Norfolk Southern Corp (NSC) 2007 Q1 法說會逐字稿

[Audio starts in progress]-- President and Chief Executive Officer of Norfolk Southern Corporation.

And it's my pleasure and privilege to welcome you to our first quarter 2007 analysts meeting.

I would also like to welcome those who are listening by telephone and on the Internet.

In response to your feedback, we are now offering MP3 downloads of today's meeting on our website for your convenience.

I should say, of course, for all of you like -- who like me use that iPod shuffle every morning on the elliptical, there is nothing better than downloading one of our meetings.

I remind our listeners and Internet participants that the slides of the presenters are available for your convenience on our website in the investor section, and I would encourage all of you who are 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 upon a number 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.

As customary, we have with us today several members of our management team including: our Vice Chairman, Hank Wolf, and Chief Financial Officer, Steve Tobias, Chief Operating Officer, along with Don Seale, our Executive Vice President and Chief Marketing Officer, we're also joined by Jim Squires, our newly appointed Executive Vice President Finance, Bob Fort, Vice President Corporate Communications, Rob Kessler, Vice President Taxation, Marta Stewart, Vice President Controller, Leanne Marilley, Director Investor Relations, and Debbie Malbon, who is Hank Wolf's assistant.

Now, before we crank it up, I would also want to mention that we're in the process of reviewing the conduct of these meetings and communications generally with the investment community.

You'll note that we actually have changed the batting order of the presentations this morning, and have even gone so far as to take the radical step of me having a few slides in a little while.

We do want these sessions to add value for you, and your feedback is integral to our understanding how best to do this, and I would encourage everyone who is here and listening to contact Leanne with your suggestions going forward.

Now, I would also like to take just a couple of minutes to acknowledge that this is Hank Wolf's 67th analyst meeting.

As many of you who follow the company know, Hank plans to retire at the end of June and -- so this -- this may be the last meeting he attends, at least in this role.

This meeting caps not only an enviable attendance record, but also commemorates a very long and distinguished railroad career.

I know Hank will have an opportunity to speak with a lot of you personally in the next few months, but I know that I'm also confident that I speak for everyone here when I say, thank you, Hank, for your invaluable service to our industry and to our company.

Now, at our last meeting we reported record results and indicated that it might be difficult to improve of upon that performance near term.

Excuse me, given our view of the economy.

Especially against the back drop of record volumes in the first quarter of last year.

Consistent with that outlook and compounded by some winter weather conditions that were more severe than the comparatively mild weather of a year earlier, we did indeed experience some challenges in the first quarter.

In addition, as you'll hear from Don in a moment, the effects of continued weakness in the automotive and housing sectors of the economy, along with the loss of some hurricane-related traffic, resulted in volume declines that overshadowed an improvement in revenue per unit.

As a result, our revenues of $2.25 billion for the quarter were 2% short of the record levels reported a year ago.

However, I am happy to say that the challenges we faced showcased strengths and dedication of our people and of Norfolk Southern.

We were able to control our operating costs which also declined 2%, and this, when combined with our nonoperating results, resulted in a $0.71 per diluted earnings per share for the quarter.

More importantly, I think, we continued to safely handle business demands that were unimaginable only a few years ago, and we continued to improve our infrastructure, maintain our service level and deliver solid financial results for our shareholders.

Now with all this as a preface, I'm now going to turn the podium over to Don Seale, who will walk you through our first quarter results from a commercial standpoint, and then Jim Squires will follow with a financial overview, and I'll close out with some views as to our operating and financial strategies for the future, before we take your questions.

Don.

Thanks, Wick, and good morning.

As we all know with the weaker economy, transportation demand in the U.S.

has been falling across both the rail and trucking industries, January housing starts were the lowest in a decade and continued softness in the consumer and manufacturing sectors, combined with excess inventory in the retail sector have produced the lowest freight volumes seen in the past couple of years.

