Norfolk Southern Corp (NSC) 2007 Q4 法說會逐字稿

As a reminder this conference is being recorded.

It is now my pleasure to introduce Norfolk Southern Chairman, President, and CEO, Charles Moorman.

Thank you, Mr.

Moorman, you may now begin.

I am wick Moore man, chairman, President and Chief Executive Officer of Norfolk Southern Corporation, and it is my privilege to welcome you to our fourth quarter 2007 analyst meeting.

We remind our liners and internet participants slides are available on our website at www.nscorp.com in the investor section and additionally MP3 downloads of today's meeting will be available on our website for your convenience.

As usual, transcripts of the meeting also will be posted on our website and will be available upon request from our corporate communications department.

At the end of the prepared portion of today's meeting, we'll conduct a question and answer session and invite those participating via teleconference to participate as well, time permitting.

Please be advised any forward-looking statements made during the course of this presentation represent our best good faith judgment as to what my occur in the future.

Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate, and project.

Our actual results may differ materially from those projected and will be subject to a number of risks and uncertainties, some of which may be outside of our control.

Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we view as most important.

You may have noticed we have a slightly larger contingent of our management team represented today and an expanded set of presentations.

Our goal this morning is to provide you with a comprehensive overview of our strategic operational and financial initiatives going forward.

To help us do that, we have with us Vice Chairman and Chief Operating Officer, Steve Tobias, Deb Butler, our Executive Vice President of Planning and CIO, Jim Hixon, our Executive Vice President Law and Corporate Relations; Mark Manion, Executive Vice President Operations; John Rathbone, Executive Vice President Administration, Don Seale.

Our Executive Vice President and Chief Marketing Officer, and Jim Squires, our Executive Vice President in finance and Chief Financial Officer.

We're also joined by Rob Kessler, VP Tax, Bill Romig, Vice President and Treasurer, Marta Stewart, our Vice President and Controller, Frank Brown, Assistant Vice President Corporate Communications, Key Parkerson, General Attorney who is standing in for Leanne Marilley today, and Debbie Malvin, Jim Squires' assistant.

Since we have a full slate for you this morning, let me move ahead by saying I am pleased to report that Norfolk Southern delivered a strong financial performance in the fourth quarter in the face of economic headwinds and higher fuel costs.

The challenges were similar to those that we've seen for a number of preceding quarters, as volumes declined on a year-over-year basis.

However, even though our volumes were down overall, we did have gains in several of our commodity segments as Don will describe, and our results improved year-over-year, including all-time record quarterly revenues of $2.5 billion, which were up 6% compared with the same period of last year.

We also set a number of fourth quarter records including income from railway operations, net income, and earnings per share.

For the fourth quarter, net income was $399 million, an increase of 4% compared with the $385 million in the fourth quarter of 2006, and earnings per share were $1.02, an increase of 7% over the $0.95 per share we earned for the same period last year.

Our fourth quarter results benefited from the resolution of a contract settlement that increased revenues by $26 million and diluted earnings per share by $0.04.

Jim Squires will provide you with the full details of our financial results in just a moment.

The fourth quarter operating ratio improved 1.5 percentage points to 72%, compared with 73.5% for the same period of 2006, and as all of you know, lowering the operating ratio has always been and continues to be a primary goal for us, and we remain committed to further improvement in this very important metric.

For the full year, our 2007 results reflected solid levels of performance throughout our organization.

During the year, we continued to sharpen our customer focus by investing in new capacity to handle business opportunities and developing and integrating new technologies to increase reliability, safety, and efficiency.

Our service continued to improve as you'll see in Steve's presentation, and Steve will also describe how we're altering our incentive compensation plan to better tie improved service to compensation.

Our 2007 railway operating revenues were the highest of any year in Norfolk Southern's history.

We posted our best-ever income from railway operations, earnings per share, and our lowest annual operating ratios since the integration of Conrail, and stockholders benefited from a sixth consecutive year of dividend increases that together raised the dividend 41%.

Despite lower and intermodal and coal volumes for the year as well as continued weakness in the housing sector of the economy, we produced improvement in revenue yield, and we were also able to control operating costs where appropriate, given the business environment and the result for 2007 was net income of $1.46 billion, or $3.68 per diluted share.

As an indication of of our confidence in the strategic direction of our company, the Board increased our quarterly dividend $0.03 per share yesterday or 12%, and we repurchased 8.4 million shares of common stock in the fourth quarter for a total of 23.6 million shares in 2007.

Naturally, I am pleased to report these results but more significantly I am pleased that our performance continues to showcase the strength and dedication of our people and our organization.

We continue to handle historically strong business demands safely and efficiently, and we continue to produce good results that benefit customers and investors alike.

I am going to turn the podium over to Don now, who will provide additional details about our revenues followed by Jim Squires, who will review our financial results.

In addition, I have asked Steve Tobias to talk to with you about two subjects nearest and dearest to our hearts, service delivery and asset utilization, and finally, Deb Butler will outline our 2008 capital plan, and I will close with some comments before we take your questions.

Don?

Thank you, Wick, and good morning, everyone.

Despite well-documented softness in the economy and excess freight trucking capacity, as Wick indicated, we were able to generate record fourth quarter revenues of $2.54 billion, an increase of 135 million or 6% over the fourth quarter of 2006.

The two primary drivers for the increase were higher pricing and fuel.

Merchandise revenue increased by $123 million or 10% in the quarter, as record revenues were attained in agriculture and chemicals.

Automotive revenue was up 20%, or $46 million for the quarter, due to a contract volume shortfall payment of $26 million, and other revenue gains in the automotive segment.

For the full year, merchandise revenues increased by $90 million or 2%.

Coal revenue in the quarter was up $9 million over last year, an increase of 2%, and a new quarterly record.

For the year, coal revenue declined by 1%.

Revenues were up 1% in the quarter for intermodal, despite a less than robust marketplace while revenue declined by 3% for the full year.

With respect to pricing and yield, the fourth quarter represented our 21st consecutive quarter of revenue per unit growth.

Each of our seven primary business segments produced record revenue per unit for both the quarter and the year.

RPU reached an all-time high of $1313 for the quarter and $1242 for the year, an increase of 9% and 4% respectively.

Of the 9% RPU growth in the fourth quarter, 1% was due to the automotive contract settlement that I just mentioned and the remaining 8% was roughly half price and half fuel and mix.

Going forward, as discussed in previous quarters, we expect an average of 4% pricing yield independent of fuel and mix.

Looking at volumes, despite unfavorable economic headwinds, four of our seven business segments realized higher shipment levels in the quarter.

As you can see here, short falls in coal, intermodal and paper offset gains and other merchandise traffic resulting in a 3% overall decline in volume versus last year's fourth quarter.

Volume for the full year was down 4% compared to 2006.

Now turning to our individual markets for the quarter, record agricultural revenue was up $36 million or 14% as shipments increased by 3%.

Pricing gains along with strong export and domestic corn shipments, which were up 10%, drove the growth.

The integrated agri fuels market, comprised of biodiesel, ethanol and related feed stocks including fertilizers was up over 4,000 car loads or 30% during the quarter.

In chemicals, we recorded our 18th consecutive quarter of year-over-year revenue gains as strong pricing and higher volumes drove revenues up 12% to a new quarterly record.

Volume was up 1% in the quarter due to increased plastics traffic as well as higher sulfuric acid and soda ash load and soda ash car loads.

Online plant expansions for plastics production and new asphalt terminal in Georgia added to volumes in the quarter as well.

As mentioned earlier, automotive revenue in the quarter was up 20% or $46 million, $26 million of the increase consisted of a volume shortfall payment in one of our automotive contracts, while improved pricing and higher traffic volume with other automotive customers generated the remaining $20 million gain in the quarter.

Volume rose 1% for the quarter driven by higher shipments for the new domestics, Toyota, BMW, Honda, et cetera, and General Motors.

Turning to metals and construction, metals and construction revenues increased by 7% or $20 million in the quarter, while volume rose by 2%.

