Norfolk Southern Corporation (SO) Earnings Report: Q1 2015...

CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies

EventDescription:Q12015EarningsCallMarketCapasofEventDate:40.60BPriceasofEventDate:44.65

©2014TheStreet,Inc.Al l R ightsReserved Page1of26

NorfolkSouthernCorporation(SO)EarningsReport:Q12015ConferenceCallTranscriptThefollowingNorfolkSouthernCorporationconferencecalltookplaceonApril29,2015,08:45AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

KatieCook;NorfolkSouthernCorporation;Director-IRWickMoorman;NorfolkSouthernCorporation;Chairman,CEOJimSquires;NorfolkSouthernCorporation;PresidentMarkManion;NorfolkSouthernCorporation;COOMartaStewart;NorfolkSouthernCorporation;CFO

OtherPart icipants

BillGreene;MorganStanley;AnalystKenRyan;CreditSuisse;AnalystTomKim;GoldmanSachs;AnalystRobSalmon;DeutscheBank;AnalystScottGroup;WolfeResearch;AnalystTomWadewitz;UBS;AnalystMattTroy;NomuraSecuritiesInternational;AnalystJohnBarnes;RBCCapitalMarkets;AnalystPrashantRao;Citigroup;AnalystBrianOssenbeck;JPMorgan;AnalystJustinLong;StephensInc.;AnalystBrandonOglenski;BarclaysCapital;AnalystKenHoexter;BankofAmericaMerrillLynch;AnalystJeffKauffman;BuckinghamResearchGroup;AnalystJasonSeidl;CowenandCompany;AnalystDavidVernon;Bernstein;AnalystCleoZagrean;MacquarieResearchEquities;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Greetings,welcometotheNorfolkSouthernfirst-quarter2015earningscall.

(OperatorInstructions)

Asareminder,thisconferenceisbeingrecorded.Iwouldnowliketoturntheconferenceovertoyourhost,KatieCook,directorofinvestorrelations.Thankyou,Ms.Cook.Youmaynowbegin.

KatieCook(Director-IR):

Thankyou,andgoodmorning.Beforewebegintoday'scall,Iwouldliketomentionafewitems.First,theslidesofthepresentersareavailableonourWebsiteatNorfolkSouthern.comintheinvestorsection.Additionally,transcriptsanddownloadsoftoday'scallwillbepostedonourWebsite.




Pleasebeadvisedthatduringthiscall,wemaymakecertainforward-lookingstatements.Theseforward-lookingstatementsaresubjecttoanumberofrisksanduncertaintiesandouractualresultsmaydiffermateriallyfromthoseprojected.PleaserefertoourannualandquarterlyreportsfiledwiththeSECforafulldiscussionofthoserisksanduncertaintiesweviewasmostimportant.

Additionally,keepinmindthatallreferencestoreportedresults,excludingcertainadjustments,thatisnon-GAAPnumbers,havebeenreconciledonourWebsiteintheinvestorsection.Now,itismypleasuretointroduceNorfolkSouthernChairman,CEO,WickMoorman.

WickMoorman (Chairman,CEO):

Thankyou,Katie,andgoodmorningeveryone.It'smypleasuretowelcomeyoutoourfirst-quarter2015earningsconferencecall.WithmetodayareseveralmembersofourseniorteamincludingourPresident,JimSquires;ourChiefOperatingOfficer,MarkManion;andourChiefFinancialOfficer,MartaStewart.

Asallofyouknow,earlierthismonth,weannouncedfirst-quarterearningsof$1pershare,15%lowerthanlastyear.Theseresultsreflectedlowerfuelsurchargesonthetoplineaswellascontinuedweaknessinourcoalfranchise,whichrestrictedgrowthinrevenueandrevenueperunit.Additionally,verysevereweatherinourserviceterritoryslowedouroperations,increasedourexpenses,andimpactedourvolumes.Withtheexceptionoftheongoingaffectoflowerfuelsurchargesandcontinuedpressureinourcoalmarkets,webelievethatmostofourissueswillbelargelyresolvedbythesecondhalfoftheyear.

Havingsaidthat,wewillbeupagainststrongcomps,particularlyinthesecondandthirdquartersaslastyear'sresultswererecord-settingquartersforus.Jimwillsharewithyoumoredetailontherevenuetrendsandtheoutlookfortheremainderoftheyear.Withrespecttoservice,wehavealreadyseensteadyimprovementinournetwork,andweexpecttoreachourstrong2012-2013velocityandservicelevelsinthesecondhalfofthisyear.Markwillprovideyouwiththelatestontherelevantservicemetricsandouroperationsoutlook,andMartawillrounditalloutprovidingyouwithdetailsofourfullfinancialresults.

Beforegettingdowntothedetails,I'lljustreiteratewhatItoldallofyouonourearliercall.WehaveagreatteamatNorfolkSouthern,andwhiletherearealwaysuncertaintiesaroundourmarkets,allofusareconfidentinthelong-termstrengthofourfranchiseandourprospectsforfuturesuccess.Onthatnote,IwillturntheprogramovertoJim,Mark,andMarta,andthenI'llreturnwithsomeclosingcommentsbeforetakingyourquestions.Jim?

JimSquires (President):

Thankyou,Wick,andgoodmorning,everyone.First-quarter2015operatingrevenuedeclined5%to$2.6billionprimarilyduetoa$102millionreductioninfuelsurchargerevenuesasaresultoflowerfuelprices.Growthinintermodalandmerchandisevolumesoffsetcoaldeclines,increasingfirstquartervolume2%to1.8millionunits.Revenueperunitdeclined7%butwithouttheimpactofdecliningfuelsurcharges,revenueperunitdeclinedonly2%.Mixshiftsbetweenincreasedvolumesofintermodalanddecreasedvolumesofcoaloffsetstrongpricingacrossmostofourbusinesssegments.

Wewilldiscussthemiximpactaswerevieweachcommoditygroup.Overallvolumegrowthof2%forthequarterwasdrivenbya5%gaininintermodalanda3%gaininmerchandisemarketspartiallyoffsetbya7%declineincoalvolumes.Afterastrongstarttotheyear,volumeinthefirstquarterwasagainimpactedbywinterweatherconditionsandaccompanyingservicedisruptionsparticularlythroughoutFebruary,butsimilartofirst-quarter2014,weachievedstrongvolumeandimprovedservicelevelsinMarch.




Breakingupthemarketsegmentsstartingwithcoal,firstquartervolumedecreased7%.Coalburnateasternutilitieswasdown14.5%inthefirstquarterduetolowerednationalandregionalnaturalgaspricescausingourutilityvolumestodecline6%.Volumestonorthernutilitiesweredownnearly9%whilevolumestosouthernutilitiesweredown2%.Thoughhandlingagreaterpercentageofutilityvolumetooursouthernutilitiesgenerallyincreasesourcoalrevenueperunit,thispositivemiximpactwasmorethanoffsetbya20%declineinexportcoalvolumesinthefirstquarter.

Persistentweakconditionsintheglobalmarketplace,softprices,andastrongUSdollarmadeitverydifficultforUScoalstocompeteinthisover-suppliedenvironment.Domesticmetallurgicalvolumesweredown1%withweakerdemandformetcoalsrelatedtosoftersteelproductionandsourcingshiftspartiallyoffsetbymarketsharegainsofcokeshipments.Thisdecreaseinvolumeandlowerfuelsurchargesreducedrevenueby$86millionto$455million,a16%declineversusfirst-quarter2014.Inadditiontothepreviouslydiscussedmixchanges,lowerfuelchargesalsonegativelyimpactedRPU.

Turningtoourintermodalmarket,wecontinuedtoseestrongvolumegrowthof5%tonearly927,000units.Intermodalpricinggainsoutpacedourotherbusinessunitswithcontinuedgrowthexpectedtherestoftheyear.Despitethesepositivetrends,thedecreaseinfuelsurchargerevenuesdrovethedecreaseinoverallrevenueandrevenueperunit.Theeffectsoflowerfuelsurchargerevenuesmorethanoffseta2%increaseinaveragerevenueperunitalreadydampenedbynegativemixresultingfromhighervolumeincreaseininternationalfreight.Aswe'vediscussedbefore,internationalintermodalfreighthasalowerrevenueperunit.

Merchandiserevenueof$1.5billionwas$32millionor2%--wasdown$32millionor2%forthequarterwitha5%declineinrevenueperunit.Morethan80%ofthisRPUdeclinewasduetofuelsurcharges.Wealsoexperiencednegativemixassociatedwithincreasedvolumesinlowerratedsand,gravel,andaggregateswhilehigherratedironandsteelvolumesdeclined.Ourautomotivesectorwasalsoimpactedbynegativemixwithdecreasedautopartsshipmentsandincreasedbyleveltraffic.

Volumeforthemerchandisebookwasup3%overallwiththestrongestgaininourchemicalsmarketduelargelytoincreasedshipmentsofcrudeoilfromtheBakkenandCanadianoilfieldstoEastCoastrefineries,aswellasincreasednaturalgasliquidsfromtheMarcellusUticaShaleplays.Automotivevolumesincreased4%inthequarterwithincreasedvehicleproductionatseveralkeyNS-servedplants.OurmetalsandconstructionmarketsbenefitedfromincreasedvolumesofaggregatesforconstructionprojectsintheSoutheastaswellasincreasedfracsandvolumeintotheMarcellusUticaregiontosupportnaturalgasdrillingefforts.

Theseincreaseswerepartiallyoffsetbyreducedshipmentsofsteelpipeandsteelcoildrivenbyasofteningofthepipemarketandreducedsteelproductioninthequarter.Agricultureshipmentswereup2%withincreasedvolumesofcornmovingtoSoutheastpoultryproducersaswellasincreasedvolumesoffeedproductsandfertilizers.ThesegainsoffsetreducedvolumesofexportsoybeansresultingfromarecordSouthAmericancrop,thestrengthoftheUSdollar,andlimitedrailcaravailability.

Finally,paperandforestproductsvolumeswereflatinthequarterwithstrengthinlumberrelatedtothecontinuinghousingrecoveryoffsetbyreducedvolumesofwoodchipsandwastematerials.Letclosewithexpectedtrendsinvolumeandrevenueforthebalanceoftheyear.First,weexpectsolidvolumegrowthinmanypartsofourfranchisethroughouttheyear.HighwayconversionsandquarterinvestmentsshouldcontinuetodrivedomesticintermodalgrowthwhileinternationalintermodalshipmentswillbenefitfromtherecoveryfollowingtheWestCoastportdisruptionsearlierintheyear.