During the first quarter, we were not immune to this trend as excess trucking capacity in the marketplace, weak housing, cuts in automotive production and the effects of adverse weather all combined to suppress volume across our network.

Now, when we met -- last met in January, I presented our view that we would see softness in our volumes for the first half of the year.

During the first quarter, the economic headwinds that I just mentioned and operational issues from severe weather conditions in our service area drove declines across all of our business groups with total volume down 86,000 units or 4%.

As you all know, we also faced a very strong comparison from the first quarter of last year, which was our best first quarter ever, both in revenue -- revenue and volume.

As a point of comparison, first quarter 2006 volume was up 94,000 loads or 5% over 2005.

Our first quarter 2006 volume actually exceeded fourth quarter 2006 peak season traffic by 2% and was within 2% of third quarter totals in 2005 as well.

Weakness in the housing and automotive sectors had the greatest impact on volume for the quarter and accounted for over 50% of our decline.

Losses we're experienced across the board in all of our business groups.

Housing-related declines ranged from chemicals used to produce PVC pipe to insulation and roofing materials.

Also, lumber, plywood, wallboard, gypsum, sheet steel and construction-related commodities such as aggregates and cement were all down in the quarter.

Accordingly, after 19 consecutive quarters of growth in revenue, these lower volumes produced total revenue of $2.25 billion, down $56 million or 2% below the first quarter 2006.

Automotive and post-Katrina spot traffic represented $76 million in year-over-year revenue loss.

Reduced fuel surcharge revenues associated with the lower volumes handled in the quarter at the lower average price of crude oil also contributed to the decline in revenue.

Average price realized was up 4% in the quarter, or $82 million.

In spite of the impact of negative mix and fuel surcharge, revenue per unit reached $1,201 or $25 per unit which represents our 18th consecutive quarter of RPU growth.

Nonrecurring traffic associated with Hurricane Katrina which had a high RPU, but also high associated expenses, impacted RPU for agriculture, as well as total revenue per unit.

Without the negative mix effect of this traffic, total RPU for the quarter would have increased by 4%, compared to first quarter 2006.

Please see our website where we have reconciled our reported results with those excluding this nonrecurring Hurricane Katrina traffic.

Now, turning to our individual markets, coal revenue of $557 million was flat versus first quarter 2006 as volume declined 4%.

Revenue per unit grew by 3% for the quarter, reaching $1,326 as a result of rate increases, higher tons per car, which was partially offset by lower volumes of higher RPU metallurgical coal.

Now within the segments, utility volume was down 3% in carloads, versus first quarter 2006.

Severe winter weather in February and associated service disruptions led declines at northern utility plants, but these losses were somewhat offset by increased volumes at power plants in our southern utility network.

Because of cold weather in February and early March, coal fire generation has been strong, but stockpiles remain relatively at target levels at most of our utility plants.

Export and industrial coal shipments were both strong in the first quarter with gains of 4% and 17% respectively.

In the export segment, demand for U.S.

coal is increased recently in the face of vessel-loading delays at Australian ports and a weaker U.S.

dollar.

Industrial coal was up 17% compared to the same period last year.

Improved pricing, new business and stronger demand were the primary factors that drove this market's growth.

Net coal, coke and iron ore volume was down 23% for the quarter.

Coking furnace outages resulted in lower volumes of metallurgical coal throughout the quarter and caused coke to be stockpiled or diverted to alternative destinations.

Spot movements of iron or and imported coke handled in 2006 did not repeat this year and also contributed to the decline.

Now, turning to our carload business, merchandise revenue of $1.2 billion fell $50 million or 4% below strong first quarter 2006 revenue.

Weakness in housing and construction-related materials, along with lower automotive and post-Katrina spot business, suppressed volume comparisons by 8% below last year.

Despite the total revenue and volume declines, merchandise recorded its 13th consecutive quarter of revenue per car growth, gaining $76 or -- or 4%.

