Norfolk Southern Corporation Q1 2009 Earnings Call Transcript

Apr.22.09 | About: Norfolk Southern (NSC)

Norfolk Southern Corporation (NYSE:NSC)

Q1 2009 Earnings Call

April 22, 2009 9:00 am ET

Executives

Leanne D. Marilley – Director of Investor Relations

Charles W. Moorman – President & Chief Executive Officer

Donald W. Seale – Executive Vice President & Chief Marketing Officer

Mark D. Manion – Executive Vice President & Chief Operating Officer

James A. Squires – Chief Financial Officer

Analyst

Ken Hoexter – Bank of America/Merrill Lynch

John Larkin – Stifel Nicholaus

Thomas Wadewitz – JPMorgan

Walter Spracklin – RBC Capital

Randy Cousins – BMO Capital Markets

William Greene – Morgan Stanley

Jason Seidl – Dahlman Rose & Co

Edward Wolfe – Wolfe Research

John Barnes – BB&T Capital Markets

Christopher Ceraso – Credit Suisse

Matthew Troy – Citigroup

Gary Chase – Barclays Capital

David Feinberg – Goldman Sachs

Lee Klaskow – Longbow Research

Operator

Greetings and welcome to the Norfolk Southern Corporation first quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure to introduce Norfolk Southern Director of Investor Relations, Leanne Marilley.

Thank you, Ms. Marilley. You may begin.

Leanne D. Marilley

Thank you and good morning. Before we begin today's meeting, I would like to mention a few items. First we remind our listeners and Internet participants that the slides of the presenters are available for your convenience on our website at nscorp.com in the Investor section. Additionally, mp3 downloads of today's meeting will be available on our website for your convenience.

As usual transcripts of the meeting also will be posted on our website and will be available upon request from our Corporate Communications Department. At the end of the prepared portion of today's call, we will conduct a question-and-answer session. At that time, if you choose to ask a question, an operator will instruct you how to do so from your telephone keypad.

Please be advised that any forward-looking statements made during the course of this presentation, represent our best good faith judgment as to what may occur in the future. Statements that are forward-looking can be identified by the use of the word such as believe, expect, anticipate and project. Our actual results may differ materially from those projected and will be subject to a number of risks and uncertainties, some of which may be outside of our control.

Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we view as most important. Additionally, keep in mind that all references to reported results, excluding certain items such as non-GAAP numbers, have been reconciled on our website at nscorp.com in the Investors section.

Now, it is my pleasure to introduce Norfolk Southern Chairman, President, and CEO, Wick Moorman.

Charles W. Moorman

Thank you, Leanne and good morning everyone. It’s my privilege to welcome all of you to our first quarter 2009 Analyst Conference Call. I’m joined today by several members of our management team including Mark Manion, our Chief Operating Officer, Don Seale, our Chief Marketing Officer, and Jim Squires our Chief Financial Officer. We also have with us Jake Allison, our Vice President and Controller, Rob Kesler, our Vice President of Taxation, Marta Stewart, our Vice President and Treasure, and Frank Brown, our Assistant Vice President of Corporate Communications.

While, as I mentioned during our January meeting we began the year facing business conditions as challenging and uncertain as any we have experienced. Our first quarter results were clearly under considerable pressure, as volumes declined an unprecedented 20% year-over-year, and revenues fell even further by 22% year-over-year. However, we were able to mitigate much of the negative impacts through aggressive costs control as operating expenses declined 19%.

The result was first quarter railway operating profit of $383 million, which was 34% below last year. Earnings per share were down 38% year-over-year, and not surprisingly our first quarter operating ratio also came under pressure increasing 3.4 percentage points over the comparable period last year to 80.3%. Against this tough economic backdrop, we are focused on those things that we can control, reducing our costs while continuing to enhance our service product and the safety and efficiency of our operations.

Mark Manion will be discussing our cost reduction initiatives and service performance little later. But before I turn the podium over to Don Seale, let me say that while we expect our results for the next few months to continue to be under considerable pressure, I am confident that we will emerge from the current economic downturn as the preferred transportation solution.

The fundamental drivers of our success in recent years remain in place and we continue to manage for the long-term despite near term economic uncertainty. We are confident that our volumes will resume growing as the economy rebounds and new industrial development projects come online, and we will be strategically positioned to attract and handle that growth. In the meantime, we will continue to exercise cost discipline, improve service quality, and pursue new business opportunities and franchise enhancements.

I will now turn the program over to Don, who will provide additional details about our revenues, followed by Mark, who will review our first quarter operations, Jim Squires will then discuss our financial results. I will close with some comments about the challenges and opportunities before us and then we will take your questions. Don?

Donald W. Seale

Thank you Wick, and good morning everyone. During the first quarter the ongoing recession continued to depress transportation demand as low-tech industrial production reached its lowest point since the third quarter of 1994 accompanied by a weak consumer spending and international trade. With this unfavorable economic environment revenue for the quarter was $1.94 billion down $557 million or 22% below the same period last year.

This decline was driven by a 20% reduction in volume, which I will address in a moment, coupled with lower fuel surcharge revenue. For the quarter, fuel-related revenue was down $226 million versus 2008, and represented approximately 41% of the overall decrease in revenue. This decline was partially offset by a $10 million positive lag effect for fuel, which partially offset volumes and fuel revenue declines.

With respect to yield as depicted on slide three, three of our seven business units posted year-over-year RPU gains, despite lower fuel revenue and the effect of a downward adjustment in the rail cost adjustment factor, which is contained in certain coal contracts. In total, revenue per unit reached $1,335 falling $32 or 2% below the first quarter of 2008.

Gains in agriculture and paper were driven by improved pricing and a more favorable mix of longer-haul traffic in the quarter. The remaining business units saw lower revenue per unit driven by declining fuel surcharge revenue, and a negative mix effect in the form of reduced volumes of higher rated commodities such as coil steel, plastics, chemicals, and auto parts. And finally overall yield improvement of 7% was realized from a combination of price and traffic mix.

Now turning to volume and shown on the next slide in the face of gale-force economic headwinds, we experienced declines across our book of business. Total volume in the quarter reached $1.5 million units down 372,000 loads or 20% below the first quarter of last year. Reduced consumer spending, plant closures, production curtailments, falling international volumes and increased truck competition for all major contributors to the decline.

On a more positive note revenue ton-miles handled in the quarter declined by 18% compared to the 20% unit decline, reflecting increased payloads in coal and other bulk commodities. International related volumes continued to feel the impact of the global recession with export volumes down 31% principally driven by weakness in export coal, grain, pulp board and kaolin clay, and the import volumes declined by 33% in the face of weakened consumer demand.

Now transitioning to our individual business groups. Coal revenue reached $602 million for the quarter down $60 million or 9% compared to first quarter last year. Revenue per car of 1581 was up $30 or 2%. The improved pricing and fewer short haul movements were sufficient to offset lower fuel-related revenue and downward RCAF contract adjustments in the quarter.

As shown in slide six total coal volume fell by 11% in the quarter as business across all segments of the market soften. Utility volume declined by 7%, due to a 3% drop in electricity demand and several power plant outages. For example, power unit outages at two southeastern utilities alone reduced volume by approximately one million tons in the quarter. And a six-year low in natural gas prices pressured coal burn at certain utility plants.

During the quarter, metallurgical coal volumes were down 26% both domestically and for export to Europe. Major reductions in steel output in the U.S. and Europe, which were down 53% and 43% respectively, drove these lower volumes. And finally, central app coal production fell by 6% during the quarter led by the temporary closure of two primary met producers that we serve.

As shown in slide seven, Intermodal revenue for the quarter reached $366 million down a $120 million or 25% from the same period in 2008. Revenue per unit of $604 million fell $52 million or 8% compared to first quarter of last year, driven primarily by a significant decline in fuel surcharge revenue. Additionally, RPU was effectively impacted by a volume decline in higher RPU Triple Crown traffic, as well as an unfavorable mix change as we handled less long-haul transcon business and more local domestic Intermodal business east of the Mississippi River.

Intermodal volumes as shown in the next slide were down 18% compared to first quarter 2008. Excess trucking supply and resulting truck competition impacted volumes across all of our business segments. This impact was most evident in volumes of Triple Crown, which ended the quarter down 15%, as a result of automotive plant closures and lower truck pricing.

On the upside domestic volumes increased by 2% as highway conversions and new service lanes helped partially offset economy driven declines in our premium segment. And declines in our international business continue to be driven by lower consumer spending and the weak global economy.

Now turning to our carload business as shown in slide nine, revenue for our merchandise sector was $975 million down $377 million or 28%. Recessionary weakness across the Board resulted in 29% decline in volume. On the plus side revenue per car reached $2,083 million up $36 million or 2% for the quarter driven by gains in agriculture and paper traffic.

Drilling down to the individual merchandise markets as shown on slide 10, agriculture volume fell 14% in the first quarter. Weakness in fertilizer demand and lower volumes of export corn and grain to Midwest processors drove this decline. On the upside ethanol continued its growth trend, our shipments increased by 14%.