Weexpectgrowthinnaturalgasliquidsanddespiteloweroilprices,crudebyrailvolumes.Double-digitgrowthinhousingstartsandincreasesinconstructionactivityshouldgeneratemorelumber,plastics,sodaash,andaggregatestraffic.AutomotivevolumesshouldgrowataratebetterthanNorthAmerican




vehicleproductiondrivenbyoutputatkeyNS-servedplants.Ethanolshipmentsshouldincreaseduetorisinggasolineconsumptionandprojectrelatedgrowthwhileastrongercropshouldpushexportsoybeanvolumesuplaterintheyear.

However,loweroilpricesareexpectedtocausedeclinesinourmetalsandconstructiongroupasdrillingactivityslowsreducingshipmentsofpipe,fracsand,andotherdrillinginputs.Further,productioncurtailmentsbymajorsteelproducersandhighinventorieswilllikelydampenshipmentsofironandsteelproducts.

Lastly,lownaturalgasprices,utilitystockpilesatorabovetargetlevels,astrongUSdollar,andglobaloversupplywillmakethisachallengingyearforcoal.Wecontinuetoobtainpriceincreasesatorabovetherateofrealinflationinmostareasofourbusinessandshouldseenegativepricemixeffectsabateinthesecondhalf.

However,highfuelsurchargerecoveriesinthecomparableperiodslastyeararelikelytoresultinlowerrevenueinthesecondandthirdquartersandforthefullyear.Bythefinalquarterof2015,however,weexpecttop-linegrowthtoresume.Thankyouforyourattention,andIwillnowturnthepresentationovertoMark,whowillprovideanupdateonourfirst-quarteroperations.

MarkManion (COO):

Thankyou,Jim.Restoringourservicelevelsremainsourprimaryfocus,however,safetyisattheheartofeverythingwedosolet'stakealookatoursafetynumbers.Turningtoslide2,ourreportableinjuryratiowas1.08forthefirstquarterof2015ascomparedto1.49forthefirstquarterof2014.ThetrainincidentsthroughMarch2015were71versus61overthesameperiodlastyear.GradecrossingaccidentsthroughMarchwere76downfrom88overthesameperiodin2014.

Nowlet'stakealookatourservice.Whileourservicecompositeinthefirstquarterwaslowerthan2014asawhole,weareoperatingatahigherlevelthanwewereinthefourthquarterevenwiththemorechallengingoperatingconditionsthatexistedinthefirstquarter.Inaddition,asyoucanseeontheright,ourservicehasbeentrendingupwardsincetheendofFebruary.ThetimelineandtrajectoryofourservicerecoveryIhaveprovidedonourlastcall,whichoutlinedincrementalimprovementinthesecondquarterwithmoresignificantimprovementinthesecondhalfofthisyear,hasnotchanged.

Weexpectthatcompositeserviceperformancewillbenear80%bytheendofthesecondquarter.AndasyouseethesizableimprovementsintrainspeedanddwellinDecemberwasmaintainedinJanuary,andalthoughFebruarywaschallengingrecoveryhasbeenevident.Weexpectthistrendofincreasingtrainspeedandterminaldwellreductiontocontinuethroughtherestofthesecondquarter.Wefullyanticipatethatourendofquarterspeedanddwellmetricswillbecommensuratewiththesuperiorservicelevelsweachievedin2012and2013.

Asyouhaveseen,we'vemadesolidimprovementsandweexpecttoseeevenlargergainsinourservicemetricsbytheendofthesecondquarter.Slide5outlinesourplanthatwillleadtotheselargergains.Wehaveanincreaseof600conductorsand50locomotiveengineersbetweenMarch1andJuly1.Weexpecttotakereceiptof40additionalSD90MACsduringthissametimeperiod,andwe'realreadyseeingthenumberofbadolderlocomotivesnormalize,whichwillresultin160additionallocomotivesavailableforservice.

Bythesecondhalfoftheyear,weanticipatewewillbestoringsomeofourolder,highermaintenancelocomotives,whichwillreduceourexpensesandstrengthenourservicereliability.Withregardtoinfrastructure,theconnectiontrackinChicago,aswellasGoshen,Siding,EastElkhart,werecompletedinApril.BothoftheseprojectswillfurtherimproveourfluiditythroughtheChicagocorridor.Lastly,thesecondphaseoftheBellevueplanhasbegunwithmodificationoftheeastboundflows.Thewestbound




flowswillthenbeimplementedlaterinthesummer.

ThefullimplementationofBellevuewillimprovevelocitythroughreducedcarhandling,improveassetutilization,andresultinanoverallreductionincoststructure.Inclosing,weareconfidentourservicewillcontinuetotrendintherightdirectionwithsequentialimprovementsinthesecondquarter.Inthesecondhalfoftheyear,weexpectimprovedmetricsconsistentwithstrongservicelevelsasthefulleffectofourinvestmentsisrealized.Thankyou,andnowIwillturnitovertoMarta.

MartaStewart (CFO):

Thankyou,Mark.Nowlet'sreviewourfinancialresultsforthefirstquarter.Asyoucanseeonslide2andashasalreadybeennoted,theweatherandservicechallengessignificantlyaffectedourfirstquarterresults.Jimdiscussedthe5%declineinrevenuesandwhileoperatingexpensesdecreasedby$61millionor3%,itwasnotsufficienttooffsettherevenuedeclineresultingina9%reductioninincomefromrailwayoperationsandanoperatingratioof76.4%.

Slide3outlinesthemajorcostcategoriesaffectedbytheweatherandservicerecoveryeffort.Theseareestimatedat$42million,thelargestportionofwhichwasatcompensationandbenefits.Additionalservicehoursoccurredinallareasofoperations,includingtrainandengineemployeesforfieldservice,mechanicalemployeestomaintainthehighernumberoflocomotives,andmaintenanceandwayemployeesrelatedtostormcleanupandrepair.Similarly,theotherlistedexpensesreflecttheincreasedcostofaslownetworkandaddedassets.

Purchasedservicesandrentswereprimarilyaffectedbythedecreasedvelocitywhilethelasttwocategories,materialsandfuel,wereprincipallyaffectedbytheriseinlocomotivecount.Aswe'vepreviouslystated,someoftheservicerecoverycostsareexpectedtocontinueintothesecondquarter.However,atalowerlevelcurrentlyestimatedat$25million.Turningnowtoslide4,thisillustratestheyear-over-yearchangebyexpensecategory.Fuelwastheonlycategorythatdeclinedversusthefirstquarteroflastyear,andthedecreasewaslargelyattributabletolowerpricesasshownonthenextslide.

Breakingdownthecomponentsofthefuelexpensechange,$160millionofthereductionwasduetopriceasconsumptionwasflatonthe2%increaseintrafficvolume.Slide6depictsthe$42millionor6%riseincompensationexpenses.Wehavehigherthanusualweightrateandpayabletaxincreases.AsdiscussedduringourJanuarycall,theunionwageincreasewaseffectiveJanuary1versustheJuly1timeframeofrecentyears.Thisresultedina$26millionincrease.

PayrolltaxratesroseonJanuary1aswell,andtotalpayrolltaxeswereup$14million.Inaddition,employeeactivitylevels,includingincreasedhours,moreovertime,andmoretrainees,added$14millionandsigningbonusesrelatedtoourrecentlywrappedsiteagreementwiththeBrotherhoodofLocomotiveEngineers,added$11million.Thatlaboragreementalsocallsforalumpsumbonus,whichwillaffectfourthquarterexpensesbyasimilaramount.

Thefinalsignificantitemwasinthecompensationarea.Itwasareductionintheaccrualsforincentiveandstockcompreflectiveofthequarter'sresult.Slide7showspurchasedservicesandrentexpense,whichincreasedby$31millionor8%.Thisriseisprimarilyduetohighervolumerelatedactivitiessuchasequipmentrentsandintermodaloperations.Aspreviouslymentioned,lowernetworkvelocityalsocausedthesecoststorise.

Turningtothenextslide,materialsandotherexpensesroseby$25millionor11%.Abouthalfoftheincreasewasduetohighermaterialsexpensesandwasassociatedwithbothlocomotiveandmaintenanceofwayusage.Environmentalandpersonalinjuryexpensesalsoroseinpartduetoaprior-yearfavorableaccrual.Andlastly,travelcostsincreasedlargelyrelatedtoourtrainserviceemployeeswhohadmoreovernightstaysaswellastemporarytransferstoareasonoursystemswithcrewneeds.




Depreciationexpense,displayedonslide9,roseby$8millionor3%reflectingourlargercapitalbaseaswecontinuetoinvestininfrastructureandequipment.Operatingexpenseheadwindsaresummarizedonthenextslide.Inadditiontotheservicerecoverycosts,thewageandpayrolltaxincreases,andthelumpsumpayment,2015expenseswillincludecostsassociatedwiththepreviouslyannouncedclosingofourRoanoke,Virginiaoffice.Approximately450employeeswillbeaffectedbythismovegoingfromRoanoketoeithercorporateheadquartersinNorfolk,operationsheadquartersinAtlanta,orchoosingtoretireorresign.

Movingandrelocationcostsin2015relatedtothistransitionareexpectedtototal$35millionandwillbegintobeincurredinthesecondquarteralthoughmostofthecostwillimpactthethirdquarterwhenthebulkoftherelocationsareexpectedtooccur.Efficienciesassociatedwiththisconsolidationwillbegintobenefitexpensesinthefourthquarter.Next,incometaxestotaled$185millionforaneffectivetaxrateof37.4%comparedwith33.6%in2014.Asyoumayrecall,lastyearcontaineda$20millionor$0.06persharetaxreductionresultingfromataxlawchangeinIndiana.

NetincomeandEPScomparisonsareillustratedonslide12.The$58millionnetincomedecreaseisa16%declinecomparedtolastyear,anddilutedearningspershareof$1was15%lowerthanlastyear.Asshownonthefinalslide,cashfromoperationscoveredcapitalexpendituresaswellasourhigherdividendlevelof$181million.

OnourfourthquarterearningscallinJanuary,Imentionedweanticipatedreturningtoahigherlevelofsharerepurchases.Duringthefirstquarter,weusedcashonhandtobuyback$415millionofourshares.Wenowexpectfull-year2015repurchasestobebetween$1.2billionand$1.3billion.Andwiththat,Ithankyouforyourattention,andI'llturntheprogrambacktoWick.