Continued strong market based pricing drove this improvement in spite of the loss of higher RPU business handled in 2006.

Now, within the merchandise group, ag revenue of $241 million for the quarter was down $23 million or 9%, while volume fell 2%.

Now, excluding spot shipments last year for hurricane relief, total ag revenue in the quarter would have been up 8% and RPU would have grown by 5%.

This particular business included the cost of -- Debbie, I think we've -- we got ahead on the slides.

If we could go back to ag.

This particular business included the cost of loading and unloading in the rate which produced a higher than average RPU.

On the plus side, ethanol volume continued to grow, up 27% in the quarter, as business to the northeast and mid-atlantic markets continued to expand.

Also, the expected 15% increase in 2007 corn acreage, as a result of increased demand for ethanol, drove a 16% increase in fertilizer carloadings in the first quarter.

Metals and construction products generated revenue of $274 million for the quarter, down 1% versus last year in the face of an 11% decline in volume.

This sector faced tough comparisons to first quarter 2006 as last year we reported record revenue and volume with year-over-year gains of 25% and 12% respectively during that period.

During the first quarter, total U.S.

steel production fell 11%, and we estimate that reduced steel demand from the automotive sector drove approximately 25% of the reduced orders and production.

Paper and forest products revenue reached $211 million, down for the quarter -- down $3 million or 1% as volume fell 8%.

Housing starts were off 30% in the first quarter, which led to a 20% reduction in our lumber shipments, while increased imported paper partially offset declines in the pulp board and domestic paper shipment business.

Chemicals revenue in the quarter grew by 6% to $274 million, despite a 1% decline in volume associated with lower demand, again driven by housing and automotive.

Contract renegotiations and improved pricing drove the improvement in RPU and overall revenue growth.

And finally, automotive revenue of $227 million was down $35 million or 13% for the quarter, accompanied by a 14% decline in volume.

Extensive production cuts at the big three, including the full impact of Ford and GM plant closures in 2006, drove this decline.

Inbound auto parts to the affected plants declined by over 7,000 carloads, which represented 33% of the volume loss, but close to 50% of the revenue decline in the quarter.

International auto volume grew 3% due to strong export shipments, as well as new Suzuki and Toyota traffic.

But looking ahead, we expect the loss over the balance of the year of over 12,000 carloads of auto parts, due to these plant closures and production cuts, which obviously will continue to pressure our year-over-year comparisons.

This trend will continue into 2008, as the announced plant closures are completed.

Auto parts traffic at Norfolk Southern generates a higher than average revenue per car, $2,400.

So the loss will have a disproportionate impact on RPU and revenues.

This traffic will not generally be replaced as domestic auto production shifts closer to the Ohio Valley in close proximity to parts' suppliers.

This slide graphicly depicts the magnitude and depth of the big three restructuring plans.

While I won't go through a deep dive of the details of these production cuts, suffice to say that our automotive year-over-year comparisons will be impacted in each quarter for the balance of this year and into 2008, and to a lesser degree 2009, as GM's plant in Atlanta and Chrysler's plant in Newark, Delaware, are closed in those years.

Now turning to our intermodal market.

Intermodal revenue in the quarter was $462 million, down 1% versus 2006, as volume declined 1% in the face of softer demand and higher trucking capacity.

Revenue per unit gains moderated to 1% this quarter, compared to the strong growth we saw in the first three quarters of last year.

RPU growth was primarily driven by fuel surcharges and contract rate increases.

Within the intermodal market segments, combined truck load and domestic IMC volume decreased 3% for the quarter.

Overall domestic intermodal marketing company demand was lower due to higher truck capacity and softer pricing over the highways.

Truck load shipments on the other hand continued to grow with major customers such as JB Hunt.

Truck load volumes should remain strong and domestic IMC traffic should improve as truck load capacity trends downward as the year progresses.

