norfolk southern corporation (so) earnings report: q1 2015...
TRANSCRIPT
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
EventDescription:Q12015EarningsCallMarketCapasofEventDate:40.60BPriceasofEventDate:44.65
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NorfolkSouthernCorporation(SO)EarningsReport:Q12015ConferenceCallTranscriptThefollowingNorfolkSouthernCorporationconferencecalltookplaceonApril29,2015,08:45AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
KatieCook;NorfolkSouthernCorporation;Director-IRWickMoorman;NorfolkSouthernCorporation;Chairman,CEOJimSquires;NorfolkSouthernCorporation;PresidentMarkManion;NorfolkSouthernCorporation;COOMartaStewart;NorfolkSouthernCorporation;CFO
OtherPart icipants
BillGreene;MorganStanley;AnalystKenRyan;CreditSuisse;AnalystTomKim;GoldmanSachs;AnalystRobSalmon;DeutscheBank;AnalystScottGroup;WolfeResearch;AnalystTomWadewitz;UBS;AnalystMattTroy;NomuraSecuritiesInternational;AnalystJohnBarnes;RBCCapitalMarkets;AnalystPrashantRao;Citigroup;AnalystBrianOssenbeck;JPMorgan;AnalystJustinLong;StephensInc.;AnalystBrandonOglenski;BarclaysCapital;AnalystKenHoexter;BankofAmericaMerrillLynch;AnalystJeffKauffman;BuckinghamResearchGroup;AnalystJasonSeidl;CowenandCompany;AnalystDavidVernon;Bernstein;AnalystCleoZagrean;MacquarieResearchEquities;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Greetings,welcometotheNorfolkSouthernfirst-quarter2015earningscall.
(OperatorInstructions)
Asareminder,thisconferenceisbeingrecorded.Iwouldnowliketoturntheconferenceovertoyourhost,KatieCook,directorofinvestorrelations.Thankyou,Ms.Cook.Youmaynowbegin.
KatieCook(Director-IR):
Thankyou,andgoodmorning.Beforewebegintoday'scall,Iwouldliketomentionafewitems.First,theslidesofthepresentersareavailableonourWebsiteatNorfolkSouthern.comintheinvestorsection.Additionally,transcriptsanddownloadsoftoday'scallwillbepostedonourWebsite.
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
EventDescription:Q12015EarningsCallMarketCapasofEventDate:40.60BPriceasofEventDate:44.65
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Pleasebeadvisedthatduringthiscall,wemaymakecertainforward-lookingstatements.Theseforward-lookingstatementsaresubjecttoanumberofrisksanduncertaintiesandouractualresultsmaydiffermateriallyfromthoseprojected.PleaserefertoourannualandquarterlyreportsfiledwiththeSECforafulldiscussionofthoserisksanduncertaintiesweviewasmostimportant.
Additionally,keepinmindthatallreferencestoreportedresults,excludingcertainadjustments,thatisnon-GAAPnumbers,havebeenreconciledonourWebsiteintheinvestorsection.Now,itismypleasuretointroduceNorfolkSouthernChairman,CEO,WickMoorman.
WickMoorman (Chairman,CEO):
Thankyou,Katie,andgoodmorningeveryone.It'smypleasuretowelcomeyoutoourfirst-quarter2015earningsconferencecall.WithmetodayareseveralmembersofourseniorteamincludingourPresident,JimSquires;ourChiefOperatingOfficer,MarkManion;andourChiefFinancialOfficer,MartaStewart.
Asallofyouknow,earlierthismonth,weannouncedfirst-quarterearningsof$1pershare,15%lowerthanlastyear.Theseresultsreflectedlowerfuelsurchargesonthetoplineaswellascontinuedweaknessinourcoalfranchise,whichrestrictedgrowthinrevenueandrevenueperunit.Additionally,verysevereweatherinourserviceterritoryslowedouroperations,increasedourexpenses,andimpactedourvolumes.Withtheexceptionoftheongoingaffectoflowerfuelsurchargesandcontinuedpressureinourcoalmarkets,webelievethatmostofourissueswillbelargelyresolvedbythesecondhalfoftheyear.
Havingsaidthat,wewillbeupagainststrongcomps,particularlyinthesecondandthirdquartersaslastyear'sresultswererecord-settingquartersforus.Jimwillsharewithyoumoredetailontherevenuetrendsandtheoutlookfortheremainderoftheyear.Withrespecttoservice,wehavealreadyseensteadyimprovementinournetwork,andweexpecttoreachourstrong2012-2013velocityandservicelevelsinthesecondhalfofthisyear.Markwillprovideyouwiththelatestontherelevantservicemetricsandouroperationsoutlook,andMartawillrounditalloutprovidingyouwithdetailsofourfullfinancialresults.
Beforegettingdowntothedetails,I'lljustreiteratewhatItoldallofyouonourearliercall.WehaveagreatteamatNorfolkSouthern,andwhiletherearealwaysuncertaintiesaroundourmarkets,allofusareconfidentinthelong-termstrengthofourfranchiseandourprospectsforfuturesuccess.Onthatnote,IwillturntheprogramovertoJim,Mark,andMarta,andthenI'llreturnwithsomeclosingcommentsbeforetakingyourquestions.Jim?
JimSquires (President):
Thankyou,Wick,andgoodmorning,everyone.First-quarter2015operatingrevenuedeclined5%to$2.6billionprimarilyduetoa$102millionreductioninfuelsurchargerevenuesasaresultoflowerfuelprices.Growthinintermodalandmerchandisevolumesoffsetcoaldeclines,increasingfirstquartervolume2%to1.8millionunits.Revenueperunitdeclined7%butwithouttheimpactofdecliningfuelsurcharges,revenueperunitdeclinedonly2%.Mixshiftsbetweenincreasedvolumesofintermodalanddecreasedvolumesofcoaloffsetstrongpricingacrossmostofourbusinesssegments.
Wewilldiscussthemiximpactaswerevieweachcommoditygroup.Overallvolumegrowthof2%forthequarterwasdrivenbya5%gaininintermodalanda3%gaininmerchandisemarketspartiallyoffsetbya7%declineincoalvolumes.Afterastrongstarttotheyear,volumeinthefirstquarterwasagainimpactedbywinterweatherconditionsandaccompanyingservicedisruptionsparticularlythroughoutFebruary,butsimilartofirst-quarter2014,weachievedstrongvolumeandimprovedservicelevelsinMarch.
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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Breakingupthemarketsegmentsstartingwithcoal,firstquartervolumedecreased7%.Coalburnateasternutilitieswasdown14.5%inthefirstquarterduetolowerednationalandregionalnaturalgaspricescausingourutilityvolumestodecline6%.Volumestonorthernutilitiesweredownnearly9%whilevolumestosouthernutilitiesweredown2%.Thoughhandlingagreaterpercentageofutilityvolumetooursouthernutilitiesgenerallyincreasesourcoalrevenueperunit,thispositivemiximpactwasmorethanoffsetbya20%declineinexportcoalvolumesinthefirstquarter.
Persistentweakconditionsintheglobalmarketplace,softprices,andastrongUSdollarmadeitverydifficultforUScoalstocompeteinthisover-suppliedenvironment.Domesticmetallurgicalvolumesweredown1%withweakerdemandformetcoalsrelatedtosoftersteelproductionandsourcingshiftspartiallyoffsetbymarketsharegainsofcokeshipments.Thisdecreaseinvolumeandlowerfuelsurchargesreducedrevenueby$86millionto$455million,a16%declineversusfirst-quarter2014.Inadditiontothepreviouslydiscussedmixchanges,lowerfuelchargesalsonegativelyimpactedRPU.
Turningtoourintermodalmarket,wecontinuedtoseestrongvolumegrowthof5%tonearly927,000units.Intermodalpricinggainsoutpacedourotherbusinessunitswithcontinuedgrowthexpectedtherestoftheyear.Despitethesepositivetrends,thedecreaseinfuelsurchargerevenuesdrovethedecreaseinoverallrevenueandrevenueperunit.Theeffectsoflowerfuelsurchargerevenuesmorethanoffseta2%increaseinaveragerevenueperunitalreadydampenedbynegativemixresultingfromhighervolumeincreaseininternationalfreight.Aswe'vediscussedbefore,internationalintermodalfreighthasalowerrevenueperunit.
Merchandiserevenueof$1.5billionwas$32millionor2%--wasdown$32millionor2%forthequarterwitha5%declineinrevenueperunit.Morethan80%ofthisRPUdeclinewasduetofuelsurcharges.Wealsoexperiencednegativemixassociatedwithincreasedvolumesinlowerratedsand,gravel,andaggregateswhilehigherratedironandsteelvolumesdeclined.Ourautomotivesectorwasalsoimpactedbynegativemixwithdecreasedautopartsshipmentsandincreasedbyleveltraffic.
Volumeforthemerchandisebookwasup3%overallwiththestrongestgaininourchemicalsmarketduelargelytoincreasedshipmentsofcrudeoilfromtheBakkenandCanadianoilfieldstoEastCoastrefineries,aswellasincreasednaturalgasliquidsfromtheMarcellusUticaShaleplays.Automotivevolumesincreased4%inthequarterwithincreasedvehicleproductionatseveralkeyNS-servedplants.OurmetalsandconstructionmarketsbenefitedfromincreasedvolumesofaggregatesforconstructionprojectsintheSoutheastaswellasincreasedfracsandvolumeintotheMarcellusUticaregiontosupportnaturalgasdrillingefforts.
Theseincreaseswerepartiallyoffsetbyreducedshipmentsofsteelpipeandsteelcoildrivenbyasofteningofthepipemarketandreducedsteelproductioninthequarter.Agricultureshipmentswereup2%withincreasedvolumesofcornmovingtoSoutheastpoultryproducersaswellasincreasedvolumesoffeedproductsandfertilizers.ThesegainsoffsetreducedvolumesofexportsoybeansresultingfromarecordSouthAmericancrop,thestrengthoftheUSdollar,andlimitedrailcaravailability.
Finally,paperandforestproductsvolumeswereflatinthequarterwithstrengthinlumberrelatedtothecontinuinghousingrecoveryoffsetbyreducedvolumesofwoodchipsandwastematerials.Letclosewithexpectedtrendsinvolumeandrevenueforthebalanceoftheyear.First,weexpectsolidvolumegrowthinmanypartsofourfranchisethroughouttheyear.HighwayconversionsandquarterinvestmentsshouldcontinuetodrivedomesticintermodalgrowthwhileinternationalintermodalshipmentswillbenefitfromtherecoveryfollowingtheWestCoastportdisruptionsearlierintheyear.