Thanks,Marta.Well,asyou'veheard,clearlyourfirst-quarterresultswerenotasstrongasweandyouexpectedthattheywouldbe.Intheshortterm,wefacesomecontinuingheadwindsinthetoughcompsfromlastyear.However,weseecontinuingstrengthintheoveralleconomy,andasJimdescribed,wehavealotofopportunitiesinmanyofthemarketsweserveandagreatfranchisewithwhichtocapitalizeontheseopportunities.

Inaddition,wearewellonthewaytorestoringournetworkvelocityandefficiency,whichwilldrivefurthercostoutofouroperation.Andasallofyouknow,thatwillalsoenableustosecuremorebusinessatratesthatdrivepositivereturnsforourshareholders.

Aswedothat,wealsoremaincommittedtoreturningcashtoourshareholdersasdemonstratedthroughourstrongdividendhistoryaswellasthroughoursharerepurchaseprogram,whereasMartajustmentionedwe'renowtargetingbetween$1.2billionand$1.3billioninsharerepurchasesthisyear.Insum,wehaveaprovenstrategyforsuccessandtherightpeopleandresourcestosuccessfullyexecuteit.Thanks,andI'llturnitbacktotheoperatorforyourquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

BillGreene,MorganStanley.

BillGreene (Analyst-MorganStanley):

Jim,youobviouslyidentifiedinyourslidesthechallengesaheadfromthefuelsurchargemechanism.We




askedthislasttimeaswell,butsincewe'vegoneanotherquarterandnowwiththepre-announcement,isthereanyreasontothinkthatyoumightsortofaddressthatagainandcomebackandsaymaybeweneedtoadjustthatandchangethatgoingforward?Anumberofthefreighttransportshavere-basedfuelsurchargesgiventhevolatilitythere,sowhatareyourthoughtsonfuelsurcharges?


WeareworkingtowardshiftingmoreofourrevenuetoanOHD-basedfuelsurchargemechanismovertime.Andsothat'sgoingtotakeawhile.It'scontractbycontract.Customershavetheirownpreferences.Ouroverallgoalwillbetoincreaserateandgrowtherevenue,butwerecognizethatourrelianceonWTIinourfuelsurchargeprogramcreatesvolatilityinourearningsandthat'sundesirable.SowewillbeworkingovertimetoshifttoamoreOHD-basedprogram.

BillGreene (Analyst-MorganStanley):

Okay.AndthenJimorevenWick,howdoyougetconfidentinvolumegrowthbeingactuallyagoodthing?Obviouslylastyear,wehadservicechallengesandwehadunexpectedgrowth,andnowwe'rehavingsortofachangeinthemacrooutlookthat'screatedsomeexcessresourcesandyettheservicelevelsaren'tback.Canyousortofwalkusthroughyourthoughtsondoesitmakesenseinsteadtosortoflet'sfocusongettingtherightkindofbusinessonthenetworktoresultinabettermarginorbetteroutcomeandnotworrysomuchaboutthevolumegrowthinstead?

DoyouknowwhatI'mgettingat?Itseemslikethereneedstobemoreofafocusalmostonshrinkingthebusiness.Thatwillimprovetheservicewhichisevenbetterforpricing.


Bill,Iunderstandyourquestion,andIthinkit'saveryreasonableandinterestingone.OneofthethingsthatIwillsayaboutourvolumegrowthiswedon'tgooutandtrytogrowvolumeatratesandmarginsthatdon'tmakesensefromthestandpointofshareholdervalue.We'renot--we'recertainlynotinthemodeoflet'sjustgrowvolumeforvolumesake.

Infact,ifyoulookatalotofourvolumegrowththisquarter,it'sbeeninintermodalwhereyouknowwe'vemadealotofinvestments,andwherewe'renowseeing,asJimmentioned,verypositivepricingtrends.Wedon'tseethatasaproblem.Infact,weseevolumegrowthatgoodratesasastrengthforus.

Wealsodon'tseethatvolumegrowthasseverelyimpactinginanymeaningfulwayourservicerecovery.Ourservicerecoveryisbasedupongettingtherightresourcesinthere.Wethinkwe'velargelydonethatandwe'reontherightpathback.Lastyearasyoumentioned,wehadsomevolumegrowthweclearlydidnotforeseeinthesecondandthirdquarterandgotcaughtshortprimarilyonthecrewside.

Thevolumegrowthwe'rehavingrightnow,weseeasdesirable.Weseeitascontinuingtobeagoodthingforus.AsJimmentioned,inthisquarterinparticular,andalthoughwemayseeitforalittlewhilelonger,wesawsomemixeffectsevenwithinourmerchandisebusinessthatdidn'thelpouroverallRPUbutevenwithinthat,thesomewhatlowerratedtrafficthatwasgrowingwasstillgoodmarginbusinessandbusinessthatwewanttocontinuetohandle.

Operator :

AllisonLandry,CreditSuisse.

KenRyan (Analyst-CreditSuisse):

ThisisKenonforAllison.Justaquickquestiononthebuyback.Asyoumentioned,thebuybackwaspretty




biginQ1andyouhighlightedatargetof$1.2billion,$1.3billionforthefullyear.Justcuriousonhowthatcouldpossiblytrendthroughthenextfewquartersandwhetherthereisanylimitonhowbigofabuybackyoucandoinanyonequarter.Thanks.

MartaStewart (CFO):

Theestimateof$1.2billionto$1.3billionisjustalittlebithigherthanwhatwewere--whatweprojectedontheJanuarycall.We'reverycomfortablewiththatlevel.Wedidnotissuedebtlastyear.Wehaveplentyofdebtcapacitythisyear,andwe'recomfortablewithourprojectionsthatthat'sgoingtobeanamountofcashwe'regoingtobeabletoreturntotheshareholders.

KenRyan (Analyst-CreditSuisse):

Justasmyfollow-up,youmentionedthatutilitycoalstockpileswerecurrentlyabovetarget.Justcurioushowfarabovetargetyou'reseeingthestockpilescurrentlytrendatyourutilitiesandhowlongyouwouldexpectittotaketogetbacktothattargetlevelifweassumeanormalweatherenvironment.


Basedonourestimates,utilitystockpilesintheSouthattheendofMarchwereataround71.5days,intheNorth,65.3days.Roughtargetforsouthernstockpilesof70,andforthenorthernutilitiesabout50days.Asbetweenthetwo,thenorthernutilitiesareabitmoreoverstocked.Thestockpiletrendswilldependheavilyontheweatherpatterninthesummer,andallofourassumptionsaroundutilitycoalinfactdoassumeanormalweatherpatterninthesummer,whichwoulddriveourvolumeassumptionsgoingforward.

Operator :

TomKim,GoldmanSachs.

T omKim(Analyst-GoldmanSachs):

Marta,IwantedtoaskaboutyourRoanokerelocation.Youtalkedabouttheincrementalcostsyou'regoingtoincurthisyearbutIwaswonderingwhatarethesavingsweshouldanticipatenextyear?Andthenmoreimportantly,aretherefurtheropportunitiestorationalizeorconsolidateyouroperationsandisthereapipelinethatyoumightsortofalludeto?Thankyou.

MartaStewart (CFO):

TheRoanokerelocationhas,Tom,twocomponentstoit.Theprimaryreasonwhywedecidedtodothatwasbecausewethinkitwillbemoreeffectiveforourpeopletobeinfewerlocations.Wethinkthatwillhelptheoperationsofallofthedepartmentsthatareinvolved.Thatwasnumberone.

AsaresultofdoingthatwassortofacatalysttoacceleratesomeG&Areductionsthatwehadbeenplanningforthenextthreeorfouryears.Thatallowsusto--becausesomepeoplearechoosingnottomove,thatallowsustoacceleratethose,asIsaid.Wethinkwe'llhaveabout150G&Apositionsbetweennowandtheendofthe--betweenthethirdquarterandtheendofthefirstquarterofnextyearthatwillcomeoutasaresultofthat.

T omKim(Analyst-GoldmanSachs):

Aquestionwithregardtothecoalandparticularlythecoalexports.Whataretheleversyoucanadjusttoapotentiallylongeranddeeperdowncycleforexportcoals?Towhatextentwoulditmakesensetomaybeevenrationalizeterminalinterest?Andthenmaybeevenwithrollingstock,istheresomethingyoucoulddotherelikeareyousatisfiedwithyourutilizationlevelsorcouldyoudoanythingwithregard




toeventhatsideofthebusiness?Thanks.


Forstarters,wecanbeverynimblewithourequipmentassetservingourcoalbusiness,ourexpertcoalbusiness.Wecanobviouslyredeploythelocomotives.Wecandownsizeorcurtailcoalcarreplacements.Wehavecompleteflexibilitywithregardtotheequipment.Theinfrastructureadjustmentswouldinvolveadjustmentstomaintenancelevels,particularlyinthecoalfieldandinsomecasesperhapsalonger-termmothballingoftheassetbutmostlikelytheinfrastructuresidewouldinvolveservicereductionsuntilthevolumesreturn.

Operator :

RobSalmon,DeutscheBank.

RobSalmon (Analyst-DeutscheBank):

Withregardtothemerchandiseoutlook,obviouslythereareacoupleofputsandtakeswithregardtoyourgrowthexpectationswithweaknessonthesofteningsteelproductionside,aswellasgrowthinseveralotherendmarkets.WhenI'mthinkingaboutthecrudebyrailoutlook,itsoundslikeyou'reexpectingcontinuedgrowth.Iwouldimagineweshouldbeseeingthatvolumegrowthdecelerateandpotentiallydeclineinthebackhalfoftheyearbutwashopingforalittlebitmorecolorintermsofyourexpectationsregardingthatendcommodity.


Sure,sowehandledaround29,000crudebyrailshipmentsinthefirstquarterof2015.Thatcomparesto22,000crudebyrailshipmentsinthecomparablequarterlastyear.That'sanincreaseof34%.Sincethefirstquarteroflastyear,wehavehadahandfulofnewcustomerscomeonline.

Withsofteningoilprices,wedoexpectthegrowthrateforcrudebyrailtodecelerate,butwethinkweshouldbeabletomaintainaratable29,000or30,000carloadingsperquarterthisyear.Thatwouldimplygrowthyearoveryearinthesecondquarterandforthefullyear,butwewouldbemodestlynegativerelativetothecrudebyrailvolumesinthethirdandfourthquarter.