Paper clay and forest products shipments were down 26% in quarter as U.S. paper production declined by 18%. In additions shipments of lumber and wood products declined by 33% in the face of the worse housing market since World War II. Offsetting some of these declines were new shipments of waste, which began moving during the quarter from the Northeast to landfills in the South.

As shown on slide 12, chemicals volumes fell 21% in the first quarter with lower production of basis chemicals and plastics as a result of depressed housing and automotive demand. Metals and construction volume declined 35% in the first quarter as lower domestic steel production resulted in two permanent plant closures and 16 idle blast furnaces in our service territory. On a positive note new Scrubber Stone shipments to coal-fired power plants increased by 27% as four additional power plants completed Scrubber installation over the past several months.

And finally, automotive carloads were down 48% in the quarter driven by the automotive industries efforts to realign vehicle production with consumer demand. In that regard North American vehicle production of 1.8 million units was down 49% compared to the first quarter of 2008.

As we move alone in the second quarter there are still no definitive signs of an economic turnaround, but speculation abounds that we maybe approaching the bottom of the housing and automotive markets. If so these are two key economic components that could lead us to economic recovery just as they led to economic recession.

In a more visible sense the AgriFuels market will provide growth that Norfolk Southern for the balance of 2009 as new ethanol production and distribution terminals generate growth and inbound corn and outbound ethanol. We also expect continued growth in the construction and demolition debris markets and new shipments and municipal solid waste from the Northeast to Southeastern landfills.

With respect to our coal markets weakened global steel production will continue to suppress export and domestic met markets at least through the second quarter. Utility demand will continue to be affected by lower electricity production along with stockpiles that are either at target or slightly above target levels, and natural gas prices below $4 per million Btu, which are expected throughout the summer will also impact the utility coal market.

Within our Intermodal market as summarized in slide 16, growth from highway conversions in local domestic markets will continues to help us buffer the effects of the weakened international market. In that regard we are pressing ahead with our corridor initiatives and launching new services to expand market reach for both Intermodal and carload traffic.

I’ll briefly highlight three of these new projects that saw substantial progress in the first quarter. First as shown on slide 17, in February we along with our partners the Canadian National and West Tennessee Railroad announced our latest initiatives, the MidAmerica Corridor. This new Corridor, which stretches from Chicago and St. Louis to Corinth, Mississippi and beyond, will provide shorter, faster routes for merchandise traffic between the Midwest and Southeast.

Also new coal flows will be targeted over this corridor from the Illinois Basin to NS served utility plants in the Southeast, and ultimately this new routing could support a new more direct service for Intermodal between Chicago and the Florida markets. With respect to the Florida market as shown on the next slide, we launched a slate of new Intermodal services between Chicago, Atlanta, Dallas, LA and Kansas City and our new Intermodal terminal at Titusville, Florida, which covers the Orlando and Tampa markets.

This is a good shot of our new terminal in action with the March launch of the Space Shuttle from Cape Canaveral as a backdrop. I guess you could say that we started this new service with the bank. And a third initiative the Pan Am Southern shown on slide 15 received the required approval from the STB on March 10 and closed on April 9, which will allow us to proceed with our joint venture with Pan Am Railway to better serve of the New England market.

This new joint venture will include upgrades of the Corridors main line to provide for faster and more reliable service along with new automotive, intermodal, and carload transload terminals along the wrap. With projects like the MidAmerica Corridor, our New Florida Intermodal service and Pan Am Southern’s expanded service into New England, when the economic does recover, we planned to be ready to take full advantage of the opportunities that lay ahead.

And finally, I will conclude my remarks by restating that as we focused on launching new services and managing through a challenging economy, we never lose focus on what our primary mission is all about and that’s providing industry leading service in the safest and most efficient manner possible at price levels that reflect the true value of that service.

As we outlined in our call in January we ended this year with 70% of our book of business price for the year. At the end of the first quarter approximately 10% of the remaining book has been repriced at levels that reflect this overall value proposition. The remaining 20% of the book will be repriced mostly in the third and fourth quarters of the year.

Now, thank you for your attention and I will now turn the program over to Mark Manion for our operations report. Mark?

Mark D. Manion

Thank you, Don and good morning everyone. We continue to reduce costs aggressively and do it in a balanced ways so we provide good customer service. I will give you more detail on that, but first let me bring you up to date with our safety performance. As shown here on slide 2, our safety process remained strong with initiatives in place for continued improvement.

Our estimated injury ratio for three months in 2009 is 0.94, that is 19% lower than our first quarter of last year, which was a ratio of 1.16. Let’s turn to our operation for the first quarter. On slide three, the green bars represent carloads for 2008, and you can see volumes were down about 20% in the first quarter. Furthermore, gross ton-miles were down about 18%.

With regard to the operating plan beginning on slide four. For road trains we reduced crew starts quarter-over-quarter by 14% and for yard assignments we reduced crew starts by a 11%. We will continue to monitor business conditions closely and we expect further reductions in crew starts being mindful that this business is not necessarily a business where volume reductions equate to an equivalent number of train starts. While you can take a certain number of trains out of the networks you have to keep running some number of trains if you are going to maintain a scheduled operation and the level of service our customers want.

As we discussed in our last meeting, we have some terrific tools, which enable us to respond to changing traffic conditions with revised operating plans, which reduced trains without adding additional equipment expenses or delays or any degradation in service levels. Clearly, the amount of variable cost you can reduce depends largely upon the type of business. Coal and Intermodal are the easiest to reduce variable expenses through the elimination of trains while merchandize tends to be the most difficult.

Nonetheless, we are continuing to scrub our train and yard plans on a weekly basis as we see changing traffic patterns. In the first quarter, our service metrics shown on slide five improved significantly in terms of train performance, connection performance, plan adherence and of course our composite service measure. Train performance increased nearly 16% while connection performance and plan adherence increased to a lesser extent but from already exceptionally high levels.

Illustrating operating plan efficiency slide six, shows our car days per carload measure. Car days per carload represents the number of days involved in moving foreign cars through the load empty cycle on Norfolk Southern while this calculation is specific to measure foreign cars for which car hire is paid the velocity is generally indicative of all cars on the system. Despite a significantly, reduced operating plan car days per carload decreased quarter-over-quarter indicating an efficient and balanced plan.

Let me emphasize this point, maintaining an efficient and balanced operating plan and then following it is of prime important to us. One thing we are always mindful of is how easy it is to seriously impair the level of a railroad service and how hard it is to them restore their services. Following the operating plan is key to service and cost control. This benefit is further illustrated when we turn to slide seven, car rental expense.

As you may recall due to traffic flows Norfolk Southern is a net payer of equipment rents, through a solid operating plan and strong execution we were able to manage rental payments to produce a net equipment rent reduction of $6 million. In addition to reducing our operating plan we are also taking out our assets base as shown here on slide , we have about 32,300 cars in storage now and that represents roughly 28% of our fleet.

Additionally, as we see on slide nine, we have, what’s now over 400 locomotives stored, this represents about 11% of our fleet. Slide 10, shows the total number of railroad employees for each of the last five months as you can see beginning in November 2008, we have reduced employees in the wake of volume declines through furloughs and attrition.

With regard to furlough employees, we have approximately 1200 total were about 1050 coming from train and engine service. The balances are primarily mechanical employees as we have significantly curtailed our car repair programs. Additionally, we have reduced overtime expense 41% in the first quarter of 2009 and we will continue to take cost out where we can. While we’ve reduced our employee count it’s important to note the real savings comes from reduced crew starts and improving system velocity.

Our T&E employees are essentially paid on an activity basis. So, while we furloughed 9% of our T&E forces we don’t think there is a good short-term cost advantage to significantly increasing the T&E furlough pace. We’ll incur some additional costs in health and welfare benefits, but we think its more expensive in the long run to let people go then have to hastily try and rehire them when business recovers.

The result of this is some T&E employees aren’t making as many trips and consequently not earning as much. Turning to slide 11, going forward we will continue our focus on safety using the tools available to us, we will ensure the operating plan is correctly sized to the underlying traffic volumes and changing patterns. As we have to-date we will approach the plan development in a balanced and customer focused framework not just optimizing one or two elements to the deferment of the overall cost structure but looking at it from a comprehensive perspective.

And finally as our operating plan evolved, we will make sure we have correctly sized our asset based to support it efficiently. I thank you and turn to the program over to Jim Squires. Jim?

James A. Squires

Thank you, Mark. I will now provide a review of our overall financial results for the quarter. Let’s start with our operating results, as Don described railway operating revenues for the quarter were $1.9 billion down a $557 million or 22% compared to last year.

Slide 3, displays our corresponding operating expenses, which decreased by $362 million or 19% for the quarter. The resulting income from railway operations was $383 million down 34%. The substantial decrease in revenues due primarily to lower volumes this quarter resulted in an increased operating ratio of 80.3.

Turning to our expense detail this slide presents the major components driving the $362 million decrease. As you can see all of our expense categories are down this quarter with the exception of depreciation, which reflects our ongoing investment and infrastructure. The largest reason for our overall expense decline was sharply lower fuel costs, which decreased by $245 million or 61%.

