Donald W. Seale - Norfolk Southern

Donald W. Seale
Executive Vice President and Chief Marketing Officer
Balanced Portfolio of Business
NS Network
% of 1H 2014
NS Revenue
 74% of U.S. population
 55% of total energy
consumption in U.S.
 65% of U.S.
manufacturing
 Estimate 45M+ truck
shipments over 550
miles touch our
network
Agriculture
13%
Coal
21%
MetCon
13%
Intermodal
22%
Auto
8%
Paper
7%
Chemicals
16%
 Extensive port access
2
Network of Key Corridors and Port Access
Detroit
Chicago
Burns Harbor
Toledo
Erie
Ashtabula
Cleveland
NY/NJ
Philadelphia
Camden/South Jersey
Wilmington
Baltimore
Pittsburgh
Naples
Cincinnati
Portsmouth
Granite City
Jeffersonville
Louisville
Norfolk
Portsmouth
Memphis
Morehead City
Charleston
Savannah
St. Bernard
New Orleans
Braithwaite
Brunswick
Mobile
Jacksonville
Seaports
River Ports
Lake Ports
3
Changing Business Mix
First Half 2014
First Half 2006
22%
17%
38%
Volume
50%
40%
3.98 million units
$4.7 billion in revenue
3.75 million units
$5.7 billion in revenue
21%
24%
21%
33%
55%
Merchandise
Revenue
Intermodal
22%
57%
Coal
4
Major Group Comparisons
First Half 2014 vs. First Half 2006
Units (000s)
2006 Volume
2014 Volume
2006 Revenue
2014 Revenue
Revenue ($M)
$6,000
4,000
$5,000
1H 2014 vs. 1H 2006
Total Revenue CAGR: 3%
3,000
$4,000
$3,000
2,000
$2,000
1,000
$1,000
0
$0
RPU
General
General Merchandise
Merchandise
Coal
Coal
Intermodal
Intermodal
Total
Total
1H 2006
$1,734
$1,293
$600
$1,179
1H 2014
$2,651
$1,865
$670
$1,530
RPU CAGR
5.4%
4.7%
1.4%
3.3%
5
4 Broad Categories of Growth
 Energy
‒ Coal continues in the mix
‒ Oil production – new and projected
‒ Natural gas production and expansion
 Manufacturing
‒ Cost of US manufacturing
‒ FDI in the United States
 Highway Conversions
‒ $680B in US trucking revenues
‒ Trucking industry is critically challenged
• Highway congestion
• Driver availability
‒ Intermodal and carload growth ahead
 Agricultural Growth
6
David Lawson, Vice President - Coal
Jeff Heller, Vice President - Intermodal & Automotive
Mike McClellan, Vice President - Industrial Products
7
NS Coal Network
First Half 2014 Volume
 Extensive network provides
access to U.S. coal basins
 Outlet to domestic and
global markets via coastal,
lake, and river ports
 Investments to support coal
market shifts
 Ability to handle growth
Industrial
6%
Domestic
Met
10%
Export
18%
Utility
66%
8
Utility Volume & Basin Shifts
NS Utility Coal Volumes
NS Utility Sourcing Shifts
Tons in millions
Percentage of NS Utility Volume
140
100%
90%
120
80%
100
70%
60%
80
50%
60
40%
30%
40
20%
20
10%
0%
0
2010
2011
2012
2013
1H14
2010
CAPP
2011
ILB
2012
2013
NAPP
1H14
PRB
Source: SNL Energy
9
U.S. Electricity Generation by Source
1994
History
2012
Projection
6
trillion kilowatthours
5
Natural gas
4
30%
14%
10%
20%
3
2
0
1990
12%
52%
1
4%
Renewables
Petroleum liquids & other
2000
2010
19%
Nuclear
37%
Coal
1%
2020
2030
2040
Source: EIA, Annual Energy Outlook May 2014
10
Utilization Factors and Sourcing Competitiveness
Plant Capacity Utilization
Baseload Competition Coal and NG
Weighted avg. capacity factor (CF) for remaining NS plants
Forward HH Price Range $/mmbtu and Illustrative Coal Competition Ranges
$7
70%
Midwest
Northeast
Southeast
$6
65%
60%
$5
CAPP
$4
NAPP, ILB,
PRB
55%
50%
ILB & PRB
NAPP
$3
45%
40%
2010
2011
2012
2013
1H14
$2
Range of HH Futures thru 2020
