NSC
#Thank you, Jim, and good morning, everyone
Thank you for joining us today
Norfolk Southern delivered first quarter revenue of $2.6 billion, a strong 6% year-over-year increase, which was driven by volume growth of 5% and a revenue per unit improvement of 1%
We attained volume and revenue gains in all three of our major market groups with a particularly robust performance in coal, intermodal and steel versus the first quarter of 2016. Additionally, fuel surcharge revenues increased due to higher on-highway diesel prices
We maintain our focus on pricing
Revenue per unit excluding fuel was flat as pricing gains were offset by negative mix associated with increased intermodal volume and short-haul utility coal
On slide 8, Merchandise revenue was up 2% for the quarter with a 1% increase in volume and overall revenue per unit growth of 2%
Volume gains were primarily driven by metals and construction strength due to improved steel production and increased construction and drilling activity
Other markets declined slightly in the first quarter due to reduced energy shipments, truck competition and, in automotive, decreased U.S
light vehicle production
Merchandise revenue per unit increased 1% excluding fuel surcharge as positive pricing gains were partially offset by negative mix related to increased aggregate and soybean volume
Turning to our Intermodal market on slide 9, revenue of $571 million represents a 9% increase over first quarter 2016 with a 4% gain in volume and a 5% improvement in RPU. Our improved service product helped drive a 5% volume increase within our domestic intermodal franchise despite weakness across the trucking industry
Continued strength in East Coast port activity supported international volume, which was up 3%
Excluding fuel, our intermodal revenue per unit improvement of 1% was driven by current pricing initiatives within the context of a soft trucking environment
Moving to slide 10, Coal revenue increased 20% to $420 million in the first quarter, driven by significant volume increases in the export and utility markets as well as pricing gains
Utility coal volume of 17.6 million tons in the first quarter benefited from our previously announced market share gain and higher natural gas prices, which offset the impact of mild winter weather
In our export market, we handled 6.3 million tons in the quarter through Lamberts Point in Baltimore due to improved demand and pricing for U.S
export coal
More than doubling its shipments, Baltimore is primarily lower RPU thermal coal and represents 38% of our total export volume, while Lamberts Point grew over 50% and is predominantly metallurgical coal
As we look ahead to slide 11, our focus is on continuing to execute our strategic vision for growth
We are forecasting generally improved economic conditions, particularly related to manufacturing and consumer spending, which we expect will positively impact our volume
Merchandise volume is expected to be relatively flat in 2017. Crude oil, which represented over 50,000 units last year, is predicted to decline close to 30% in 2017 as shipments are diverted to the Dakota Access Pipeline
The largest year-over-year decrease is projected in the second quarter
Additionally, a projected 3.5% decline in 2017 U.S
vehicle production will negatively impact our automotive volume
However, metals and construction, grain and plastics are expected to be up year-over-year
Within Intermodal, our strong service product has and will continue to enable success in converting service-sensitive volume from the highway
Looking ahead, we expect positive macroeconomic trends to drive organic growth
Expected increases in transportation demand and gradually tightening truck capacity in the latter part of the year will provide potential volume growth through the remaining quarters this year
We expect year-over-year growth within our coal markets with export gains driven by the continued tightening of international supply, most recently affected by Cyclone Debbie in Australia
Though seaborne prices fell from the highs in late 2016 and earlier this year, the after effects of the cyclone recently increased prices again
This should be a short-term benefit to U.S
coals in the global market
Due to this volatility, we expect to exceed our guidance in the second quarter and return to 3.5 million ton to 4.5 million ton rate in the third and fourth quarters
We expect utility coal volume to grow this year and remain confident in our quarterly guidance range of 17 million tons to 19 million tons
It is important to note we are in shoulder months when the utilities typically rebuild their inventories from winter; although this winter was relatively mild, particularly in the South and, as a result, stockpiles remain elevated
Consistent with our strategic plan, we are securing high-quality revenue growth that complements our existing network
We have developed a service product conducive to attracting new revenue and launch new customer focused initiatives designed to improve our customer experience and make it easier to do business with Norfolk Southern
At the same time, we have a keen understanding of the capacity of our existing network and we'll work to balance growth in targeted areas with the needs of our customers
While leveraging the value of our service product, we will continue our initiatives to attain pricing in excess of rail inflation
As we have previously stated, we take a long-term view of our markets and pricing to yield sustainable shareholder value
We will continue to work with our customers to understand their expectations and remain an integral part of their supply chain
I will now turn it over to Mike, who will discuss our operational performance
Yes, Chris, as you noted, we do have relatively easy comps in the second quarter
We also had that in the first quarter and we delivered 5% growth
It starts to get a little bit more difficult in the third and fourth quarters, although that's the time period in which most analysts expect that trucking competition is going to tighten
And so, we're going to continue to leverage our very good customer-focused service product and try and take trucks off the highway
We did that in the fourth quarter of last year, and we did that in the first quarter of this year in pretty loose truck environment
So, we feel good about where we are with growth
We've given you some guidance on what we see in our coal and our merchandise markets, and in our intermodal markets
Yes, we saw consistent pricing in the first quarter with last year, and we're continuing to differentiate ourselves based on our service and ability to innovate as supply chains evolve
We're confident in our ability to continue to drive high-quality revenue that complements our network at low incremental costs, which will ultimately and continue to drive shareholder value
Sequentially, it's – yeah, it's pretty much the same as where we were last year year-over-year and sequentially
We continue to see pressure in the trucking environment and we are getting some very significant and competitive rate increases at our export coal franchise
As truck markets tighten and economic conditions continue to improve, we fully expect additional opportunities for price later this year and into 2018.