This reduction was a combination of lower usage and lower prices. Our consumptions for the quarter decline commensurate with the 20% traffic volume decline Don discussed, and this consumption improvement accounted for approximately $70 million of the fuel expense decrease. In addition lower fuel prices as illustrated on our next slide provided a $175 million benefit. This graph shows our average price per gallons for each of the last nine quarters. The $1.39 average price in the first quarter of 2009 was a 50% decline compared with the $2.79 price per gallon in the first quarter of 2008.

The next largest expense decline was compensation and benefits, which decreased $66 million or 9%. Slide eight, presents the major of components driving this change. First stock based and other incentive compensation fell $56 million due largely to a $13 per share decrease in our stock price during the quarter coupled with the $4 per share increase during the first quarter of 2008 as well as reduced performance relative to financial measures.

Second, volume related labor was reduced by $47 million in the quarter. The reductions primarily reflect reduce train and engine crew hours and other labor in response to the lower volumes, as well as a significant reduction in overtime. Somewhat offsetting these reductions were higher wage rates up by $30 million reflected of the agreement pay increase that went into effect last July.

Pension benefits increased by $10 million primarily due to reduced asset values also medical benefits for active and retried employees were up by $10 million. Materials and other expenses decreased $40 million or 17%. Slide 10, provides additional details to define this decrease. As you will recall last year we reached a legal settlement related to the January 2005 Graniteville accident. The absence of expenses related to the settlement and favorable personal injury and other loss and damage claims development combined to result in a $29 million year-over-year expense reduction.

The other large component of the decrease was a $12 million reduction related primarily to materials used in operations as we have aligned engineering and freight car materials use to confirm with lower traffic volumes. Other expenses include a mix of relatively small items. Purchase services and rents decreased $20 million or 5% reflecting decreased volumes. Intermodal operating costs declined $14 million. Transportation services comprised primarily of automotive related costs fell $7 million, and equipment rents decreased to $6 million.

Partially offsetting these declines we incurred additional costs during the quarter preparing for positive train control requirements. And finally as reflected on slide 12, depreciation expense increased by $9 million or 5% reflecting both continuing investment in our network and equipment and the impact of higher replacement costs.

Now let’s turn to our non-operating items on slide 13, corporate-owned life insurance contributed a net $8 million. In addition coal royalties were up $6 million. All other non-operating items were net unfavorable of $4 million. As illustrated on slide 14, income before income taxes decreased a $193 million or 41% largely related to lower operating income.

Income taxes for the first quarter were a $106 million or an effective tax rate of 37.5%, which compares with a $185 million or an effective rate of 38.9% last year. Slide 16, depicts our bottom line results. First quarter net income was a $177 million a decrease of $114 million or 39%. Diluted earnings per share were $0.47, which was $0.29 per share or 38% below last year.

Now turning to cash flows, cash provided by operating activities was down. However, free cash flow generated for the period was a positive $111 million, while we did not acquire shares this quarter, dividends were up reflecting the $0.02 per share increase approved this year in January as well as the $0.03 per share increase approved in July last year.

As you will recall cash and cash equivalents at the end of 2008 were $680 million. This balanced at the end of March was $884 million and reflects in part the cash provided from our $500 million debt offering in January. Some of this cash was used to repay $200 million of accounts receivable borrowings in January. Subsequent to the quarter end, we’ve repaid $400 million in term debt and we have no significant remaining maturities for the balance of the year.

And with that, I will turn it back over to Wick.

Charles W. Moorman

Thank you, Jim. Well as you’ve heard the first quarter posed some extraordinary challenging quarter for us. The word unprecedented is used a lot these days with good cause. And to give you a point of comparison our volume declines year-over-year of 20% compared to the 10% year-over-year declines we saw at the peak of the 1981, ‘82 recession.

As I said earlier to successfully manage through this environment, we are focused on effectively addressing current conditions while at the same time preparing for the future. As we addressed these challenges we are following two basic principles. The first is obviously that we have to reduce costs whenever and however possible. As you know, Norfolk Southern as a long history of effective cost control and we demonstrated our capability to respond quickly to trade changing traffic conditions in the past.

However, along with cost control or keeping our other principle in mind and that is that we are not cutting costs in a way that will degrade our service products or customer service or that will have a significant negative impact on our ability to respond aggressively when economic conditions start to improve.

When the economy rebounds, and it will, we will be ready to capture the maximum possible benefits. An example of this thinking is our capital program for the year. We’ve identified about $125 million in reductions to our announced 2009 capital program. And we are planning on making those reductions borrowing a rapid economic turnaround.

However, our revised 2009 capital spending forecast of $1.3 billion is still the third highest in our history and we’ll set the stage for future growth as well as keep our property in good operating condition. Another example is the funding both capital and expense for our track 2012 initiatives. These projects focused on service, asset utilization, workforce productivity, and fuel consumption all have very solid returns and they will drive Norfolk Southern to the next level.

We are fully funding all of them in 2009. As part of track 2012 we’re looking at all of the other elements in our longer-term cost structure including some of our staffing requirement to see where improvements can be made. And as we focused on cost control we’re also being careful not to pursue what will eventually be false economy. You will recall that at our last meeting we did discussed the potential for an equipment cost to increase as service starts to flip. Mark show to you how we been able to significantly reduce our equipment and crew cost while actually improving our service metrics the result of the very disciplined and deliberate set of processes that we have in place to manage our network.

Additionally, as Mark mentioned we’ve heard a lot of train and engine service employees over the past few years. Our models tell us that we are going to meet them and the valuable institutional knowledge that they are acquiring to offset attrition in the near future. If we are going to be able to respond to increase traffic volumes in the economic recovery in the same way that we responded in 2003, we believe that it makes great business sense to keep us many of these people working as we can albeit at reduced pay levels.

Notwithstanding the current challenges the longer-term trends point freight railroads the preferred way to move goods and believe highway congestion. Our long-term strategy remains the same and unwavering emphasis on improving service, and a continuing process to strengthen our franchise through strong industrial development and key partnerships with our customers and interline rail partners. From a service standpoint we are consistently ranked as the best service provider in the industry by our customers as it has evidence most recently by Toyota is awarding as their 2008 President's Award for overall logistical excellence for rail carriers.

It's Toyota’s highest award for rail carriers and NSS captured the award six times in the past 13 years. At the end of the day we are a service company and superior customer service will drive superior financial results. From the standpoint of franchise enhancement as Don mentioned, we closed last week on the Pan Am Southern, our joint venture with Pan Am Railway, this quarters improved access to the Boston market and it's associated terminal facilities are very positive additions to our franchise as is the recently announced MidAmerican quarter initiative with CN these types of initiatives are going to set this stage for us to broaden our product in market reach and we believe they offered significant growth opportunities in future years. There are also great examples of team I touched on earlier our willingness to continue to invest in the future.

Turning to our economic outlook we expect that there will be continued significant pressure on volume across all of our major business groups in the second quarter. No one has any real idea of when current economic conditions will improve, or at what pace that improvement will occur. But our current best hypothesis is that we might see a bottom in the second quarter with some improvement in the second half. If for no other reason that a lot of stimulus money will be injected into the economy by that time. Let me be quick to add that this is a just a hypothesis with little or any, if any real data to support it, but it does seem like a reasonable assumption at this time.

Looking beyond this year again the phase of the economic recovery is very uncertain, but I’ll reiterate what we have already said and that is that we’re confident in the long-term future of our company and our industry. All of the factors that propelled our growth over the past five years are still there I’ll be at somewhat overshadows by the economic downturn and now along with all of the other factors the railroads advantage in terms of energy independence in carbon footprint are becoming more and more important in the considerations of many transportation buyers.

The greatest threat to our continued prosperity is the possibility of action in Washington either legislative or regulatory, which might change the economic framework under which we operate. A lot has been said recently about this so I’ll just that at a time when the rail industry has at last been able to produce returns modestly in excess of its cost of capital. And at the time when the overwhelming majority of the population and public policy leaders are interested in moving more traffic to the rails, I find it agronomic that are fairly narrow group of self-interested companies has been able to progress this idea at all.

However, I’m still optimistic that when the smoke clears, common sense and sound public policy will prevailed and our industry will continue to grow business and produce positive returns and positive outcomes for all of our key constituencies. When that happens it’s our intention to keep Norfolk Southern in its role as an industry leader.

Thanks and I’ll now turn the program over to the operator who will instruct our telephone participants how to ask a question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is coming from Ken Hoexter with Bank of America/Merrill Lynch. Please state your question.

Ken Hoexter – Bank of America/Merrill Lynch

Great, good morning. Wick, just coming back to the export column, maybe it’s a Don question, but we’ve seen such rapid declines in the export volumes. Do you get the feeling like we’re still on that cliff and we’re still seeing them fall pretty rapidly? Have things started to stabilize at these new levels post the new contract here? Can you just talk a little about where we are in that process?

Donald W. Seale

Ken good morning, it’s Don. Until we see some stabilization in steel making in Europe, I don’t think we will see export metallurgical coal pick backup. The Australians settled at a lower price in Europe. They certainly are more competitive going forward after the April 1st settlement, but steel production are the lack they are all still it’s the big story in Europe.