Avg. CF Remaining Plants
Source: SNL Energy
'13/'14 Winter Avg. CF
Source: SNL Energy
11
Coal Basin Origins – 2010 vs 2014 YTD
Western
2010 – 21%
2014 – 16%
Illinois
Basin
2010 - 8%
2014 – 20%
Northern
Appalachia
2010 – 29%
2014 – 30%
Central
Appalachia
2010 – 42%
2014 – 34%
12
Investing in Coal’s Future
 NAPP
‒ West Brownsville, PA
‒ South Fork, PA
 ILB
‒ Sorrento, IL
‒ White Oak, IL
 Freight Car Investments
13
Total U.S. Coal Exports
140
Short Tons (Millions)
120
100
80
60
40
20
2010
2011
2012
2013
2014
Metallurgical
Steam
NS
2015
2016
Source: Doyle Trading Consultants, Quarterly Coal Outlook and Price Forecast , 3Q 2014, 2014 – 2017 are estimated forecasts
14
2017
Global and Domestic Markets Access
East Coast Ports
River & Lake
Facilities
NS
Norfolk, VA
Ashtabula, OH
Sandusky, OH
Wheelersburg, OH
3rd Party
Baltimore, MD
Charleston, SC
Mobile, AL
New Orleans, LA
Philadelphia, PA
Cyrus, WV
Ceredo, WV
Convent, LA
Owner
Lamberts Point
Wheelersburg Terminal
15
Summary
 Upside capacity factor leverage
at post-2016 compliant utilities
 Coal vs. gas competitiveness
with shifting basins
 Available capacity to take
advantage of changing export
demand
16
Jeff Heller
Vice President, Intermodal & Automotive
17
Intermodal & Automotive Environment
Intermodal
 Increasing demand for Intermodal
 Growth focused on markets east of the
Mississippi
 Rising motor carrier costs and capacity
constraints
 Strengthening pricing environment
Automotive
 Increasing North America vehicle production
 On-line plant expansions and new models
 On-shoring of vehicle production
Network synergies exist between
Intermodal and Automotive
18
Norfolk Southern’s Intermodal Network
Buffalo
Albany
Boston
Detroit
Chicago
Bethlehem
Cleveland
Harrisburg
Toledo
Pittsburgh
Decatur
Greencastle
Philadelphia
Baltimore
Columbus
Cincinnati
New York / New Jersey
Inland Virginia
Kansas City
St Louis
Georgetown
Louisville
Norfolk
Greensboro
Huntsville
Charlotte
Greer
Memphis
Atlanta
Birmingham
Dallas
Charleston
Savannah
Shreveport
New Orleans
Jacksonville
Intermodal Terminals

59 Intermodal Terminals

On-Dock access to all major EC ports

Comprehensive transcon service

Distributed “hub and spoke” network
Central Florida
On-Dock Access
Interchange Gateways
Hubs & Load Centers
19
NS Intermodal Volumes
NS Intermodal grew 7% in First Half 2014 vs. First Half 2013
Second Quarter 2014 was NS Intermodal’s 18th consecutive quarter of growth
4.00
Compound Annual Growth
Rates, 2010-2013
Units (m)
3.50
3.00
6.84%
2.50
NS Intermodal
2.00
3.87%
1.50
US Intermodal
1.00
0.50
2.14%
0.00
US GDP
2010
2011
Domestic
2012
2013
1H 14
International
20
Scratching the Surface
Significant opportunity for growth remains
Drivers of highway conversion
Total US Truck and IM Moves
Over 550 Miles
 Highway congestion
25,000,000
20,000,000
 Driver wages
15,000,000
 Regulatory action
10,000,000
 Environmental
5,000,000
Domestic Intermodal Shipments
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
0
 Fuel cost
Long-Haul Truckloads
Source: TTX; IANA
21
Driver Market
Truckload Costs
($/Loaded Mile, OTR; Index: 2003 = 100)
200
180
8.5%
160
4.8%
-0.4%
2.5%
140
120
100
80
60
40
20
0
2010
2011
Labor
Overhead
2012
Equipment
2013
2014F
Fuel
Source: FTR
22
NS Intermodal Network Growth
2010-2013 CAGR
Majority of growth has been in these Corridors
Units