RobSalmon (Analyst-DeutscheBank):

Withregardtothetrainlengthopportunityonthemerchandisenetwork,doyoufeellikeastheserviceimprovesthatthereshouldbetheopportunitytoextendoutthosetrainlengthsinthebackhalfoftheyear?Orgivensomeofthesofteningofthegrowthincrudebyrailaswellaslikelydeclinesinthesteelproduction,willthatbeanoffsetintermsofyourabilitytogainsomeoperatingleverageinthemerchandisenetwork?


We'realwayslookingforwaystoincreaseouraveragetrainlength,andinfactweareseeinganincreaseinourmerchandisetrainlengthevennow.Ithinkwe'reintheneighborhoodof5,900feetthereaboutscurrently,andkeepinginmindthataroundoursystem,oursidingcapacityataminimumisinthe8,000footrange.Alotofroomtogrowthereandthat'ssomethingwecontinuetoworkon,andthathasmostlytodowithcontinuingtoadjustourtrainplan,ouroperatingnetworkplantobethemostefficient.

Operator :

ScottGroup,WolfeResearch.




Scott Group(Analyst-WolfeResearch):

Jim,Iknowyoutalkedaboutexpectationsforrevenuetoremaindownthenextcoupleofquarters.I'mwonderingifyoucansharewithusaviewifyouthinkthattherevenuedeclinesmoderateinthesecondandthirdquarterordotheystayheremaybeevengetworse,andifyouthinkbasedonthat,shouldwecontinuetoexpectthesedouble-digittypeearningdeclines.AndIknowyoudon'ttypicallygivethatlevelofcolor,butobviouslyalotofushavestruggledmodelingthenumbersinthefirstquartersomightbehelpfultogetyourperspectiveonnear-termearningsandrevenue.


Letmestartbyremindingyouofthefuelsurchargecomparisonsinthesecondandthirdquarter.Inthefirstquarterofthisyear,webooked$163millioninfuelsurchargerevenue.Thatwasa$132milliondeclineyearoveryear.Lastyearinthesecondquarter,webooked$358millioninfuelsurchargerevenue,$369millioninthethirdquarteroflastyear.Assumingstableoilpricesforthenextcoupleofquarters,thatwouldimplyroughly$200millionlessfuelsurchargerevenueperquarterforthesecondandthirdquarter.

Inthefourthquarter,thecomparisongetsalittlebiteasier.Lastyear,wetookin$308millioninfuelsurchargerevenueinthefourthquarter.Thatrightthereisaprettysignificantrevenueheadwindforthenextcoupleofquarters.Ontheotherhand,asIsaid,weexpectsomeofthenegativemixeffectswesawinthefirstquartertobegintoabate.Bythethirdquarter,we,basedonourcurrentforecast,wouldbelookingforrevenuepershipmentexcludingFSCstoturnfavorable.

Similarly,revenueex-fuelsurchargesinthethirdquarterwouldturnfavorable,andthenbythefourthquarter,westarttoseeoverallgrowthinthetopline.Thatobviouslyhasavolumecomponentaswellandtherewe'refeelingprettybullish.

Obviously,thedeclinesincoalvolumearenothelping,butwearefeelingasifontheutilityside,naturalgassubstitutionhasrunitscourse,andweshouldbeabletoseeafairlystableutilitycoalvolumerunrateforthebalanceoftheyear,albeitwiththetoughcomparisonstolastyear.That'souroveralloutlookontherevenueandsowehavealotofopportunitiestogrowrevenue,andasIsaid,thenegativemixeffectsshouldbeginrollingoffinthesecondquarter.

Scott Group(Analyst-WolfeResearch):

Justotherquestionaswethinkbiggerpicture,alotoftherailshaveoperatingratiotargetsinthat60%,low60%range.I'mwonderingasyouthinkaboutthebusiness,Jim,arethere--doyouthinkthattherearestructuraldifferencesforyouorEasternrailsingeneraloristhateventuallyaplacewhereyouthinkyoucangettowiththerightmixofrevenueandcost?


Lastyearatthistime,wewereonthevergeofproducingsomeofthebestquartersthatwehaveproducedinthisCompany'shistoryandthelowestoperatingratiosaswell.Thatwaspossiblebecausewewereseeingsignificantgrowth--volumegrowthinourmerchandiseandintermodalbusinessesinparticularandthatwassufficienttomorethanoffsetdeclinesinourcoalbusiness.

That'stheformulaforusgoingforward.Wewillbegintoseeourcoalvolumesstabilizeatsomepointandwewill,webelieve,growourmerchandisevolumes,ourhighestincrementalmarginvolumes,andourintermodalvolumeswithsubstantialpriceincreasestoboot.Thatisaformulaforcontinuedimprovementinourfinancialperformanceandformateriallyloweroperatingratiosinthefuture.





Letmeaddtothat.Ithinkthatsure,inherently,ifyou--relativetofranchisebusinesses,theWestlooksdifferentthantheEastwhichlooksdifferentthanCanada,butwe,asJimmentioned,wecameoff,we'vecomeoffayearwetookouroperatingratiofortheyearbelow70forthefirsttime.

Weexpecttocontinuetodriveoperatingratioimprovement,andwehaveavery,verystrongfranchise,particularlyintermsofintermodalandmerchandise.Ithinkthatthepaceofwhenyougetthereisobviouslyalwayssomethingthattheeconomywilllargelydetermineaswellasourownefforts,butwehaveinternalgoalsfordrivingoperatingratiodownandwebelievethatwe'llcontinuetodothat.

Operator :

TomWadewitz,UBS.

T omWadewitz (Analyst-UBS):

Iwantedtoaskyoualittlebitaboutpricing.Yougotalotofmovingpartsontherevenueside,andyou'vehighlightedthemixheadwindsbutisthereanywaytodisentanglethatandtalkaboutcorepriceandgiveusasenseofwhereyou'reatinfirstquarterorifyoudon'twanttodothat,ifyoujusttalkabouttheprogression.

Shouldweexpectex-mixtoseeaccelerationinyouryear-over-yearpriceordidyoualreadygetthestepupfromtighterrailcapacityinfirstquarterandit'sjustnegativemixrollingoff.Howdowethinkabouthowmuchcorepriceyou'regettingandwhetherthatacceleratesifyoulookintosecondquarter,thirdquarter?


Weweresuccessfulinmeetingourgoalofincreasingpricing--corepricingatarateatorbetterthanrealcostinflationmeasuresbasedonallinclusivelessfuelinthefirstquarter,inmostofourbusinesses.Generallyspeakingoutsidecoal,wewereabletodrivepricinghigherandIthinkmostencouraginglywesawthelargestcorepriceincreaseacrossourbookofbusinessinourintermodalline.


Justtorefresh,wheredid-

(Crosstalk)


Backinthefutureaswell,Tom.


Youreferredto[aiilif].Wheredidyousee[aiilif]infirstquarter?


Soreported[aiilf]inthefirstquarterwas2.8%.


Soit'snot--there'snotreallyacaveatthatyou'resayingacrossthebookyouwouldhavedonebetterthanthat2.8%ifwelookedatacorepricekindoftakingoutmix.Isthatfair?





Right,right.Withtheexceptionofcoal,asImentioned,virtuallyacrossthebook.Nowtherewerepocketswhereitwasstrongerbutonaverage,wewereabletomeetthegoalofincreasingcorepricesatthatrate.


Whatabouttheaspectofaccelerating?Itseemslikeyou'reprettyoptimisticaboutimprovingthenetworkperformance,soyouwouldthinkthatcustomerservicewouldimproveasyoulookintothroughsecondquarter,intosecondhalf.Iguessthetruckmarketseemslikesitloosenedabit.Maybefreightoverallisn'tasstrong,butdoyouthinkthereismoremomentuminpricingthatthatwouldaccelerateorhaveyoukindofachievedtherunrateinfirstquarterandyoustaystablenextcoupleofquarters?


Wewillstayfocusedonraisingpricesataratebetterthan--atarebetterthanrailinflation.That'sourlong-termgoal.Thecontractsvaryquarterbyquarter.Thepricingopportunityvariesbyquarterbyquarter,butoverallwe'regoingtostayvery,veryfocusedonthatgoalandareconfidentwecanachieveit.

Operator :

MattTroy,NomuraSecurities.

MattT roy(Analyst-NomuraSecuritiesInternational):

Ijusthadaquestion,maybeabigpictureoverviewofthenetwork.Youguyshavedoneagoodjobofexplainingyourtargetofreturningtheservicemetrics,beitspeedordwelloryourcompositeserviceindicesbacktothepeak2012,2013levelsby2Q,andyou'vealsokindofoutlinedverynicelywhatyouintendtodotogetthere.

Ijustwantedtotakeastepbackandmaybeunderstandfromanoperationalperspectiveifweweretolookatanetworkmap,kindofaheatmapifyouwill,whatarethekeyareasthatyouneedtoaddress,thepinchpointsifyouwill,becauseyou'vegivenusthepiecestogetusthere,thetargetsthat'dwouldliketoreach.Ijustwouldlikeabetterunderstandingbecausewe'reonly6to8weeksoutfromkindofthemiddleofthesecondquarterorthestartofthethirdquarterwhenyoucanhitthesegoals.Whatarethefocalpointsthatwillhelpyougettothesetargets?Thanks.

MarkManion (COO):

OurmostchallengingpartofthesystemlastyearandintothefirstquarterwasourChicagoline,andreallyprincipallybetweenChicagoandtheClevelandarea,andalothasgoneoninordertoincreaseourvelocity.AndI'llsaythat,thatareaisrunningreallywellnow.There'sjustbeenalotoffocusonit.Inordertodothat,therewasa--wereallypinpointedthemanpowerincreaseswhichhavecomealongverynicelyandI'lljustsaythatwe'reinprettydarngoodshapeupinthatareafromamanpowerstandpointnow.

Anotherthingthathasbeengoingonforalongerperiodoftimeisinfrastructureimprovementupthere.Ididmentionthefactthatwe'vegotacoupleofsignificantinfrastructureprojectsthatarenowcompletethatjustgiveus--itjustgivesusabiggerpipetorunthetrafficthroughthere.Keepinginmindthatpartsofthatareauptherewillrun100ormoretrainsaday.Infrastructureimprovement,niceincreases,theBellevueproject,likeIsaid,ismoretocomewhichwillbeveryhelpfulaswellaswegothroughthesummer.

That'stheareaweputalotofconcentrationinto,andit'spaidoffverynicelyandofcourse,alotofother




thingsgoingaroundotherpartsofthesystemandotherveryimportantpartsofthesystem,butthatwasabigfocus,andithada--it'sreallyhadaniceending.