Ken Hoexter – Bank of America/Merrill Lynch

Okay. What percent of coal within your region has switched over to natural gas? Is that more? Is base load staying the same and your seeing other switch, I just want to see what kind of percentage of your base? Is it or can be exposed to the swap to natural gas?

Donald W. Seale

Ken, we are certainly seeing gas below $4 it’s about 350 per million Btu currently, we’re seeing it compete on the margin that serve at certain plants particularly in the Northern half of our utility universe, some in south, but more concentrated in the North. We can’t give you a number in terms of the overall percentage, but natural gas prices at these low prices certainly are competing with coal on the margin.

Ken Hoexter – Bank of America/Merrill Lynch

You gave fuel revenues of $226 million in the quarter. Can you give that for what it was quarterly last year?

James A. Squires

Actually Ken, this is Jim. Fuel surcharge revenue in the quarter was $94 versus $320 in 1Q ’08. So the variance was negative $226.

Ken Hoexter – Bank of America/Merrill Lynch

Okay. And then can you provide what it is for through 4Q or is that on, have you given that each of the quarters?

James A. Squires

Yes, that’s been filed. The fuel surcharges and the comparisons are now on file with the STB. So, which number you’re looking for?

Ken Hoexter – Bank of America/Merrill Lynch

Okay, I’ll come back afterward then. Then last question I have is just on the traffic benefits from the Pan Am Southern and MidAmerican Corridor. It seems like you get access to great markets particularly with Boston in the Northeast. Is that something you already are getting those revenues now with these investments you’re looking to improve, your flows by making more capital investments on those infrastructure? Or is this, or does this open up new markets for you directly?

Donald W. Seale

Well, we are already getting some of the benefits. We have had an agreement in place with Pan Am for sometime to access the Boston market. What this initiative will allow us to do with the terminal capacity that will come with it, both in the immediate Boston area and the new terminal we’ll be constructing at mechanic field, is to open up some new markets with the Boston terminals themselves, in Intermodal and Automotive and some other pieces of business that we’ll be pursuing. The new Intermodal terminal at mechanic field will also allows to substantially reduce operating cost, because today we have to all run a lot of service over a long-distance single stack, and this will allow us to double stack that service all the way to in and out of mechanic field and then just reduce the height to get through the Hoosick Tunnel on into Boston.

Ken Hoexter – Bank of America/Merrill Lynch

Okay, and then pricing on Intermodal, is that something that, obviously with the trucks getting more and more competitive. Are you seeing that continued increase with the excess capacity on the truck side, obviously that was big impact on the Intermodal revenue side, does that continue to get more aggressive? How aggressive are you willing to be to keep some of those volumes as opposed to letting them walk away?

James A. Squires

We are certainly seeing truck-pricing falling right now with excess supply. We did have also a fairly significant fuel surcharge impact in Intermodal for the quarter about $46 million. So, we are seeing truck pricing competitive and we are competing in the marketplace.

Ken Hoexter – Bank of America/Merrill Lynch

Great, thanks for the time.

Operator

Our next question is coming from John Larkin with Stifel Nicolaus. Please state your question.

John Larkin – Stifel Nicholaus

Yes, good morning everyone.

Donald W. Seale

Good morning John.

John Larkin – Stifel Nicholaus

Just wanted to get a handle maybe from Don on whether or not all this talk of inventory, destocking is having a pronounced impact on the weak traffic volumes? Whether or not you believe that at some point here in the next quarter or two we may have destock as far as we need to destock and you may see a bit of a rebound as we restock to a lower demand level?

Donald W. Seale

Good morning, John certainly the destocking continued in the first quarter. The sales and the inventory ratio of 1.43 did declined from 1.45 in February, from February to March. So, but we’re still seeing inventories relatively high, compared to demand in automotive, steel, and some of the basic commodities. So, we don’t see that destocking turning around at least not what we’ve seen so far in the month of April.

John Larkin – Stifel Nicholaus

Okay. And then, as far as your base load same-store sales increases on your carload traffic. I think previously you’ve guided to something on the order of 5% to 6% exclusive of fuel surcharge. Is it fair to assume that your pricing came in roughly inline with those numbers?

James A. Squires

As we indicated in the presentation John, our yield in terms of combination of weighted mix was 7% for the quarter.

John Larkin – Stifel Nicholaus

Okay, Thank you. And then lastly maybe one question on the Track 2012 initiatives, which as I understand is to basically, get the company to a position where it can run in the 60s as far as operating ratio is concerned in good and bad times or both. How was that tied to management incentives, and given the events for the last couple of quarters has it become necessary to kind of reset the timetable for the achievement of those objectives?

Donald W. Seale

Well it, we said a number of objectives in Track 2012. Clearly, we set a total revenue objective. We set an OR objective, which is first and foremost set a safety objective and then we set objectives tied to the four components that I mentioned, service, delivery, asset utilization, workforce productivity and fuel consumption. We clearly had to rethink the OR and the revenue goals and given the economic times that we’re living in, but we have not backed away from any of the goals in the specific projects that we’re looking at. We have some very good projects underway and we’re planning on and talking a lot more about them in June at our Investors Day Meeting down in Atlanta. But, in terms of the specific goals and the investments we’re making in them we’ve backed away. In terms of some of the overarching goals, we’re clearly not going to be able to achieve what we thought we might achieve couple of years ago in terms of revenues given the recession that we’re living through.

John Larkin – Stifel Nicholaus

All right, thank you very much.

Operator

Our next question is coming from Tom Wadewitz with JPMorgan. Please state your question.

Thomas Wadewitz – JPMorgan

Yeah, good morning.

Charles W. Moorman

Good morning Tom.

Thomas Wadewitz – JPMorgan

A question for Don on the mix effect I guess you mentioned some, I guess higher price traffic that was weaker, but you also said that RTMs were down less than carloads. So it’s unclear to me whether the mix was positive or negative in the quarter. Can you give us a sense on that?

Donald W. Seale

Good morning Tom. Tom, mix was negative about $40 million in the quarter.

Thomas Wadewitz – JPMorgan

Okay, negative by $40 million. All right. In terms of the view on pricing, do you think of then much of a change and you got most of your contracts locked in for this year. What’s your view on the way the pricing has changed. It seems like your pricing has stayed pretty firm and that that’s pretty likely to continue to come in well through the year and the yield weakness in terms of revenue per car being down is really driven largely by the fuel surcharge and little mix. Is that a fair way to think about it or is there any kind it seems that notable on pricing?

Donald W. Seale

The way you just summarized it is a very fair way to look at it.

Thomas Wadewitz – JPMorgan

Okay, all right. Good that's helpful. And on the approach on cost reduction, I think, Mark’s comments were pretty helpful in the way you are approaching that. In terms of headcount and so forth, how do we think about the cost per worker going forward? And how much of that is sustainable? If you do it on cost per worker reduction instead of lower headcount that’s fine and that seems like a reasonable approach, but it also seems that if you are taking headcount down that would be more sticky where the cost per worker could be pretty variable in a given quarter. So, how would you view that? Is that, decline in cost per worker going to be true in the next couple quarters as well?

Mark D. Manion

Well, Good morning Tom, this is Mark. What we will see going forward is that we continue to have initiatives to reduce our expenses. Yeah, clearly there are more locomotives that we will be taking out of the system that's an ongoing kind, pretty good number, as we go forward. And that of course will reduce fuel cost. It will take material cost out. It will take personnel cost out. We continue to size our operating plan. As we do that, we have personnel reductions that surround that as well. And we’ve got cost reduction initiatives going on in our engineering area as well. So, we will see overall costs reduce further. We will see personnel cost reduce further and that plays to more efficiency as far as our cost per person.

James A. Squires

Tom let me give you a little more color on that too in terms of why we are thinking the way we are thinking and that is that, our 2007 and 2008 attrition rate in our T&E workforce was running between 8% and 9% and it made back-off just a little bit this year, but it’s still, we’re still attriting people out at a fairly high rate and that’s to some extent due to the demographics of our workforce. So, we are trying to kind of think about how to manage through this attrition and building on the point Mark has been making, particularly in the T&E workforce. There have to be enough work out there, so that people on the Boards can get some number of turns and make some amount of money, a living wage if you will. But we pay people in T&E on an activity basis. So, in terms of our T&E headcount, the best way we know to manage it is just manage crew starts and then we’ll sort out how many people we can keep employed for the level of activity we have, so that they can still make a reasonable wage albeit a somewhat reduced wage.

Thomas Wadewitz – JPMorgan

Right. Okay, that I appreciate, that seems it make a lot of sense. One last one for you Wick and I’ll pass the line. I think, obviously, the legislation and issues in DC are significant focused significant interest to investors. What’s your view about something getting done versus not getting done? Do you think at this point your view about that there will be real legislation and you kind of try to shape at the best way you can? Or do you think it’s still significant uncertainty as to whether something actually gets done in terms of new real legislation?