Also during the second quarter we expect to begin new domestic intermodal train service from Los Angeles to Atlanta over the Meridian Speedway by Union Pacific Shreveport.

This new high speed route will reduce total rail mileage and provide the fastest available service to the Atlanta market.

Now turing to the international segment, volume was flat for the quarter as imports to the U.S.

moderated.

A 7% increase in our east coast port volume was almost offset by a 6% decline in west coast port volume.

Our west coast port volumes are being challenged by higher inland transportation costs from western ports, combined with the effects of recent steamship line consolidations.

These two factors have resulted in market share shifts between ocean carriers, which in the short run is impacting our volumes.

But on the positive side of the equation, we have recently secured two new transcontinental international commitments which should generate added west coast volumes this year and we expect our all water service business over the east coast ports to also continue to build.

Finally, our premium intermodal volume increased 6% while Triple Crown volume declined by the same percentage.

Within the premium sector we saw increased repositioning of revenue empties for UPS which boosted overall volume and revenue, but at lower revenue per unit.

Triple Crown's lower as the result of reduced automotive traffic in the face of plant closures and production cuts.

Now to summarize, we had difficult year-over-year comparisons in the first quarter.

And we will face similar comparisons in the second quarter versus 2006 volumes of over two million shipments handled in the second quarter of last year.

Compared to the first quarter of 2007, we will need to handle an additional 153,000 loads just to match the record levels set in the second quarter of last year.

In the short term, we expect current weakness in housing and automotive will continue to impact volumes in most of our business sectors.

But we're seeing signs of stronger demand ahead and projections call for excess trucking capacity to diminish in the second half of the year.

This, along with new international business, stronger truck load and premium volumes and our new train service to Atlanta all bode well for renewed intermodal growth.

In the energy sector, coal stockpiles have somewhat moderated in the face of severe winter weather, which is an opportunity in our utility market going into the high demand summer season, and the outlook for our metallurgical coal market is improving, as two of our major customers restarted blast furnaces during the first quarter.

In merchandise, chemical volumes and revenues should improve as lower inventories of plastics are rebuilt and we gain new business through plant expansions and new business development activity.

Ethanol volume will continue to build, and increased shipments of fertilizer ingredients to boost corn production are expected, which will generate higher revenues going forward as well.

And projected higher steel demand of 8% over the first quarter bodes well for increased volume in metals.

Auto parts and automotive will continue to represent difficult comparisons as discussed today, but we expect our portfolio of new -- domestic domestic plants to generate substantial new revenue to mitigate these losses as new production and expansions at Toyota, Honda, BMW, Mercedes and other manufacturers continue to build.

In short, we have a solid service network and are very strong and balanced franchise.

Near term softness as seen today will in our view transition to a renewed level of growth and market expansion as the year progresses.

And our focus on market-based pricing continues to present a clear opportunity for margin enhancement ahead.

Now, thank you, and I'll have Jim Squires come up and review the details of our financial performance.

Debbie, you will get his slides queued, I understand, so --

Thank you, Don.

I'll now provide a review of our overall financial results for the first quarter.

Net income for the quarter was $285 million, a decrease of $20 million or 7% compared with the $305 million eared in the first quarter of last year.

Diluted earnings per share for the quarter were $0.71 which was $0.01 per share or 1% less than last year.

The more modest decrease in earnings per share reflects the impact of our share repurchase program on which Wick will provide an update in just a minute.

This is a snapshot of our operating results.

As Don described, railway operating revenues declined 2% from last year.

Operating expenses also declined 2%, resulting in a $23 million or 4% reduction in operating income.

The railway operating ratio for the quarter was 76.5% compared with 76.1% last year.

An increase of .4% points.

We estimate that the more severe winter weather this year added about $10 million to our operating expenses and .4% points to the operating ratio.

Now let's take a look at our operating expenses in more detail.

The largest decrease was in compensation and benefits which declined $40 million or 6%.

This decrease was driven by a number of items as shown on this slide.