Volume gain in the quarter was partially driven by new coil steel business to Detroit, as well as new business diverted from barge at Hennepin, Illinois.

Construction materials volume fell 3% in the quarter due to continued softness in the housing sector.

Paper and forest products revenue fell $11 million or 5% in the quarter while volume declined by 9%.

In the fourth quarter and throughout the year, lumber shipments were weak due to the housing market, kale and clay volumes were impacted by competition from Brazil, and the loss of some short haul export business and our conventional paper market continued to be impacted by increased truck availability throughout the southeastern market.

In our coal business, despite a soft utility and domestic met coal market we produced the highest revenue quarter ever at $601 million, an increase of 2% over the same period of 2006.

Revenue per car reached $1441, an increase of 7% over fourth quarter 2006.

The revenue per car growth resulted from higher rates, increased fuel surcharges and more favorable traffic mix.

With respect to volume for coal, in the quarter, a 23% increase in export coal shipments were offset by weakness in the utility and domestic met markets, export demand to Europe remained strong, driven by the weak dollar and Australian port congestion.

High utility stockpiles, primarily in the southeast, along with mine outages and weaker domestic coke demand suppressed volume in the utility and domestic met markets.

In the near term, reports indicate that Consol's Buchanan Virginia mine will reopen during the first quarter.

Annual production at this mine represents approximately 5 million tons of low volume coal, which is currently in great demand in the U.S.

and world markets.

Turning to intermodal now, revenue for the quarter of $496 million was up $3 million or 1% over fourth quarter 2006.

Fourth quarter revenue per unit was all time high reaching $640.

Contractual rate increases for several major customers and expanded fuel application contributed to the gains.

We also repriced approximately 30% of our international business during the quarter, which bodes well for 2008.

Intermodal volumes in the quarter fell 4% as continued excess trucking capacity and economic softness impacted shipments.

Looking at the intermodal segments, our international business continued to see the impact of restructuring of trade flows by ocean carriers from West Coast ports to the east, as well as lower overall imported traffic.

NS volumes moving through East Coast ports grew 23% for the quarter, while volumes moving through the West Coast fell 13%.

Domestic volumes in intermodal were impacted by increased over the road competition in the face of softer demand.

Premium traffic was up primarily as a result of increased business with United Parcel Service and triple crown volume was impacted by excess trucking capacity and cuts in automotive production.

Looking ahead, 2008 will continue to be a difficult environment as soft economic conditions are expected to remain.

That's no surprise to any of us.

A weak housing market and high oil prices will make the first half of 2008 challenging for consumer and business activity.

The weak dollar and strong global demand should bolster exports, partially offsetting the slowdown in domestic demand.

Despite these economic headwinds, we expect both volume and revenues to improve in '08 versus 2007.

Strong project growth and new business are expected to generate increased traffic in most of our business groups in 2008.

Also, we anticipate continued pricing gains, averaging 4% over the year as ongoing improvements in our service increase the value of our product.

Thank you.

Now Jim Squires will walk you through our financial report.

Jim?

Thank you, Don, and good morning, everyone.

I will now provide a review of our overall financial results for the fourth quarter as well as free cash flow and capital structure review.

Net income for the quarter was $399 million, an increase of $14 million or 4% compared with $385 million.

Diluted earnings per share for the quarter were $1.02 which was $0.07 or 7% more than last year.

Looking at our operating results, both revenues and profits from railway operations set fourth quarter records.

The 6% increase in revenues Don described combined with only a 4% rise in expenses resulted in a $72 million or 12% increase in income from railway operations.

The railway operating ratio improved 1.5 percentage points to 72.0 in the fourth quarter of 2007.

Before we review our operating expenses in detail, I would like to update you on reclassifications in our income statement line items.

The new income statement line items, including reclassifications, are shown here.

The most notable reclassification relates to fuel.

As you're aware, beginning with the fourth quarter of 2007, the STB will require railroads to provide certain information regarding fuel such as surcharge revenue, fuel expense and gallons consumed.

Previously our income statement line item entitled diesel fuel included only those expenses related to the diesel fuel consumed by locomotives.

In connection with the reporting requirements to the STB, we will now include all costs related to all fuel used in railroad operations in our line item fuel.

This includes items such as fuel used by our vehicle fleet and our roadway machines.

In addition, we made a couple of other reclassifications to provide for smaller groupings on the income statement.

Please note that all of the components are still available in the detail in the back of the quarterly analyst book.

Turning to our expense detail, the largest increase was fuel which rose $97 million or 38%.

Higher prices resulted in an additional $103 million of costs.

Our average cost per gallon was $2.56, a 43% increase compared with 2006.

Locomotive fuel consumption declined $6 million or 3%, commensurate with the 3% decrease in traffic volume.

Depreciation expense rose by $10 million or 5%, reflecting continuing investment in our network and equipment.

Compensation and benefits decreased $32 million or 5% in the fourth quarter compared with last year.

Stock-based compensation declined $15 million in the quarter, due almost entirely to the combination of last year's $6.24 per quarter quarterly stock price increase and this year's $1.47 per share decrease.

Next the accrual for incentive compensation was $13 million lower, reflecting the higher bar set for our bonus calculation.

Finally, other items combined to contribute $4 million to the decline as lower volume related payroll more than offset the effects of higher wages and benefits costs.

Materials and other decreased $7 million or 3%, reflecting lower derailment and personal injury expenses, which is are included in this line item along with other components of what was previously casualties and other claims.

Purchase services and rents declined $5 million or 1%, primarily due to lower volume related equipment rents.

Now let's turn to our nonoperating items.

Other income net for the quarter was $34 million compared with $40 million last year, a decline of $6 million.

Equity in Conrail earnings increased $20 million from last year, primarily due to favorable adjustments related to the settlement of a federal tax audit.

Returns from corporate-owned life insurance decreased $14 million and interest income decreased 8 million as a result of lower cash balances.

Interest expense on debt was $7 million lower than last year, largely due to less outstanding debt.

Now for the last time, I would like to provide some detail concerning our synthetic fuel investments.

This slide shows amounts recognized during the fourth quarter related to our synthetic fuel investments, which as you know, have a pre-tax and an after-tax component.

As of the end of the year the tax credit phaseout was expected to be 66%.

Because of this high phaseout, the quarter reflects a $7 million loss on these investments compared with a $7 million benefit last year.

As you are aware, this was the last year of section 29 credits.

For the full year, we had a net benefit of $13 million compared to an $18 million benefit in 2006.

Total taxes for the fourth quarter were $213 million, compared with 154 million last year.

The much higher effective rate of 35% compared with a rate of 29% in 2006 was driven primarily by the phaseout of the synthetic fuel credits.

While fourth quarter net income was 4% above last year, full-year results were $17 million or 1% below 2006.

Diluted earnings per share for 2007 were $3.68, which is $0.11 per share or 3% more than 2006.

Now I would like to update you on our flee cash flow and capital structure.

For the third consecutive year, our cash provided by operating activities was over $2 billion.

As you can see, capital expenditures have increased over this same period.

In a few minutes, Deb Butler will updated you with regard to our capital plans for 2008.

Free cash flow, which is after capital expenditures, was approximately $1 billion in each of the past three years, well above our historical free cash flow.

These levels of profitability have enabled us to increase our dividend as well as make significant share purchases in the last two years.

The dividend has risen at a compound annual rate of 41% over the past two years from $0.48 per share to $0.96 per share.

Yesterday, our board voted to further raise the dividend by 12% to $0.29 per share per quarter, which is 32% above the $0.22 paid a year ago.

These dividend increases are supported by the strong cash flow generation of our business and demonstrate management's commitment to achieve a payout ratio of approximately one third of net income.

In 2007, Norfolk Southern paid 26% of its net income as dividends.

Recent market volatility in combination with consistent dividend increases has resulted in an indicated yield for NS of approximately 2.5%, a significant premium compared with 1.5% for the other U.S.

Class One railroads and about 2% for the S&P 500.