Charles W. Moorman

As you know, Tom as all of you know there is a lot of conversation going on about this right now and I really don’t want to talk too much about some of the discussions. I would say that my best view is that there is still some significant uncertainty as to whether or not any legislation emerges. However, I would say that the, whatever the probabilities are they are higher this year than they were last year that we might see something legislatively. And that’s why we have been engaged as an industry in a lot of discussions on the hill presenting our economic case as to why the industry framework works today and needs to remain essentially in a fashion where it will work for us in the future to sustain investment, sustain employment, and do the things that we think the American public and its policy leaders want to do. And I’m optimistic as I said earlier that at the end of the day, that if legislation emerges that we will get legislation that allows us to continue to be profitable and to grow.

Thomas Wadewitz – JPMorgan

Right. Okay great thank you for the comments. Thanks for the time.

Operator

Our next question is coming from Walter Spracklin with RBC Capital. Please state your question.

Walter Spracklin – RBC Capital

Thanks very much. Good morning guys.

Charles W. Moorman

Good morning.

Walter Spracklin – RBC Capital

Just on the price changes just to make sure I understand you mentioned that there was a $40 million negative mix impact, but 7% overall yield improvements. Is that to suggest that your base pricing was up around 7%?

Charles W. Moorman

That’s correct.

Walter Spracklin – RBC Capital

Okay. On your cost reduction this is you did a really good job here of emphasizing the importance of not cutting too much too quickly. As we look forward and start to focus on the turn in the economy, what are the biggest challenges for you as an organization? When we do start to see volumes come back? You mentioned that you didn’t want to bring cost down as much but in other calls there has been less of a focus that you placed on and this one in terms of being balanced and moderate your cost reduction initiatives. Can you talk to us a bit about what are the most difficulties, or the most difficult things to bring back on, what are the big challenges that you have when you see volumes come back and particularly if they come back quickly?

Charles W. Moorman

Well, if volumes where to come back very quickly as we continue in our current initiatives to reduce headcount and cut cost, and I would say that I think let me say parenthetically, I think that if you kind of look at the overall numbers, we did I think a strong job in the first quarter reducing headcount particularly if you just kind of get pass this one number of what percentage of people were furloughed because as we believe that’s not the appropriate number to look at. But your question is a good one and when we think about a lot, clearly the biggest issue was probably calling back people that have been furloughed and getting the people in place to run the trains and maintain, pulling locomotives out of service, but our goal in all of this is to take out cost in a deliberate manner, but to take out cost that reflects our volume declines to the extent we can, but always with the mindset that if volumes do start to ramp up quickly, we are able to respond without undo strain, or undo damage our service delivery to our customers.

Walter Spracklin – RBC Capital

Okay yeah that makes lot of sense. Just one more question and then pass it on, is on pricing, And Don perhaps you could talk to us bit about the renewal pricing you are seeing in the current environment today, clearly pushback is always going to be evident in negotiations, but are you seeing or having to take not as much pricing as you would normally have taken because as some of the difficulties your customers are having and perhaps can you give us a sense of what are your 2010 book is in terms how much of that is completed for 2010?

Donald W. Seale

Well I won’t go after 2010, but in the first quarter the 10% of the additional book that we priced, we were able to realize prices that were inline with what we think the service is worth in the marketplace as we look across more competition. Certainly the deliberations and negotiations are more difficult in today’s environment. We’re working very closely though with our customers trying to put together packages that support their requirements and service needs, while at the same time generating the proper pricing return for what we see is very good rail service.

Walter Spracklin – RBC Capital

Is it safe to say you got inflation plus something you coverage your cost?

Donald W. Seale

We were satisfied with the 10% we repriced in the first quarter inline with the yield improvement that we’ve been discussing with you quarter-to-quarter.

Walter Spracklin – RBC Capital

Okay, good. That’s great. Thanks for the color guys.

Donald W. Seale

Thanks.

Operator

Our next question is coming from Randy Cousins with BMO Capital. Please state your question.

Randy Cousins – BMO Capital Markets

Good morning. Don I wonder if you could talk a little bit about our customer retention. You’ve had in Q3 and Q2 of last year you had extraordinarily strong growth in your traditional truckload business. How many of those customers have you held on to, I guess it’s corollary question you open up the Rickenbacker last year, and how is that facility performing? What kind of volumes are you kind of pumping through it?

Donald W. Seale

Rickenbacker has surpassed our expectations since we opened it last March a year ago little over a year ago. Its doing quite well, our domestic Intermodal in the quarter was up 2%, which offset a lot of moving parts, but we still see strong conversion opportunities and strong conversion execution on our local Intermodal business East of the Mississippi with our key truckload partners. So even though the truck market is tougher, there’s no doubt about that we’re continuing to see conversion into the new service delay, service lanes that we’ve opened, new terminals that we’ve opened like Rickenbacker but also our overall service product in conjunction with our truckload partners is quite good.

Randy Cousins – BMO Capital Markets

And in terms of further retention for the new customers that you signed up last year, have you retained 80% of them, 90% of them, 100% of them?

Donald W. Seale

We have retained a good high percentage. I would say it’s in the high 90s, where we are seeing dilution the premium traffic is down, that is UPS and some other freight that has declined with the consumer economy being down. But in terms of share ships we are pleased with the way we’ve been able to retain customers, retain business and then grow business on top of that in that local domestic sector.

Randy Cousins – BMO Capital Markets

And coming back to your export metallurgical coal the indications are the Aussie’s have signed prices at about 130 a ton. The Aussie dollar is substantially lower Water born shipping rates have come down with the fuel price. Do you have like take or pay contracts with some of the steel mills in Europe so that your volume or at least your revenues side is set or could you give some sense us to sort of how that pricing dynamics global transportation or water born transportation cost has the potential that impact your export coal business.

Donald W. Seale

No doubt about it the Aussie’s are more competitive after settling at the 129, 130 level that they get into Europe, but as I mentioned earlier our larger concern is with the lack of metallurgical coal demand in Europe that is closely associated with the big reduction in steel production.

Randy Cousins – BMO Capital Markets

And does the lower net coal price, has it any impact whatsoever on the rates that you get for export coal.

Donald W. Seale

We have repriced our export, effective from April 1, we were aware of the global competition including the Aussie’s when we repriced that. And we feel we are competitive with respect to transportation on export coal, but demand is being severely depressed because of the steel industry only operating at about 45% of capacity in Europe.

Randy Cousins – BMO Capital Markets

Okay. So I guess it’s safe to say though that the rate that you are going to get post April 1 is lower than the rate that you are currently getting?

Donald W. Seale

The total cost to the shipper will be lower because fuel is substantially down. So it’s a better deal for the customers what was out there last year, but we have been able to slightly improve our yield in terms of our overall position on export call.

Randy Cousins – BMO Capital Markets

Okay. And then I guess the final question for Jim would be just on sort of the class. If I look at the cost items and start to look at the ones I’ll call sticky once that seem to flex. One of the ones that stood for me is purchase services. It was down about $20 million or 5% drop in that number. Is there something unusual there or could we see that number come down more aggressively as we go forward or is it like a $20 million drop quarter-to-quarter a more reasonable view to take in terms of a run rate.

James A. Squires

There are significantly variable items within purchase services and you saw that. I mean some of the bigger items that it did flex down in the quarter include Intermodal services, which were down $14 million. Transportation services being primarily automotive related third party services were down seven. So, those things do tend to vary with volumes and so we would expect to see some additional favorability within purchase services as a result of those items in subsequent quarters.

Randy Cousins – BMO Capital Markets

And so would it be fair to assume that purchase services is going to come down little bit more aggressively that it did in Q1?

James A. Squires

Well, if you look at the decline in purchase services spending sequentially versus fourth quarter, you do see a significantly greater rate of decline. So I think as volume really decelerated late in the year continuing this quarter, you saw an increase in the rate of decline in purchases services spending well.

Randy Cousins – BMO Capital Markets

Okay, thank you.

Operator

Our next question is coming from William Greene with Morgan Stanley. Please state your question.

William Greene – Morgan Stanley

Yeah, just a couple of quick follow ups. The second quarter to-date volumes are really quite weak so two questions fall from that. Number one, is there something specific about the early part of this quarter that we’re missing was there a loss of a contract somewhere here that maybe is affecting this? And then secondly how do you think about the timing when do you actually have to react from a headcount and a CapEx perspective if the volumes are just weak here in the second quarter if your comments about the rebound don’t occur?

Donald W. Seale

Bill, with respect to the first part of the question April in terms of the volumes as I mentioned we have two metallurgical coalmines that have temporarily curtailed production in central approximately. That’s impacting our overall coal also our comps continue to be rather tough as you recall our coal business was up 4%, last year it was up 5% in the fourth quarter. We are facing those comps as we go through. So we are seeing weaker export demand some temporary curtailment of production at the metallurgical perspective in central app plus some utility demand that’s off that we talked about. So nothing in terms of losses, but certainly a lot of moving parts associated with a very weak economy as well as a reduction in electricity demand and a reduction in metallurgical coal demand.