Weexpectgrowthinnaturalgasliquidsanddespiteloweroilprices,crudebyrailvolumes.Double-digitgrowthinhousingstartsandincreasesinconstructionactivityshouldgeneratemorelumber,plastics,sodaash,andaggregatestraffic.AutomotivevolumesshouldgrowataratebetterthanNorthAmerican
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
EventDescription:Q12015EarningsCallMarketCapasofEventDate:40.60BPriceasofEventDate:44.65
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vehicleproductiondrivenbyoutputatkeyNS-servedplants.Ethanolshipmentsshouldincreaseduetorisinggasolineconsumptionandprojectrelatedgrowthwhileastrongercropshouldpushexportsoybeanvolumesuplaterintheyear.
However,loweroilpricesareexpectedtocausedeclinesinourmetalsandconstructiongroupasdrillingactivityslowsreducingshipmentsofpipe,fracsand,andotherdrillinginputs.Further,productioncurtailmentsbymajorsteelproducersandhighinventorieswilllikelydampenshipmentsofironandsteelproducts.
Lastly,lownaturalgasprices,utilitystockpilesatorabovetargetlevels,astrongUSdollar,andglobaloversupplywillmakethisachallengingyearforcoal.Wecontinuetoobtainpriceincreasesatorabovetherateofrealinflationinmostareasofourbusinessandshouldseenegativepricemixeffectsabateinthesecondhalf.
However,highfuelsurchargerecoveriesinthecomparableperiodslastyeararelikelytoresultinlowerrevenueinthesecondandthirdquartersandforthefullyear.Bythefinalquarterof2015,however,weexpecttop-linegrowthtoresume.Thankyouforyourattention,andIwillnowturnthepresentationovertoMark,whowillprovideanupdateonourfirst-quarteroperations.
MarkManion (COO):
Thankyou,Jim.Restoringourservicelevelsremainsourprimaryfocus,however,safetyisattheheartofeverythingwedosolet'stakealookatoursafetynumbers.Turningtoslide2,ourreportableinjuryratiowas1.08forthefirstquarterof2015ascomparedto1.49forthefirstquarterof2014.ThetrainincidentsthroughMarch2015were71versus61overthesameperiodlastyear.GradecrossingaccidentsthroughMarchwere76downfrom88overthesameperiodin2014.
Nowlet'stakealookatourservice.Whileourservicecompositeinthefirstquarterwaslowerthan2014asawhole,weareoperatingatahigherlevelthanwewereinthefourthquarterevenwiththemorechallengingoperatingconditionsthatexistedinthefirstquarter.Inaddition,asyoucanseeontheright,ourservicehasbeentrendingupwardsincetheendofFebruary.ThetimelineandtrajectoryofourservicerecoveryIhaveprovidedonourlastcall,whichoutlinedincrementalimprovementinthesecondquarterwithmoresignificantimprovementinthesecondhalfofthisyear,hasnotchanged.
Weexpectthatcompositeserviceperformancewillbenear80%bytheendofthesecondquarter.AndasyouseethesizableimprovementsintrainspeedanddwellinDecemberwasmaintainedinJanuary,andalthoughFebruarywaschallengingrecoveryhasbeenevident.Weexpectthistrendofincreasingtrainspeedandterminaldwellreductiontocontinuethroughtherestofthesecondquarter.Wefullyanticipatethatourendofquarterspeedanddwellmetricswillbecommensuratewiththesuperiorservicelevelsweachievedin2012and2013.
Asyouhaveseen,we'vemadesolidimprovementsandweexpecttoseeevenlargergainsinourservicemetricsbytheendofthesecondquarter.Slide5outlinesourplanthatwillleadtotheselargergains.Wehaveanincreaseof600conductorsand50locomotiveengineersbetweenMarch1andJuly1.Weexpecttotakereceiptof40additionalSD90MACsduringthissametimeperiod,andwe'realreadyseeingthenumberofbadolderlocomotivesnormalize,whichwillresultin160additionallocomotivesavailableforservice.
Bythesecondhalfoftheyear,weanticipatewewillbestoringsomeofourolder,highermaintenancelocomotives,whichwillreduceourexpensesandstrengthenourservicereliability.Withregardtoinfrastructure,theconnectiontrackinChicago,aswellasGoshen,Siding,EastElkhart,werecompletedinApril.BothoftheseprojectswillfurtherimproveourfluiditythroughtheChicagocorridor.Lastly,thesecondphaseoftheBellevueplanhasbegunwithmodificationoftheeastboundflows.Thewestbound
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
EventDescription:Q12015EarningsCallMarketCapasofEventDate:40.60BPriceasofEventDate:44.65
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flowswillthenbeimplementedlaterinthesummer.
ThefullimplementationofBellevuewillimprovevelocitythroughreducedcarhandling,improveassetutilization,andresultinanoverallreductionincoststructure.Inclosing,weareconfidentourservicewillcontinuetotrendintherightdirectionwithsequentialimprovementsinthesecondquarter.Inthesecondhalfoftheyear,weexpectimprovedmetricsconsistentwithstrongservicelevelsasthefulleffectofourinvestmentsisrealized.Thankyou,andnowIwillturnitovertoMarta.
MartaStewart (CFO):
Thankyou,Mark.Nowlet'sreviewourfinancialresultsforthefirstquarter.Asyoucanseeonslide2andashasalreadybeennoted,theweatherandservicechallengessignificantlyaffectedourfirstquarterresults.Jimdiscussedthe5%declineinrevenuesandwhileoperatingexpensesdecreasedby$61millionor3%,itwasnotsufficienttooffsettherevenuedeclineresultingina9%reductioninincomefromrailwayoperationsandanoperatingratioof76.4%.
Slide3outlinesthemajorcostcategoriesaffectedbytheweatherandservicerecoveryeffort.Theseareestimatedat$42million,thelargestportionofwhichwasatcompensationandbenefits.Additionalservicehoursoccurredinallareasofoperations,includingtrainandengineemployeesforfieldservice,mechanicalemployeestomaintainthehighernumberoflocomotives,andmaintenanceandwayemployeesrelatedtostormcleanupandrepair.Similarly,theotherlistedexpensesreflecttheincreasedcostofaslownetworkandaddedassets.
Purchasedservicesandrentswereprimarilyaffectedbythedecreasedvelocitywhilethelasttwocategories,materialsandfuel,wereprincipallyaffectedbytheriseinlocomotivecount.Aswe'vepreviouslystated,someoftheservicerecoverycostsareexpectedtocontinueintothesecondquarter.However,atalowerlevelcurrentlyestimatedat$25million.Turningnowtoslide4,thisillustratestheyear-over-yearchangebyexpensecategory.Fuelwastheonlycategorythatdeclinedversusthefirstquarteroflastyear,andthedecreasewaslargelyattributabletolowerpricesasshownonthenextslide.
Breakingdownthecomponentsofthefuelexpensechange,$160millionofthereductionwasduetopriceasconsumptionwasflatonthe2%increaseintrafficvolume.Slide6depictsthe$42millionor6%riseincompensationexpenses.Wehavehigherthanusualweightrateandpayabletaxincreases.AsdiscussedduringourJanuarycall,theunionwageincreasewaseffectiveJanuary1versustheJuly1timeframeofrecentyears.Thisresultedina$26millionincrease.
PayrolltaxratesroseonJanuary1aswell,andtotalpayrolltaxeswereup$14million.Inaddition,employeeactivitylevels,includingincreasedhours,moreovertime,andmoretrainees,added$14millionandsigningbonusesrelatedtoourrecentlywrappedsiteagreementwiththeBrotherhoodofLocomotiveEngineers,added$11million.Thatlaboragreementalsocallsforalumpsumbonus,whichwillaffectfourthquarterexpensesbyasimilaramount.
Thefinalsignificantitemwasinthecompensationarea.Itwasareductionintheaccrualsforincentiveandstockcompreflectiveofthequarter'sresult.Slide7showspurchasedservicesandrentexpense,whichincreasedby$31millionor8%.Thisriseisprimarilyduetohighervolumerelatedactivitiessuchasequipmentrentsandintermodaloperations.Aspreviouslymentioned,lowernetworkvelocityalsocausedthesecoststorise.
Turningtothenextslide,materialsandotherexpensesroseby$25millionor11%.Abouthalfoftheincreasewasduetohighermaterialsexpensesandwasassociatedwithbothlocomotiveandmaintenanceofwayusage.Environmentalandpersonalinjuryexpensesalsoroseinpartduetoaprior-yearfavorableaccrual.Andlastly,travelcostsincreasedlargelyrelatedtoourtrainserviceemployeeswhohadmoreovernightstaysaswellastemporarytransferstoareasonoursystemswithcrewneeds.
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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Depreciationexpense,displayedonslide9,roseby$8millionor3%reflectingourlargercapitalbaseaswecontinuetoinvestininfrastructureandequipment.Operatingexpenseheadwindsaresummarizedonthenextslide.Inadditiontotheservicerecoverycosts,thewageandpayrolltaxincreases,andthelumpsumpayment,2015expenseswillincludecostsassociatedwiththepreviouslyannouncedclosingofourRoanoke,Virginiaoffice.Approximately450employeeswillbeaffectedbythismovegoingfromRoanoketoeithercorporateheadquartersinNorfolk,operationsheadquartersinAtlanta,orchoosingtoretireorresign.
Movingandrelocationcostsin2015relatedtothistransitionareexpectedtototal$35millionandwillbegintobeincurredinthesecondquarteralthoughmostofthecostwillimpactthethirdquarterwhenthebulkoftherelocationsareexpectedtooccur.Efficienciesassociatedwiththisconsolidationwillbegintobenefitexpensesinthefourthquarter.Next,incometaxestotaled$185millionforaneffectivetaxrateof37.4%comparedwith33.6%in2014.Asyoumayrecall,lastyearcontaineda$20millionor$0.06persharetaxreductionresultingfromataxlawchangeinIndiana.
NetincomeandEPScomparisonsareillustratedonslide12.The$58millionnetincomedecreaseisa16%declinecomparedtolastyear,anddilutedearningspershareof$1was15%lowerthanlastyear.Asshownonthefinalslide,cashfromoperationscoveredcapitalexpendituresaswellasourhigherdividendlevelof$181million.
OnourfourthquarterearningscallinJanuary,Imentionedweanticipatedreturningtoahigherlevelofsharerepurchases.Duringthefirstquarter,weusedcashonhandtobuyback$415millionofourshares.Wenowexpectfull-year2015repurchasestobebetween$1.2billionand$1.3billion.Andwiththat,Ithankyouforyourattention,andI'llturntheprogrambacktoWick.
WickMoorman (Chairman,CEO):
Thanks,Marta.Well,asyou'veheard,clearlyourfirst-quarterresultswerenotasstrongasweandyouexpectedthattheywouldbe.Intheshortterm,wefacesomecontinuingheadwindsinthetoughcompsfromlastyear.However,weseecontinuingstrengthintheoveralleconomy,andasJimdescribed,wehavealotofopportunitiesinmanyofthemarketsweserveandagreatfranchisewithwhichtocapitalizeontheseopportunities.