In Thousands
2,500
Premier
8%
MSLLC
9%
Crescent
16%
Heartland
20%
PAS
9%
Total
11%
A Network of Key Corridors
Albany Boston
2,000
Detroit
Bethlehem
Chicago
Harrisburg
Columbus
1,500
New York/New Jersey
Philadelphia
Greencastle
Cincinnati
1,000
Charlotte
Memphis
Atlanta
Birmingham
500
Shreveport
New Orleans
0
2010
Premier
MSLLC
2011
Crescent
2012
2013
Heartland
PAS
23
Global Changes Enhance Opportunity
Port of NY/NJ
24
NS Automotive Franchise
 27 NS-served assembly plants
 35 vehicle distribution
facilities
 4 million vehicles shipped in
2013
 160,000 parts shipments in
2013
 A network for domestic and
international automotive
25
North America Vehicle Production
 Trend is positive
Annual North America Vehicle
Production
‒ 42% growth since 2010
‒ Recent U.S. sales at highest SAAR
since July 2006
(in millions)
 NS rail network well-positioned
‒ Production up 61% since 2010 at
NS-served plants in Southeast
‒ NS automotive exports up 156%
since 2010
15.8
16.5
17.3
13.5
12.2
 Industry outlook for continued
growth
‒ Forecast for over 18 million vehicles
production in 2018
2010
2012
2014
Source: WardsAuto Forecast, August 2014
26
NS-Served Opportunities
Assembly Plant Expansions and New Products
 New model releases in 2014 at NS-served plants:
‒ Ford F-series
Dearborn, MI and Kansas City, MO
‒ Ford Transit
Kansas City, MO
‒ Mercedes C-Class
Vance, AL
‒ GM Colorado and Canyon Wentzville, MO
 BMW announces $1 billion plant expansion at Greer, SC
 Volkswagen announces $900 million investment to expand Chattanooga, TN
 Subaru plans for $422 million investment for Impreza at Lafayette, IN
27
Summary
 NS has the premier
Intermodal & Automotive
networks in the East
 Both franchises are
growing and have upside
potential in both volume
and margin
 NS will continue to focus
investment on areas of
growth
28
Don Seale
EVP and Chief Marketing Officer
29
Strategic Growth Elements – Industrial Products
 Improving TOP network with the
expansion of Bellevue Yard
First Half 2014 IP Volume
Agriculture
24%
 Improving unit train productivity
 Strong equipment position including
largest metals fleet in North America
Construction
14%
Energy
13%
Manufacturing
49%
 Strong short line partnerships
 Best in class Industrial Development
 Expanding rail-truck transfer facility footprint
‒ 31 Thoroughbred Bulk Transfer Terminals (TBTs)
30
Top 10 Growth Markets
2013 vs. 2010 Volume Growth in Carloads
PETROLEUM & ENVIRON .
50,700
SAND/OTHER
21,500
COIL STEEL
20,800
SOYBEANS
12,300
LUMBER & WOOD
7,900
FOOD OILS
7,200
PLASTICS
5,200
CEMENT
3,700
PULPBOARD
3,200
CANNED GOODS
3,000
0
10,000
20,000
30,000
40,000
50,000
31
60,000
IP Market Segments
First Half 2014 vs. First Half 2010 Volume
Energy
1H
2010
7%
1H
2014
Construction
53%
13%
0%
Manufacturing
14%
49%
20%
40%
Agriculture
26%
14%
60%
24%
80%
100%
32
Energy Portfolio
Utility Coal Offset by Other Energy-Related Commodities: 2010 – First Half 2014
Annual Revenue in $M
$2,008
$2,313
82%
80%
$2,029
$2,069
$1,130
66%
64%
2013
1H 2014
100%
90%
80%
70%
60%
50%
40%
74%
30%
20%
10%
0%
2010
Utility Coal
2011
Ethanol
2012
Marcellus/Utica Inputs
NGLs
Crude Oil
33
Industrial Products Energy Portfolio
13% of Total IP Volume in First Half 2014
First Half 2014 Energy Volume
Crude
Oil
31%
NGLs
16%
Ethanol
25%
Shale
Inputs
28%
 1H 2014 NS energy revenue CAGR up 22% vs.