Charles W. Moorman

And thinking about how we react we kind of outlined the way we think about is as we see volumes decline further as Mark indicated we will continue to manage the train plan down. As Don pointed out lot of the weakness we’re seeing in April is further fall off in coal. And that means we’ve reduced the coal train plan. We’ve already taken some steps to reduce capital this year, but we will only reduce it in a prudent way. So I think we are taking all of the appropriate actions in terms of cost control that we should and we’ll continue to take them and as Mark also indicated we’ll take further steps this quarter in cost reduction as well.

William Greene – Morgan Stanley

Okay. And then just quickly on the Intermodal side, how much of the domestic Intermodal was help by J.B. Hunt? Is that where you classify it?

Donald W. Seale

The truckload sector we continue to gain highway convergence with Hunt and with some other truckload partners and IMCs as well.

William Greene – Morgan Stanley

Okay and what’s the pricing gap versus truck broadly in Intermodal for you now?

Donald W. Seale

Well we are following the market Bill and a goodwill firm is 10 to 15%.

William Greene – Morgan Stanley

Okay. And then lastly on the automotive side I think you have the Ford contract coming up for renegotiation. I might be wrong in the timing of that, but I think you do in. Does the fact of the governments looking so heavily at automotive issues affect how you think about what we should do here in terms of pricing?

Donald W. Seale

That is a great question. We do have the Ford contract ending at the end of this year. We are in dialogue with them about that contract. With respect to the government as you know Ford has not elected to take government loans. But it’s very difficult to even be able to talk about the impact with the other two Detroit three who have taken loans with respect to pricing.

William Greene – Morgan Stanley

Sorry I didn’t understand. You said it’s difficult to talk pricing with them because of the loans?

Donald W. Seale

It’s difficult to ascertain the impact of government loans on transportation pricing. It’s, the correlation between two are difficult to quantify.

Charles W. Moorman

It's, and as you know as everyone knows we are, everyone is still looking at all of the Detroit three right now in terms of where they will be in six months time. So, I think that’s an issue, that’s just still very murky for us.

William Greene – Morgan Stanley

Okay, thanks for your help.

Operator

Our next question is coming from Jason Seidl with Dahlman Rose Company. Please state your question.

Jason Seidl – Dahlman Rose & Co.

Gentleman, good morning. Couple of quick questions here, Jim, just some clarification points. You have the debt offering 1Q, where there any costs associated with that offering in your interest expense number?

James A. Squires

Minimal

Jason Seidl – Dahlman Rose & Co.

Minimal. Okay. Also when we look at your stock incentive compensation break out it was $56 million below the prior year. Could you split that out for us so we get a better feel over what’s going on, sort of how much is stock versus how much is incentive comp?

James A. Squires

Sure. The stock based compensation was $56 millions in the incentive compensation, bonus compensation was 6.

Jason Seidl – Dahlman Rose & Co.

Okay. That's very helpful. Thank you. On a CapEx reduction, Jim, that you mentioned or maybe it was Wick that mentioned of $125 million when should we expect that the flow through your cash flows, is this going to be in the first half of the year? Or should we see this in 2Q?

Charles W. Moorman

It’s spread out throughout the year and there were a lot of different items associated with it. So you will probably, I would say you’ll see it second through fourth quarters. We had spread a lot of those purchases out.

Jason Seidl – Dahlman Rose & Co.

Okay. And maybe this is one for Wick. Wick, what gets you to the point where you want to start participating in your share repurchase authorization again?

Charles W. Moorman

If you really want a good answer to that, a little more, a little clear picture into the economic situation in the future. I mean we are just going to be very guarded right now because we don’t know where this economy is going. And as was pointed out earlier we’ve seen some further deterioration in volume in April. We are tracking that very closely, we are responding to it from a cost standpoint. But I think until we have a better picture of the economy going forward and when the bottom comes and is past and what the rate of recovery will be. We are just going to be very careful in thinking about cash in general.

Jason Seidl – Dahlman Rose & Co.

I think we will all feel a little better if we get a clearer picture of the economy. Listen everyone thank you for the time as always.

Charles W. Moorman

Thanks.

Operator

Our next question is coming from Edward Wolfe with Wolfe Research. Please state your question.

Edward Wolfe – Wolfe Research

Hi, thanks good morning guys. With the price fuel mix break out, before you said seven or eight for both price and mix, and then said mix was a negative $40 million. To me that means price is more than 8%. Am I thinking about that wrong? Then you said back that’s about 7% so I got confused there.

Donald W. Seale

Yes. Ed, this is Don. If you break it out that way it was north of eight, about 8.5%. But the combined rate mix affect was 7% that’s the way we take a look at it.

Edward Wolfe – Wolfe Research

Okay, and when you think about RCAF. How do you split your RCAF between fuel and price?

Donald W. Seale

The RCAF that we have in our coal contracts the remaining RCAF escalation provisions in the contracts generally, we have fuel backed out or a percentage of the RCAP backed out for fuel.

Edward Wolfe – Wolfe Research

So, does that 8.5 of prices include the RCAF net of fuel or is it RCAF completely separate?

Donald W. Seale

The RCAF would be the percentage of RCAF that’s in the contract, which backs out fuel.

Edward Wolfe – Wolfe Research

Okay, but in the overall numbers that you gave of 8.5 for price. The RCAF piece net of fuel is there?

Donald W. Seale

Yes.

Edward Wolfe – Wolfe Research

Okay, I’m just trying to make sure understand that. I’m sorry to keep about the headcount, but you said you’re down I think it was 1200 or so, heads and that implies that from the average in a quarter there is another 600 or so, that are out as we start second quarter. Is that a fair number to hold it there or through attrition do we assume that goes down from here?

Charles W. Moorman

No I think giving the volumes we’re seeing today. And giving the attrition, that you’re seeing if you, kind of look at the slope of the graph and that is I mean, it’s not a straight line all the way down, but we’ll see further reductions over the course of the second quarter.

Edward Wolfe – Wolfe Research

And you talked about several coal outages. Can you talk a little bit about the different ones and the timing for them to come back as you see it?

Donald W. Seale

Ed we had one major one come back yesterday. That was in the state of Georgia. I wont name the utility, but it was significant. And it came back yesterday. It takes PRB coal and that will be good. We still have a fairly major outage in state of Tennessee, with a utility that probably will be out through the second quarter. We also have another unit out with Pennsylvania Power and Light up in Pennsylvania. That’s Scrubber installation, which was planned, which will be a good thing. When it’s down because it will enhance the coal flow to that plant for us. So, those are three examples.

Charles W. Moorman

And to build on the point Don was making as some of these outages occurred there are for Scrubber installation. We think that’s a positive for Norfolk Southern and it’s one of the reasons as Don mentioned. Why we think ultimately the MidAmerican Corridor and its access to the Illinois coal basin. Is an important addition to our franchise.

Edward Wolfe – Wolfe Research

Is there a way down to look at the number of loads or how you want talk about the tons that the Georgia plant were down for the quarter and how we can think about that coming back?

Donald W. Seale

Well those two plants that I mentioned in the Southeast were about 1 million tons and Ed, you could, realistically expect about half of that to come back with the unit, that came back on yesterday.

Edward Wolfe – Wolfe Research

That was 1 million in a quarter.

Donald W. Seale

1 million tons in the quarter, that’s correct.

Edward Wolfe – Wolfe Research

Okay, and it came back yesterday?

Donald W. Seale

Yes.

Edward Wolfe – Wolfe Research

Okay.

Donald W. Seale

That was 1 million tons between the two plants that I mentioned not just that one plant.

Edward Wolfe – Wolfe Research

Half back now, halfback maybe after second quarter

Donald W. Seale

All right.

Edward Wolfe – Wolfe Research

East of the Mississippi Intermodal trends, can you talk a little bit it seems like when oil was up at about 50 or 150 a year ago. Everybody on the shippers side was rushing to go move towards intermodal, and was willing to pay upfront to maybe move some infrastructure to do that. Does that grandfather itself as we get into May, June, July do you think a bit and how do you think about those domestic Eastern Intermodal moves as we move throughout the year.

Donald W. Seale

We continue to see beneficial owners moving ahead with plans to convert highway freight to intermodal. And we are working very closely with our truckload partners and our IMC partners with the beneficial owners, and we are continuing to see those customers stay with that conversion plan. The environmental issues are there, the cost issues are there certainly rates continue to change, but we don’t see a lot of customers veering off of that strategy because I think one, there is a clear belief on the part of most customers that transportation demand will pick back up eventually. And energy prices will pick back up eventually and costs will go back up with truck and Intermodal will be better placed environmentally and from a competitive standpoint when all that happens. So, we’re continuing to see strong interest in automotive conversions in the east.

Edward Wolfe – Wolfe Research

So the domestic volumes in the east were up how much?

Donald W. Seale

Our domestic volume in east was up 2%, our domestic business overall was up 2%.

Edward Wolfe – Wolfe Research

And what was it like in fourth quarter?

Donald W. Seale

Fourth quarter it was up higher than that about 8 or 9%.

Edward Wolfe – Wolfe Research

And I’m sorry to do this but if you have it can we go back through the quarters last year? So eight or nine in fourth quarter what was third and second?

Donald W. Seale

I don’t have it here in front of me, Ed but we certainly have that we’ve been telling that in each of the quarters. So, we can certainly provide that to you.