This slide shows our share repurchase activity for the past two years.

During 2006 we purchased 21.7 million shares at a total cost of $1 billion.

During the fourth quarter of 2007, we bought back 8.4 million shares of stock at a cost of $428 million.

This brings our total purchases for 2007 to 23.6 million shares at a total cost of $1.2 billion.

Provided the economy cooperates, we expect to continue to generate significant free cash flow.

This, along with debt issuances is expected to provide the resources necessary to continue along this path.

As a result, subject to economic and market conditions we expect to repurchase a similar amount of shares in 2008.

Thank you for your attention, and now for an operations update, I will turn the program over to the Railroader of the Year, Steve Tobias.

Thank you, Jim.

Good morning.

Appreciate you being here with us today.

As we begin 2007, our operations were impacted by severe weather in both of the Midwest and the Southeast regions of our operations.

However, as you will see, we quickly recovered from these continue conditions and finished the year very strong.

Our network is fluid and operations remain strong as we continue to emphasize improvements in service and safety.

Our performance measures continue to show improving trends as we increase focus on consistency of operations and service delivery.

Before I get into service performance, let me briefly tell you about our unit train service initiatives.

In our October meeting, Don Seale mentioned our initiatives, the 75 car unit trains but allow me to give you a little bit more detail.

As we have gotten further along in analyzing our operating plan, we determined the network scheduling of unit trains was a key element in reducing variation in the day-to-day operations of the network, with benefits to be had in both the unit train side as well as the rest of the network.

Under our traditional approach, unit trains were essentially treated as a separate network, and train schedules were controlled by our divisions.

Initiating the train and operated without much consideration for the overall network impact.

Scheduling unit trains to run in defined slots enhances capacity and better utilizes train crews and locomotives, by integrating the unit trains into the overall network operations.

Power generally remains with the train in order to facilitate expeditious movement, return of empties, and completion of the cycle time.

Where service has been initiated, some benefits we have seen include improved cycle times such as an 18% reduction in loaded transit times and a 40% reduction in the time loaded units are held awaiting power and assignment.

In addition, reduced transit cycles have improved asset utilization, allowing us to store 4500 cars since July of '07 and reducing '08 [car harders] by 800 units.

Although a much smaller network, we've seen similar improvements in unit grain operation.

So far cycle time improvements have allowed us to turn in 210 leased grain cars.

Now looking at our service performance, all measures clearly point to continued improvement.

However, going forward, keeping the lead in service means higher expectations in service delivery.

In the next few minutes I will review some of our traditional metrics.

I will also introduce to you some new internal metrics, new internal measures, we are using in our effort to raise the bar on service delivery including our plan to tie service performance to incentive compensation.

First, let's look at the measurements you're familiar with.

This slide shows our daily cars online since 1999, the orange line shows a twelve-week moving average.

Cars on line represent the active cars on Norfolk Southern including both loads and empties.

Fluctuation in cars online can be influenced by several factors including business levels and weather, but is generally a good indicator of network fluidity.

This slide shows the weekly average system train speed since 1999.

This measure represents the average transit speed between terminals, and combined with terminal dwell reflects two major components of service delivery, average train speed for the fourth quarter was 22 miles per hour just slightly below fourth quarter of '06.

Train speed can be impacted by changes in traffic mix and traffic volumes.

For example, lower automotive volume which moves in faster train service normally relative to other commodity train which is moves in heavier slower trains can impact average overall speed.

In '07, train speed was 21.59 versus 21.71, primarily due to flooding in the Midwest and fires in Georgia and north Florida in the first half of the year.

This slide shows continuing improvement in terminal dwell.

The second major component of service delivery.

Terminal dwell represents the average time a rail car spends in a terminal.

In the fourth quarter of 2007, average terminal dwell was 21.3 hours, an improvement of 2.6% over the fourth quarter of '06, and almost 11% below the same period in 2005.

Improvements in terminal dwell are a success story for NS, due to our focus on terminal operations and connection performance.

This graph provides more detail on the improvements and connection performance.

Connection performance measures the percentage of rail cars making their scheduled connections and is one of the primary internal measurements we use in evaluating our over all service delivery.

The measurement covers nearly all connections made at 284 locations across the network.

Improvement over the last three years is evident by the trend line shown in red, with reduced variation particularly in the latter half of '07.

At the end of '07, our connection performance stood at 92%.

Top adherence measures the percentage of scheduled work events, pickups and set offs if you will, executed by road trains.

It is another one of our primary internal measurements used in monitoring our service delivery.

The execution of work events is a critical component of service delivery, since failure to execute scheduled events can result in shipment delays, and slower shipment cycles.

The improvement over the last three years in the declining variation trend in '07 as shown in red, reflects improved consistency of top plan and scheduled adherence.

Train performance.

Train performance is an obvious and traditional measure of service delivery.

Beginning this year, we are significantly raising the bar on this measurement by expanding its scope and redefining what it means to be on time.

This is part of our broader goal of reducing variation.

In oder to better measure variation in train performance and improve the measure to include a broader view of the network, we are changing the train performance measurement to include more trains.

In fact, all scheduled trains.

The additions include Amtrak and the newly scheduled coal trains, grain, and other bulk commodity trains.

In addition, the measurement is now bounded both by the early and late side for the first time and clearly establishes early trains as a defect to service delivery.

The two graphs illustrate the defined windows of on-time performance under the old and new measures.

As shown under the old measure, all early trains were considered on time, shown in green, regardless of how early they arrived at final destinations.

Under the redefined measurement, excessively early trains, shown in blue are no longer considered on time.

We believe this will be the most rigorous internal measurement criteria in this industry.

The three component measurement I have mentioned, connection performance, top adherence and train performance, are now part of a new composite measurement, the intent of the composite metric is to provide a single direct measurement, service delivery that is comprehensive, plan driven, accurate, robust, transparent, easily understood, and actionable.

In short, our employees will be able to positively impact these measurements a daily basis.

In 2008, this new measurement will be tied directly to compensation as part of our bonus calculation along with pretax net income and operating ratio.

The composite metric will represent 20% of the incentive compensation calculation.

In order to achieve a comprehensive measurement, the composite performance measure combines the three components into a composite measurement.

The components are weighted in order to provide a more balanced view of all the traffic.

Since many intermodal and bulk commodity and unit trains are point to point in nature, and therefore not fully represented in the adherence and connection performance measurement, train performance is weighted heavier at 40% of the total.

It goes without saying that the focus of these initiatives is the improvement of consistency and service.

Consistency of service delivery yields both higher customer satisfaction and more efficient operations, along with safety of operations, they remain our highest priorities.

Thank you.

I will turn the floor over to Deb Butler with pleasure.

Thank you.

Steve.

Good morning.

I would like to spend a few minutes describing Norfolk Southern's 2008 capital expenditures plans with a particular focus today on infrastructure investment.

Norfolk Southern manages our Capital Investments to support our business strategy.

Our 2008 budget includes investments both to maintain the safety and quality of our existing franchise and to support the business growth we expect in future years.

We will continue to invest in core rail programs and in rolling stock.

Investment in service quality and performance, especially in the intermodal market area has been and will remain key drivers of growth.

We'll continue to look toward public/private partnerships as one method to help finance these improvements.

In 2008, Norfolk Southern plans to spend 1.425 billion on capital investments.

This represents an increase of $84 million or 6% versus 2007 expenditures.

Each year, a significant portion of our capital expenditures is invested to maintain our franchise, including maintaining our right of way, equipment replacement, and safety and regulatory requirements.

Approximately 71% of our 2008 capital expenditures will be spent on maintaining our railroad for continued safe and reliable operations.

The remaining 29% of our budget is related to the growth and productivity of our franchise.

These projects include infrastructure and terminal expansion investments, strategic opportunities, and projects that improve our productivity and efficiency.

The categories of capital expenditures we plan to make in 2008 are highlighted here.

I will provide some detail for each of these types of investments on the next few slides.