Ken, this is <UNK>
Network performance is one way to look at it
Jim's been very clear that we're driving customer-specific service metrics that are unique to the markets that we serve and, in many cases, unique to the demands of individual customers as their transportation needs evolve
This allows us to improve the value that we provide to our customers
It provides for more rich conversation with our customers as we're renegotiating contracts and looking for additional business, about the benefits of the Norfolk Southern product
And, they can become defined as for individual customers or broadly by markets
And if you look at, say, intermodal, it could be availability of a box on a chassis at a terminal; within the merchandise network, it could be consistency of delivery to a customer location to the original ETA
Those are all important things to the customer
And I can tell you, categorically, that for each of those individual customer metrics, we are in much better shape than we were last year and have improved year-over-year
And that's what we're doing is we are collaborating with our customer to find out what they want and becoming a much more integral part of their supply chain
Yes, Mike, you talked about our equipment strategy, and I think it's notable that our efforts to go to a more homogenized fleet don't just benefit operations
It also improves our ability to compete with truck and provide a better service product to our customer
It's more flexible by definition
It lowers investment risk
It lowers operating costs, and it improves our ability to provide a serviceable piece of equipment to our customer in good working order on time
So, there's great collaboration between marketing and operations on a lot of these initiatives to make sure that we're taking a sustainable approach and a balanced approach to take costs out while improving our service – individual service to our customers
Hey, <UNK>, I'm glad you brought that up
It's – it is an issue with the mix headwind, as you reference
However, we did get very competitive rate increases, and very significant rate increases, at Lamberts Point; although, you should note that Lamberts Point is still only 14% of our overall coal volume
So, it's a relatively minor component, because we have a pretty diverse coal franchise
And so, while Lamberts Point grew over 50%, Baltimore, which is more of a thermal market and has a lower RPU, grew over 100%
And so, you can see some mix issues within that within export
And then, we were supported by a market share gain in the North, and the very mild weather in the South limited our growth in Utility South
So, last year, we had talked at this time, <UNK>, our Utility South volume was about 54%, 55% of our utility volume
That's flipped a little bit
And now, Utility North is more than 50% of our utility volume
That also has a – tends to have a lower length of haul than Utility South, and so that creates some pressure on our RPU. But I'll note, we are really focused on adding high-quality revenue that fits our network, complements our product and drives long-term shareholder value
And that's – and our first quarter results reflect a successful execution of that strategy
You noted that with Cyclone Debbie that prices have gone up
That's a near-term phenomenon and we're already starting to see a correction there; although, that will benefit, clearly, our second quarter export volumes
And so, in my remarks, I guided to the fact that we would probably exceed our previous guidance of 3.5 million tons to 4.5 million tons in the second quarter, and then third and fourth quarters would be back within that range
There's a lot of volatility, as you could expect, within our coal network; not only because of seaborne prices, but also because utility coal is now a load follower and stockpiles, while significantly down from last year, are still elevated
And so, we're going to be watching the same things that you watch
We're going to be watching natural gas prices, weather, electricity demand, cooking coal prices and API, too
It's going to be highly dependent upon market conditions and those four or five factors that I just referenced, <UNK>
We're getting price
We're particularly getting price in the export met market
The sustainability of that's going to be dependent upon the – some of the factors, such as coke and coal price
Yeah, we – <UNK>, we take a long-term sustainable view of our pricing, the value of our service product, the markets and the customers we serve, which ultimately is going to promote shareholder value in the near-term and long-term
We are fully confident that trucking capacity is going to tighten in the second half of this year, which will lift truck prices maybe – late this year and early next year, and we're taking a long-term approach to this
We grew our volume in the fourth quarter of last year in a difficult truck environment
We grew our volume in the first quarter of this year in a difficult truck environment as we leveraged the value of our service product
Dave, we're achieving price
We have achieved price, and we're going to continue to do it
For us, truck is pricing opportunity
Conversions from truck create an opportunity not just in intermodal, but in our merchandise network
And Mike and I talked about collaborating with customers on an equipment strategy that allows us to convert truck to rail in the merchandise network
So, we're going to continue to push on price
We've achieved price and volume in very difficult truck environment last year and in the first quarter of this year
It's potentially starting to tighten a little bit, and the analysts believe that it's going to tighten a lot more as the year progresses
So, that's our focus is taking a long-term view of our pricing and the value of our service
We had some shifts within our intermodal network, but we achieved our price
And, clearly, truck is limiting the upside to our price, so we've talked about that in the past, too
We're confident in our ability as we move forward and our results reflect it
It's a process
As cars fall out, we can scrap them
It's a homogenous fleet and it has quicker cycle times
You have to buy – purchase less cars, invest in less equipment to replace that carrying capacity