Edward Wolfe – Wolfe Research

We will search that back up. A couple more quick ones. Positive train control it was you, Jim, who mentioned during the cost side of thing that there was some cost for preparation. What is that and how is that look going forward?

James A. Squires

Right. That was specifically related to GPS mapping initiative we have underway. And we spent a couple of million dollars in the quarter on that. So, it wasn’t a significant component of that overall number. But that’s going to be ongoing and we’ll continue to spend on that specifically throughout the year, probably to the tune of about $5 million or $6 million of quarter. And then the spending will ramp up as we approach the PDC Mandate in a few years.

Charles W. Moorman

We have some other kind of lesser expenses in various technology areas, in IT in particular. And then we have a significant capital component for positive to train control as well.

Edward Wolfe – Wolfe Research

Right. Last one, Wick, maybe this is a good one for you or for Mark but when you think about the locos and cars that are off-line and furlough employees that are off-line, if demand did come back pretty strong which so far there’s no evidence, but let’s say that happened quickly in say the fourth quarter, where is the constraint? Is it getting the locos out and functioning? Is it getting the furlough people back up to front? Where would you say it would take the longest to meet that constraint?

Mark D. Manion

That really, I don't see that as being particularly problematic. The furloughed people, it would be a matter of them accepting the call to come back. And have reason to think that we would get a pretty healthy percentage of them back in the workforce. And we have plans for doing some quick training and ramping them up quickly that are in place as we speak. And similarly with the locomotives, of the locomotives that we’ve sidelined we have purposely stored them in shop facilities that handle the heavy work as far as the locomotive fleet goes. We purposely, when we put them in storage, we ensure that they are in good running condition, when we put them in storage so that we can get them back out again in good shape. So, I really don’t see it as an issue.

Edward Wolfe – Wolfe Research

Okay, thanks guys for the time.

Charles W. Moorman

Thanks

Operator

Our next question is coming from John Barnes with BB&T Capital Markets. Please state your question.

John Barnes – BB&T Capital Markets

Hi, good morning guys. Two quick ones for you. Number one just on looking at cost and I hate to keep hammering this but your cost X fuel was down about 7.7%, if you look at it on a per carload basis or on a gross ton-mile basis. I guess my question is, can you reduce cost at a similar level to the carload decline or the gross ton-mile decline? Or is it a case where, you were running lean before so, you are in a little bit tougher situation trying to take that much cost out of the system?

Mark D. Manion

Well given today’s volumes as I’ve said there is a significant amount of locomotive that we anticipate we’ll get stored up and as we put more locomotives in storage, the other costs fallout as well. We don’t have the fuel spend we don’t have the material spend. We have personnel costs that dropout so the way we see it, there is considerably more work to be done and can be gained on the cost saving side of things and that does apply to the engineering side as well.

John Barnes – BB&T Capital Markets

Okay, but can it mirror, the volume declines.

Charles W. Moorman

It depends on how deep the volumes declines are at a certain point, as everyone points out. We have short-term variable reflects costs in the cost structure, longer term variable, which just take a while to get out and then a certain amount of cost, which is very long-term variable are fixed. And so, if volume declines go deeply enough, you have less ability. They are just diminishing returns and what you can do in your costs structure. It’s really function of where volumes go, as we are all the same in that when volume starts to go out, there is some amount of spending that we are doing that we just go eliminate that may not have anything to do with activity level. But it has something to do with improving the property or doing something else that we think is desirable. So, I would just say it’s not a straight line and it really depends on what happens to volumes.

John Barnes – BB&T Capital Markets

Okay, very good. And then last one, I’m just talking to a couple of Intermodal companies recently, most of them made the point that in order for them to remain competitive in this environment, they were eventually going to have to get some rate relief from the rails that they were partnered with. And I'm just kind of curious as to your though process as you, it seems to me like intermodal, which is the most competitive of your products. It’s the right trucks substitute type of product. How do you balance, the need to keep your Intermodal partners healthy and not give up on pricing, because you’ve done such a phenomenal job in keeping pricing, kind of keeping pricing move in the right direction.

Donald W. Seale

John, it is Don, one we have to collaborate and continue to plan for a closely with all of our Intermodal partners, which we are doing, what we are facing unfortunately in Intermodal that I haven’t mentioned too much of in the call. I mentioned it in the prepared remarks is that the international component of our Intermodal business is quite large as you know. And the imported traffic and consumer demand is down, so dramatically that it’s impacting our international business substantially. So, that is a big component of Intermodal that unfortunately, we haven’t lost, we don’t see any losses to motor carrier, we don’t see share losses to another railroad. We get to see suppressed volumes in terms of what’s entering the country and what’s being consumed. And that includes also what use to be exported in the containers. On the domestic Intermodal market, it continues to be a big, big target for us, because as you know while we grown our Intermodal business there is still a very high percentage of the market moving by truck, and truck dynamics are low and favorable right now, but no one expects them to continue to be there. So we are working very closely with all of our Intermodal partners to weather the storm get through this rough patch very rough patch in the market and be there with new services, product, terminals and capabilities, to grow that business significantly when demand picks up.

John Barnes – BB&T Capital Markets

Okay. Can I ask a one more question on the port activity real quick? The West Coast ports LA and Long Beach in the last couple of weeks, it appears that there has been a bit of a change in philosophy there in terms of fees and that type of thing. I mean, a couple of the commentaries that you provide recently they acknowledged that they’ve made on, they acknowledged, they’ve made some mistakes, in terms of chasing off business are making it too difficult to workout there. Are you worried at all about a shift back to, the West Coast ports being more, a larger piece of the supply chain and maybe striping out some of the volume that have come through the East Coast ports that you benefited from?

Donald W. Seale

Well we’ve said all along that we like traffic over either Coast. We want our customers to be able to choose the Coast and the ports and we want to be able to provide service from either the West Coast ports or the East Coast ports that benefit the ultimate customer and steamship lines. So conversion to West Coast ports or an increase in volume we would gladly take it, right now.

John Barnes – BB&T Capital Markets

Okay all right. Very good, thanks for your time guys.

Operator

Our next question is coming from Chris Ceraso with Credit Suisse. Please state your question.

Christopher Ceraso – Credit Suisse

Thanks for taking my call. And just a quick one left here. We’ve noticed pretty pronounced seasonality in the wages as a percent of sales in Q1 versus the rest of the quarters for the past years, it's a fair amount higher in Q1. Should we expect the same kind of effect this year or is fuel going to mess with that and your changes in head count going to screw that up?

James A. Hixon

I think what you maybe observing Chris, this is Jim. As the effects on compensation expense in first quarters from stock-based compensation, and grants made in the first quarter. More broadly speaking though we do expect to see favorability in compensation and benefits going forward from both incentive and stock-based compensation and of course, this depends on how the stock performs, it depends on how the business performs and how those performances affect compensation. But I think it's likely that will see additional favorability at least in the second and third quarter from both bonus and stock-based compensation.

Christopher Ceraso – Credit Suisse

Right, I guess that’s the point. So, if you cut the stock comp already in Q1. Is there is much room to see a step down, as we work into Q2 ’03?

James A. Squires

It’s adjusted quarterly and given the trend in the stock price last year. We are likely to see favorability in both stock-based compensation, which has influenced both by the comparisons with regard to the stock price and in terms of business performance through earn out assumptions. So, we would see favorability there and all likely but as well as in the bonus, which is based on business performance.

Christopher Ceraso – Credit Suisse

Okay, thanks for the help.

Operator

Our next question is coming from Matt Troy with Citigroup. Please state your question.

Matthew Troy – Citigroup

Yes, just a few questions on cash flow. First, on the pension side, as obviously an issue for Corporate America, but just curious in terms of funding requirements as you see them taking shape that we are four month into the year, the equity markets were to hold recent gain. What can we expect in terms of cash flow funding requirements or outlook for the year?

James A. Squires

We will not have to make a cash contribution to our pension fund this year. We know that, next year we’re less certain but so, we will make our calculation late this year, but not in this year.

Matthew Troy – Citigroup

All right, but that hasn’t change and on the CapEx side, then, can you just give us an update mix of maintenance versus expansion area in CapEx? And on the latter bucket could you maybe break out the top two or three projects that you’re looking at in 2009 that are continue to be justify despite the short fall off in volumes?

James A. Squires

Let me distribute a breakdown on property additions in the first quarter for starters. Total CapEx was 243 in the quarter, 200 of which was basically track related to essentially maintenance spending. The other 43 was various types of equipment. No coal cars, no locomotives that we purchase some, commit to purchase some covered hoppers that are base load part of our agricultural equipment fleet in the quarter. That with regard, I think certain replacement spending as well as essentially since it go to base load business, along which are run like, Yeah and so I think, the cuts that wake outline earlier combination of productions mostly in the discretionary capital spending area as you would expect even business levels.

Matthew Troy – Citigroup

Right, might that skew change into the back half of the year, if volumes were to stabilize. Are there one or two projects that are either shovel ready or going to process where ongoing investments justified and warranted and planned for the back half of the year?