I mentioned earlier that a large part of our budget is spent to maintain our existing franchise, and a significant portion of that is need to do maintain our right of way.

Maintenance of [waste] spending in 2008 is budgeted to be $613 million or 43% of our total capital budget.

Norfolk Southern has a strong history of maintaining our track network at levels that allow us to operate trains safely and efficiently and that meet our customer service standards.

Our 2008 budget contains funding for the normalized replacement of rail ties and ballasts as well as for the continued improvement or replacement of bridges located throughout our system.

Locomotives and freight car acquisitions and improvements will total $264 million or 19% of our expected capital expenditures this year.

We will continue a multi-year program that began in 2007 to replace our coal car fleet with more efficient cars as our existing fleet becomes unsuitable for service due to age and condition.

The main capacity in certain high demand freight car fleets, we plan to buyout the leases of 321 freight cars as their leases expire in 2008.

163 new multi-level automobile racks will be built to handle existing traffic.

We also continue to make capital improvement to our multi-level fleet to keep the cars at the high quality levels that our automotive customers expect.

I mentioned in June we expected spending on locomotives to be lower for the next few years due partly on aggressive spending in previous years and partly to the asset utilization improvements Steve just described.

We'll take delivery of 15 new locomotives in early 2008 and we'll continue to make capital improvements to the fleet to improve efficiency and reliability.

Investments in facilities and terminals throughout our network will total 143 million or 10% of our total planned capital expenditures.

We believe that intermodal will continue to be a high growth market on our network over the long-term, so we are still investing in terminal capacity to handle the expected growth.

Major projects include the construction or expansion of facilities in Columbus and Maple Heights, Ohio.

Investments in bulk transfer facilities will support the growing ethanol market as well as other commodities.

Significant facility investments are also budgeted for noncommercial activities.

These include a new freight car repair shop in Portsmouth, Ohio, upgrades to locomotive service facilities and new or upgraded wastewater treatment plants.

Investments in computers and technology are budgeted to be $66 million or 5% of our total capital expenditures.

We believe strongly that investments in technology enhance safety, improve operational efficiency, and equipment utilization and give us the tools to better plan and manage our network and processes.

Accordingly, we're investing in hardware and software to support a number of technology initiatives in 2008.

A few examples of the projects that we will be funding next year include Leader, a locomotive inner coaching system proven to yield fuel savings and reduce track wear and tear as a result of better train handling, optimized train control, Norfolk Southern's version of positive train control and also invest in several new or improved systems that will take advantage of the increased availability of GPS and other on board communication devices on our locomotives.

Projects that fall outside of the categories I previously described total $339 million or 24% of our planned capital expenditures in 2008.

We've classified these as infrastructure and other.

This category is primarily comprised of investments in infrastructure and expansion, although I should pointed out that some projects that also provide for expansion and growth are already included in other categories such as terminals or technology.

Most of the infrastructure investments are projects to increase main line capacity, track upgrades and expansions to accommodate new customers and traffic, and large network public private partnership investments such as the Heartland and Crescent corridors and the Chicago Create project.

Core investments, such as communications and signal projects, replacement of maintenance of weighed machinery and public improvements such as grade crossing separations are also included in this category.

Our infrastructure investments are critical to our capacity to support future growth, so I will provide a little more detail about them on the next few slides.

Before I describe our 2008 spending plans, I think it is important to highlight the infrastructure investment that is were made in 2006 and 2007.

Investing to accommodate growth on our southern gateways has been a priority.

Investments in the Memphis and Meridian gateways support growth in interline business with our Western partners, growing volumes in our routes to Florida, including our Jacksonville gateway with FEC, has led to spending in that area of the southeast as well.

We've also invested to improve operations in two key areas outside the southeast.

On our route between Cincinnati and Columbus, Ohio, and at our Harrisburg, intermodal hub.

NS has made several targeted investments to improve the efficiency of its coal network, and we've also had success in building partnerships with the states of Georgia, North Carolina and Pennsylvania to facilitate $118 million of investment on Norfolk Southern lines.

Overall, Norfolk Southern authorized $120 million for strategic capacity improvements our lines in 2006 and 2007, not including the Heartland and Crescent corridors.

The investments shown here as well as infrastructure spending prior to 2006 have already had positive impacts on network fluidity and service reliability.

Let me quickly highlight our two major capacity expansion initiatives.

The heartland corridor project will give us a new double stacked gateway for container traffic from the East Coast to the Midwest reducing, transit time from the Hampton Roads Ports to the Ohio Valley by 24 hours.

This is a complex engineering project that will raise clearances in 28 tunnels, and it is not only the engineering that's complex, an enormous amount of work has gone into redesigning service to existing customers to allow trains to operate around the construction windows.

The first tunnel work began in October of last year, and the entire project is expected to be complete by 2010.

As you will recall, this is a $150 million public/private partnership, involving contributions totaling 95 million from the federal government, Virginia, West Virginia and Ohio.

As we announced in June, the Crescent corridor project will link key markets in the Northeast, mid-Atlantic and central southeast with high quality rail intermodal service.

Most of the investments will be targeted to expand existing facilities or markets along the Norfolk Southern network and make lane or road improvements to increase heavy traffic.

The remaining investments for the Crescent Corridor will include locomotives, rail cars and intermodal equipment such as chainers and chassis.

The total cost for the corridor is in excess of $2 billion and will take several years to complete.

As with the Heartland corridor, Norfolk Southern will invest to the ex tent we expect to earn a reasonable return on our investment.

In fact, a couple of projects in our 2008 infrastructure plan will directly support Crescent and are the result of a public/private partnership with the commonwealth of Virginia.

The availability of additional public funding will be a critical component of the success of this project.

Apart from Heartland and Crescent and based on the market expectations we have today, over the next three years infrastructure investment on Norfolk Southern is expected to be concentrated in two major areas, the lines east of Chicago and the southeast.

The Chicago east projects have largely been identified and will be built out in phases over the next two to three years.

Significant investments and facilities in track capacity are also planned in the Atlanta and Birmingham areas.

Let me end where I began, as has always been our practice, Norfolk Southern's capital plan is designed to support and closely align with our business strategy.

Clearly that strategy anticipates solid prospects for long-term growth.

But our plan is also flexible enough to allow us to adjust spending if market or regulatory conditions change.

Thank you and I will turn the program back over to Wick.

Thank you, Deb.

Let me try briefly to sum up all of this in terms of our results for 2007 and our outlook for 2008 and beyond.

I reflect that beginning in about 2004, one of recurring questions that all of us have had, all of you have had for us is how deep and long-lasting are the changes in the transportation marketplace that have been driving our improved financial performance as well as the improved financial performance of the industry.

My response has usually been they seem to be here to stay, but we really wouldn't know until we saw a business downturn.

In 2007 we saw that downturn, and in the face of it, Norfolk Southern which as you know was an industry leader in volume growth and pricing from 2002 through 2006, still posted improved year improved year-over-year financial results and a lower operating ratio.

While down year-over-year, our volumes remain at historically high levels, and as you've heard this morning, we continue to take a long-term perspective as we plan new traffic corridors, improve technology and support our operations with the tools necessary to provide both superior service and drive profitable volume growth.

2008 obviously presents hurdles similar to those that we tackled in 2007 and for that matter have tackled for a number of years, including cost pressures in the form of increased wages and health and welfare benefits and continuing high diesel fuel prices.

In the near term, we obviously continue to keep a close eye on the economy.

In January we see continued pressure on overall car loadings, especially in the automotive and housing sectors, and we do expect as Don mentioned, to see that pressure continue for the next several months.

As all of you know, we never take our eyes off of the cost side of our company, and our commitment to improve our operating ratio, and we'll react to changes in revenues accordingly.

However, right now we do plan to continue our locomotive and car overhaul program to y ensure that we can continue to respond to our customer service demands.

As Deb discussed, we're continuing to invest for future growth and traffic flows and in short we remain very optimistic about our future prospects.

Thank you very much.