Inaddition,wearewellonthewaytorestoringournetworkvelocityandefficiency,whichwilldrivefurthercostoutofouroperation.Andasallofyouknow,thatwillalsoenableustosecuremorebusinessatratesthatdrivepositivereturnsforourshareholders.
Aswedothat,wealsoremaincommittedtoreturningcashtoourshareholdersasdemonstratedthroughourstrongdividendhistoryaswellasthroughoursharerepurchaseprogram,whereasMartajustmentionedwe'renowtargetingbetween$1.2billionand$1.3billioninsharerepurchasesthisyear.Insum,wehaveaprovenstrategyforsuccessandtherightpeopleandresourcestosuccessfullyexecuteit.Thanks,andI'llturnitbacktotheoperatorforyourquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
BillGreene,MorganStanley.
BillGreene (Analyst-MorganStanley):
Jim,youobviouslyidentifiedinyourslidesthechallengesaheadfromthefuelsurchargemechanism.We
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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askedthislasttimeaswell,butsincewe'vegoneanotherquarterandnowwiththepre-announcement,isthereanyreasontothinkthatyoumightsortofaddressthatagainandcomebackandsaymaybeweneedtoadjustthatandchangethatgoingforward?Anumberofthefreighttransportshavere-basedfuelsurchargesgiventhevolatilitythere,sowhatareyourthoughtsonfuelsurcharges?
JimSquires (President):
WeareworkingtowardshiftingmoreofourrevenuetoanOHD-basedfuelsurchargemechanismovertime.Andsothat'sgoingtotakeawhile.It'scontractbycontract.Customershavetheirownpreferences.Ouroverallgoalwillbetoincreaserateandgrowtherevenue,butwerecognizethatourrelianceonWTIinourfuelsurchargeprogramcreatesvolatilityinourearningsandthat'sundesirable.SowewillbeworkingovertimetoshifttoamoreOHD-basedprogram.
BillGreene (Analyst-MorganStanley):
Okay.AndthenJimorevenWick,howdoyougetconfidentinvolumegrowthbeingactuallyagoodthing?Obviouslylastyear,wehadservicechallengesandwehadunexpectedgrowth,andnowwe'rehavingsortofachangeinthemacrooutlookthat'screatedsomeexcessresourcesandyettheservicelevelsaren'tback.Canyousortofwalkusthroughyourthoughtsondoesitmakesenseinsteadtosortoflet'sfocusongettingtherightkindofbusinessonthenetworktoresultinabettermarginorbetteroutcomeandnotworrysomuchaboutthevolumegrowthinstead?
DoyouknowwhatI'mgettingat?Itseemslikethereneedstobemoreofafocusalmostonshrinkingthebusiness.Thatwillimprovetheservicewhichisevenbetterforpricing.
WickMoorman (Chairman,CEO):
Bill,Iunderstandyourquestion,andIthinkit'saveryreasonableandinterestingone.OneofthethingsthatIwillsayaboutourvolumegrowthiswedon'tgooutandtrytogrowvolumeatratesandmarginsthatdon'tmakesensefromthestandpointofshareholdervalue.We'renot--we'recertainlynotinthemodeoflet'sjustgrowvolumeforvolumesake.
Infact,ifyoulookatalotofourvolumegrowththisquarter,it'sbeeninintermodalwhereyouknowwe'vemadealotofinvestments,andwherewe'renowseeing,asJimmentioned,verypositivepricingtrends.Wedon'tseethatasaproblem.Infact,weseevolumegrowthatgoodratesasastrengthforus.
Wealsodon'tseethatvolumegrowthasseverelyimpactinginanymeaningfulwayourservicerecovery.Ourservicerecoveryisbasedupongettingtherightresourcesinthere.Wethinkwe'velargelydonethatandwe'reontherightpathback.Lastyearasyoumentioned,wehadsomevolumegrowthweclearlydidnotforeseeinthesecondandthirdquarterandgotcaughtshortprimarilyonthecrewside.
Thevolumegrowthwe'rehavingrightnow,weseeasdesirable.Weseeitascontinuingtobeagoodthingforus.AsJimmentioned,inthisquarterinparticular,andalthoughwemayseeitforalittlewhilelonger,wesawsomemixeffectsevenwithinourmerchandisebusinessthatdidn'thelpouroverallRPUbutevenwithinthat,thesomewhatlowerratedtrafficthatwasgrowingwasstillgoodmarginbusinessandbusinessthatwewanttocontinuetohandle.
Operator :
AllisonLandry,CreditSuisse.
KenRyan (Analyst-CreditSuisse):
ThisisKenonforAllison.Justaquickquestiononthebuyback.Asyoumentioned,thebuybackwaspretty
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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biginQ1andyouhighlightedatargetof$1.2billion,$1.3billionforthefullyear.Justcuriousonhowthatcouldpossiblytrendthroughthenextfewquartersandwhetherthereisanylimitonhowbigofabuybackyoucandoinanyonequarter.Thanks.
MartaStewart (CFO):
Theestimateof$1.2billionto$1.3billionisjustalittlebithigherthanwhatwewere--whatweprojectedontheJanuarycall.We'reverycomfortablewiththatlevel.Wedidnotissuedebtlastyear.Wehaveplentyofdebtcapacitythisyear,andwe'recomfortablewithourprojectionsthatthat'sgoingtobeanamountofcashwe'regoingtobeabletoreturntotheshareholders.
KenRyan (Analyst-CreditSuisse):
Justasmyfollow-up,youmentionedthatutilitycoalstockpileswerecurrentlyabovetarget.Justcurioushowfarabovetargetyou'reseeingthestockpilescurrentlytrendatyourutilitiesandhowlongyouwouldexpectittotaketogetbacktothattargetlevelifweassumeanormalweatherenvironment.
JimSquires (President):
Basedonourestimates,utilitystockpilesintheSouthattheendofMarchwereataround71.5days,intheNorth,65.3days.Roughtargetforsouthernstockpilesof70,andforthenorthernutilitiesabout50days.Asbetweenthetwo,thenorthernutilitiesareabitmoreoverstocked.Thestockpiletrendswilldependheavilyontheweatherpatterninthesummer,andallofourassumptionsaroundutilitycoalinfactdoassumeanormalweatherpatterninthesummer,whichwoulddriveourvolumeassumptionsgoingforward.
Operator :
TomKim,GoldmanSachs.
T omKim(Analyst-GoldmanSachs):
Marta,IwantedtoaskaboutyourRoanokerelocation.Youtalkedabouttheincrementalcostsyou'regoingtoincurthisyearbutIwaswonderingwhatarethesavingsweshouldanticipatenextyear?Andthenmoreimportantly,aretherefurtheropportunitiestorationalizeorconsolidateyouroperationsandisthereapipelinethatyoumightsortofalludeto?Thankyou.
MartaStewart (CFO):
TheRoanokerelocationhas,Tom,twocomponentstoit.Theprimaryreasonwhywedecidedtodothatwasbecausewethinkitwillbemoreeffectiveforourpeopletobeinfewerlocations.Wethinkthatwillhelptheoperationsofallofthedepartmentsthatareinvolved.Thatwasnumberone.
AsaresultofdoingthatwassortofacatalysttoacceleratesomeG&Areductionsthatwehadbeenplanningforthenextthreeorfouryears.Thatallowsusto--becausesomepeoplearechoosingnottomove,thatallowsustoacceleratethose,asIsaid.Wethinkwe'llhaveabout150G&Apositionsbetweennowandtheendofthe--betweenthethirdquarterandtheendofthefirstquarterofnextyearthatwillcomeoutasaresultofthat.
T omKim(Analyst-GoldmanSachs):
Aquestionwithregardtothecoalandparticularlythecoalexports.Whataretheleversyoucanadjusttoapotentiallylongeranddeeperdowncycleforexportcoals?Towhatextentwoulditmakesensetomaybeevenrationalizeterminalinterest?Andthenmaybeevenwithrollingstock,istheresomethingyoucoulddotherelikeareyousatisfiedwithyourutilizationlevelsorcouldyoudoanythingwithregard
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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toeventhatsideofthebusiness?Thanks.
JimSquires (President):
Forstarters,wecanbeverynimblewithourequipmentassetservingourcoalbusiness,ourexpertcoalbusiness.Wecanobviouslyredeploythelocomotives.Wecandownsizeorcurtailcoalcarreplacements.Wehavecompleteflexibilitywithregardtotheequipment.Theinfrastructureadjustmentswouldinvolveadjustmentstomaintenancelevels,particularlyinthecoalfieldandinsomecasesperhapsalonger-termmothballingoftheassetbutmostlikelytheinfrastructuresidewouldinvolveservicereductionsuntilthevolumesreturn.
Operator :
RobSalmon,DeutscheBank.
RobSalmon (Analyst-DeutscheBank):
Withregardtothemerchandiseoutlook,obviouslythereareacoupleofputsandtakeswithregardtoyourgrowthexpectationswithweaknessonthesofteningsteelproductionside,aswellasgrowthinseveralotherendmarkets.WhenI'mthinkingaboutthecrudebyrailoutlook,itsoundslikeyou'reexpectingcontinuedgrowth.Iwouldimagineweshouldbeseeingthatvolumegrowthdecelerateandpotentiallydeclineinthebackhalfoftheyearbutwashopingforalittlebitmorecolorintermsofyourexpectationsregardingthatendcommodity.
JimSquires (President):
Sure,sowehandledaround29,000crudebyrailshipmentsinthefirstquarterof2015.Thatcomparesto22,000crudebyrailshipmentsinthecomparablequarterlastyear.That'sanincreaseof34%.Sincethefirstquarteroflastyear,wehavehadahandfulofnewcustomerscomeonline.
Withsofteningoilprices,wedoexpectthegrowthrateforcrudebyrailtodecelerate,butwethinkweshouldbeabletomaintainaratable29,000or30,000carloadingsperquarterthisyear.Thatwouldimplygrowthyearoveryearinthesecondquarterandforthefullyear,butwewouldbemodestlynegativerelativetothecrudebyrailvolumesinthethirdandfourthquarter.
RobSalmon (Analyst-DeutscheBank):
Withregardtothetrainlengthopportunityonthemerchandisenetwork,doyoufeellikeastheserviceimprovesthatthereshouldbetheopportunitytoextendoutthosetrainlengthsinthebackhalfoftheyear?Orgivensomeofthesofteningofthegrowthincrudebyrailaswellaslikelydeclinesinthesteelproduction,willthatbeanoffsetintermsofyourabilitytogainsomeoperatingleverageinthemerchandisenetwork?