First, you'll recall that last year's quarter included the effect of grants and retirement agreements with our former CEO and Chief Marketing Officer.

Second, performance-based compensation decreased $17 million as the bar has been set higher for our bonus calculation this year.

Third, a modest increase in our stock price during the first quarter of this year compared with the $9.24 increase last year, resulting in $14 million less in expenses.

And you will recall as a rule of thumb that each $1 increase in our share price adds about $1.5 million to our stock-based compensation expenses.

These decreases were partially offset by a $10 million increase for health and welfare benefits and increase in $4 million in wage rates.

The next largest expense decrease was for diesel fuel which declined $12 million or 5%.

The absence of any hedge benefits, which reduced last year's first quarter expenses by $15 million, was almost entirely offset by a 5% drop in the average price per gallon which reduced diesel fuel costs by $14 million.

Also, lower consumption in the first quarter of 2007 resulted in an additional $13 million reduction.

Materials, services and rents decreased $6 million or 1% in the first quarter, compared with last year, as lower equipment rents and the absence of purchase service associated with hurricane recovery traffic more than offset higher maintenance costs.

Depreciation expense increased $9 million or 5% over last year, reflecting continuing investment in our network and equipment.

Other expenses increased by $17 million or 28%, primarily due to higher franchise sales and use and property taxes.

Now let's turn to our nonoperating items.

Other income net, in the middle of the slide, for the quarter was $7 million, compared with $35 million last year, a decline of $28 million.

Most of this decrease resulted from lower gains on sales of property and investments that were $17 million below 2006.

And we do experience some variability in gains on property sales from quarter-to-quarter, and you'll recall that last year we had a sale of a large parcel of land in Georgia in the first quarter.

Expenses related to our synthetic fuel investments increased $6 million over last year, reflecting a lower expected phase-out in 2007, compared with 2006, and all other was a decrease of $5 million.

Interest expense on debt was $5 million lower than last year, largely due to less outstanding debt.

Turing the synfuel investments, as many of you know, NS has invested in companies that own and operate facilities that produce synthetic fuel from coal and generate tax credits.

This slide shows amounts recognized during the first quarter related to these investments.

And as you can see, the net benefit from the investments was slightly above the amount recognized in the first quarter of last year.

You'll also recall that these credits are subject to reduction as oil prices rise.

As of -- as of the end of the first quarter, based on oil prices to date and the expected future prices indicated by the forward curve, we estimate a full year phase-out of 15%.

Now, of course this estimate may change as the year progresses, but if it holds true we would expect to be recognizing amounts comparable to the $7 million in the remaining quarters.

Turning back to our results, the combination of the $23 million decline in income from railway operations and the $23 million decrease in nonoperating items resulted in first quarter income before income taxes of $420 million, of which $46 million -- which was $46 million or 10% below last year.

Provision for income taxes for the first quarter was $135 million, compared with $161 million last year, and the effective tax rate was 32.1% compared with 34.5% in 2006.

And we still expect our full-year effective tax rate to be around 34%.

Thank you, and I'll now turn the program back over to Wick.

Can I use that slide for a minute?

Thank you, Jim.

Well, as you heard the first quarter did pose a slightly different set of challenges than those we've seen for a number of preceding quarters, but I would say that overall we're pleased with our quarterly performance, especially in the light of the severe winter weather and the volume declines, which were discussed.

Importantly, as you heard, we were able to realize an improvement in revenue per unit, which speaks to our commitment to value-based price -- pricing and while the severe weather in February had an impact on our operations, our operating ratio rose only slightly, largely driven, as you heard, by the weather-related expenses.

And while as all of you know, we always are striving to improve our operating ratio, I think it's important to say that Steve, Mark Manion, and the rest of our operating team have continued to do an exemplary job of making what I believe is the best railroad in the country operate even better, and we have more improvement on the way.