Charles W. Moorman

Well, if economic conditions change, we clearly have put a few projects some infrastructure additions, for example, on the back burner that we would look at cranking back up. We are talking a lot in terms of other programs about some of our quarter initiatives. Particularly, the crescent quarter where we think we have a lot of shovel ready project should economic conditions improved. So, we’re going to watch the capital quarter-by-quarter and make the adjustments as need the $125 million that we’ve outlined, if business conditions do improve, rapidly, that’s money that we’re certainly capable of spending in the second half of the year. So, we’re watching that very closely.

Matthew Troy – Citigroup

Great, thanks. One last question just on the pricing issue taken from a different perspective. Could you give us a sense in terms of the business mix, as you look across your revenue base, what is contract versus spotted test, what I’m trying to get sense of here is what kind of platform you’ve gotten embedded in contract escalation that are in placed that would support pricing game, away from your ability to negotiate spot rates and what is obviously a very weak market, what percentage if the book has some kind of escalation baked into a contract?

Donald W. Seale

We have approximately 65% of our book business under contracts of varying duration. The balance of the business would be priced annually, some of that would be less than on an annual basis that in general 65% contract that balance split between an annual pricing and variable rate pricing schedule over the course of the year.

Matthew Troy – Citigroup

Okay, great. Thanks for the detail.

Operator

And our next question is coming from Gary Chase with Barclays Capital. Please state your question.

Gary Chase – Barclays Capital

Good morning, everybody. I wanted to just ask a couple of clean ups here, a couple of people have asked about the volume trends in the last few weeks. I mean isn’t it normal to see this kind of disruption around the Easter Holiday. Is it anymore than that? I mean I know you noticed the plan shutdowns. But, is it anymore than just what’s you normally see around the holiday?

Donald W. Seale

Well, we certainly see, every year a weakening of shipment volume around Good Friday and the Easter Holiday. So, that something we do see every year.

Gary Chase – Barclays Capital

Okay

Donald W. Seale

The other impacts, we’re seeing are very much economic related, as we’ve described here this morning.

Gary Chase – Barclays Capital

Well, I think there are, the headlines have gotten a little bit worse, but I’m not sure that underlying reality has changed much. It’s just the, with Easter moving around it’s a sort of you had better comps earlier and worse comps are later. Is that fair characterization or do you think have actually got a little bit worse?

Donald W. Seale

That certainly, place into but as we discussed this morning our coal business we are seeing in April the impact of a weaker export market, weaker utility market, and weaker domestic metallurgical coal market here in the U.S.

Gary Chase – Barclays Capital

Okay, and just a couple others Don. You mentioned the fuel impact in the quarter was down $226 million year-on-year. Presumably, a significant portion of that is going to be related to volume. Can you tell us what that is, and how much of it was just, how much of the surcharge reduction was a function of fuel price?

James A. Squires

Gary, we have not broke, we chosen not to break it out that way, believing that the fuel surcharges are a variable pricing mechanism and they are not related per se to volume change. So, that’s our perspective on the fuel surcharge variance, its price related.

Gary Chase – Barclays Capital

Okay so, when we look at the actual surcharges from last year. Is the variance going to be more than $226 million than or when you file with STB and we compare it to what you filed for the first quarter of ’08. Is the difference between those going to be $226 million or more than that because of the volume differential?

James A. Squires

Yes that will be the numbers. It’s the actual amount of fuel surcharges billed. There is some small amount of capitalized fuel included in the numbers with the STB as well. So there might be a discrepancy of a couple of million dollars. But it’s going to be roughly 320 for 1Q ’08 versus 94 for 1Q ’09.

Gary Chase – Barclays Capital

Okay, and I apologize, Jim, there is going to be volume related is going to be at least the contributor to that 226 yes.

James A. Squires

I understand, the point you are making and you can look at the, the change in fuel surcharge revenue as influenced by volume. But I guess what we are saying is that we view the fuel surcharges as a variable pricing mechanism that’s what they are and they are not, driven directly in our minds nor under the contracts by the amount of volume that is being shipped.

Gary Chase – Barclays Capital

Okay, maybe we will follow up with you off-line on that. And just the last one I have is how much of your domestic utility coal business rolls this year and is it right on to think of that as what is most at risk from switching to met gas?

Donald W. Seale

Well certainly a utility coal is most susceptible to natural gas at low prices the metallurgical coal is not, it's not a substitute and that would include domestic met as well as export met. In terms of our repricing and utility coal we did much of that and these third quarter and fourth quarter of 2008, for effective dates either in those quarters or January 1st.

Gary Chase – Barclays Capital

Okay. But wouldn't you have had base line minimums in those contracts or are you running way above those now or do you not? What’s the freedom of under a contract that's already negotiated is there a lot of flexibility to actually switch back to gas?

Donald W. Seale

Well in our contracts obviously there are commitments made in the contract mutuality commitments in the contract, but certainly the utility has the flexibility to adjust volumes based on stock pile requirements on electrical generation, which is down 3% as I mentioned which is unprecedented in itself, to use that word again.

Gary Chase – Barclays Capital

Okay. Sorry, just one last one, the RCAF thing, it wouldn’t have been a big impact where you just highlighting that is something that was a modest negative in coal. I mean it was only down 3%

Donald W. Seale

It was a modest negative in coal for the quarter.

Gary Chase – Barclays Capital

Okay, thanks very much.

Operator

Our next question is coming from David Feinberg with Goldman Sachs. Please state your question.

David Feinberg – Goldman Sachs

Good morning. I’ll make it quick question for Wick. I am trying to followup on your hypothesis about the potential recovery here for the U.S. Economy. Your thoughts about second quarter stabilization, second half ’09 recovery. which parts of your business or which traffic types would you expect to lead us out of the recovery? I was trying to tie together your comments with regard to physical stimulus and thought you might be implying that Intermodal would be the first place we would expect to pick up, am I reading too far between the lines?

Charles W. Moorman

You are doing a lot of extensive reading, but I think that Don mentioned this as well. If in fact we start to see some economic recovery in the second half, I think we will start to see some increased level of activity in housing in automotive and with all of the other by- products of that if you will in terms of our business groups which would include some ramp up in the level of steel production some possible ramp up in the some of our chemical business and some other pieces as well. And obviously Intermodal with a little bit of a boost in retail sales particularly on the import side would be where we would see it.

David Feinberg – Goldman Sachs

And maybe a followup there. Just looking at the slides that comment that you make about perhaps seeing the bottom in the housing and automotive market I just want to make sure that I clearly understand that, that’s not based on what your customers are telling you, that’s based what looking at the macro data and looking at your weekly volumes. Is that the way to think about that it.

Charles W. Moorman

No I mean, its you are assigning more data to this than exists we are just trying to kind of look at what all of the economists are saying and ranging and that’s a broad range of opinion and at least trying to think in our own minds about what this might look like. And we keep coming back to the fact that there is an enormous amount of stimulus money that’s going to be pumped into the economy it will be a, it will start reaching the economy in a meaningful way in the second half. And it seems reasonable to assume that, that might be the trigger to at least to start some pattern of recovery. Albeit I think slow?

David Feinberg – Goldman Sachs

Great and then my last question for Don. I am just trying to reconcile on the Intermodal segment when talking about the domestic business, increased volume from truck conversion yet increased competition from truck. How do we think about reconciling those two types trends leading to volume growth in one part of your business? But significant volume decline in another?

Donald W. Seale

Well, it’s a big truck market over the 49 continuous states. So we are seeing continued gains in the Eastern portion of our Intermodal business. We saw some actual declines in the transcontinental segment. So we are seeing head to head competition with truck. There is no doubt about that, but also mentioned the differential between pricing and truck versus intermodal. And Intermodal still offers a good value proposition for a lot customers.

Charles W. Moorman

But, one other piece of that I think that we keep talking about that’s important is the whole issue around service. Domestic truckload carriers are not going to convert Intermodal beneficial owners are not going to convert to Intermodal until they are convinced that we can offer a level of service that is suitable for their business needs, and I think that fact that we have been demonstrating now for a considerable period of time that we can provide those service product and there is those service levels and do it on a sustain basis not just up and down. I think that’s convinced to a lot people that rail Intermodal is a viable alternative, and we are seeing that in our numbers.

David Feinberg – Goldman Sachs

Do you then risk once you’ve converted a truck customer to Intermodal losing them back to the truck once it’s in that container is that right way think about it.

Donald W. Seale

Losing it back to motor carrier as Wick indicated with sustained good service levels and competitive customer service that customer becomes the long-term customer for intermodal.

David Feinberg – Goldman Sachs

Great, I will leave it there. Thank you.

Operator

Our last question is coming from Lee Klaskow with Longbow Research. Please state your question.

Lee Klaskow – Longbow Research

Yeah, hi thanks, all my questions have been answered.

Charles W. Moorman

Thanks Lee.

Operator

Gentlemen I would like to turn it over back over to management for any closing comments.

Charles W. Moorman

Well, we will just say in closing that we appreciate all of the questions today. And we are going to continue to pursue the initiatives we’ve outlined and we look forward to speaking with you in the future. Thanks.

Operator

Ladies and Gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time, and we thank you for your participation.

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