JimSquires (President):
We'realwayslookingforwaystoincreaseouraveragetrainlength,andinfactweareseeinganincreaseinourmerchandisetrainlengthevennow.Ithinkwe'reintheneighborhoodof5,900feetthereaboutscurrently,andkeepinginmindthataroundoursystem,oursidingcapacityataminimumisinthe8,000footrange.Alotofroomtogrowthereandthat'ssomethingwecontinuetoworkon,andthathasmostlytodowithcontinuingtoadjustourtrainplan,ouroperatingnetworkplantobethemostefficient.
Operator :
ScottGroup,WolfeResearch.
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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Scott Group(Analyst-WolfeResearch):
Jim,Iknowyoutalkedaboutexpectationsforrevenuetoremaindownthenextcoupleofquarters.I'mwonderingifyoucansharewithusaviewifyouthinkthattherevenuedeclinesmoderateinthesecondandthirdquarterordotheystayheremaybeevengetworse,andifyouthinkbasedonthat,shouldwecontinuetoexpectthesedouble-digittypeearningdeclines.AndIknowyoudon'ttypicallygivethatlevelofcolor,butobviouslyalotofushavestruggledmodelingthenumbersinthefirstquartersomightbehelpfultogetyourperspectiveonnear-termearningsandrevenue.
JimSquires (President):
Letmestartbyremindingyouofthefuelsurchargecomparisonsinthesecondandthirdquarter.Inthefirstquarterofthisyear,webooked$163millioninfuelsurchargerevenue.Thatwasa$132milliondeclineyearoveryear.Lastyearinthesecondquarter,webooked$358millioninfuelsurchargerevenue,$369millioninthethirdquarteroflastyear.Assumingstableoilpricesforthenextcoupleofquarters,thatwouldimplyroughly$200millionlessfuelsurchargerevenueperquarterforthesecondandthirdquarter.
Inthefourthquarter,thecomparisongetsalittlebiteasier.Lastyear,wetookin$308millioninfuelsurchargerevenueinthefourthquarter.Thatrightthereisaprettysignificantrevenueheadwindforthenextcoupleofquarters.Ontheotherhand,asIsaid,weexpectsomeofthenegativemixeffectswesawinthefirstquartertobegintoabate.Bythethirdquarter,we,basedonourcurrentforecast,wouldbelookingforrevenuepershipmentexcludingFSCstoturnfavorable.
Similarly,revenueex-fuelsurchargesinthethirdquarterwouldturnfavorable,andthenbythefourthquarter,westarttoseeoverallgrowthinthetopline.Thatobviouslyhasavolumecomponentaswellandtherewe'refeelingprettybullish.
Obviously,thedeclinesincoalvolumearenothelping,butwearefeelingasifontheutilityside,naturalgassubstitutionhasrunitscourse,andweshouldbeabletoseeafairlystableutilitycoalvolumerunrateforthebalanceoftheyear,albeitwiththetoughcomparisonstolastyear.That'souroveralloutlookontherevenueandsowehavealotofopportunitiestogrowrevenue,andasIsaid,thenegativemixeffectsshouldbeginrollingoffinthesecondquarter.
Scott Group(Analyst-WolfeResearch):
Justotherquestionaswethinkbiggerpicture,alotoftherailshaveoperatingratiotargetsinthat60%,low60%range.I'mwonderingasyouthinkaboutthebusiness,Jim,arethere--doyouthinkthattherearestructuraldifferencesforyouorEasternrailsingeneraloristhateventuallyaplacewhereyouthinkyoucangettowiththerightmixofrevenueandcost?
JimSquires (President):
Lastyearatthistime,wewereonthevergeofproducingsomeofthebestquartersthatwehaveproducedinthisCompany'shistoryandthelowestoperatingratiosaswell.Thatwaspossiblebecausewewereseeingsignificantgrowth--volumegrowthinourmerchandiseandintermodalbusinessesinparticularandthatwassufficienttomorethanoffsetdeclinesinourcoalbusiness.
That'stheformulaforusgoingforward.Wewillbegintoseeourcoalvolumesstabilizeatsomepointandwewill,webelieve,growourmerchandisevolumes,ourhighestincrementalmarginvolumes,andourintermodalvolumeswithsubstantialpriceincreasestoboot.Thatisaformulaforcontinuedimprovementinourfinancialperformanceandformateriallyloweroperatingratiosinthefuture.
WickMoorman (Chairman,CEO):
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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Letmeaddtothat.Ithinkthatsure,inherently,ifyou--relativetofranchisebusinesses,theWestlooksdifferentthantheEastwhichlooksdifferentthanCanada,butwe,asJimmentioned,wecameoff,we'vecomeoffayearwetookouroperatingratiofortheyearbelow70forthefirsttime.
Weexpecttocontinuetodriveoperatingratioimprovement,andwehaveavery,verystrongfranchise,particularlyintermsofintermodalandmerchandise.Ithinkthatthepaceofwhenyougetthereisobviouslyalwayssomethingthattheeconomywilllargelydetermineaswellasourownefforts,butwehaveinternalgoalsfordrivingoperatingratiodownandwebelievethatwe'llcontinuetodothat.
Operator :
TomWadewitz,UBS.
T omWadewitz (Analyst-UBS):
Iwantedtoaskyoualittlebitaboutpricing.Yougotalotofmovingpartsontherevenueside,andyou'vehighlightedthemixheadwindsbutisthereanywaytodisentanglethatandtalkaboutcorepriceandgiveusasenseofwhereyou'reatinfirstquarterorifyoudon'twanttodothat,ifyoujusttalkabouttheprogression.
Shouldweexpectex-mixtoseeaccelerationinyouryear-over-yearpriceordidyoualreadygetthestepupfromtighterrailcapacityinfirstquarterandit'sjustnegativemixrollingoff.Howdowethinkabouthowmuchcorepriceyou'regettingandwhetherthatacceleratesifyoulookintosecondquarter,thirdquarter?
JimSquires (President):
Weweresuccessfulinmeetingourgoalofincreasingpricing--corepricingatarateatorbetterthanrealcostinflationmeasuresbasedonallinclusivelessfuelinthefirstquarter,inmostofourbusinesses.Generallyspeakingoutsidecoal,wewereabletodrivepricinghigherandIthinkmostencouraginglywesawthelargestcorepriceincreaseacrossourbookofbusinessinourintermodalline.
T omWadewitz (Analyst-UBS):
Justtorefresh,wheredid-
(Crosstalk)
JimSquires (President):
Backinthefutureaswell,Tom.
T omWadewitz (Analyst-UBS):
Youreferredto[aiilif].Wheredidyousee[aiilif]infirstquarter?
JimSquires (President):
Soreported[aiilf]inthefirstquarterwas2.8%.
T omWadewitz (Analyst-UBS):
Soit'snot--there'snotreallyacaveatthatyou'resayingacrossthebookyouwouldhavedonebetterthanthat2.8%ifwelookedatacorepricekindoftakingoutmix.Isthatfair?
JimSquires (President):
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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Right,right.Withtheexceptionofcoal,asImentioned,virtuallyacrossthebook.Nowtherewerepocketswhereitwasstrongerbutonaverage,wewereabletomeetthegoalofincreasingcorepricesatthatrate.
T omWadewitz (Analyst-UBS):
Whatabouttheaspectofaccelerating?Itseemslikeyou'reprettyoptimisticaboutimprovingthenetworkperformance,soyouwouldthinkthatcustomerservicewouldimproveasyoulookintothroughsecondquarter,intosecondhalf.Iguessthetruckmarketseemslikesitloosenedabit.Maybefreightoverallisn'tasstrong,butdoyouthinkthereismoremomentuminpricingthatthatwouldaccelerateorhaveyoukindofachievedtherunrateinfirstquarterandyoustaystablenextcoupleofquarters?
JimSquires (President):
Wewillstayfocusedonraisingpricesataratebetterthan--atarebetterthanrailinflation.That'sourlong-termgoal.Thecontractsvaryquarterbyquarter.Thepricingopportunityvariesbyquarterbyquarter,butoverallwe'regoingtostayvery,veryfocusedonthatgoalandareconfidentwecanachieveit.
Operator :
MattTroy,NomuraSecurities.
MattT roy(Analyst-NomuraSecuritiesInternational):
Ijusthadaquestion,maybeabigpictureoverviewofthenetwork.Youguyshavedoneagoodjobofexplainingyourtargetofreturningtheservicemetrics,beitspeedordwelloryourcompositeserviceindicesbacktothepeak2012,2013levelsby2Q,andyou'vealsokindofoutlinedverynicelywhatyouintendtodotogetthere.
Ijustwantedtotakeastepbackandmaybeunderstandfromanoperationalperspectiveifweweretolookatanetworkmap,kindofaheatmapifyouwill,whatarethekeyareasthatyouneedtoaddress,thepinchpointsifyouwill,becauseyou'vegivenusthepiecestogetusthere,thetargetsthat'dwouldliketoreach.Ijustwouldlikeabetterunderstandingbecausewe'reonly6to8weeksoutfromkindofthemiddleofthesecondquarterorthestartofthethirdquarterwhenyoucanhitthesegoals.Whatarethefocalpointsthatwillhelpyougettothesetargets?Thanks.
MarkManion (COO):
OurmostchallengingpartofthesystemlastyearandintothefirstquarterwasourChicagoline,andreallyprincipallybetweenChicagoandtheClevelandarea,andalothasgoneoninordertoincreaseourvelocity.AndI'llsaythat,thatareaisrunningreallywellnow.There'sjustbeenalotoffocusonit.Inordertodothat,therewasa--wereallypinpointedthemanpowerincreaseswhichhavecomealongverynicelyandI'lljustsaythatwe'reinprettydarngoodshapeupinthatareafromamanpowerstandpointnow.
Anotherthingthathasbeengoingonforalongerperiodoftimeisinfrastructureimprovementupthere.Ididmentionthefactthatwe'vegotacoupleofsignificantinfrastructureprojectsthatarenowcompletethatjustgiveus--itjustgivesusabiggerpipetorunthetrafficthroughthere.Keepinginmindthatpartsofthatareauptherewillrun100ormoretrainsaday.Infrastructureimprovement,niceincreases,theBellevueproject,likeIsaid,ismoretocomewhichwillbeveryhelpfulaswellaswegothroughthesummer.
That'stheareaweputalotofconcentrationinto,andit'spaidoffverynicelyandofcourse,alotofother
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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thingsgoingaroundotherpartsofthesystemandotherveryimportantpartsofthesystem,butthatwasabigfocus,andithada--it'sreallyhadaniceending.
MattT roy(Analyst-NomuraSecuritiesInternational):
Myfollow-upwouldbeontheintermodalpiece.Theinternationalvolumegrowthof8%makesensegiventhepotentialforsomediversions,residuallyfromtheWestCoastportstrike,orworkstoppage,butthedomesticpiece,thevolume'suponly3%.IwasalittlebitlighterthanIthinkwe'vebecomeaccustomedtoseeingthroughgivenyourgoodtractionandprogressandhighwayconversions.