MattT roy(Analyst-NomuraSecuritiesInternational):

Myfollow-upwouldbeontheintermodalpiece.Theinternationalvolumegrowthof8%makesensegiventhepotentialforsomediversions,residuallyfromtheWestCoastportstrike,orworkstoppage,butthedomesticpiece,thevolume'suponly3%.IwasalittlebitlighterthanIthinkwe'vebecomeaccustomedtoseeingthroughgivenyourgoodtractionandprogressandhighwayconversions.

Wonderingifyoucouldjustupdateusonthequartergatewaystrategyandwasthat3%representativemoreofaGDPlevelgrowthwhatyou'dexpectthisyearorweretherecertainmixfactorsorcontractualfactorsthatsaidwesawalittlebitofadipinthegrowthindomesticintermodalforyoufolksshouldkindofresumeatamultipleofGDPasithasbeeninthepast?Thanks.


Sure,Matt.Letmetakeastabatthat.Withinthedomesticintermodalbook,weobviouslyhaveseveralchannels.Theintermodalcompany,IMCchannel,principallyhubandhuntgrewat6%.That'salittleclosertoourhistoricalgrowthrate,andthat'sthesortofgrowthratewewouldexpecttoseeorbetteroutofthatchannelgoingforward.Ourpremiumandtriplecrownbooksdeclinedsomewhatandthat'swhatledtotheoverall3%increaseinvolumeinthetotaldomesticbook.Goingforward,wedothinkthatwecancontinuetodrivetheentiredomesticintermodalfranchiseatgrowthratesmorelikemid-high-singledigits.

Operator :

ChrisWetherbee,Citigroup.Mr.Wetherbee,yourlineisopenforquestions.

JohnBarnes,RBC.

JohnBarnes (Analyst-RBCCapitalMarkets):

First,ontheoperatingratioimprovement,notaskingforaspecifictargetbutwhateverwemodelforORimprovement,you'vekindofgiven--you'vegottheservicerelatedcosts,you'vegotthesavingsfromRoanoke,you'vegotsomethingslikethat.Canyoujusttalkaboutthemagnitudeofeachofthoseandkindoffrommostimportanttoleastimportant,what'sgoingtodrivetheimprovementgoingforward?

MartaStewart (CFO):

ThemainthingthatwilldriveimprovementwillbegettingthenetworkbacktothevelocitythatMarkmentioned.Thetrainspeeds,theterminaldwellimprovementsthathementionedhethinkswillhappenthesecondhalfoftheyear.Thatisthemainthingthatwillhelpuswithexpenses.Iwouldliketopointoutifyou'relookingattheORthatgoingforwardasJimmentioned,thefuelsurchargecomponentofitisgoingtobequiteadrag.It'sonouroperatingmarginstherestoftheyear.


Fromnetworkvelocity,what'sthenextcoupleofcatalyststhere?

MartaStewart (CFO):

Afternetworkvelocity?





Yes.

MartaStewart (CFO):

It'sjustthegeneralproductivitywork,andagain,thatnetworkvelocitywethinkwillbeginto--willhappentowardstheendofthesecondquartersoweexpectthatimprovementtohappeninthesecondhalfoftheyear.


Ifyoulookatourtrackrecordforthe2012,2013period,andwediscussedthisalot,whenyourampthenetworkup,youstarttotakenotonlydoyoutakethecostsoutthatMartahasbeendiscussing,butitthensetsthestageforevenfurtherprojectstocontinuetodrivecostsdown,particularlyasvolumegrows.

Andit'sthatcombinationofaneverhighernetworkvelocity,MarkmentionedBellevueandwe'vetalkedtoyouaboutthesavingsthatarecomingonlineasweturnBellevue,butit'sthatcombinationofhavingastablehighvelocitynetworkwhichthensetsthestageforcontinuingprojectstodrivevelocityalongwiththeleverage,asJimmentioned,thevolumegrowththatreallydrivetheeconomicsofNorfolkSouthernandforthatmatter,anyrailroad.


Thefollow-upis,Jimyoutalkedaboutstabilityonthecoalfranchise.Canyoutalkabouthowyouweighgettingtoamorestablebutlowerlevelofcoal,bothonthedomesticandtheexportside,andwhenyoustarttomakemaybesomeofthoseserviceadjustmentsandbegintotakeassetsout,begintodownsizeorrationalizethesizeofyourcoalsupportnetwork,whendoyoubegintodothat?

Whatdoyouhavetoseefromastabilitystandpointtoreallystarttohammerthecostonthecoalsideifstableisgoingtobewhatwegetgoingforward?


Letmestartwiththeutilitysideofthefranchiseandgiveyousomeofourassumptionsforthebalanceoftheyear,andI'llbereferringtoutilitytonnagehere.Wedid20.1milliontonsofutilitycoalinthefirstquarter,andourcurrentforecasthasthatlevelofutilityvolumeholdingbasicallysteadyfortheremainderoftheyear.AsImentioned,wedobelievethatgassubstitution,withnetgasinthecurrentpricerange,hasrunitscourse.

Thereisverylittletonnagelefttocomeoutduetomats,andofcoursetheimplicationsofcarbonregulationdowntheroadaresomewhatunknownatthispoint.Butintermsofmats,we'llmaybesee500,000fewertonsthisyear.Atthatlevelofvolume,that'salbeitsignificantlydepressedfromlastyearandevenmoresofromyearspast,weprobablydonothaveanopportunityandwouldnotwanttotakeoutsignificantinfrastructure.

Ontheotherhand,wecanandalreadyhavedownsizedourequipmentinvestmentsinourcoalbusiness.Atthislevelofvolume,wecanmakedowithourcurrentcoalcarfleetforsometimethathavebeenrelievedofthesignificantcapitalinvestmentincoalcars.Thatpertainsreallymoretotheexportsideofthebusinesssoletmetouchonthataswell.

Wehandled5.3milliontonsofexportcoalinthefirstquarter.That'sdownsignificantlyfromlastyearfirstquarterwhichwasourpeakquarterforexportcoal.Fortheremainderoftheyear,wearecallingfor4.5millionto5milliontonsofexport.Wefeelprettyconfidentonthethermalsideofthat.




Ifthereisadownside,potentialitwouldbemoreonthemetside.Ourcentralagproducersareverychallengedrightnow.Butagain,atkindofa$20millionannualrunrate--20milliontonannualrunrateforexportcoal,weprobablywouldnotwanttosignificantlydownsizeourinfrastructurealthoughwedohavetheopportunitytoreducespendingonequipmentandthepeoplesideofitissomethingwecanmodulateaswell.

Operator :

ChrisWetherbee,Citigroup.

PrashantRao (Analyst-Citigroup):

ThisisPrashantinforChris.Iapologizedearlier.Wewerehavingalittleheadsetissuehere.Irealizewe'rerunningalittlebitlateinthecall,soI'llkeepitbrief.We'recurioustoknowaboutthegrowthpotentialforthecorebusiness,takingapart,leavingasidefuelsurchargeandcoal,ifyougetacoalnormalization,doyouthinkwecouldseethecoregrowindoubledigits?

Andin2015,arereallycoalandservicesthat'sthebiggestfactorspreventingthat?Isthereanywaytoisolateeither?Isthattherightwaytosortofthinkaboutthat?Thanks.


Ifbycorebusinessyoumeanourmerchandisebusiness,ourindustrialproductsbusinesses,yes,wedoseegrowthpotentialtherein2015andbeyond,definitely.Therearealwaysputsandtakes.Wehavesomechallengesinourmetalsandconstructionfranchiserightnowduetoverylowsteelpricesandreduceddemandforpipe,inparticular.

TheWallStreetJournalquoted$444pertonasthegoingpriceforhot-rolledcoilthismorning.That'sdownfrom$474attheendofMarch,sosteelpricesareverydepressedandourcapacityutilizationistrackingbelow70%.Wehavesomechallengesonthatsideofourmet-confranchise.Ontheotherhand,stillwithinmet-con,aggregateswereupsignificantly,constructioncarloadingswereup,cementtrafficwasup,alldrivenbyhousingandroadconstruction.

Therearedefinitebrightspotsontheenergysideofthecorefranchiseaswell.Weseecontinuedopportunity.Overinchemicals,wewereabletogrowNGLs,[accrued]byrailwe'vealreadydiscussed,ourplasticbusinesseswereup.Thosewereallindicationsofaprettyhealthyindustrialeconomyandshouldbethedriversofsignificantgrowthinourindustrialproductsfranchisegoingforward.

Ouragvolumeswereupinthefirstquarteraswell,andweseecontinuedpromisethereforthebalanceoftheyearaswell.Overall,wefeelreallygoodaboutourindustrialproductsfranchise,albeittherearealwaysafewsoftspots.Andintermodalcontinuestogrow,andontopofthevolumegrowththisyear,weexpecttoseesignificantpriceincreases.Imentionedthatourcorepriceswereupinourintermodalbusinessmorethaninanyotherbusinesssegmentinthefirstquarter,andthat'svery,veryencouraging.

PrashantRao (Analyst-Citigroup):

Justasaquickfollowup,onthecompandemployeeissue,itlookslikeonaperaverageemployeebasis,theyear-over-yearchangeisjustunderabout2%,whichthinkingaboutthatandgoingforwardthroughtheyearonayear-over-yearbasishowtothinkaboutthatlineitem,arethereoffsetstotheheadwindsandwhataresomeoftheinitiativesthatyouguyseeonthetablemaybeintermsofcombatingsomeoftheheadwindsyoupointedoutintheslides?





Ifyoulookatourcomprightnow,obviously,andwe'vediscussedthisbefore,wehavethelaboragreementswhichcoverabout85%ofourworkforce.Wehadtheeffective--effectivelyanearlypayincreaseasaresultofthelastroundofnegotiationsthatkickedininJanuaryratherthanJuly1,asMartahasdiscussed.

Aswelookatoverallheadcounts,weareclearlyfocusedrightnowongettingtherightnumberofpeopleinourtrainandengineserviceworkforcetohandlethetrafficwithoutdelay.Iwillsaythatasthesenumbers,andMarkshowedyoutheconductorsandengineersweexpecttobringoninthenextcoupleofmonths,mostofthemareincludedintheheadcounttodaybecausetheyaretraineesattheendofthefirstquarter.Astheycomeon,theycomeofftrainingstatusinwhichtheyareeffectivelypaidasalaryandstarttobepaidonatripratesothatwillthenbeproportionaltoouroperations.