Going forward, as Don outlined, we do continue to expect volume headwinds at least through the second quarter, and as a result of those expected headwinds, we are taking some steps to temporarily restrict some of our hiring, and we're looking very hard at all of the other components of our cost structure, including making sure that our top plan is right sized for the traffic that we're currently handling.

However, we do believe that demand for our transportation services will continue to grow, and we remain committed to strategically investing in safety, capacity and new technology, and thereby strengthening our service and financial performance.

As you may recall, this is consistent with our strategy in prior years, most notably in 2003, when we made the investments necessary to position ourselves for the unprecedented volume growth that we then saw begin late in 2003, and continue for the next three years.

We're also obviously continuing to keep a close eye on the economy.

Our overall volumes in April are experiencing continued downward pressure, especially in the automotive and out housing sectors.

But I think the most important and positive aspect of our current traffic levels is that they remain at levels that are very high in historical terms, even in what is clearly a softer economy than we have seen for the past few years.

Now, let me take a few minutes to talk about some issues that have to do with our financial structure and strategy that seem to be on everyone's radar these days, and I thought that since we talk about this from time to time, but don't really -- haven't really set forth all of our principles, that I would take a few minutes today to do this, and then obviously in the future you'll be hearing from Jim Squires and the rest of us about how we're progressing on -- on these issues.

First issue is capital expenditures.

The bottom line here -- here we go -- is what I have already said.

We believe that the fundamental drivers of growth that we have seen in the past few years in our business and our industry are structural and long-lived in nature.

And we are committed to taking the steps necessary -- necessary to strategically position ourselves for when the volume growth resumes.

As you know, we have budgeted $1.34 billion in capital spending in 2007, and that reflects that commitment to maintain our rail system and invest for growth.

Now, our capital expenditures over a long period of time have averaged around 15% of our total revenue, excluding fuel surcharges, and our goal is to maintain that trend going forward.

Now, I will tell you that that percentage will vary a little bit from year -- year to year, particularly given the fact that we do have some heavy capital expenditures coming up for new coal cars.

But we're comfortable that the 15% average will give us the ability to do what we need to do, namely, to continue to invest in infrastructure and equipment and technology.

Next slide.

While -- while we're making -- while we're making significant investments, we're also generating substantial free cash flow, and as you know, we've used that in part to pay down debt in recent years.

I will tell you that we are comfortable now within the range of our current rating.

We show it here along with the ratings of the other major rail companies, and after this May, our intention is to refinance future debt maturities and direct our free cash flow to direct returns to our shareholders through increased dividends and share repurchases.

As you can see, the Board of Directors has increased our dividend, and in each of the last five years, most recently the board increased the dividend by another $0.04 per share or 22% in the first quarter of this year.

Our goal is to move towards a payout ratio of about 33% of net income and a dividend deal above the average of the S&P 500.

Understanding, of course, that the timing and the ultimate payout ratio will always be dependent upon business conditions.

Finally, share repurchases, we do remain confident in the strength of our long-term fundamentals of our business, and as an indication of our confidence our Board as you know recently amended the share repurchase program we had in place to increase the number of shares repurchased -- repurchased from 50 million to 75 million, and in addition the authorization term for that program was shortened by five years.

From the announcement of the program November 2005 through the end of the first quarter of this year, 27.4 million shares have been repurchased for $1.2 billion, including 5.6 million shares repurchased in the first quarter of 2007 for $276 million.

This chart, which I know a lot of you have seen before, shows the daily share repurchases since February 10th of last year, the first day that shares were purchased under the current program, and it's plotted against Norfolk Southern's daily closing stock prices through the end of first quarter of 2007.

You have heard me say before that Hank and I are firmly committed value shoppers, and you can see that we increase the purchases concurrent with declines in our stock price.

I will tell you that we plan to take this same opportunistic approach to share repurchases going forward whenever we can, given our firm belief that that's the best way for such a program to add shareholder value.