Wonderingifyoucouldjustupdateusonthequartergatewaystrategyandwasthat3%representativemoreofaGDPlevelgrowthwhatyou'dexpectthisyearorweretherecertainmixfactorsorcontractualfactorsthatsaidwesawalittlebitofadipinthegrowthindomesticintermodalforyoufolksshouldkindofresumeatamultipleofGDPasithasbeeninthepast?Thanks.
JimSquires (President):
Sure,Matt.Letmetakeastabatthat.Withinthedomesticintermodalbook,weobviouslyhaveseveralchannels.Theintermodalcompany,IMCchannel,principallyhubandhuntgrewat6%.That'salittleclosertoourhistoricalgrowthrate,andthat'sthesortofgrowthratewewouldexpecttoseeorbetteroutofthatchannelgoingforward.Ourpremiumandtriplecrownbooksdeclinedsomewhatandthat'swhatledtotheoverall3%increaseinvolumeinthetotaldomesticbook.Goingforward,wedothinkthatwecancontinuetodrivetheentiredomesticintermodalfranchiseatgrowthratesmorelikemid-high-singledigits.
Operator :
ChrisWetherbee,Citigroup.Mr.Wetherbee,yourlineisopenforquestions.
JohnBarnes,RBC.
JohnBarnes (Analyst-RBCCapitalMarkets):
First,ontheoperatingratioimprovement,notaskingforaspecifictargetbutwhateverwemodelforORimprovement,you'vekindofgiven--you'vegottheservicerelatedcosts,you'vegotthesavingsfromRoanoke,you'vegotsomethingslikethat.Canyoujusttalkaboutthemagnitudeofeachofthoseandkindoffrommostimportanttoleastimportant,what'sgoingtodrivetheimprovementgoingforward?
MartaStewart (CFO):
ThemainthingthatwilldriveimprovementwillbegettingthenetworkbacktothevelocitythatMarkmentioned.Thetrainspeeds,theterminaldwellimprovementsthathementionedhethinkswillhappenthesecondhalfoftheyear.Thatisthemainthingthatwillhelpuswithexpenses.Iwouldliketopointoutifyou'relookingattheORthatgoingforwardasJimmentioned,thefuelsurchargecomponentofitisgoingtobequiteadrag.It'sonouroperatingmarginstherestoftheyear.
JohnBarnes (Analyst-RBCCapitalMarkets):
Fromnetworkvelocity,what'sthenextcoupleofcatalyststhere?
MartaStewart (CFO):
Afternetworkvelocity?
JohnBarnes (Analyst-RBCCapitalMarkets):
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
EventDescription:Q12015EarningsCallMarketCapasofEventDate:40.60BPriceasofEventDate:44.65
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Yes.
MartaStewart (CFO):
It'sjustthegeneralproductivitywork,andagain,thatnetworkvelocitywethinkwillbeginto--willhappentowardstheendofthesecondquartersoweexpectthatimprovementtohappeninthesecondhalfoftheyear.
WickMoorman (Chairman,CEO):
Ifyoulookatourtrackrecordforthe2012,2013period,andwediscussedthisalot,whenyourampthenetworkup,youstarttotakenotonlydoyoutakethecostsoutthatMartahasbeendiscussing,butitthensetsthestageforevenfurtherprojectstocontinuetodrivecostsdown,particularlyasvolumegrows.
Andit'sthatcombinationofaneverhighernetworkvelocity,MarkmentionedBellevueandwe'vetalkedtoyouaboutthesavingsthatarecomingonlineasweturnBellevue,butit'sthatcombinationofhavingastablehighvelocitynetworkwhichthensetsthestageforcontinuingprojectstodrivevelocityalongwiththeleverage,asJimmentioned,thevolumegrowththatreallydrivetheeconomicsofNorfolkSouthernandforthatmatter,anyrailroad.
JohnBarnes (Analyst-RBCCapitalMarkets):
Thefollow-upis,Jimyoutalkedaboutstabilityonthecoalfranchise.Canyoutalkabouthowyouweighgettingtoamorestablebutlowerlevelofcoal,bothonthedomesticandtheexportside,andwhenyoustarttomakemaybesomeofthoseserviceadjustmentsandbegintotakeassetsout,begintodownsizeorrationalizethesizeofyourcoalsupportnetwork,whendoyoubegintodothat?
Whatdoyouhavetoseefromastabilitystandpointtoreallystarttohammerthecostonthecoalsideifstableisgoingtobewhatwegetgoingforward?
JimSquires (President):
Letmestartwiththeutilitysideofthefranchiseandgiveyousomeofourassumptionsforthebalanceoftheyear,andI'llbereferringtoutilitytonnagehere.Wedid20.1milliontonsofutilitycoalinthefirstquarter,andourcurrentforecasthasthatlevelofutilityvolumeholdingbasicallysteadyfortheremainderoftheyear.AsImentioned,wedobelievethatgassubstitution,withnetgasinthecurrentpricerange,hasrunitscourse.
Thereisverylittletonnagelefttocomeoutduetomats,andofcoursetheimplicationsofcarbonregulationdowntheroadaresomewhatunknownatthispoint.Butintermsofmats,we'llmaybesee500,000fewertonsthisyear.Atthatlevelofvolume,that'salbeitsignificantlydepressedfromlastyearandevenmoresofromyearspast,weprobablydonothaveanopportunityandwouldnotwanttotakeoutsignificantinfrastructure.
Ontheotherhand,wecanandalreadyhavedownsizedourequipmentinvestmentsinourcoalbusiness.Atthislevelofvolume,wecanmakedowithourcurrentcoalcarfleetforsometimethathavebeenrelievedofthesignificantcapitalinvestmentincoalcars.Thatpertainsreallymoretotheexportsideofthebusinesssoletmetouchonthataswell.
Wehandled5.3milliontonsofexportcoalinthefirstquarter.That'sdownsignificantlyfromlastyearfirstquarterwhichwasourpeakquarterforexportcoal.Fortheremainderoftheyear,wearecallingfor4.5millionto5milliontonsofexport.Wefeelprettyconfidentonthethermalsideofthat.
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
EventDescription:Q12015EarningsCallMarketCapasofEventDate:40.60BPriceasofEventDate:44.65
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Ifthereisadownside,potentialitwouldbemoreonthemetside.Ourcentralagproducersareverychallengedrightnow.Butagain,atkindofa$20millionannualrunrate--20milliontonannualrunrateforexportcoal,weprobablywouldnotwanttosignificantlydownsizeourinfrastructurealthoughwedohavetheopportunitytoreducespendingonequipmentandthepeoplesideofitissomethingwecanmodulateaswell.
Operator :
ChrisWetherbee,Citigroup.
PrashantRao (Analyst-Citigroup):
ThisisPrashantinforChris.Iapologizedearlier.Wewerehavingalittleheadsetissuehere.Irealizewe'rerunningalittlebitlateinthecall,soI'llkeepitbrief.We'recurioustoknowaboutthegrowthpotentialforthecorebusiness,takingapart,leavingasidefuelsurchargeandcoal,ifyougetacoalnormalization,doyouthinkwecouldseethecoregrowindoubledigits?
Andin2015,arereallycoalandservicesthat'sthebiggestfactorspreventingthat?Isthereanywaytoisolateeither?Isthattherightwaytosortofthinkaboutthat?Thanks.
JimSquires (President):
Ifbycorebusinessyoumeanourmerchandisebusiness,ourindustrialproductsbusinesses,yes,wedoseegrowthpotentialtherein2015andbeyond,definitely.Therearealwaysputsandtakes.Wehavesomechallengesinourmetalsandconstructionfranchiserightnowduetoverylowsteelpricesandreduceddemandforpipe,inparticular.
TheWallStreetJournalquoted$444pertonasthegoingpriceforhot-rolledcoilthismorning.That'sdownfrom$474attheendofMarch,sosteelpricesareverydepressedandourcapacityutilizationistrackingbelow70%.Wehavesomechallengesonthatsideofourmet-confranchise.Ontheotherhand,stillwithinmet-con,aggregateswereupsignificantly,constructioncarloadingswereup,cementtrafficwasup,alldrivenbyhousingandroadconstruction.
Therearedefinitebrightspotsontheenergysideofthecorefranchiseaswell.Weseecontinuedopportunity.Overinchemicals,wewereabletogrowNGLs,[accrued]byrailwe'vealreadydiscussed,ourplasticbusinesseswereup.Thosewereallindicationsofaprettyhealthyindustrialeconomyandshouldbethedriversofsignificantgrowthinourindustrialproductsfranchisegoingforward.
Ouragvolumeswereupinthefirstquarteraswell,andweseecontinuedpromisethereforthebalanceoftheyearaswell.Overall,wefeelreallygoodaboutourindustrialproductsfranchise,albeittherearealwaysafewsoftspots.Andintermodalcontinuestogrow,andontopofthevolumegrowththisyear,weexpecttoseesignificantpriceincreases.Imentionedthatourcorepriceswereupinourintermodalbusinessmorethaninanyotherbusinesssegmentinthefirstquarter,andthat'svery,veryencouraging.
PrashantRao (Analyst-Citigroup):
Justasaquickfollowup,onthecompandemployeeissue,itlookslikeonaperaverageemployeebasis,theyear-over-yearchangeisjustunderabout2%,whichthinkingaboutthatandgoingforwardthroughtheyearonayear-over-yearbasishowtothinkaboutthatlineitem,arethereoffsetstotheheadwindsandwhataresomeoftheinitiativesthatyouguyseeonthetablemaybeintermsofcombatingsomeoftheheadwindsyoupointedoutintheslides?
WickMoorman (Chairman,CEO):
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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Ifyoulookatourcomprightnow,obviously,andwe'vediscussedthisbefore,wehavethelaboragreementswhichcoverabout85%ofourworkforce.Wehadtheeffective--effectivelyanearlypayincreaseasaresultofthelastroundofnegotiationsthatkickedininJanuaryratherthanJuly1,asMartahasdiscussed.
Aswelookatoverallheadcounts,weareclearlyfocusedrightnowongettingtherightnumberofpeopleinourtrainandengineserviceworkforcetohandlethetrafficwithoutdelay.Iwillsaythatasthesenumbers,andMarkshowedyoutheconductorsandengineersweexpecttobringoninthenextcoupleofmonths,mostofthemareincludedintheheadcounttodaybecausetheyaretraineesattheendofthefirstquarter.Astheycomeon,theycomeofftrainingstatusinwhichtheyareeffectivelypaidasalaryandstarttobepaidonatripratesothatwillthenbeproportionaltoouroperations.
Thenonthenon-agreementsideandparticularlytheG&Aside,asMartamentioned,we'realwayslookingatwaystodoeverythingweneedtodowithalowerheadcountandtheRoanokeclosurewillhelpprecipitatesomeofthat.Wewillcontinuetolookatthatandtryanddrivethosecostsdownwhereverwecan.