Thenonthenon-agreementsideandparticularlytheG&Aside,asMartamentioned,we'realwayslookingatwaystodoeverythingweneedtodowithalowerheadcountandtheRoanokeclosurewillhelpprecipitatesomeofthat.Wewillcontinuetolookatthatandtryanddrivethosecostsdownwhereverwecan.


LetmejustaddafootnotetotheRoanokeofficeclosurequestion.Havingspentalotoftimewithourmarketingteaminthelastcoupleofmonths,Iamreally,reallyexcitedabouthavingallofoursalesandmarketingteamunderoneroofhereinNorfolk.

Thatisgoingtoallowustoproduceamuchmorefocusedandconsistentapproachtogrowingourtopline,andwe'llhaveanopportunitytomovepeoplearoundbetweenjobsthattheymightnothavebeenabletomovearoundbetweeninthepast.AndtherewillbesimilarsynergiesfromaworkforcestandpointacrossallofthefunctionsthatarecurrentlyinRoanoketoday,ourITandaccountingdepartmentsforexample.

MartaStewart (CFO):

Ontheoperationsside,whatIwouldaddis,wecanexactlywrite[noB]increasesthatMarkdescribedwehaveWhatwe'reprojectingfortheremainderoftheyearisanother500increase.Mostofthatwilloccurbytheendofthethirdquarter,andthatisalmostexclusivelyintheoperatingarea.Sobyendoftheyear,wethinkwe'llbeupathou.

Operator :

BrianOssenbeck,JPMorgan.

BrianOssenbeck(Analyst-JPMorgan):

Twoquickones.Jim,youmentionedalotoftheheadwindsofthestrongdollaronsomeofthedisruptiveimportsthatwe'reseeinginthesteel,butyoualsomentionedyouexpectethanolandsoybeanstobeup.Somaybeifyoucouldjustsummarizewhyyouthinkthosearemovingandifoverallyouthinkthatthestrongdollarisapositivefactororanegative,excludingcoalfortherestinthebusiness,ifthestrongdollarisapositiveoranegative.


MostofourbusinessisUSdomesticeconomyfocusedsotherearecertainlypocketsofresistanceintherevenuebasedonthestrongerdollar.Wehighlightedafewofthem,themostprominentofwhichwouldbeexportcoalandpocketselsewhereaswell.Idon'tseeanoveralldampeningeffectonthetotalrevenuenecessarilyoutsideexportcoalfromthemuchstrongerdollar.Incertainpocketsofourbusiness,




it'llbeanadditionalchallengebutwehaveenoughdriversofrevenuegrowthwithintheUSdomesticeconomytopushthetoplinehigherbasedonourportfolioevenwiththestrongdollar.

BrianOssenbeck(Analyst-JPMorgan):

Onefollowupontheexportcoalside.Youmentionedyou'reprettyconfidentinthethermalside,andhowthatlooksfortherestoftheyear,butIknowthemixhasbouncedaroundalittlebit.Canyoujustgiveusarefresheronwhatthemixwasinthefirstquarterandperhapswhatyouexpectfortherestoftheyear?Thanks.


Inthefirstquarterofthisyear,64%oftheexporttonswehandledwasmetallurgicaland36%wasthermal.Thatcomparestolastyear's69%met,31%thermal.Wehadarelativelyhighproportionofthermalcoalinthefirstquarterofthisyear.Wethinkthatwillrevertinthebalanceoftheyeartomoreofthe75/25typeofsplit.Goingback,wewerealmostallmetallurgicalcoalbutthelastcoupleofyears,70%,80%metandtherestthermalhasbeenthecommonsplit.Wethinkwe'llgetbacktosomethinglikethatsplit.

Iwillsay,though,thatthedemandfeelsfirmeronthethermalsideofthefranchiserightnowandnorthernendproducerswereabletojumponsomeopportunitiesthereinthefirstquarter,andthat'swhywesawthethermalpartspikesomewhatrelativetothemetallurgicalcoalmovingpredominantlyoverLambertsPoint.Andbythewayasyouprobablyknow,mostofthemetallurgicalcoalwehandlemovesoverLambertsPointandmostofthethermalcoalmovesoverBaltimore.

Ifthere'sapotentialdownsideinourassumptions,roughly4.5billionto5billiontonsperquarterforexportcoal,itwouldbeonthemetallurgicalcoalwhichinourcaseiscomingoutofcentralag.Becauseofallofthefactorswementioned,theverystrongdollar,theglobaloversupplyofcoal,Queenslandat1.09andspotcoalismovingfourplacesbelowthatbecauseofthelow,verylowbulkdryshippingrates.It'sjustanextremelydifficultenvironmentforcentralagproducersinparticularrightnow.

Operator :

JustinLong,Stephens.

Just inLong (Analyst-StephensInc.):

IwantedtoaskaquestionaboutPTC.Asyouhavecontinuedtorolloutthistechnology,howmuchofadisruptionisitcausingtothenetwork?Isthisacontributortocongestionintherailnetworktodayorwouldyousayitisnotasignificantneedlemoverwhenyouthinkaboutfluidity?

MarkManion (COO):

It'ssomethingwe'repayingawholelotofattentionto,andithaseverythingtodowithhowwellweplanit.ThosePTCcutoverstakeplaceonaregularbasiseachmonth,andthegoodthingis,isthatoursignalingcommunicationgrouparedoingaverygoodjobofreducingtheamountofdisruptionthattakesplacewitheachoftheevents.Andcaseinpoint,whenwestartedthisout,andwe'vebeendoingitforawhilenow,butwhenwestartedtheseout,theoutageswereintheneighborhoodof12hours,andofcourse,we'ddoalotofschedulingandplanningaroundthattoreallyminimizethedisruptionbutaswe'vegonealonghere,outageshavegonetoeighthoursandnowinmorecasesdowntosixhours.

Andwe'vegotsomethingsgoingonwherewethinkwecanreducethemevenbelowsix,someofthemdowntoaslittleasfourhours,soalotofplanningandscheduleworkaroundssothedisruptionfactorwillbeminimizedgoingforwardbutstillsomethingwedoalotofplanningaround.





I'lladdonethingtothatwhichwe--Ithinkit'sverygoodquestion,andwehavenottalkedaboutthatinanydetailnorhavetheotherrailroads,butIwillsaythatwegotalotofthereallyproblematicareasontherailroadintermsoftrafficdisruptiondonelastyear.Westillhavesomemoretogoandmyanalogyforitlastyearisitwas--wewerealmost--itwasalmostlikewewereconstantlyrunningalow-gradefever.

Wehadalotofworktodooutthereandalotofsignificantdisruptionthat,asMarksaid,weplannedaroundit.Wedideverythingwecouldbutnonetheless,itwasdisruptiveandit'ssomethingthatwe,asMarkhasdescribed,wecontinuetoworkonandinfactit'sarealpointoffocusforusrightnowaswelookatrestoringournetworkvelocity.

Just inLong (Analyst-StephensInc.):

I'lljustsneakonemoreinonintermodal.Iwascurious,areyougettingalotofpushbackfromyourcustomersandyourIMCsontheintermodalpriceincreasesyou'regoingonwithtoday?Andalsoasoftoday,howmuchofyourbookofbusinessinintermodalhasbeenrepricedathigherlevels,callitthatmid-single-digitrangeoverthepastyear?


Wearenotgettingalotofpushbackonpriceincreases.Wearealignedwithourintermodalpartnersintheviewofthemarketplaceanddesiretotakepriceshigheratthispoint.Ifyoulookatourequipmentbylineofbusinessasanindicatorofwherewehavetheopportunitytoleanintopricemost,E&Pisabout70%ofthetotalbookbyvolume,andthat'stherailownedfleet,railequipmentownedfleet,isthat'swherewehavethemostabilitytotakepricesuponaspotbasis.Andalsoonthetriplecrownsideofthings,at10%ofourtotalbookbyvolume,wecanleanintoratethereaswell.

Operator :

BrandonOglenski,Barclays.

BrandonOglenski(Analyst-BarclaysCapital):

Jim,welcometothehotseat.Asyouguysknow,we'vebeensupportiveofthestockheresoI'mgoingtotrytobeconstructivewiththesequestions,butIdothinkit'sworthitforyourshareholderstoasksomeofthedifficultquestionsherethough,too.Granted,I'veneverrunatrain.WejustliveinExcelmodelssopleasetelluswherewe'rewrong.Thisquarter,volumewasup2%.Youhad3%growthinmerchandise.

Intermodalwasup5%,andyetearningsaredown15%onwhatwasaprettyeasycompfromlastyeargivenalltheweatherdisruptions.That'salotofthefrustrationIthinkwithyourshareholders,andifIlistentothestrategytodriveimprovementgoingforward,it'sgettingpriceaboveinflationwhichwegotthisquarter,it'sgettinggrowthinthoseintermodalandmerchandisesegmentsandit'sthestabilityinthecoalbook.

ButIguessmyconcernhereis,whereistheprofitabilityoutsideofcoal?Ithinkyou'veevensaiditandWicksaiditinthepast,coalisaveryprofitablesegmentforyou,butwherearethemarginsandreturnsonintermodalandmerchandise?

AndisthatgoingtobeenoughtodrivefutureearningsgrowthforthisCompanyordowehaveallofthesecontinualcostpressuresandfuelsurchargeheadwindswherewe'rejustnotgoingtobeabletoseealotofearningsexpansionevenwiththoseprettyrobustgrowthratesoutsideofcoal.





Letmejustsay,weappreciatethecandorandbyallmeans,askthetoughquestions.Wedemonstratedlastyearthatwecandroptheoperatingratiosignificantlybasedonsolidgeneralmerchandisevolumegrowthandintermodalvolumegrowthevenwithcoalheadwinds.Whenyou'retalkingaboutcoalvolumesdown7%overallinaquarter,that'saprettystrongheadwindandthatismoredifficultandwelostgroundthisquarter,nodoubtaboutit.Butthatwillstabilize.

Wewillseeabottomoncoalvolumes,andaswe'vediscussedonthiscall,wethinkwemaybetherealready.Andthenwehavetheopportunitytoseecontinuedgrowthinmanyareasofourmerchandisefranchiseandinourintermodalfranchise.Putontopofthatsignificantpriceincreasesandyoudohavearecipeforgrowingearnings.It'sessentialthatwegetthenetworkbackuptospeed.Wehaveaplantodothat.Wehavetheresourcescomingonline.

