NSC
#Thank you, Jim, and good morning everyone
Our third quarter 2017 revenue growth in all three business units reflects the strength and sustainability of our strategic plan
Total revenue for the quarter was up 6% versus 2016 driven by a combination of volume gains in intermodal, coal and steel and increased pricing
Merchandise volume was down slightly in the third quarter as gains in steel, sand and fertilizers were more than offset by lower automotive shipments associated with U.S
vehicle production declines and reduced crude oil shipments
Overall merchandise revenue was up 3% this quarter as negotiated price increases outpaced volume losses
Intermodal revenue increased $46 million, or 8% versus the same period in 2016, resulting from highway conversions, organic growth with our existing customers and new service offerings
Intermodal achieved record volume for the second consecutive quarter as total units once again topped the 1 million unit mark
Our intermodal growth in the third quarter is the result of our market approach, which aligns our service product with the needs of our customers, enhancing their ability to grow while positioning Norfolk Southern as an integral part of their supply chain
Coal posted year-over-year revenue and volume growth primarily due to increased export coal volume and pricing
Coal RPU was up 1% due to the impact of pricing gains that were partially offset by negative mix
Higher growth rates and lower rated export steam negatively impacted RPU despite improved pricing in our export markets
Utility volume decreased as mild weather caused an approximate 15% year-over-year decline in overall coal burn in eastern utilities
Turning to slide 8. We look ahead to the remainder of the year with confidence based on current economic trends
In merchandise, we expect low single-digit growth in the fourth quarter
Industrial production is likely to drive demand in steel, while growth in construction will positively impact our aggregate volume
Further, we expect increased drilling activity in the Marcellus/Utica region will continue to drive growth in frac sand
These increases will be offset by declines in automotive and by a lower crude oil, which is adversely impacted by pipeline activity
Intermodal expectations remained strong as tight trucking capacity should be further impacted by the ELD implementation in December
We continue to enhance our service offerings, providing growth opportunities with our customers to further drive revenue, volume and shareholder value
In coal, we expect fourth quarter utility volume to be in the range of 15 million to 17 million tons impacted by the mild summer weather
Export tonnage should continue to exceed last year's with volume in the range of 5 million to 6 million tons
We remain focused on pricing in all of our markets
Current indicators point to higher levels of demand and tighter truck capacity for the remainder of the year continuing into 2018. Such an environment increases our value in the marketplace, and we are confident that improvement will be reflected in our pricing
Moving to slide 9. Our market approach and current opportunities are consistent with our strategic plan, offering a balance of safety, service, productivity, and growth to drive shareholder value
To execute this plan, we deliver customer-centric service product that adapts to the needs of our customers, while providing an environment, in which, it is easy to do business
Our customer-centric service product first focuses on tailoring the right service to our customers
We collaborate with our customers to develop the best product that is beneficial to both our shareholders and customers
We pay close attention to customer feedback and continue to make adjustments to meet their needs, viewing our product through the lens of our customers
Our goal is to enhance the competitiveness of our customers in an evolving marketplace, allowing them to quickly adapt and compete for growth, increasing revenue to Norfolk Southern, while strengthening our role in their supply chain
Lastly, we employ best-in-class industrial development team to help customers locate or expand on our lines, providing a future pipeline for growth
The continuity of our management team, operating philosophy, and longstanding customer relationships combined with improving the customer experience and product is the overarching theme of our growth initiatives
We are confident this approach differentiates our service product, allows us to compete with truck, and will continue to provide the revenue and volume growth and shareholder value we delivered this quarter
Thank you
And now, I'll turn it over to, Mike, for an update on operations
<UNK>, as you know, we've clearly stated that our primary form of competition is truck
And within the East, we have a unique opportunity to divert shipments away from the highway to rail
Obviously, within intermodal container, but also within a boxcar, within a (20: 19), and within a multi-level and as truck capacity tightens, and that's the narrative that we hear from our customers on a daily basis that has volume implications for us and importantly it has pricing implications
Certainly I think we're seeing some of that volume matriculate to us now and the pricing will continue into 2018, as our customers and we go through bid season
With respect to share gains, once again our primary form of competition is truck
We are going to put out a very dependable service product and a very consistent approach
We feel like our customers value that approach
And so that has been reflected in our volumes and in our revenue
<UNK> - Credit Suisse Securities (USA) LLC Okay
And then just a follow-up, as you think about just sort of the whole pricing umbrella
Are you seeing an underlying acceleration in your core pricing growth, whether – I guess compared to the second quarter?