JimSquires (President):
LetmejustaddafootnotetotheRoanokeofficeclosurequestion.Havingspentalotoftimewithourmarketingteaminthelastcoupleofmonths,Iamreally,reallyexcitedabouthavingallofoursalesandmarketingteamunderoneroofhereinNorfolk.
Thatisgoingtoallowustoproduceamuchmorefocusedandconsistentapproachtogrowingourtopline,andwe'llhaveanopportunitytomovepeoplearoundbetweenjobsthattheymightnothavebeenabletomovearoundbetweeninthepast.AndtherewillbesimilarsynergiesfromaworkforcestandpointacrossallofthefunctionsthatarecurrentlyinRoanoketoday,ourITandaccountingdepartmentsforexample.
MartaStewart (CFO):
Ontheoperationsside,whatIwouldaddis,wecanexactlywrite[noB]increasesthatMarkdescribedwehaveWhatwe'reprojectingfortheremainderoftheyearisanother500increase.Mostofthatwilloccurbytheendofthethirdquarter,andthatisalmostexclusivelyintheoperatingarea.Sobyendoftheyear,wethinkwe'llbeupathou.
Operator :
BrianOssenbeck,JPMorgan.
BrianOssenbeck(Analyst-JPMorgan):
Twoquickones.Jim,youmentionedalotoftheheadwindsofthestrongdollaronsomeofthedisruptiveimportsthatwe'reseeinginthesteel,butyoualsomentionedyouexpectethanolandsoybeanstobeup.Somaybeifyoucouldjustsummarizewhyyouthinkthosearemovingandifoverallyouthinkthatthestrongdollarisapositivefactororanegative,excludingcoalfortherestinthebusiness,ifthestrongdollarisapositiveoranegative.
JimSquires (President):
MostofourbusinessisUSdomesticeconomyfocusedsotherearecertainlypocketsofresistanceintherevenuebasedonthestrongerdollar.Wehighlightedafewofthem,themostprominentofwhichwouldbeexportcoalandpocketselsewhereaswell.Idon'tseeanoveralldampeningeffectonthetotalrevenuenecessarilyoutsideexportcoalfromthemuchstrongerdollar.Incertainpocketsofourbusiness,
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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it'llbeanadditionalchallengebutwehaveenoughdriversofrevenuegrowthwithintheUSdomesticeconomytopushthetoplinehigherbasedonourportfolioevenwiththestrongdollar.
BrianOssenbeck(Analyst-JPMorgan):
Onefollowupontheexportcoalside.Youmentionedyou'reprettyconfidentinthethermalside,andhowthatlooksfortherestoftheyear,butIknowthemixhasbouncedaroundalittlebit.Canyoujustgiveusarefresheronwhatthemixwasinthefirstquarterandperhapswhatyouexpectfortherestoftheyear?Thanks.
JimSquires (President):
Inthefirstquarterofthisyear,64%oftheexporttonswehandledwasmetallurgicaland36%wasthermal.Thatcomparestolastyear's69%met,31%thermal.Wehadarelativelyhighproportionofthermalcoalinthefirstquarterofthisyear.Wethinkthatwillrevertinthebalanceoftheyeartomoreofthe75/25typeofsplit.Goingback,wewerealmostallmetallurgicalcoalbutthelastcoupleofyears,70%,80%metandtherestthermalhasbeenthecommonsplit.Wethinkwe'llgetbacktosomethinglikethatsplit.
Iwillsay,though,thatthedemandfeelsfirmeronthethermalsideofthefranchiserightnowandnorthernendproducerswereabletojumponsomeopportunitiesthereinthefirstquarter,andthat'swhywesawthethermalpartspikesomewhatrelativetothemetallurgicalcoalmovingpredominantlyoverLambertsPoint.Andbythewayasyouprobablyknow,mostofthemetallurgicalcoalwehandlemovesoverLambertsPointandmostofthethermalcoalmovesoverBaltimore.
Ifthere'sapotentialdownsideinourassumptions,roughly4.5billionto5billiontonsperquarterforexportcoal,itwouldbeonthemetallurgicalcoalwhichinourcaseiscomingoutofcentralag.Becauseofallofthefactorswementioned,theverystrongdollar,theglobaloversupplyofcoal,Queenslandat1.09andspotcoalismovingfourplacesbelowthatbecauseofthelow,verylowbulkdryshippingrates.It'sjustanextremelydifficultenvironmentforcentralagproducersinparticularrightnow.
Operator :
JustinLong,Stephens.
Just inLong (Analyst-StephensInc.):
IwantedtoaskaquestionaboutPTC.Asyouhavecontinuedtorolloutthistechnology,howmuchofadisruptionisitcausingtothenetwork?Isthisacontributortocongestionintherailnetworktodayorwouldyousayitisnotasignificantneedlemoverwhenyouthinkaboutfluidity?
MarkManion (COO):
It'ssomethingwe'repayingawholelotofattentionto,andithaseverythingtodowithhowwellweplanit.ThosePTCcutoverstakeplaceonaregularbasiseachmonth,andthegoodthingis,isthatoursignalingcommunicationgrouparedoingaverygoodjobofreducingtheamountofdisruptionthattakesplacewitheachoftheevents.Andcaseinpoint,whenwestartedthisout,andwe'vebeendoingitforawhilenow,butwhenwestartedtheseout,theoutageswereintheneighborhoodof12hours,andofcourse,we'ddoalotofschedulingandplanningaroundthattoreallyminimizethedisruptionbutaswe'vegonealonghere,outageshavegonetoeighthoursandnowinmorecasesdowntosixhours.
Andwe'vegotsomethingsgoingonwherewethinkwecanreducethemevenbelowsix,someofthemdowntoaslittleasfourhours,soalotofplanningandscheduleworkaroundssothedisruptionfactorwillbeminimizedgoingforwardbutstillsomethingwedoalotofplanningaround.
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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JimSquires (President):
I'lladdonethingtothatwhichwe--Ithinkit'sverygoodquestion,andwehavenottalkedaboutthatinanydetailnorhavetheotherrailroads,butIwillsaythatwegotalotofthereallyproblematicareasontherailroadintermsoftrafficdisruptiondonelastyear.Westillhavesomemoretogoandmyanalogyforitlastyearisitwas--wewerealmost--itwasalmostlikewewereconstantlyrunningalow-gradefever.
Wehadalotofworktodooutthereandalotofsignificantdisruptionthat,asMarksaid,weplannedaroundit.Wedideverythingwecouldbutnonetheless,itwasdisruptiveandit'ssomethingthatwe,asMarkhasdescribed,wecontinuetoworkonandinfactit'sarealpointoffocusforusrightnowaswelookatrestoringournetworkvelocity.
Just inLong (Analyst-StephensInc.):
I'lljustsneakonemoreinonintermodal.Iwascurious,areyougettingalotofpushbackfromyourcustomersandyourIMCsontheintermodalpriceincreasesyou'regoingonwithtoday?Andalsoasoftoday,howmuchofyourbookofbusinessinintermodalhasbeenrepricedathigherlevels,callitthatmid-single-digitrangeoverthepastyear?
JimSquires (President):
Wearenotgettingalotofpushbackonpriceincreases.Wearealignedwithourintermodalpartnersintheviewofthemarketplaceanddesiretotakepriceshigheratthispoint.Ifyoulookatourequipmentbylineofbusinessasanindicatorofwherewehavetheopportunitytoleanintopricemost,E&Pisabout70%ofthetotalbookbyvolume,andthat'stherailownedfleet,railequipmentownedfleet,isthat'swherewehavethemostabilitytotakepricesuponaspotbasis.Andalsoonthetriplecrownsideofthings,at10%ofourtotalbookbyvolume,wecanleanintoratethereaswell.
Operator :
BrandonOglenski,Barclays.
BrandonOglenski(Analyst-BarclaysCapital):
Jim,welcometothehotseat.Asyouguysknow,we'vebeensupportiveofthestockheresoI'mgoingtotrytobeconstructivewiththesequestions,butIdothinkit'sworthitforyourshareholderstoasksomeofthedifficultquestionsherethough,too.Granted,I'veneverrunatrain.WejustliveinExcelmodelssopleasetelluswherewe'rewrong.Thisquarter,volumewasup2%.Youhad3%growthinmerchandise.
Intermodalwasup5%,andyetearningsaredown15%onwhatwasaprettyeasycompfromlastyeargivenalltheweatherdisruptions.That'salotofthefrustrationIthinkwithyourshareholders,andifIlistentothestrategytodriveimprovementgoingforward,it'sgettingpriceaboveinflationwhichwegotthisquarter,it'sgettinggrowthinthoseintermodalandmerchandisesegmentsandit'sthestabilityinthecoalbook.
ButIguessmyconcernhereis,whereistheprofitabilityoutsideofcoal?Ithinkyou'veevensaiditandWicksaiditinthepast,coalisaveryprofitablesegmentforyou,butwherearethemarginsandreturnsonintermodalandmerchandise?
AndisthatgoingtobeenoughtodrivefutureearningsgrowthforthisCompanyordowehaveallofthesecontinualcostpressuresandfuelsurchargeheadwindswherewe'rejustnotgoingtobeabletoseealotofearningsexpansionevenwiththoseprettyrobustgrowthratesoutsideofcoal.
JimSquires (President):
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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Letmejustsay,weappreciatethecandorandbyallmeans,askthetoughquestions.Wedemonstratedlastyearthatwecandroptheoperatingratiosignificantlybasedonsolidgeneralmerchandisevolumegrowthandintermodalvolumegrowthevenwithcoalheadwinds.Whenyou'retalkingaboutcoalvolumesdown7%overallinaquarter,that'saprettystrongheadwindandthatismoredifficultandwelostgroundthisquarter,nodoubtaboutit.Butthatwillstabilize.
Wewillseeabottomoncoalvolumes,andaswe'vediscussedonthiscall,wethinkwemaybetherealready.Andthenwehavetheopportunitytoseecontinuedgrowthinmanyareasofourmerchandisefranchiseandinourintermodalfranchise.Putontopofthatsignificantpriceincreasesandyoudohavearecipeforgrowingearnings.It'sessentialthatwegetthenetworkbackuptospeed.Wehaveaplantodothat.Wehavetheresourcescomingonline.
Therewillbesomecostheadwindstogetfromheretothereintheshortterm,butoncethenetworkisbackupto2012,2013servicelevels,wewillsignificantcostdropoutaswell.It'sthecombinationofthatbasicefficiencyandthecostreductionthatcomesfromrunningafasternetwork,bottomingoutofcoalvolumes,andthecombinationofvolumegrowthandpriceinourgeneralmerchandiseandintermodalbusinesses.