Therewillbesomecostheadwindstogetfromheretothereintheshortterm,butoncethenetworkisbackupto2012,2013servicelevels,wewillsignificantcostdropoutaswell.It'sthecombinationofthatbasicefficiencyandthecostreductionthatcomesfromrunningafasternetwork,bottomingoutofcoalvolumes,andthecombinationofvolumegrowthandpriceinourgeneralmerchandiseandintermodalbusinesses.

BrandonOglenski(Analyst-BarclaysCapital):

You'renottheonlyrailroadtoseesomeprettychallengingcoalnumbers,andIdoagreewithWick'sassessmentthatthere'sdifferencesbetweentheEast,theWestinCanadabuttherearesomesimilaritiesbetweentheWestandCanadaatleastintermsofachievingmidtolow60sORforalotofthesecarrierswithpublictargetstogetthere.

IfI'mhearingyoucorrectly,Jim,itsoundslikeweneedtohavestabilityincoalbeforewecangetanyrealtractionontheoperatingratio,butIthinkthere'dbealotofskepticsonthebuysideoratleastyourinvestorbasewhereifwelookatnaturalgasbeingsub-$5inthefuture,there'sstillsomeincrementalgascapacityintheEastandontopofit,theexportmarketdoesn'tlookallthatsolidasyou'veconfirmedonthiscall.CanNorfolkgettractiononmarginsevenifcoalcontinuestobemaybeamodestheadwindheadingforward?


Ithinkwecan,Ireallydo.Thisisgoingtobeatoughyear.Wewillstarttoseethetoplinegrowagaininthefourthquarterwethinkbasedonourcurrentforecast.Untilwegetthetoplinemoving,itwillbedifficultforustomakealotofimprovement.That'scoming.That'scoming.

Thesemixeffectsthatyousawinthefirstquarteraresomewhattransitory.Coalvolumeswillbottomout.Wecannotsaywithtotalassurancethatwehavehitbottomintermsofcoalvolumetoday,butwe'vestudiedourutilityfranchiseprettycarefullyandwedobelievegassubstitutionbecomesmoredifficultatthispointwithgasplantsrunningfullout.

Ontheexportsideofthings,thereareheadwindsthere,butthereareopportunitiesaswell,particularlyonthethermalsideofthatfranchise.Wethinkwecandoit.We'vegotacoupleoftoughquartersaheadofuswiththefuelsurchargeheadwind,withsomeadditionalcostsouttheretogetservicebackup,butoncewe'rethereontheservice,onceweseecoalvolumesstabilizeandwegetpastthisfuelsurchargeheadwind,we'reingreatshapetoimproveourfinancialperformance.

Operator :

KenHoexter,BankofAmerica.

KenHoexter (Analyst-BankofAmericaMerrillLynch):




I'mgoingtotakealittlebitofadifferenttactonsomethesamequestionsthere,butitlookslikeservicestartingtoshowsomeimprovement,stillthemid70soperatingratioforthequarter.Whysuchacontrast,maybeifIcouldaddressthistoMark,betweenyourneedtoaddthe650employeesbetweentheconductorsandengineers,the200someoddlocomotives?

AndwhenyoulookatCanadianPacific'splantocutresourceswhichcreatesalotofcapacity.MaybeMark,canyoujustdescribemaybealittlebitofthedifferencesintheoperationsorhowyou'rerunningitsowecanunderstandwhywecanseesuchagreatcontrastbetweenonecreatingcapacityandtheabilitytomovemoreversuswhat--howyou'restructuringtheoperations?


Well,asfarastheresourcesthatwe'readding,weknowthatwhenwe'reintheprocessoframpingup,it'salmostlikeyoucan'thaveenoughlocomotives.Youneedacertainnumberoflocomotivesjusttospinyourselfupandthat'swhatwe'reintheprocessofdoingandinfact,I'vegotmysightssetonstoringlocomotivesbeforelong.Infact,we'llprobablygetintothatbyMayandgiveourselvesasurgefleetof--we'llseehowfarwego,100to200locomotives.

Samethingonthepeopleside.Youneedacertainnumberofpeopletomanyourtrains,anditisactivitybased.Wepaythemwhentheywork.Weneedtotakeonmorepeople.

Wewillstabilizeonthepeoplesidebytheendofthesecondquarter,andfromthereonweareessentiallyoutsideofbusinessgrowthopportunitiesaswegetintothesecondhalf.We'regoingtobeleveledoffonpeopleandwe'llbehiringforattrition.Wedon'tseeourselvesdoinganythingparticularlydifferentlythanwhattheotherrailroadsdoasfarasthatgoes.


AndsoIguessmaybejusttokeepdiggingintothattotakeitastepfurther,isitthenetworkresetsyou'vedoneafewtimesoverthelongweekendsorisitchangingtheoperatingplanwhichcreatesthatextracapacity?


No,it'sthe--wesaidlastyearthatdependingontheseverityofthewinterthatwewoulddoaswetypicallydo,aswecomeoutofthesewinterevents.Thesearebignetworksystemsandtheyrampuponagradualbasis;thatiswhathasbeenhappeningeversinceMarch.We'reseeingsomenicerampupnow,andI'msureyoulookatournumbersaswell.Youseeourcarsonlinegoingdown.Youseeourbadolderratiogoingdown.

Ourtrainperformanceisimproving.Ourconnectionperformanceimproves.Thenumberoflocomotivesavailableimproves.Allofthatdrivesoverallnetworkvelocitybutithappensinagradualway.

We'llseethat--wewillcontinuedayinanddayouttoseethatgradualimprovementtakeplace,throughMay,throughJune,andIthinkbytheendofJune,we'llseesomeprettydarngoodnumbers.


Justintheoveralltheme,letmesayonemorethingaboutthat.Anditgoesbacktothisidea,everyfranchiseisdifferent.Everyrailroadisdifferent.TheEasterncarriersobviouslyare,asallofyouknow,shorterhaulcomplexnetworks,andthat'sfine.Foronething,welivewhereallthepeople,andthatwethinkthathasalotofpositivesintermsofgrowingbuttheoverallbeliefthatIthinkeveryoneintherailroadindustrysharesisthatvelocitycreatescapacity,andthat'swherewe'regoing.




Thefirstthingyoudoisgetyourvelocitywhereyouwantittobe,wherewe'vehadoursinthepast.Asyouseevelocitygoup,asMarkmentioned,carsonlinegodown.Ourterminalsgetmoreandmorefluid,andthat'swhatthendrivesfurtheroperatingandcostimprovements.That'sthepathweareon.

Ifyoulookatsomeofthethingswe'vedoneinthepasthere,we'vedonealotofworkonourterminalsintermsofweclosedtwosignificantyards,we'veexpandedonetomakeupforthatandtomakeupforchangesinourtrafficbase.Thepatternsmaylooksomewhatdifferentbasedonthefranchise,butthethemeisalwaysthesameintermsofconstantlyimprovingthevelocityofyourrailroadnomatterwhoserailroaditisinordertocreatecostefficienciesandcreatefurthercapacity.


IfIcouldgetthefollow-up,IguessJim,asyoupreparetotakeoverintwomonthsorso,whatareyourthoughtsonM&A?Obviously,we'veheardWick'skindofthesisinthepast.I'mjustwonderinghowyouviewtheworldandobviouslygiventhediscussionsthatwe'veheardfromsomeoftheCanadians,andmaybeyourpeerontheeastinthepast,justwanttogetyourinsightandwhetheryouthinkit'spossible,andifnot,whynot.Andthenifnotnow,doesthatmeansomethingcouldhappeninthefuture,maybejustsomethoughtsonthat.


Sure,wellI'llshareafewthoughtsandthenI'llinviteWicktochimeinaswell.


we'llseehowwellI'vetrainedhim.


Letmestartbysayingthatweareapubliccompany.We'reobviouslyheretoserveourshareholders,sotherearenocategoricalanswersinthatregard.Ontheotherhand,wedoseesignificantchallengesassociatedwithfurtherconsolidation.Theregulatoryreviewprocessforconsolidationsinthisindustryisvery,verytime-consuming,onerous,andrisky.AndIsaythatasonewhopracticallylivedattheSurfaceTransportationBoardforayearandhalforsoasweweregoingthroughConrail.

It]isaveryunpredictableprocess,anditisaverycostlyandriskyprocessaswell.Therearerelativelyfewsynergiestobeachievedinexchangeforthoserisksaswell.Theremainingcombinationsinthisindustryareendtoendandbydefinitionhavefewersynergiesavailable.Wedon'tthinkit'sagoodideaandwethinkwehaveagreatbusinessplantorunthisCompanyonastandalonebasis,andwhatwecandowiththisCompanyisbetterthananythingthatcouldbeachievedthroughcombinations.


JimandIagreecompletelyaboutthis,butIthinkJim'sfirstcaveatobviouslyisimportant.Weareapubliclytradedcompany.Weareinterestedinlong-termwelfareandbenefittoourshareholders.Thatisourjob,andweunderstandthatveryclearly.ButIthinkthatwhatissometimesreallyunderestimatedbythosewhodon'tliveorimmersethemselvesintheregulatoryenvironmentinthewaythatwedoisjusthowharditwouldbe,A,tohaveanykindoftransactionapproved,particularlyunderthenewmergerruleswherebydefinition,ithastobeprocompetitive,whateverthatmeans,andnoonehasdefinedthat.

Second,theenormousrisksthattheconditionsimposedifyouwereevenabletogetamergerapprovedbytheSTPwouldnegateanyandallbenefitsandbeyondofthetransactionitself,andtherewouldbeanenormousamountofresistanceonthecertainpartsofourcustomerbase.Wejustthinkthatyouneversayneverandthetimemaywellcome,butrightnowisnotatimewheretryingtodoatransactionofany




sizemakesanysense.

Operator :

JeffKauffman,BuckinghamResearch.

Jef f Kauf fman (Analyst-BuckinghamResearchGroup):

Iwanttoaskaquestiononadifferentaspectofthecoalfranchise.GiventhatmostUS-basedcoalsarewelloutofthemoneygloballyandgiventhattheutilityinventoriesremainquitehigh,Ithinkuptillnow,everybody'sfocusedmainlyonthevolumeaspectofthecoalfranchisebutIguessthequestionbecomesatwhatpointdoeitherthecoalproducersorutilitycustomerssay,ifwewanttokeepthecoalmoving,weneedapoundofflesh,andlet'srevisitthepricingsothatwecankeepcoalcompetitiveandkeepcoalmoving.