As we're renegotiating contracts in the third quarter, we see more strength, particularly on the truck competitive business, as you would expect
<UNK> - Credit Suisse Securities (USA) LLC Okay
Thank you
Yeah
Our primary form of competition is truck, <UNK>
We do share some customers with CSX and as I suggested, we're offering a differentiated service product and a long-term approach of a balance between cost effectiveness and supporting our customers' growth
And so to the extent the customers are looking for dependable service provider, we're there
Our primary focus is on securing business from the highway and we see that spot rates are up 15% in trucking and drive-in over the last couple of months and are up about 25% year-over-year
That's also buttressed by an improving economy in which consumer confidence and the PMI for manufacturing are at effectively 13-year highs
So our focus is on competing with truck
That's been our thesis
That's the opportunity provided to us by operating in the East and that's where we're going to see a lot of growth
Yeah
<UNK>, as we've talked before, there is a lot of collaboration within Norfolk Southern about volume opportunities
And our primary focus was on making sure that any volume we brought on was accretive to the bottom line and to our shareholders and did not disrupt the responsibility that we have to our existing customer base to provide a consistent and predictable service product
And so that's how we went into this
We could be judicious with the unit trains that we added, and we look for opportunities to add trains into our scheduled merchandise network and within intermodal
We also make sure that anything we brought on in the short-term did not necessarily reduce our ability to handle additional business at higher returns in the long-term
<UNK>, we're pretty excited about the environment in which we're operating right now
We see truck capacity tightening significantly, buttressed by an improving economy, which should certainly assist our intermodal markets
It will also assist many of our merchandise markets, as we implement – we continue to implement our plan of a strong service foundation, schedules that meet our customers' needs, an equipment strategy that supports growth, technology improvements that optimize the distribution of the equipment and make it easier to do business with us
All of that is part of our strategic plan
It's all designed to compete with truck
And so those are positives for us
As I look into the fourth quarter, I'll draw your attention to export, we're still projecting 5 million tons to 6 million tons of export coal
Recognize last year the fourth quarter was our highest export coal quarter
I think through three quarters, we did about – last year we did about 10 million tons of coal, export in the fourth quarter we did 4.6 million tons
So the comps get a little bit more difficult
We also had a much milder summer in the East and the start to the fall has been mild
And so I think we're going to be somewhat limited in our utility volume in the fourth quarter
For export coal, what we're hearing, <UNK>, is that that market has legs through – potentially through the first half of next year
A lot of the run up in price has been event driven, which isn't necessarily good, but I think it also supports the theory that the market out there for export coal is fairly tight
Although I can paint the other picture
As you're aware, API 2is backwardated right now
So that suggests it's going down
But the best I can do, <UNK>, is kind of tell you what we're hearing, which I just did, and then point you towards the economic metrics that we're looking at or indicators that we're looking at
With respect to utility coal, that's going to be highly dependent upon the weather
Natural gas prices are pretty similar to where they are – were at this time last year
Stockpiles are down slightly versus last year
I think they're down about where they were at like 79 days, they're off about 22 days from the high, which was May 2016. And really what happens in the first quarter and second quarter next year is going to be dependent upon weather patterns in the East in the winter
So, <UNK>, the – as I think I noted, the contracts that we renegotiated in the third quarter generally had a higher level of increase than what we were able to secure in the second quarter
So that's a positive for us
I'll note that one of the things that really supported year-over-year rate increases this year within coal was the export market, and we certainly don't expect that level of run up next year
As trucking firms, we've got a lot of business that's transactional, and that is going to offer support for pricing
You know there was a lag there too because the uptick was relatively sharp, certainly a lot sharper than folks had anticipated generally in March 2014. We might be a little bit ahead of it this year in terms of the outlook because the commentary about the tightening truck market has been out there for a bit, particularly associated around ELD
So we're certainly factoring that into our conversations with our customers and our bid approach, and frankly our customers are having those same kind of conversations with their customers
Well, we've moved more towards shorter-term pricing in export so that has to be renegotiated
But once again that's less than 3% of our overall volume
With intermodal, there are defined escalators, but there's also transactional business and that has offered support for us
I note that even this quarter we had RPU growth in all seven of our major groups
Same thing we had in second quarter
Second quarter, I would say, truck capacity was loose; third quarter truck capacity tightened and we were able to continue that March
Hey, <UNK>, it is a – it's a very small component of our revenue
We have every intention of growing that and we're working on opportunities to put together products that would improve that
But, it's something that we're monitoring very closely where there have been four negotiations so far and there are three more that are scheduled
<UNK>, I think, the key is the opportunity for both us and our channel partners in a tightening truck environment
We have – we have strong relationships with channel partners throughout the intermodal business and we expect to grow along with them
So, we see it as a win-win for NS and its channel partners
We see it as an opportunity to grow both volume and rate next year
Well, <UNK>, what's occurred is that, we're starting to see a much tighter truck environment and we've got some market approach that our customers value
We've got a service product with schedules that meet their needs
And, so, our conversation with them is how do we grow together
And we firmly believe that negotiated rate increases reflect the value of your service product, and we're leaning in the price
We're not putting new dots on the map
We've got our capacity
We'll continue to invest in the big areas like Chicago and Atlanta, but our focus is on utilizing the existing capacity that we have to – and leaning in the price to drive shareholder return
Five years, 10 years ago, we implemented some Corridor strategies which have been very beneficial to us
For instance, the Heartland Corridor, we put in the – handled business between the Ohio Valley and Chicago, and Norfolk
And as volume moves to the East Coast ports, that's something that's going to support our growth
And we've got the capacity in place
Now it's our opportunity to leverage it
<UNK>, capacity is tight with boxes, which is good for pricing opportunities, particularly on the transactional level
As Jim noted, we're currently in the process of developing our capital plan for 2018.
It's an ongoing process, as Cindy said
We're implementing some things now, some things we're investing ahead of the curve in some areas and some things we'll be rolling out next year
The foundation of it is a predictable service product
What differentiates us is our equipment strategy for growth homogenizing the fleet that offers for better asset turns, that offers better equipment reliability, the ability to provide equipment in safe working order to our customers on time, better transparency for our customers, it's a customer engagement focused on proactive notification and a seamless interface with the customer
It's collaboration with our short line partners and economic development partners to extend our network reach, it's innovative service products that utilize and generate a return on our existing assets
All those things are part of our strategy to differentiate ourselves and help us compete with truck