BrandonOglenski(Analyst-BarclaysCapital):
You'renottheonlyrailroadtoseesomeprettychallengingcoalnumbers,andIdoagreewithWick'sassessmentthatthere'sdifferencesbetweentheEast,theWestinCanadabuttherearesomesimilaritiesbetweentheWestandCanadaatleastintermsofachievingmidtolow60sORforalotofthesecarrierswithpublictargetstogetthere.
IfI'mhearingyoucorrectly,Jim,itsoundslikeweneedtohavestabilityincoalbeforewecangetanyrealtractionontheoperatingratio,butIthinkthere'dbealotofskepticsonthebuysideoratleastyourinvestorbasewhereifwelookatnaturalgasbeingsub-$5inthefuture,there'sstillsomeincrementalgascapacityintheEastandontopofit,theexportmarketdoesn'tlookallthatsolidasyou'veconfirmedonthiscall.CanNorfolkgettractiononmarginsevenifcoalcontinuestobemaybeamodestheadwindheadingforward?
JimSquires (President):
Ithinkwecan,Ireallydo.Thisisgoingtobeatoughyear.Wewillstarttoseethetoplinegrowagaininthefourthquarterwethinkbasedonourcurrentforecast.Untilwegetthetoplinemoving,itwillbedifficultforustomakealotofimprovement.That'scoming.That'scoming.
Thesemixeffectsthatyousawinthefirstquarteraresomewhattransitory.Coalvolumeswillbottomout.Wecannotsaywithtotalassurancethatwehavehitbottomintermsofcoalvolumetoday,butwe'vestudiedourutilityfranchiseprettycarefullyandwedobelievegassubstitutionbecomesmoredifficultatthispointwithgasplantsrunningfullout.
Ontheexportsideofthings,thereareheadwindsthere,butthereareopportunitiesaswell,particularlyonthethermalsideofthatfranchise.Wethinkwecandoit.We'vegotacoupleoftoughquartersaheadofuswiththefuelsurchargeheadwind,withsomeadditionalcostsouttheretogetservicebackup,butoncewe'rethereontheservice,onceweseecoalvolumesstabilizeandwegetpastthisfuelsurchargeheadwind,we'reingreatshapetoimproveourfinancialperformance.
Operator :
KenHoexter,BankofAmerica.
KenHoexter (Analyst-BankofAmericaMerrillLynch):
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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I'mgoingtotakealittlebitofadifferenttactonsomethesamequestionsthere,butitlookslikeservicestartingtoshowsomeimprovement,stillthemid70soperatingratioforthequarter.Whysuchacontrast,maybeifIcouldaddressthistoMark,betweenyourneedtoaddthe650employeesbetweentheconductorsandengineers,the200someoddlocomotives?
AndwhenyoulookatCanadianPacific'splantocutresourceswhichcreatesalotofcapacity.MaybeMark,canyoujustdescribemaybealittlebitofthedifferencesintheoperationsorhowyou'rerunningitsowecanunderstandwhywecanseesuchagreatcontrastbetweenonecreatingcapacityandtheabilitytomovemoreversuswhat--howyou'restructuringtheoperations?
JimSquires (President):
Well,asfarastheresourcesthatwe'readding,weknowthatwhenwe'reintheprocessoframpingup,it'salmostlikeyoucan'thaveenoughlocomotives.Youneedacertainnumberoflocomotivesjusttospinyourselfupandthat'swhatwe'reintheprocessofdoingandinfact,I'vegotmysightssetonstoringlocomotivesbeforelong.Infact,we'llprobablygetintothatbyMayandgiveourselvesasurgefleetof--we'llseehowfarwego,100to200locomotives.
Samethingonthepeopleside.Youneedacertainnumberofpeopletomanyourtrains,anditisactivitybased.Wepaythemwhentheywork.Weneedtotakeonmorepeople.
Wewillstabilizeonthepeoplesidebytheendofthesecondquarter,andfromthereonweareessentiallyoutsideofbusinessgrowthopportunitiesaswegetintothesecondhalf.We'regoingtobeleveledoffonpeopleandwe'llbehiringforattrition.Wedon'tseeourselvesdoinganythingparticularlydifferentlythanwhattheotherrailroadsdoasfarasthatgoes.
KenHoexter (Analyst-BankofAmericaMerrillLynch):
AndsoIguessmaybejusttokeepdiggingintothattotakeitastepfurther,isitthenetworkresetsyou'vedoneafewtimesoverthelongweekendsorisitchangingtheoperatingplanwhichcreatesthatextracapacity?
JimSquires (President):
No,it'sthe--wesaidlastyearthatdependingontheseverityofthewinterthatwewoulddoaswetypicallydo,aswecomeoutofthesewinterevents.Thesearebignetworksystemsandtheyrampuponagradualbasis;thatiswhathasbeenhappeningeversinceMarch.We'reseeingsomenicerampupnow,andI'msureyoulookatournumbersaswell.Youseeourcarsonlinegoingdown.Youseeourbadolderratiogoingdown.
Ourtrainperformanceisimproving.Ourconnectionperformanceimproves.Thenumberoflocomotivesavailableimproves.Allofthatdrivesoverallnetworkvelocitybutithappensinagradualway.
We'llseethat--wewillcontinuedayinanddayouttoseethatgradualimprovementtakeplace,throughMay,throughJune,andIthinkbytheendofJune,we'llseesomeprettydarngoodnumbers.
WickMoorman (Chairman,CEO):
Justintheoveralltheme,letmesayonemorethingaboutthat.Anditgoesbacktothisidea,everyfranchiseisdifferent.Everyrailroadisdifferent.TheEasterncarriersobviouslyare,asallofyouknow,shorterhaulcomplexnetworks,andthat'sfine.Foronething,welivewhereallthepeople,andthatwethinkthathasalotofpositivesintermsofgrowingbuttheoverallbeliefthatIthinkeveryoneintherailroadindustrysharesisthatvelocitycreatescapacity,andthat'swherewe'regoing.
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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Thefirstthingyoudoisgetyourvelocitywhereyouwantittobe,wherewe'vehadoursinthepast.Asyouseevelocitygoup,asMarkmentioned,carsonlinegodown.Ourterminalsgetmoreandmorefluid,andthat'swhatthendrivesfurtheroperatingandcostimprovements.That'sthepathweareon.
Ifyoulookatsomeofthethingswe'vedoneinthepasthere,we'vedonealotofworkonourterminalsintermsofweclosedtwosignificantyards,we'veexpandedonetomakeupforthatandtomakeupforchangesinourtrafficbase.Thepatternsmaylooksomewhatdifferentbasedonthefranchise,butthethemeisalwaysthesameintermsofconstantlyimprovingthevelocityofyourrailroadnomatterwhoserailroaditisinordertocreatecostefficienciesandcreatefurthercapacity.
KenHoexter (Analyst-BankofAmericaMerrillLynch):
IfIcouldgetthefollow-up,IguessJim,asyoupreparetotakeoverintwomonthsorso,whatareyourthoughtsonM&A?Obviously,we'veheardWick'skindofthesisinthepast.I'mjustwonderinghowyouviewtheworldandobviouslygiventhediscussionsthatwe'veheardfromsomeoftheCanadians,andmaybeyourpeerontheeastinthepast,justwanttogetyourinsightandwhetheryouthinkit'spossible,andifnot,whynot.Andthenifnotnow,doesthatmeansomethingcouldhappeninthefuture,maybejustsomethoughtsonthat.
JimSquires (President):
Sure,wellI'llshareafewthoughtsandthenI'llinviteWicktochimeinaswell.
WickMoorman (Chairman,CEO):
we'llseehowwellI'vetrainedhim.
JimSquires (President):
Letmestartbysayingthatweareapubliccompany.We'reobviouslyheretoserveourshareholders,sotherearenocategoricalanswersinthatregard.Ontheotherhand,wedoseesignificantchallengesassociatedwithfurtherconsolidation.Theregulatoryreviewprocessforconsolidationsinthisindustryisvery,verytime-consuming,onerous,andrisky.AndIsaythatasonewhopracticallylivedattheSurfaceTransportationBoardforayearandhalforsoasweweregoingthroughConrail.
It]isaveryunpredictableprocess,anditisaverycostlyandriskyprocessaswell.Therearerelativelyfewsynergiestobeachievedinexchangeforthoserisksaswell.Theremainingcombinationsinthisindustryareendtoendandbydefinitionhavefewersynergiesavailable.Wedon'tthinkit'sagoodideaandwethinkwehaveagreatbusinessplantorunthisCompanyonastandalonebasis,andwhatwecandowiththisCompanyisbetterthananythingthatcouldbeachievedthroughcombinations.
WickMoorman (Chairman,CEO):
JimandIagreecompletelyaboutthis,butIthinkJim'sfirstcaveatobviouslyisimportant.Weareapubliclytradedcompany.Weareinterestedinlong-termwelfareandbenefittoourshareholders.Thatisourjob,andweunderstandthatveryclearly.ButIthinkthatwhatissometimesreallyunderestimatedbythosewhodon'tliveorimmersethemselvesintheregulatoryenvironmentinthewaythatwedoisjusthowharditwouldbe,A,tohaveanykindoftransactionapproved,particularlyunderthenewmergerruleswherebydefinition,ithastobeprocompetitive,whateverthatmeans,andnoonehasdefinedthat.
Second,theenormousrisksthattheconditionsimposedifyouwereevenabletogetamergerapprovedbytheSTPwouldnegateanyandallbenefitsandbeyondofthetransactionitself,andtherewouldbeanenormousamountofresistanceonthecertainpartsofourcustomerbase.Wejustthinkthatyouneversayneverandthetimemaywellcome,butrightnowisnotatimewheretryingtodoatransactionofany
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
EventDescription:Q12015EarningsCallMarketCapasofEventDate:40.60BPriceasofEventDate:44.65
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sizemakesanysense.
Operator :
JeffKauffman,BuckinghamResearch.
Jef f Kauf fman (Analyst-BuckinghamResearchGroup):
Iwanttoaskaquestiononadifferentaspectofthecoalfranchise.GiventhatmostUS-basedcoalsarewelloutofthemoneygloballyandgiventhattheutilityinventoriesremainquitehigh,Ithinkuptillnow,everybody'sfocusedmainlyonthevolumeaspectofthecoalfranchisebutIguessthequestionbecomesatwhatpointdoeitherthecoalproducersorutilitycustomerssay,ifwewanttokeepthecoalmoving,weneedapoundofflesh,andlet'srevisitthepricingsothatwecankeepcoalcompetitiveandkeepcoalmoving.
Whenwelookatyourcontractsbothforexportanddomestic,canyougiveusanideaofwhentheygetrepriced,comeupforrenewal,andhowmuchconfidencedoyouhaveinthiskindofenvironmentthatwewon'thavethisnewlegdownthisfallwhenthesecontractsornextyeargotoreprice?