As we look to the balance of the year, we expect to see improvements in operations and further efficiency gains, along with better customer service.

At the same time we're committed to value-based pricing and we expect our favorable service trends to continue.

We're working hard to become more efficient, more reliable and more adaptable, and I look forward to seeing where we go when a rallying economy enables enables us to regain our slide -- regain our stride.

Thanks very much, and we'd be happy to take questions now if you have any.

In the back.

(Inaudible) competitive market rate.

Let me get you to repeat that.

And if you would, give your name.

[Adrian Melly], can you give me a general sense of how you price by market and by category of shipment, how come -- how much of differential is there between you and trucking for different segments, and just a general sense of where the prices come from?

Well, I'll give you a general sense.

We do look at it on a segment by segment basis, very clearly.

And try to have an understanding of what the competitive marketplace for every commodity is, and then we try to price according to -- to the marketplace.

There are -- within each market there are differentiations in terms of the type of service that may be offered and the type of equipment that's in use.

There are all kinds of variables.

But our goal is always to price based on what the market tells us that we can price.

So you feel you're pricing -- you're charging the maximum you could in any given market at this current time?

Well, I would say that we also have -- we also operate clearly under some constraints from a regulatory standpoint, but, in general, I think it's fair to say that we try to price to the -- to the point where we know we can get the business and make an adequate profit on it, based upon market conditions.

Don, is that -- okay.

In the back.

Yes, Wick, it's Tony Hatch.

I've got a couple questions, quick ones for Don.

I thought it was really interesting the -- how you broke out the impact of the auto and housing slumps on the -- on your various components, your business components.

But I was curious particularly about coal and how it impacted.

Where do you see that, and how can we try to measure that in the future?

And then what happened in the drop in west coast international volume which was the one bright spot on the west coast intermodal side?

And how optimistic are you about a second half turn with your new contracts in intermodal in general?

Tony, on the -- on the first part, with respect to coal traffic, I think if you look at our quarter in terms of a 3% improvement in RPU, basically flat revenue, it reflects the timing of contract repricing.

With respect to our book of business, as you know, if you look at 2004, 2005, on into 2006, we had some very substantial and steady improvements in RPU and even coal, because we renegotiated contracts during those years.

So in the first quarter it was a timing issue.

Going forward in terms of coal outlook, metallurgical coal we think will be better.

I mentioned two blast furnace that have restarted in the first quarter.

That -- that bodes well for increased demand, and also the increased production of steel, domestically, which is projected to be up 8% for the balance of the year.

That -- that also bodes well.

Now, with respect to our intermodal traffic from the west coast, as I've mentioned, as everyone knows, there have been some consolidations and mergers in the steamship line industry, and also there's a timing issue there with respect to when individual steamship lines renegotiate their western railroad contracts.

Those that haven't renegotiated are in a better position than those that have renegotiated at this point.

We're seeing some shifting of sands between carriers as a result of that.

I'll give you a case in point.

Maersk.

Maersk has been our largest international account for a number of years, and as everyone knows, Maersk has announced some redeployment of assets, some transition from transcontinental to all water to the southeast and they've also announced some lanes -- intermodal lanes that they'll no longer participate in.

So that's having an impact on our -- our volume, Tony.

Vis-a-vis, the total imports that are coming in.

Other questions?

Good morning.

It's Tom Wadewitz from JPMorgan.

On the yield breakout, can you give us some perspective on how much was priced of fuel and mix?

Is it -- I don't know if you gave that within the presentation, but can you give some perspective on that in the quarter?

You want to go over -- we did give some perspective on that.

Tom, our -- our net -- our net pricing gain in the quarter was 4%, and if you look -- fuel and mix as I mentioned in the presentation were both negative.

Fuel was about 3%.

Volume, of course was a 4% negative and mix was about a negative 1%.