1H 2010
 NS has the most direct and efficient route to
crude terminals in the East
 Access to 65 terminals used for shale input
distribution, and over 24 more under
consideration
 NS serves 22 ethanol production plants totaling
two billion gallons in capacity
 Access to over 65% of the fractionation
capacity in the Marcellus/Utica region
34
NS Crude by Rail (CBR) Development
Key Strategic Elements of NS
CBR Product Offering:
 Superior route
NS Crude by Rail Volume
(In Thousands)
In Excess
of 100K
150
100
50
 Unit train logistics capabilities
0
2010
 Efficient connectivity to
strategic terminals and
refineries
 Export capabilities along the
east coast
2011
2012
2013
2014
Oil Sands
North Dakota
New Jersey
Chicago
Philadelphia
35
Marcellus & Utica Shale Deposits
24% of IP Energy Volume
36
NS Manufacturing Market
49% of Total IP Volume
 1H 2014 NS manufacturing revenue CAGR up 5% vs. 1H 2010
 U.S. manufacturing output is back to 2007 levels
 U.S. manufacturing cost competitiveness is improving
 Many companies are on-shoring and near-shoring production
U.S. Industrial Production
Indexed to 2010
Raw Steel
1.40
1.30
1.20
1.10
1.00
0.90
0.80
0.70
0.60
0.50
Source: IHS Global Insight
Paper
First Half 2014 Manufacturing Volume
Basic Chemicals
34%
5% 4%
12%
7%
38%
Machinery
Paper Scrap
Pulp/Pulpboard
Kaolin/Graphic Paper
Metals
Chemicals
37
NS Construction Market
14% of Total IP Volume





1H 2014 NS construction revenue CAGR up 6% vs. 1H 2010
Overall housing starts are ahead of last year despite severe weather this year
NAHB survey reports stronger current and future home sales
Increasing activity in lumber and wood products
Non-residential investment growing slower than residential until 2017
Investment
Chained 2009 $
Housing Starts
M
$1,000
Residential
$750
$500
$250
$0
Sources: BEA; IHS Global Insight
Non-Res.
Housing Starts
2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
First Half 2014 Construction Volume
11%
5%
16%
22%
46%
Lumber/Wood
Misc. Construction
Cement
Aggregates
Waste/C&D
38
NS Agriculture Market
24% of Total IP Volume
 1H 2014 NS agriculture revenue CAGR up 5% vs. 1H 2010
 Strong outlook for balance of 2014 due to favorable crop conditions
 NS has an excellent and balanced portfolio of origin elevators and grain
processors throughout our network
NS Agriculture Network
First Half 2014 Agriculture Volume
24%
21%
8%
16%
9%
12%
Corn
Sweeteners
All Other
10%
Feed
Wheat
Fertilizer
Soybeans
39
Industrial Development
Millions
Revenue
($M)
2010 - 2013 Highlights
Revenue
$400
$300
$342
$335
$340
2010
2010
2011
2011
2012
2012
2013
2013
$2,093
$2,194
$2,408
$2,513
$350
$276
$250
$200
$150
$100
$50
$0
RPU
Average New Revenue Growth: $323 M
Annual Volume Growth: 140K
 271 new industries located
 110 industry expansions
 $40B investment by NS
customers
 18K new customer jobs
created in 21 states
 562K carloads of new rail
traffic
40
Thank you
 Four broad categories of growth ahead:
‒ Energy (utility coal plus shale activity)
‒ Manufacturing
‒ Highway conversions to carload and
intermodal service
‒ Agricultural growth
 Continued focus on strategic expansions
in network capacity and service
‒ Intermodal corridors
‒ TBT network
‒ Bellevue classification terminal
 Improving service and efficiency for our
customers is the cornerstone of our
growth strategy
41