JimSquires (President):
Webelievewecontinuetohaveacompellingvaluepropositioninourabilitytodelivercoalfromvariousbasinsinvariouswaystoourutilityandexportcustomers,andwe'regoingtopricethatonavaluebasis.Ontheexportside,therejustisn'tthatmuchwecoulddo,unfortunately.
Ourmajorcustomersarefindingitverydifficulttoplacecoalsintotheglobalmarket,particularlyonthemetallurgicalside.Ourgoalasisthecaseacrossourfranchiseistoobtainthemaximumvalueforthedollarforthevaluethatweprovideourcustomers,andwe'llcontinuetodothatinthecoalbusinessandelsewherethroughoutourfranchise.
Jef f Kauf fman (Analyst-BuckinghamResearchGroup):
Anddomestic?
JimSquires (President):
Samestory.AsIsaid,wethinknaturalgassubstitution,whichhasbeenthedrivingfactorinthedecliningutilityvolumes,haslargelyrunitscourse,andweareinpositiontocontinuetodelivercoalstoourutilitycustomers.Normalsummerweatheriscriticaltoourassumptionsinthatregard,though.Anotherverycoolsummerandwecouldseefurtherdeclinesbutprovidedwehaveanormalsummer,wethinkwe'reingoodshapetomanageaprettyconsistentrunrateonutilitycoalthisyear.
Operator :
JasonSeidl,CowenandCompany.
JasonSeidl(Analyst-CowenandCompany):
Twoquickones.One,canyoutalkalittlebitaboutyourabilitytopriceasyourservicelevelstartcomingupbecauseclearlyyou'regettingpricenowandserviceiswell,let'scallitlessthanoptimal.Isthereanyrelationbetweenrailserviceandpricingorshouldwenotlookatitthatway?
JimSquires (President):
Clearly,thereisandourpricingpotentialwillonlyimprovewithbetterservicelevels.Inthelongrun,youhavetogivethecustomersomethingmoreinordertoobtainpriceincreases,andthat'soneofthebig
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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reasonswearespendingnowtogetservicebackupsothatwewillbeabletogrowvolumesbutalsosothatinthelongrunwe'llbeabletotakepricesupforabetterandbetterproductdeliveredtothecustomer.
JasonSeidl(Analyst-CowenandCompany):
Myfollow-upandIapologizeifyouguysalreadycoveredthisbecausethere'ssomeoverlappingcallsthismorning.Wehaven'tseenanyannouncementsoutthereintermsofgettingDon'spositionfilled.Iwaswonderingwhereyouguysareatthereandareyoureviewingoutsidecandidatesaswellasinside?
WickMoorman (Chairman,CEO):
Wearereviewingbothinternalandoutsidecandidates.Wehavebeenrunningaprocess.Weexpecttocompletethatprocessandmakeanannouncementwithinamatterofafewweeks.
Operator :
DavidVernon,Bernstein.
DavidVernon (Analyst-Bernstein):
Marta,firstquestionforyou.Howmuchadditionalborrowingcapacitydoyouhaveandhaveyougottenmorecomfortableraisingtheborrowingandleverageprofileofthebusinessgoingforward?
MartaStewart (CFO):
Yes,wehavequiteabitofadditionalborrowingcapacity.AsImentionedearlier,andasI'msureyouknow,wedidn'tissueanydebtlastyearsoweareplanningtoissuedebtthisyearandwe'recomfortablebringingupourleveragelevelsbutstayingwithinourcurrentcreditratingsband,BBB+,BAA1.
DavidVernon (Analyst-Bernstein):
Isthereatargetlevelofcoveragethatyou'reshootingfor?
MartaStewart (CFO):
Thetargetistostaywithinthecreditratingsbandbecauselastyearwedidn'tissue,wefloateddownalittlebitwithintheband.We'restillwithinthebandbutfloateddownabitsowe'recomfortablerampinguptowardstheupperendofthebandbutstayingwithinit.
DavidVernon (Analyst-Bernstein):
Maybejustasaquickfollow-up,JimorMark.Haveyouguysgivenathoughtintohowmuchoftheservicerelatedcostsyouguysarepouringintothenetworkrightnowactuallydocomedown?
Igetthevelocitydrivenimprovementallowyoutopullsomecostsdown,butIwouldalsothinkthatthechangeinfreightflowsacrossyournetworkarerequiringadifferentlevelofresourcingthatyou'vehadinthepast.Isitachangeinlikethehauloflongerhaul,intermodal,lessshorthaulcoal,thatkindofstuff?Howmuchoftheextrainvestmentyou'reputtinginshouldweexpecttoactuallycomeout?
MartaStewart (CFO):
We'reexpectingthe$42millionthatwehighlightedinthefirstquarter,wethinkisgoingtomoderateto$25millioninroughlythesamecategoriesthatIoutlined,alittlebitlesspercentage-wiseincompensationbecausethecompensationpartinthefirstquarterhadatransportationpartandamaintenanceofwaypartrelatedtotheweather.
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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Percentage-wise,thecomppartwillcomedownalittlebitandthetotalwillbe$25million,andthenwebelievewegetuptothetrainspeedlevelsthatMarkdescribedinthesecondhalf.Wethinkwewillnothaveservicesothat$25million,inotherwords,wouldgoawayinthethirdandfourthquarters.
DavidVernon (Analyst-Bernstein):
Butdoyougetthe$42millionorthe$25millionbacknextyearordoyouthinkthere'sjustgoingtobesomeofthatcostisjustgoingtobeinthenetwork.
MarkManion (COO):
No,Ithinkthosecostsarethecostthatweviewastheirpurelytransitoryinnature.Theanswertoyourotherquestionisthatyes,asweseebusinessmixchange,wecanseesomeshiftinginresourcerequirements,particularlyintermsofmaybewhereweneedtraincrewsbutnet-net,Idon'tthinkthatthosechangesarematerialintermsofoverallcrewrequirementsortrainoperatingcost.
DavidVernon (Analyst-Bernstein):
Evenwiththedifferenceinlength,thehauloncoal,you'dthinkthatwouldjusttakemorelaborhours.
JimSquires (President):
You'relookingatlengthofhauloncoalchangingasbasinschange,asIllinoisbasincoalcomeson,wehauledthecoallonger,fartherasthemixchangeswithincoal.Inintermodal,we'vedoneaprettygoodjobandexpecttocontinueto.We'rereallynotnecessarilyrunningalotmoretrainsbutjustgettingmoreandmorecontainersoneachoneofthetrainsthroughstackinginadditionaltrainlength.AsIsay,Mark,Idon'tthinknet-net,thatamountstoawholelot.Doyou?
MarkManion (COO):
No,Idon't.
Operator :
CleoZagrean,Macquarie.
CleoZagrean (Analyst-MacquarieResearchEquities):
MyfirstquestionrelatestocoalsoIappreciatethatwemaybelookingatastabilizationinquarterlyrunratesonthedomesticandmaybetheexportfront,aswell.Butstillthisyearwe'relookingtoitsoundslike10%declineinthedomesticvolumeandmaybemid-teensinexport.Whatdoescoalalonedotoyouroperatingmargin,alsoyouroperatingratiothisyearintermsofaheadwind?
JimSquires (President):
Itunquestionablyisaheadwind.Whenweseethekindofyear-over-yeardeclinesthatweexperiencedinthefirstquarterof2015andprojectingforthebalanceoftheyear.Yes,wethinkasteady--asteadierrunrateforbothutilityandexportcoaltonnagebutthecomparisonsaredifficult.
Secondquarterof2014wasourpeakquarterforutilitycoalvolume,andsowearecompingthat,thatverydifficultcomparison.Similarlyinthethirdquarter,we--asutilitiesrebuildstockpilesintothethirdquarter,wearefacingsomedifficultcomps.Bythetimewegettofourthquarter,it'sgetalittlebiteasier,andwewouldexpecttoseelesseryear-over-yearvolumedeclines.
Ontheexportsideofthefranchiseaswehavediscussed,thecomparisonsreallygeteasierinthesecondhalf,beginninginthesecondhalf,andagain,particularlythefourthquarter.Fourth-quarter2014total
CompanyName:SouthernCoCompanyTicker:SOSector:Utilit iesIndustry:Utilit ies
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exporttonnagewas4.8millionsodroppedbelow5millionbythefourthquarteroflastyear.Toughmiddlepartoftheyear,toughcoupleofquarterscoming,bythefourthquarterwestarttoseegrowthresume.
CleoZagrean (Analyst-MacquarieResearchEquities):
Canyousaymaybeifyoufacespecificchallengesinyourfranchisecomparedtoyourrecentpeersandhowwecanthinkabouttheoperatingratioimpact?
JimSquires (President):
No,wedon'tthinkwefacepeculiarorparticularchallengesrelativetoourEasterncompetitorinthisregard.
CleoZagrean (Analyst-MacquarieResearchEquities):
Ontheoperatingratio,ifyou'dliketoquantifyormaybejustsaythatyou'renotpreparedtomaybeassesstheimpactofcoal,that'sfine.Butontheex-coalandexthefuelsurchargehitthisyear,wouldyoucommentastowhetheryouseemix,youknow,justbelowthetoplinebeingthetailwindoraheadwindontheoperatingincomelevel?We'refocusingsomuchonthetoplinebutsurelytheremustbebenefitingrowingintermodalandmerchandise,right?Ifyoucanhelpframethatforus,thatwouldbeveryhelpful.
JimSquires (President):
Absolutely.We'vesaidinthepastandit'sstilltruetodaythatourgeneralmerchandisebusinesses,particularlyvolumemovinginourschedulednetwork,areourhighestincrementalmarginbusinesses.Youlayeritontopofthenaturalspontaneousfavorableeconomicsofvolumegrowthinthisbusinesssignificantcorepriceincreasesandthat'sreallyakeydriverofimprovementforus.
Muchofthisunfortunatelywillbemaskedinthemiddlepartoftheyearbythefuelsurchargeheadwind,whichwillbesignificantandwiththekindsofdeltastolastyear,we'retalkingaboutinthetoplinefromfuelsurchargealone,wewillprobablyseemarginpressureinthesecondandthirdquarterunlikeinthefirstquarterwherethedeclineinfuelexpenseactuallyexceededthedeclineinfuelsurchargerevenue.Thatwillflipmostlikelygiventhemagnitudeofthefuelsurchargerevenueheadwindinthesecondandthirdquarter.
Operator :
Atthistime,IwillturnthefloorbacktoWickMoormanforclosingcomments.
WickMoorman (Chairman,CEO):
Thanks,everyone,forbearingwithusonwhathasbeenasomewhatalongcallbuthopefullywehavegivenyoualotofdataandalotofcoloronwhatwe'redoing.Weappreciateyourtimeandwelookforwardtotalkingtoyounextquarter.
Operator :
Thisconcludestoday'steleconference.Youmaydisconnectyourlinesatthistime.Andwethankyouforyourparticipation.
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