Whenwelookatyourcontractsbothforexportanddomestic,canyougiveusanideaofwhentheygetrepriced,comeupforrenewal,andhowmuchconfidencedoyouhaveinthiskindofenvironmentthatwewon'thavethisnewlegdownthisfallwhenthesecontractsornextyeargotoreprice?


Webelievewecontinuetohaveacompellingvaluepropositioninourabilitytodelivercoalfromvariousbasinsinvariouswaystoourutilityandexportcustomers,andwe'regoingtopricethatonavaluebasis.Ontheexportside,therejustisn'tthatmuchwecoulddo,unfortunately.

Ourmajorcustomersarefindingitverydifficulttoplacecoalsintotheglobalmarket,particularlyonthemetallurgicalside.Ourgoalasisthecaseacrossourfranchiseistoobtainthemaximumvalueforthedollarforthevaluethatweprovideourcustomers,andwe'llcontinuetodothatinthecoalbusinessandelsewherethroughoutourfranchise.

Jef f Kauf fman (Analyst-BuckinghamResearchGroup):

Anddomestic?


Samestory.AsIsaid,wethinknaturalgassubstitution,whichhasbeenthedrivingfactorinthedecliningutilityvolumes,haslargelyrunitscourse,andweareinpositiontocontinuetodelivercoalstoourutilitycustomers.Normalsummerweatheriscriticaltoourassumptionsinthatregard,though.Anotherverycoolsummerandwecouldseefurtherdeclinesbutprovidedwehaveanormalsummer,wethinkwe'reingoodshapetomanageaprettyconsistentrunrateonutilitycoalthisyear.

Operator :

JasonSeidl,CowenandCompany.

JasonSeidl(Analyst-CowenandCompany):

Twoquickones.One,canyoutalkalittlebitaboutyourabilitytopriceasyourservicelevelstartcomingupbecauseclearlyyou'regettingpricenowandserviceiswell,let'scallitlessthanoptimal.Isthereanyrelationbetweenrailserviceandpricingorshouldwenotlookatitthatway?


Clearly,thereisandourpricingpotentialwillonlyimprovewithbetterservicelevels.Inthelongrun,youhavetogivethecustomersomethingmoreinordertoobtainpriceincreases,andthat'soneofthebig




reasonswearespendingnowtogetservicebackupsothatwewillbeabletogrowvolumesbutalsosothatinthelongrunwe'llbeabletotakepricesupforabetterandbetterproductdeliveredtothecustomer.

JasonSeidl(Analyst-CowenandCompany):

Myfollow-upandIapologizeifyouguysalreadycoveredthisbecausethere'ssomeoverlappingcallsthismorning.Wehaven'tseenanyannouncementsoutthereintermsofgettingDon'spositionfilled.Iwaswonderingwhereyouguysareatthereandareyoureviewingoutsidecandidatesaswellasinside?


Wearereviewingbothinternalandoutsidecandidates.Wehavebeenrunningaprocess.Weexpecttocompletethatprocessandmakeanannouncementwithinamatterofafewweeks.

Operator :

DavidVernon,Bernstein.

DavidVernon (Analyst-Bernstein):

Marta,firstquestionforyou.Howmuchadditionalborrowingcapacitydoyouhaveandhaveyougottenmorecomfortableraisingtheborrowingandleverageprofileofthebusinessgoingforward?

MartaStewart (CFO):

Yes,wehavequiteabitofadditionalborrowingcapacity.AsImentionedearlier,andasI'msureyouknow,wedidn'tissueanydebtlastyearsoweareplanningtoissuedebtthisyearandwe'recomfortablebringingupourleveragelevelsbutstayingwithinourcurrentcreditratingsband,BBB+,BAA1.


Isthereatargetlevelofcoveragethatyou'reshootingfor?

MartaStewart (CFO):

Thetargetistostaywithinthecreditratingsbandbecauselastyearwedidn'tissue,wefloateddownalittlebitwithintheband.We'restillwithinthebandbutfloateddownabitsowe'recomfortablerampinguptowardstheupperendofthebandbutstayingwithinit.


Maybejustasaquickfollow-up,JimorMark.Haveyouguysgivenathoughtintohowmuchoftheservicerelatedcostsyouguysarepouringintothenetworkrightnowactuallydocomedown?

Igetthevelocitydrivenimprovementallowyoutopullsomecostsdown,butIwouldalsothinkthatthechangeinfreightflowsacrossyournetworkarerequiringadifferentlevelofresourcingthatyou'vehadinthepast.Isitachangeinlikethehauloflongerhaul,intermodal,lessshorthaulcoal,thatkindofstuff?Howmuchoftheextrainvestmentyou'reputtinginshouldweexpecttoactuallycomeout?

MartaStewart (CFO):

We'reexpectingthe$42millionthatwehighlightedinthefirstquarter,wethinkisgoingtomoderateto$25millioninroughlythesamecategoriesthatIoutlined,alittlebitlesspercentage-wiseincompensationbecausethecompensationpartinthefirstquarterhadatransportationpartandamaintenanceofwaypartrelatedtotheweather.




Percentage-wise,thecomppartwillcomedownalittlebitandthetotalwillbe$25million,andthenwebelievewegetuptothetrainspeedlevelsthatMarkdescribedinthesecondhalf.Wethinkwewillnothaveservicesothat$25million,inotherwords,wouldgoawayinthethirdandfourthquarters.


Butdoyougetthe$42millionorthe$25millionbacknextyearordoyouthinkthere'sjustgoingtobesomeofthatcostisjustgoingtobeinthenetwork.

MarkManion (COO):

No,Ithinkthosecostsarethecostthatweviewastheirpurelytransitoryinnature.Theanswertoyourotherquestionisthatyes,asweseebusinessmixchange,wecanseesomeshiftinginresourcerequirements,particularlyintermsofmaybewhereweneedtraincrewsbutnet-net,Idon'tthinkthatthosechangesarematerialintermsofoverallcrewrequirementsortrainoperatingcost.


Evenwiththedifferenceinlength,thehauloncoal,you'dthinkthatwouldjusttakemorelaborhours.


You'relookingatlengthofhauloncoalchangingasbasinschange,asIllinoisbasincoalcomeson,wehauledthecoallonger,fartherasthemixchangeswithincoal.Inintermodal,we'vedoneaprettygoodjobandexpecttocontinueto.We'rereallynotnecessarilyrunningalotmoretrainsbutjustgettingmoreandmorecontainersoneachoneofthetrainsthroughstackinginadditionaltrainlength.AsIsay,Mark,Idon'tthinknet-net,thatamountstoawholelot.Doyou?

MarkManion (COO):

No,Idon't.

Operator :

CleoZagrean,Macquarie.

CleoZagrean (Analyst-MacquarieResearchEquities):

MyfirstquestionrelatestocoalsoIappreciatethatwemaybelookingatastabilizationinquarterlyrunratesonthedomesticandmaybetheexportfront,aswell.Butstillthisyearwe'relookingtoitsoundslike10%declineinthedomesticvolumeandmaybemid-teensinexport.Whatdoescoalalonedotoyouroperatingmargin,alsoyouroperatingratiothisyearintermsofaheadwind?


Itunquestionablyisaheadwind.Whenweseethekindofyear-over-yeardeclinesthatweexperiencedinthefirstquarterof2015andprojectingforthebalanceoftheyear.Yes,wethinkasteady--asteadierrunrateforbothutilityandexportcoaltonnagebutthecomparisonsaredifficult.

Secondquarterof2014wasourpeakquarterforutilitycoalvolume,andsowearecompingthat,thatverydifficultcomparison.Similarlyinthethirdquarter,we--asutilitiesrebuildstockpilesintothethirdquarter,wearefacingsomedifficultcomps.Bythetimewegettofourthquarter,it'sgetalittlebiteasier,andwewouldexpecttoseelesseryear-over-yearvolumedeclines.

Ontheexportsideofthefranchiseaswehavediscussed,thecomparisonsreallygeteasierinthesecondhalf,beginninginthesecondhalf,andagain,particularlythefourthquarter.Fourth-quarter2014total




exporttonnagewas4.8millionsodroppedbelow5millionbythefourthquarteroflastyear.Toughmiddlepartoftheyear,toughcoupleofquarterscoming,bythefourthquarterwestarttoseegrowthresume.


Canyousaymaybeifyoufacespecificchallengesinyourfranchisecomparedtoyourrecentpeersandhowwecanthinkabouttheoperatingratioimpact?


No,wedon'tthinkwefacepeculiarorparticularchallengesrelativetoourEasterncompetitorinthisregard.


Ontheoperatingratio,ifyou'dliketoquantifyormaybejustsaythatyou'renotpreparedtomaybeassesstheimpactofcoal,that'sfine.Butontheex-coalandexthefuelsurchargehitthisyear,wouldyoucommentastowhetheryouseemix,youknow,justbelowthetoplinebeingthetailwindoraheadwindontheoperatingincomelevel?We'refocusingsomuchonthetoplinebutsurelytheremustbebenefitingrowingintermodalandmerchandise,right?Ifyoucanhelpframethatforus,thatwouldbeveryhelpful.


Absolutely.We'vesaidinthepastandit'sstilltruetodaythatourgeneralmerchandisebusinesses,particularlyvolumemovinginourschedulednetwork,areourhighestincrementalmarginbusinesses.Youlayeritontopofthenaturalspontaneousfavorableeconomicsofvolumegrowthinthisbusinesssignificantcorepriceincreasesandthat'sreallyakeydriverofimprovementforus.

Muchofthisunfortunatelywillbemaskedinthemiddlepartoftheyearbythefuelsurchargeheadwind,whichwillbesignificantandwiththekindsofdeltastolastyear,we'retalkingaboutinthetoplinefromfuelsurchargealone,wewillprobablyseemarginpressureinthesecondandthirdquarterunlikeinthefirstquarterwherethedeclineinfuelexpenseactuallyexceededthedeclineinfuelsurchargerevenue.Thatwillflipmostlikelygiventhemagnitudeofthefuelsurchargerevenueheadwindinthesecondandthirdquarter.

Operator :

Atthistime,IwillturnthefloorbacktoWickMoormanforclosingcomments.


Thanks,everyone,forbearingwithusonwhathasbeenasomewhatalongcallbuthopefullywehavegivenyoualotofdataandalotofcoloronwhatwe'redoing.Weappreciateyourtimeandwelookforwardtotalkingtoyounextquarter.

Operator :

Thisconcludestoday'steleconference.Youmaydisconnectyourlinesatthistime.Andwethankyouforyourparticipation.

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Norfolk Southern Corporation (SO) Earnings Report: Q1 2015...

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