We'll now take questions first from those of you who are here in the audience and then we'll turn it over to our telephone participants to the extent we have time available, and as always, I would ask you to identify yourself before you ask a question.

And we'll start on the right and work on the left.

Good morning.

It's Tom Wadewitz from JPMorgan.

I wonder if you can give a sense of some drivers of the significant change in yield growth and fourth quarter versus third.

You talked about it a little bit, but it is tough to figure out how to forecast '08 when you had the 2.5% growth in third and 8% in fourth.

I am just talking about reported yields year-over-year.

Wonder if you can give further thoughts on that and perhaps how we should look at yield growth in '08?

Let me ask Don to come up, too, and to maybe give some color, but I think the important thing to understand is that as we -- and we talked about this before, and we talked about it in light of the third quarter, and in particular is that our yield growth is to some extent dependent upon when we have contracts come up, and the repricing of those contracts, and that's not really ratable necessarily on a quarter to quarter basis.

On an annual basis, as Don mentioned, I think we have a pretty good idea of what's going to happen, but in any particular quarter it can be problematic depending on the number of contracts that we have come up.

Good example, Don, I guess is the fact that in the fourth quarter we saw 30% of our international intermodal contracts being renewed.

Wick, you pretty much answered the question.

I am sure Tom has another question for you.

Tom, I would like to reiterate it is not linear.

Timing as we've indicated in past quarters, timing of repricing comes into play.

Certainly fuel comes into play as well, and mix comes into play.

In the fourth quarter, we had a slightly favorable mix.

We had higher fuel, and as I mentioned, the 8% gain in RPU after you back out the 1% for the automotive settlement of the 8% half was price, yield, pure price, the other half was mix and fuel, and looking ahead, 4% is what we see as an average over '08 as we go forward.

It won't necessarily be ratable in each quarter, it could fluctuate a little bit quarter to quarter, but we think that is a good solid number for the year.

Right.

And I understand that fuel is a significant driver in reported yields, but in terms of mix, you had some significant mix unfavorables in third quarter, and sounds like slightly favorable in fourth.

And I am concluding from what you're saying that the fourth quarter is more representative on what your '08 run rate would like like.

Is that fair?

Yes.

As you may recall in the second and third quarters, we tried to make this rather explicit.

Was that we had a very quiet period in both of those quarters on repricing from a timing standpoint.

I mentioned in the second and third quarters that that would start to change in the fourth quarter, and we would see some repricing in the fourth quarter that would have a favorable, more favorable impact going into '08, and that continues to be the situation.

Okay.

I have one more for you, Don, and one for Wick and I will give you both at the same time.

Your primary competitors, CSX, yesterday had some pretty optimistic comments on export coal, saying they thought it would be up 50% in '08 versus '07.

I am wondering if you can give a sense of whether you could realize a similar magnitude type of improvement or if there are port constraints or anything else to consider there, and for Wick, in terms of operating ratio, you didn't really talk about how we might think about OR in '08 versus '07.

You said volume is probably up a little bit, pricing up 4%.

You didn't comment at all on cost side opportunity or OR, so if you could give any presumably high level comments on that.

Thank you.

Tom, with respect to export coal, the weak dollar, the weak U.S.

dollar, the port congestion, bunker fuel rates, European demand, all of that adds up to good strong demand in Europe for not only metallurgical coal, which as you know has been our traditional market in Europe, but also steam coal, and steam coals are being booked into Europe at levels that certainly was unanticipated a year ago.

So it comes back down to, our business was up 23% in the fourth quarter on export.

It has been up all year.

We forecast a continuation of those types of increases in export, but utility coal, steam coal is entering into the picture.

The unknown here is how the domestic utilities, the U.S.

domestic utilities will come back into the market for steam coal this year as stockpiles start to move.

We still have above-target stock piles we're being told by the utilities in the Southeast, but the coal burn is up, and the coal volume is not moving to the extent that it could to replenish that.

In short, we think stock piles have to come down.

When that happens, the domestic utilities are going to be back in the marketplace.

They'll be competing for that same coal in terms of some of the coal that's going for the export market.

I mean, for all of the reasons Don mentioned, we're -- we think it is going to be a very good year for export coal, but I think our uncertainty is we think there may be some things happening in the market, particularly in the second half, that may tilt the balance one way or the other which really don't have much to do with where we -- with anything we do.

I think the good news for us is that whether it moves export or moves utility, it is moving by rail and that's a positive thing.

Tom, one other comment I mentioned Consol's mine at Buchanan.

As you know, that's low vol coal, high quality metallurgical coal, which traditionally has flowed to that export market, if that mine does indeed come back in the first quarter, and we have reports that indicate that it just might, that will be favorable in terms of our export flow as well.

Tom, you did notice I didn't make any comments about the OR going forward.

As you know, we just don't, other than to say that I will tell you that we think we can drive the OR lower in our company, and we have a lot of initiatives under way and a lot of what Steve talked about in terms of asset utilization, so we're not going to make predictions, but we're committed to driving it on down, and we think we can, with the kind of year that Don outlined in terms of volume and revenue growth.

Thanks, Wick.

It is [Tony Hatch].

I first want to thank you for providing a lot of information today, and I just have three quick questions about some of the stuff you talked about.

The first is, when would we expect to see Heartland or specifically Rickenbacker begin to contribute?

The second for Steve really is given the focus which I found really interesting on integrating unit trains better and whatnot, does that allow you to accelerate putting in ECB or PTC into the system, and the last Wick for you is among your compensation plans, I know you have added what Steve talked about today.

I didn't know you guys were going reasonably quickly.

Do you have anything in there for any kind of return, whether it be on invested capital, replacement costs, whatever, is there a return component to your bonus compensation?

Steve will come onto get the last one.

Starting with the compensation, the bonus computation we're talking about and calculation is what affects the annual bonus program that we have which applies to not only all of our nonagreement workforce but our locomotive engineers and our dispatchers as well, and that computation works the same way for everyone in the company.

We think that's an important thing because as particularly our operating supervision and engineers and dispatchers look at this new component, they will -- they understand it already because they see these statistics, and they'll understand on a daily basis what they can do to impact it.

Unlike the other two components which they have an impact on, but it is not immediately visible which are operating ratio and pre-tax net.

We have other long-term incentive compensation programs which are stock-based for a significant portion of our management but not all which have a strong return component in performance shares and in particular, so I think if you look across and this is all outlined in our proxy, I think you will see that in terms of aligning our compensation with all of the key drivers of shareholder value, I think we have some really strong compensation programs that do that.

Steve, why don't you -- and Tony, remind me what was the first thing you asked?

Rickenbacker.

Rickenbacker opens hopefully next month.

The terminal itself.

Obviously we have service to it today.

What the Heartland does is take considerable amount of time off of it.

The new APM molar Maersk terminal in Norfolk has now opened although it is ramping -- it will ramp up slowly as well, and we should see more and more Maersk traffic and other traffic being driven out of that terminal during the course of 2008, and our projections right now for Norfolk is that we'll just continue over the next two to three years to see steady intermodal volume growth as more and more steamship carriers come into Norfolk which obviously the Port of Hampton Roads is a great natural port and has a lot of advantages.

Don mentioned to you this ongoing shift that we see of West Coast to East Coast steamship business, Norfolk's clearly a major player in that as well, and so you won't -- it is not a step function.

It will just be increasing growth out of the port.

Steve?

You're all familiar with many of the things we've done in our merchandise side of the business and the standpoint of cycle time and taking handling out of what we do.

It is a natural progression to apply those concepts into our unit train application and have them fit better and intermodal as well, because they're essentially point to point operations, and have them fit better into the overall network of how we do business functionally as a railroad.

As your question relates to UTCS and PTC, certainly we are rolling those processes as fast as we can roll them as we are leader, which I know, Tony, you're familiar with, and its application across our systems.

It will help facilitate those processes as we put greater regularity into what we do.

The real upside in the unit train piece of this is we made the commitment to apply the resource and the asset to standardize the requirement for the performance necessitated for these unit trains.

