've slowed down.
So I'm wondering -- if you could sort of -- I know you talked about the specifics in this quarter, but if you could look at it on a longer term business and answer whether any of it had to do with the recovery of [CSACs].
- Chairman, President, CEO
I can -- let me try that.
I think that Don mentioned that if you look at our third quarter, and you're going to see some of this in the fourth quarter, if you look at our gains in the past years, on the international side in particular, they were driven by the fact that we were able to secure some very good contracts with a number of the big ocean carriers.
And a lot of those contracts and a lot of of those gains really took place last year.
And in particular, some of them in the latter half of of the year.
And what has really happened, these quarters, that we all of a sudden, you saw those big gains and we're lapping those big gains, but we're not doing -- we haven't added more contracts in the same way to some extent because we've got a lot of the business now.
Now, we do -- we have at least one other contract set of traffic too, I guess, that at least -- that are coming on in the fourth quarter, that will help us with the intermodal comps.
But I mean I think the other piece of that, that Don said very clearly, is we look at our business, and we also just look at the overall import business that's coming into this country, and while it is still -- the growth is good, it is not -- the overall import business is not quite at the same growth rate through the ports, the East Coast ports are still growing well, but substantially, at a substantially lower pace year-over-year than they were last year.
Same with the West.
And that's to some extent reflected in our numbers as well.
Just the overall amount of traffic available, if you will.
We think competitively, we're poised very well to capture the traffic as it comes to us.
Don, anything I should add?
- EVP, Chief Marketing Officer
No.
- Chairman, President, CEO
Okay.
All right.
- Analyst
[Inaudible] Credit Suisse.
Kind of piggybacking on Tony's intermodal question, you've run off the weakness in the triple spot market, maybe curtailing growth a little bit.
What's the delta of that?
So what percent of traffic do you think is exposed to the spot market if it tracks both sides?
- Chairman, President, CEO
I don't know that we have a specific number for that.
The LTL is primarily where it is.
And it is a very dynamic market, as you know with -- vis-a-vis what we do, versus what the truckload carriers do.
And in some sense, we also, as you know, have been able to drive our -- not only our intermodal volumes, but our intermodal margins substantially higher over the past few years, and we want to be careful to make sure that we are not out, if a market gets soft in a few lanes, and pricing goes down, we are not going to go necessarily chase the business just from a volume standpoint.
We want to make sure that it is business that it makes sense for us to handle.
Next time, even though you're in the middle, you are going to need to get up here.
Yes.
One more.
- Analyst
One more follow-up question.
It's kind of a bigger picture, longer term.
When looking at your numbers in the quarter.
Obviously you [Inaudible - microphone inaccessible] was extremely impressive considering your traffic [Inaudible], you've done a lot of capacity improvements on the network.
I think you have the ability to handle even more freight.
So when you think about it going forward, all things being equal, taking on some traffic growth, there's really no reason we shouldn't see an [Inaudible] at some point in future with a [Inaudible] at one point, correct?
- Chairman, President, CEO
We don't forecast.
Let me just say this.
Would we look at that as a desirable outcome?
Yes.
And we will leave it at that.
There was one here.
And did you have one, too, as well?
Let's go right here.
Because that was an early hand.
- Analyst
Can you just comment on the pricing environment, particularly, given that you're talking about perhaps a slightly weaker economy?
We've seen fantastic pricing the last few years, and as you're looking at 2007 perhaps you can just talk about the two month supply dynamics and if things are slowing, do you still expect to see good pricing and maybe a ballpark number of what we should think about it?
- Chairman, President, CEO
I don't know that we have a ballpark number.
And we talked about this before in this gathering.
We've had a very, very strong pricing environment in our industry and at our company for three or four years now.
And we don't know from year to year exactly what that environment will look like or what we will be be able to do in terms of pricing and we've always said that one of of the tests of our industry, if you will, and what we've seen in the past three years, is what happens when the markets get a little softer.
So I cannot really make a prediction there.
To some extent, because we haven't -- we may not -- we don't necessarily have a lot of experience in that environment.
I will say, and I will emphasize this, too, though that we look at the fundamentals of transportation in this country, and we are -- we believe, and we believe firmly, that we are going to be in a position where we will have more pricing power on a go-forward basis, than you saw in this industry for the period up to 2003.
Where in effect, pricing was in real terms, was downward.
And I think that because of all of the structural conditions that we talk about and everyone else talks about, that we expect that we will be able to continue to generate positive real pricing power on a go forward basis.
- Analyst
Gary Chase from Lehman.
Just a couple quick ones on clarification.
First, for Don, you said 60% of the change in RTU was quote priced.
I think you spoke that you'd also clarify what the component was between fuel and mix.
If you could give us that, that would be helpful.
And also to piggyback on the question around pricing in general, I was curious -- there's a lot going on with repricing, some contracts that are out of date, some that are more current.
Is there any way to give us a sense of where the current bar is?
So instead of looking at where you are on a year on year basis, looking at as business reprices in the here and now is there any sign of slowing in that -- what's obviously been a very rapid, reaccelerated trend?
- EVP, Chief Marketing Officer
Maybe it is easier for me to squeeze in instead of going back up to the front.
With respect to the first question, in terms of mix effect for the quarter, the mix effect was nominal in the quarter.
So the 60% of RTU gain attributable to price was pretty much all price.
And 40% -- now, with the second part of the question, we don't see any material change in the marketplace, as we repriced expiring instruments, contracts or quotes, today, versus 90 days ago, or versus six months ago.
Pretty much the same market.
- Analyst
Sorry to do this to you Hank.
I also wanted to see if we could go back to the stock compensation issue.
If I understood your slides and the explanation you gave, you said there was a $10 in the stock price and for every dollar that was about 1.5 million change in that line item, year on year, yet I think you showed a $32 million swing in quarter?
- Vice Chairman, CFO
Well, in the third quarter of last year, the stock price was up $10.
And in the third quarter of this year it was down $9.
So that is $19 of swing quarter over quarter, if you apply the 1.5 million, you come up with a number.
- Chairman, President, CEO
One more there.
Mr. Hatch?
- Analyst
Quick one, Wick.
Are you guys back at the negotiating table, laborers, are you guys back talking and what's your -- can you talk anything about what's going on with that?
- Chairman, President, CEO
No.
- Analyst
Are you at least negotiating that?
- Chairman, President, CEO
There are always discussions going on with the other side when we're in a round of negotiations, but I can't say any more than that.
Okay.
Well, thank you all very much for coming and for your questions.
And we look forward to seeing you again.
Thank you.