If you -- if you compare that to what your primary competitor is saying in terms of same store -- they measure same store price, I think they said something like 7% in first quarter, and I'm wondering, is there -- I know you can measure those things differently, but is there an opportunity for you to be more aggressive on price, given their stance, or is it just kind of a choice of favoring volume a bit over price, or how should we look at that, vis-a-vis what we hear from your primary competitor?

As Wick mentioned, with respect to our pricing philosophy, we're always looking at the markets -- the individual markets, and we price to the market in every segment.

So there -- there is no change in that process or focus.

We continue to price to the market in terms of where the market is today with respect to renegotiations that take place.

So we -- we're not changing our philosophy and have not changed our philosophy on that.

We still see a very strong pricing environment, and, again, it comes back to timing of when we are able to reprice certain contracts, certain price instruments that are out there.

Okay.

And then one -- one more.

There's a lot of noise in the space about interest from potential private equity interest, activity of shareholders, that type of thing.

And I'm wondering if you could give us your perspective on whether that type of idea has much merit, and also, in terms of your potential response, you did increase the aggressiveness of your share repurchase program, but is that something that you think you could do meaningfully more if you're -- let's say the pressure increases from some of these parties I mentioned?

Well, it's a very interesting question.

I -- I think at the end of the day, Tom, that what we try to do is look at our company and the income that we're going to generate -- the cash that we're going to generate, and this is something we've said for a long time.

Our first thought is always, what are the requirements of the business in terms of maintaining the property and preparing ourselves for future growth, and that's reflected in our capital expenditures.

And that will always be our capital expenditures.

And that will always be the place where we look first to reinvest.

Beyond that, we look at, how do we return money to our owners?

And our owners being our shareholders and then folks who hold our debt as well.

And we think that we have a strong balanced program of doing that.

We have a lot of shareholders who are interested in our dividend policy, who are more interested in that than the repurchase program over the long-term, and we're trying, as you saw on the slide, to -- to do what we can in a reasonable, and I think not overly aggressive, but strong way to return money to those folks.

There are other folks, as well, who are interested in repurchases.

We've -- I think, as you can see, have been aggressive in repurchasing over the last year, and we have a good program on that and we're going to continue to be aggressive.

And in terms of what other folks might think about what we can do in terms of our capital structure, or how we might go out and -- and spend our money in a different way, we're always listening to the people who own our shares.

And we try to respond to them as well as we can.

But we are trying to balance those three components of what we do with our money so that we don't short the business, we don't unnecessarily deprive the business of capital expenditures, which we can't do and continue to grow in the future, and then balance the -- the -- quite frankly, the desires of shareholders who may have different -- different wants and needs and try to do something that both will feel is a reasonable and adequate return for them.

Okay.

Thank you, Witt.

Let me talk to the man who's been here 67 times.

Hank, is there anything you'd like to add to that?

I think that covers it.

Okay.

The -- the piece of your question that I would agree with whole heartedly is that there's a lot of noise in this space, so we're -- we're going to continue to do what we think is the right thing.

Other questions?

One more, yes, sir.

You mentioned the regulatory front.

Can you give me an update on exactly what the status is of the regulatory front.

It was my understanding that you're currently not regulated.

So, I guess I wasn't -- didn't understand the --

Well, we -- this may be better for a little fuller explanation offline, because it's quite lengthy and complex answer.

The answer is that we are partially deregulated.

There are components of our business that are -- are really largely unregulated.

The primary example of which is being intermodal, and then there are parts of our business that are regulated from a rate standpoint.

There are also a lot of other places where we're regulated, in terms of -- and where more regulation may be coming in terms of things like the transportation of hazardous materials.

There are a lot of regulations around the safety of our operations.

So it's -- it's a complex situation, but we are -- we still have the substantial amount of regulations that governs our business.

So -- but we can given you chapter and verse on that later, if you would like.

Okay.

Anything else?

Well, if not, thanks for your patience, it's good to see everyone, and we look forward to seeing you up here again.