That puts a whole different parameter around what our customer base, both the receiver and supplier, can look to as a standard to begin to find way to say take costs out of what they do which will help us do a better job of cycling and also impact lifestyle, which is important part of what we're trying to do also as a railroad.

In short, we're applying the KISS principle.

We want to make this very simple, and we think there is enough upside here that everyone will benefit in a very significant way.

You might mention the ECP which is a good --

ECP obviously as we migrate electronically controlled pneumatic brakes is one of the greater technology applications.

We have two trains running with ECP, and it lends itself to coal.

It lends itself to intermodal probably, and the migration and merchandise as you have some understanding of the merchandise network will take a bit longer because of the myriad types of equipment, but it is a natural progression.

The benefits there are more than significant.

Of course there will be costs associated with it, and as Debbie pointed out, we'll balance our capital dollars against the requirement and make the right decision for NS.

Hi.

Ken Hoexter from Merrill Lynch.

You talked earlier about 30% of your intermodal volume was repriced during the quarter.

I think it was said earlier.

International contracts, not the total volume.

Okay.

International contracts.

Can you talk about the length of those contract renewals, how the market is right now, particularly in light of the large shift that we're seeing of freight moving to the all water East Coast ?

Let Don.

Good morning, Kent.

With respect to the international business which as you know is about half of our total intermodal book of business, 30% of that was renegotiated in the fourth quarter, and the term of those renegotiated contracts range from 3 to 5 years.

It is a mix of terms.

As far as the shift in traffic, this is something that as we've made our trips to Asia over the past five, six, seven years, the shipping community has told us very clearly that plans to increase usage of the Suez Canal, the Panama Canal, all water service to the East Coast as trade patterns continue to develop and change, that's been a very clear message in terms of strategy, which in turn led us to the Heartland corridor planning, the Rickenbacker development, all of that was part of what the shipping community has been telling us over the past five or six years.

It is accelerating as we speak, and I think I shared this with you in the past.

If you go back five years ago, 20% of our international cargo, international container traffic, was coming in over East Coast ports.

At the end of 2007, 50% of our import container business came in over the East Coast.

The shift is now and it is happening, and it will continue to happen in our view.

So if I understand it right, about 60% of all freight that hits the ports goes by trucking because it is more local in nature.

Has that changed at all or is that the goal with the network investments?

I am trying to understand if you're seeing particularly with truck prices as where they are?

Are you seeing more and more of those goods move by truck?

We're seeing double stack economics compete very favorably with truck from the ports.

If a ship lands in New York for all water, obviously that is a local distribution.

Instead of a Chicago to New York haul, it would be local trucking.

If a ship comes to Norfolk and goes to the Ohio valley, that is a great haul for us from Norfolk all the way to the Columbus area as opposed to Chicago to Columbus today, so there is some netouts here that are very favorable even in some of the shorter haul lanes like Savannah to Atlanta.

The Port of Savannah is seeing increased activity with all water.

We have focused on that corridor.

We're running heavy, dense, long, double stack trains between Savannah and Atlanta, and we're competing quite well, and the margins are very good as well.

Then on the -- I guess more a Jim question.

On the investment or maybe it is a Wick big picture question.

On investment tax credit proposal in Congress, how would that shift, you just gave us great detail and breakdown of your CapEx plans.

How would that shift your thinking on CapEx?

Would you likely want to make larger investments in the near term or would that shift your thinking at all?

Well, depending on, it depends on the flavor, obviously, but I would say that with the right kinds of investment tax credits, for example, something that looks like the bill that the rails have introduced already with 25% tax credit, where we see opportunities where we know we're going to have ongoing infrastructure investments into our network and, we have a big process we've detailed to you before in terms of looking at our infrastructure, and our need, not just for 2008, but for the next five years, and if there's a program that's put in place that makes those-- makes it economically attractive to go ahead and accelerate those investments and increase our capital spending in the short term, knowing that we're saving money by doing that, we'll jump in that game, and I think that would be, not only beneficial to the railroads, but as we keep talking about with this legislation as you know, I think it would be great public policy as well, so, it's something we're watching.

I call Rob Kessler and ask him about it, and the AAR is looking at how that can be done, too.

It would have an impact if it's the right kind of tax credit and what we think about over '08 and '09, for maybe some increased infrastructure investment.

All right, and just a technical numbers question for Jim, it seems like if you take the $253 million of fuel expense and divide by the gallons, you get more like a $2.83 cost as opposed to the $2.56.

Is that because of the shift of added expenses that you mentioned earlier of other diesel costs being thrown into that line?

Exactly, because of the reclassification we added fuel-related expenses to the new fuel line item, and that took it up roughly 10% off what would have been pure locomotive diesel fuel.

Going forward, are you going to relate what is, again on a consistent basis for locomotive diesel, or are we, are you going to continue to report the cost that you have to spend per?

We'll continue to report that along with gallons consumed.

Okay.

And just finally, if I look at your balance sheet, your debt-to-cap ratio would, over the next year or two years, again, it's just holding results improving in the same place would drop down 3 points which means you have a $1 billion of capacity to increase buybacks over the next year and another $2 billion in two years.

Just wondering, what would get you to be more aggressive on a stock buyback at this point just conceptually?

We said that we feel we have room for incremental leverage in our capital structure while maintaining strong investment grade ratings.

That is our overall objective.

Within that, sort of within that parameter, we have room for significant additional debt and we've said this morning that we expect to do somewhere something like the amount of share repurchases we did in '07 and '06 in '08, so I think that's going to be the plan.

We'll have to see how things go.

Stock price is a factor, credit markets are a factor, the economy is a factor, cash flow generation are all factors.

Thanks again for the white slides.

Scott Flower.

Just a couple of questions.

Obviously you gave us great detail on the CapEx and we appreciate that.

I wondered maybe if either you or Jim could give us some color.

How do you look at the balancing of, obviously I am not used to see up CapEx in what is a choppy volume environment, at least near term.

Maybe you can give us perspective how you see the balancing of forward investing or eventual volume rebound versus the regulatory environment and prospectus and how you get that timing right so that you're not too early relative to what volume recovery versus obviously the broader perspective that you may see in the industry and then I had a couple of other follow-ups for Don.

That's obviously a great question because we want to invest as close as we can to a just in time basis, and we remain, as I said earlier, very optimistic about our prospects for volume growth when the economy starts to get a little better, and so the question is at what point do you start to invest.

The issue with a lot of our projects, particularly the projects that Deb has outlined in terms of infrastructure, is they're fairly long lead time projects.

Longer lead time than they used to be, because as you might imagine, not just in the rail industry, the issues and timing around particularly the acquisition of property and the permitting to do construction just seems to take longer and longer every year, and with our commitment to investing for the volume growth that we know is coming, we have to kind of step out and make those investments we think quite often a year or two in advance just to be to the point where we can go out and do the construction.

This is as you say, a little choppy on the volume side, but it -- we look through this, and we're going to do as we've always done, Scott, and you know how we look at the world.

We're going to try to do this in a ratable way, and be ready so that when the volume comes, we'll be able to handle it and handle it profitably.

Having said that, we look at it very closely this year.

One piece I should point out, too, of our capital program which both Deb and Steve touched on, but it is something that's there that we told you about before, and it is just something that -- six to eight years, and that is that we have to buy a lot of coal cars.

Our coal car fleet is aging rapidly, and reaching the end of its, really its second life because most of the fleet was rebodied about 20 years ago, as I am sure you all know, these cars start to deteriorate after some period of time because of the corrosive effects of coal.

The good news is with the new cars we're buying we're using different steels, that won't be a factor in the future, and we also are adding capacity, so these are much more productive cars, but one of the drivers of our capital for the next few years is just going to be the fact that we have to step out and buy coal cars, and that's a fair sized component of this year's budget, 1300 cars this year.

The other question and maybe this is for Don, is obviously imports and exports are shifting and there is obviously currency impact, and can you give us some sense of how much of your total business is actually affected by trade, either imports or exports, and I know that may be fuzzy and give us some sense of how you're participating in the uptick of exports, because a lot of the discussion about imports falling off is well known, how, and in what areas you're participating in exports and how that is changing could be helpful.

Scott, one of the immediate impacts with the weaker dollar and the increased exports and somewhat softer imports and also the port shifts that we talked about earlier is that we're seeing a lot less empty repositioning of containers transcontinentally back to the Pacific coast ports.

That is something that has changed rather dramatically, and those empties now are being loaded somewhat back to the East Coast ports for export product, but also the empties that are being taken back to the port are being repositioned back to the East Coast as opposed to the West Coast.

Now, with respect to the second part of your question, in terms of a flavor of what types of products, our machinery market is up significantly, I mentioned in the automotive market that General Motors was one of the increases this quarter along with the new domestics.

The GM increase was not domestic.

It was export related.

It is a range of products running from machinery, automotive products, agricultural products, I mentioned our grain business, our corn business, our domestic and export corn, which as we told you in the past, the grain, the export grain market has not been a market that we have played in on a strategic basis because we like the domestic market.

It is more predictable, it is more ratable, with southeastern feed mills that we located, but the export grain market is so prevailing today that we are participating in it and doing quite well, and that business continues to grow.

Grain, machinery, automotive, some chemical traffic, it is across the board.

Thank you.

A couple more over here and then we'll do a couple on the phone if we can.

There and there.

Hi.

Sami Kohan with Lehman Brothers.

Two quick questions.

In the uptick in the equity income from Conrail you mentioned a tax item or Jim did.

How much of that $20 million increase was from the tax audit reversal, like if we just put a number on it?

Essentially all of it.

That reflects obviously our portion from our ownership.

Right.

And then the second question is in the third quarter you spend a lot of time talking about mix but specifically length of haul issues.

Was there an offsetting impact this quarter or was mix just mix between commodity types when you mentioned the positive mix?

I think one of the things we saw, Don, is we saw in the third quarter we saw in our coal business in particular where this mix in effect hit us is we saw for various reasons a little fall off in our long haul traffic and at the same time, we've got a lot of short haul river coal traffic, and that's accelerated and continues to stay at a high level, but we saw the -- some of the long haul traffic come back to us, so that you didn't see that mix effect quarter this quarter in the same way that you did last quarter.

And the other mix effect, Don, anything in particular that it is just kind of something here, something there?

Right.

It is no one thing, and you're always -- every quarter you're just going to see little pieces throughout our business, could be a little in intermodal, could be in various places.

One more here.

Adam Longson, Morgan Stanley.

A couple of quick questions primarily for Don.

I know the economic environment creates a lot of uncertainty, but given all the growth initiatives that are out there, do you have a sense for when total volume growth might return?

It is a question we ask all the time.

That's a question that I feel like the weight of the world is on my shoulders.

That's a great question.

With all the moving parts in the domestic economy, the international economy, in terms of when volume growth will resume, if you break it in to a couple of components, the domestic trucking industry.

When that industry tightens up inside the U.S., we'll see domestic intermodal certainly continue to its growth pattern.

On the international trade side, I see that coming back.

We're in the middle of a transition of repositioning of vessels, repositioning to ports, but that growth will be there import/export growth.

The coal business, with the Illinois basin, PRB, Central Ap, Northern Ap, coal sourcing and import sourcing before the dollar got so weak, coal demand and the alternatives for coal or the lack thereof, coal volumes will continue to grow over time, and we may get to a point because of weather that stock piles are high as they are today in the southeast.

Natural gas prices are at $8 today, and that will continue to drive demand for coal.

I think it is the most available, most economic fuel for utility, electrical utility generation, so volume growth will resume in that coal market over and above the export market we've already talked about which will continue to grow.

The housing sector, your guess is as good as mine in terms of when that is going to actually bottom out.

We've seen starts down 25% last year, year before last, another 26% in '07.

We've got a ways I think to work through that, and as we mentioned in earlier meetings, housing has a pervasive cover in the economy, if what we transport and what's moved, so if you put all that far together, we still feel that our '08 volumes will be better than our '07 volumes.

Year-over-year?

Up year-over-year.

And then just one more quick follow-up.

In terms of the 4% pricing you're talking about next year, how much confidence or visibility do you have into that through things that are somewhat locked in, say, escalation contracts, contract renewals, things like that?

I can say we have very good confidence on that number.

We know when contracts are going to be repriced, which contracts are going to be repriced.

We know when we're going to reprice confidential quotes, so that number is an aggregate of the plan over the year, and as Wick indicated, that plan over the year doesn't call for it to be the same every quarter, because the timing, the termination or expiration dates of those instruments are not all timed in every quarter, because they've been in place for years, and depending upon when they're renegotiated when they're put in place, it varies the next expiration and renegotiation time, but we're very confident on the 4%.

Then if we have time, just one last quick one.

I know improving service and investing in service has been a hallmark of Norfolk Southern, particularly over the last couple of years, it's sort of been the mantra yet the volume growth hasn't been there, and a lot of that is due to the economy.

Have you really seen the kind of returns you were expecting from investing in service and has that shifted your approach to how you may invest going forward?

Let me answer that.

We haven't seen anything, we look at the impact of the economy and obviously that's a significant driver.

I think the world has changed some, but we're still very closely tied to the economy.

But we don't see anything in terms of how we deal with our customers, what they tell us, and what we've been able to do in our renegotiations in terms of both price and the volume they have available that tells us that investing in service doesn't -- isn't a high return prospect, and I think it is particularly important, to kind of look at.

I think the last four or five years are very instructive in terms of when the volume growth came on in '03 and '04, our network was able to handle it, and we were able to deliver good customer service and that's really what drove a lot of our volume growth, is people turn to us because they knew we had a high-value service product, and we are consistently told and we do a lot of market analysis that the better we make it, the more prospects we have, as well as Steve said, the other great thing about improving service and running the railroad more and more like a Swiss watch is you take out assets.

The more regularity you have, the more asset efficient you are and the most costs that come out, so from both standpoints, that's the direction we want to go.

Let me see -- I know we have a few people on the telephone, and we're running out of time here.

Who is out there?

(OPERATOR INSTRUCTIONS)> We have our first question coming from Edward Wolfe of Bear Stearns.

Thanks, everybody, for reaching out to the phones this time.

Thanks, Wick.

Sure.

A couple of things.

You talked a lot about contracts repricing and some of them in the fourth quarter.

Don, if you said it, I didn't hear it.

You talked about the contracts being three to five years.

What was the average amount of rate you're getting per year on those three to five-year international contracts, and then separately, could you talk about were there any other legacy contracts long-term?

Looks like coal yields are up dramatically relative to last quarter as well.

Were there some long-term coal contracts that came up in fourth quarter?

Well, Ed, first of all, thank you for the comment about opening up the phone lines, but although we have broken with tradition to do that, we're not going to break with tradition in terms of not really talking about price increases that are built into contracts, any specific group of contracts.

In terms of the coal for the fourth quarter, I don't think that we -- I think we had a couple of renewals, but I think what you saw there really again is the mitigation, more than anything was that mitigation of that mix effect that just seemed to really be specific to the third quarter.

The other thing, too, that we didn't mention is that a lot of our coal contracts have an RCAFU inflater in it or adjustment in it, so you start to see the impacts of fuel flow through that as well, and really, the impact in the third quarter year-over-year were down, and the impact in the fourth quarter year-over-year is up, and so that's the other piece of it, I guess you're seeing.

Okay.

Just directionally, without getting into company-specific, can you talk about are there contracts similar to fourth quarter coming up throughout first, second, third quarter, fourth quarter of '08?

I think in any given year, we feel that between contracts, private quotes, and our public tariffs, there is about half of our book of business that's out there for some kind of repricing, and we don't see anything that makes us think that that number is different in 2008.

It is just going to run about that number every year.

Okay.

Can you talk a little bit about export coal and as a percentage of total coal right now what that looks like or what the rail cars this year are versus what could be possible in '08?

Let me get Don up to comment on that.

Export coal as you know, our franchise is compared to what it was ten years ago looks dramatically different in terms of the percentage of coal that goes export versus utility.

Don, do you want to comment a little more on that?

Ed, good morning.

On the export I will put it in terms of to to tons.

The '07 tons for export was about 15.5 million-tons total.

That was over Baltimore as well as Lambert's Point, and that will be up significantly in 2008 based on our plan.

Could it be double?

Is there that kind of capacity?

I am not comfortable going into the order of magnitude.

I think if you look at the increases that we've seen in '07, certainly we feel that export coal, the utility steam coal that I mentioned earlier as well as the metallurgical coal and then if we see some of the mines come back that I mentioned like Buchanan, that will be another boost, and we have the capacity at Pier 6 at Lambert's Point to go to 19 million-tons.

We have the capacity without doing anything else, and we have capacity to go above that just by tweaking it, but --

Is the 19 million before the two mines reopened or after assuming they reopen?

The 19 million I am talking about the capacity of the terminal at Norfolk, Ed.

Okay.

That's helpful.

In terms of the mines reopening, what would that, add, would you think to volume?

How do we think about that potential?

Consol went down -- Consol's Buchanan mine went down in August of 2007, and that mine produces 5.2 million-tons of coal per year.

It is low vol, high quality low vol metallurgical coal and can go to steam market at the proper price, or it can go to the export market, so that certainly would be a boost to availability to what today on low vol coal for export is a tight market, tight supply.

That makes sense.

Jim, switching gears for a second, now that the synfuel credits are gone, can you give some kind of guidance on other income excluding them?

It has been all over the ballpark.

How do we think about that going forward?

I think that that's going to revert back to a more normalized pattern ex the synfuel.

The effective rate will gravitate upwards, turning the taxes upwards to more like a statutory rate type of rate.

So the tax rate I know will be 37, 38, but how do I look at that other income number?

Is $75 million for a year a good number, $100 million, how do I think about that?

There is a lot of components this that, Ed.

You have probably two dozen or so different moving parts inside other income.

Big ones are obviously real estate related to rentals, the real estate sales, the royalties and whatnot, and you'll see a detail of the some of the larger components of that in our 2007 10-K, so take a look at that and I think that will give you a sense of what's a more normalized level for those types of other income net items.

Okay.

Just quickly, can you give an update?

There is some sense there could be an Amtrak strike, and if there is a strike at Amtrak what impact that might have for Norfolk?

As you know, Amtrak and the labor unions that had gone through the PEB process have now signed an agreement which I think calls for the back pay which the PEB recommended I think maybe what paid over a couple of of years.

It is clearly has to go to Congress, but everything I read in the newspapers says that Congress is ready to act to give them the money.

Knock on wood, I think the possibility of an Amtrak strike is pretty much gone.

Okay.

Thank you very much.

I appreciate all the time.

Surely.

Thanks, Ed.

Thank you.

Our next question is coming from Jason Seidl of Credit Suisse.

Thanks again for taking calls from the phone.

Quick question.

You mentioned you're expecting car load and growth to go up year-over-year, but you did say that the first couple of months were going to be challenging.

Should I anticipate that most of this is going to come from sort of export coal growth a couple of mines coming back, and the Maersk port ramping up or do you anticipate any economic recovery in the second half of the year with those comments?

In general as Don mentioned, and it is mines coming back and it is other growth -- in coal it is project-driven to some extent and some of our other markets like ethanol, like scrubber stone, it does have to do with the renewal of some of our international intermodal volumes as well, not just Maersk and not just Norfolk, so it is a lot of project-driven growth, and it comes on throughout the year.

It is not really tied to any kind of economic forecast that has a much rosier second half of the year, for example.

It is tied to the economic forecast that essentially says this year with housing and everything we'll continue to kind of look like the economy will look like it has for awhile I think is the best way to say this.

Fair enough.

If I can go back to the pricing for a moment, you mentioned that roughly half of your businesses comes up for repricing every year.

Your rival, CSX, basically said they have almost about 70% of their business locked up in pricing for 2008.

Could you give us a similar number without giving us the exact amount?

Pricing?

I don't know that we can just because if for no other reason that I think we all define the world in slightly different ways, and trying to understand exactly how someone else thinks defines the world is difficult for us, sometimes.

Let me dodge that one.

That's not a problem.

And, Jim, on the incentive compensation, the $13 million in the quarter, was that just a quarterly number or was that a reversal for an a accrual that you took prior to that?

That's an accrual that is updated continuously throughout the year, and reflects the expectation for the incentive compensation for that period, so we adjusted it.

You saw that sort of an adjustment throughout the year as we had raised the bar on our bonus and incentive compensation for 2007, and so you saw favorability in that item in each quarter.

Okay.

Fair enough.

Thanks for the time.

I appreciate it.

Okay, Jason.

Thank you.

Our next question is coming from David Feinberg of Goldman Sachs.

Hi.

How are you?

Hello.

Hello.

We're here.

Two quick questions.

With regard to materials and others, I had some comments here in my notes that there were insurance reserve radio reversals.

I wanted to confirm if there were in the quarter how big they were and get a sense in terms of how often you review your insurance reserves and what your expectations are for where they might be headed in '08?

No, no, there were no such items included in materials and other this quarter for us.

And how often do you review those reserves, once a year, twice a year, once a quarter?

What do you mean specifically when you're referring to insurance reserves?

The reserves you're taking for your employee -- for your safety insurance as well as casualties and other?

Yes.

Quarterly.

Two times a year on the PI with a full blown actuarial study and I then the other two quarters an update but it is adjusted quarterly.

Perfect.

Just a housekeeping question.

On the changes you're making in terms of measuring train performance, you mentioned that going forward you're going to be looking at all scheduled trains, what I didn't have is what you were looking at previously.

Effectively our merchandise and intermodal network.

Thank you very much.

Okay.

We are running a little late.

Let's try to get one if it is a quick one two more.

Our next question is coming from John Larkin of Stifel Nicolaus.

Good morning, gentlemen.

Good morning.

Thanks for taking the extra call here.

Didn't hear a lot of commentary on head count from Steve in particular, a lot of talk about the volume decline and increased efficiency.

Just wondering how dramatic the head count reduction was year-over-year and how you see that playing out going forward essentially if we were to get a volume increase, would you have to dip into the folks that are on furlough or would you have to begin to train new employees at some point in the future?

The volume was down just slightly, and if you look at our -- I mean our head count.

If you look at our head count, there are a couple of different things going on.

One as you know, we hired and trained a lot of people on the T&E side and we're doing some continuing to replace people on the engineering and mechanical side.

We have not furloughed anyone, and we're trying and I think we've looked at the cost side, and it makes sense for us to kind of let attrition take our numbers down, because we have, as you know, a workforce with a lot of people retiring in the next few months or year even, so rather than furlough people who are typically your younger people, a lot of whom who don't then come back when you call them back, and we look at the cost of what it takes to train, hire and train one conductor, we think right now it makes better economic sense to try to keep folks working and let the numbers go down, and we expect on the T&E side if volumes stay down, we won't be hiring as much and those numbers will go down.

The other thing that has driven our head count a little bit in the past year or two is that we have done on the management side, we've got a far bigger training programs.

We're hiring people for our training, management training, first level supervisor training, and you've all heard me talk about demographics before.

We're expecting a lot of turnover in our supervisory ranks in the next year or two, and we're getting ready for that, so I always say that we're like every other American company other than Google.

We've got an aging workforce, and we're getting ready for some fairly dramatic shifts in terms of the demographics of our workforce over the next few years.

Thanks.

That's very helpful.

One more.

Nope?

Okay.

I think we're all done.

Thank you very much.

I know it has been a long meeting.

Thanks for your questions.

We look forward to talking to you again.

This concludes today's teleconference.

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Thank you for your participation.