Fiat Economics

*Real Time Notes, Updated Frequently

Today I am attending the second day of Dahlman Rose & Co’s Global Transportation Conference, and will be speaking with and listening to presentations from several trucking company executives from companies including: Werner Enterprises, Inc. (NASDAQ: WERN), Con-Way, Inc. (NYSE: CNW), Arkansas Best Corporation (NASDAQ: ABFS), Celadon Group Inc. (NASDAQ: CLDN), Transplace, Old Dominion Freight Line, Inc. (NASDAQ: ODFL), Saia Inc. (NASDAQ: SAIA), & Vitran Corporation, Inc. (NASDAQ: VTNC).  Due to popular demand from yesterday’s format, I will be posting my real time notes as the day progresses, so please check back frequently for updates. The conference should begin within the hour.

WERNER ENTERPRISES, INC. (NASDAQ: WERN): John J. Steele, Executive VP & CFO

The company likes to focus on customers with less cyclical and volatile businesses.  WERN is debt free with a strong balance sheet.  John is again heavily emphasizing the company and their clients’ stability.  He is now discussing how the company is implementing new technology to increase productivity.  As for revenue, 39% is derived from their one-way trucking business, 40% from dedicated trucking, and the rest from logistics. WERN’s biggest growth plan is in high value dedicated trucking and logistics.  Optimally WERN would like to see 1/3 of its revenue come from each  of the three categories.  In the past dedicated trucking has helped buffer the company from economic slowdowns.  The company has increased their dedicated fleet line over the past year helping to buffer declines in other segments of the company.

Freight market conditions have continued to deteriorate, which is the opposite of what you would expect in a peak season.  But, we have seen some indications of improvement.  Freight volumes have been stable in 3Q09 after showing some gains in 2Q09.  (This portion of the presentation was very short and very quick, hopefully more comes out in the Q&A on the outlook).

He is now discussing how clients can benefit from their logistic offerings.  Revenues for the segment has experienced growth since 2003.  They anticipate this segment will grow substantially once the freight markets improve.

New truck builds peaked in 2006, and have been significantly below the replacement level since 2007.  This makes John believe the supply of trucks will be tight moving into the future. John also anticipates the company will become cash flow positive over the next couple quarters. The company has taken measures to improve fuel consumption through mpg improvements to help reduce costs, which they estimated to be at US$0.02/share.  The company expects further cost saving benefits in the quarters ahead.

John is optimistic their prospect for the future is excellent as the demand for shipping eventually returns.  He believes the company has one of the most diverse service portfolio in the industry including asset and non-asset products. The company began shrinking its fleet size two years ago.  They anticipate generating a significant amount of free cash flow in 2009.

Q&A Highlights: What would pricing look like in a more favorable environment? Shippers have had some leverage, which has forced us to offer lower rates.  We anticipate a further decline in 3Q09 vs 2Q09, but, we hope that 3Q09 will be a bottom for rates.  However, that will depend on how the economy appears and what happens to the excess capacity in trucking.  They believe as things improve pricing will improve along with it.  The company is taking a market based approach, so as the market improves so will rates.

What has Werner seen in terms of smaller carrier failures? Failures up to 3Q09 have been below levels that were expected.  Our data shows lenders are being extremely lenient with companies who have been unable to make payments, which is leaving some supply in the market that wouldn’t necessarily be there.  It is hard to predict where failures are going, but we definitely haven’t had the number of failures I would anticipate.

How much more can you improve fuel MPG? In 2008 we improved the idle percentage by changing driver behavior.  We also installed apu’s and want to increase that to 100%.  We are also designing system and better planning tools to monitor the amount of miles that we are not compensated for.  There are a number of other initiatives in place to improve this further to aerodynamic trailers and automatic tire inflaters.  Over the long run we expect fuel prices to go up so it will be critical to continue improving this.

What is the extent of the investments you have made in improving fuel consumption? The biggest investment we have made thus far is in the auxiliary power units, which we are depreciating over a significant period.  Thus far the units have worked quite well and are paying for the investment we have made.  The elss significant costs are changes to our software.  Higher costs options are aerodynamic trailers, we do a cost analysis on all ideas.

CON-WAY, INC. (NYSE: CNW): Douglas W. Stotlar, President & Chief Executive Officer & Robert L. Bianco, Jr.,  Senior Vice President of Con-Way & President of Menlo Worldwide Logistics, LLC

They are planning on giving a general overview of the Con-Way Corporation.  They are going over the company’s three sectors, Menlo Logisitics, Freight, and Truckload.  Since 2008 CNW reacted quickly to a deteriorating economy reducing staff, and 2009’s capex spending plan.  In April 2009 CNW applied wage and salary reductions while suspending and cutting some benefits.  These measures helped the company’s 2Q09 earnings.

In June 2009 CNW launched new ‘True LTL pricing’ for large LTL shipments, ensuring that the price will be less than shippers would pay a Truckload carrier.  In 2008 the company had a network reorganization and began initiating new sales and marketing campaigns that led to increased market share in a declining market.  In August they grew their tonnage 4% y/y, and they anticipate this will continue in September.

Conway Truckload guarantees that they never overbook, which has helped build a dedicated client base.  Conway developed its three segments to provide strategic advantages across the company.  (Thus far the presentation has been a very high level look at the company without many specific details to the outlook or strategic initiatives).

Rob is now discussing the scope of Menlo Worldwide Logistics.  International expansion has helped to increase the amount of contracts for the logistics business to 85 in 2008 from 43 in 2007.  Net revenue increased to US$510mn from US$446mn during the same period.  Rob believes Menlo is in a counter cycle industry, which is a positive during these tough times.  Customers are trying to lower their cost structures through outsourcing, which helps Menlo.  During the 1H09 they were able to show modest growth with some margin expansion.

The company believes they have ample liquidity and have strong cash flow, and have a note coming due next year that will help deleverage the company.  They expect they are well positioned to handle this, and are satisfied they have the means to handle their future capex spending plans.

Q&A Highlights: What costs will come back? In Q4 they may unuspended some benefits if the company meets some internal goals (US$$4.5mn).  In April 2010 there may also be a US$50mn expense increase, spread evenly,  from changing crew methods.

What benefits are left for Menlo and Con-way? He beleives they have only scratched the surface on that relationship.

What is Conway’s feelings on the Employees Free Choice Act? Conway believes the act that the act goes above and beyond what is necessary. They are actively involved in the debate and trying to influence a balance outcome, but they can not support the current legislation.

Are you hiring and bringing truck back online and if so why? All of the hiring we have done this year has been in response to dealing with our growing market share and seasonality.  We downsized last year with the tonnage that went away and as it as come back we have had to hire incremental employees.  All the equipment we have bought has been for replacement not new business.  We are dealing with the here and now and not the future.

Any spending going towards more fuel efficient vehicles? They are always looking at new technology  including hybrid and alternative fuels.  They are also looking at additives, but are not currently running any alternative fuel vehicles.  They are working with UMich on new technology that might be promising in the future.

Talk about tonnage: September should be better than August, because of a weak base, but by how much we don’t know yet.

Coffee Break: Thus far the presentations have been pretty mundane without much discussion at all of the sector’s outlook.  From the best of my judgment the presenters seem slightly less optimistic than yesterday’s railroad companies.

ARKANSAS BEST CORPORATION (NASDAQ: ABFS): Judy R. McReynolds, Senior VP,CFO & Treasurer

The opening was telling, “I’m ready for better times”.  She is now going over the background of the company.  Revenues have remained relatively steady, while net income has fallen much more substantially in 2008.  The company has virtually no debt.   They feel they have the reserves necessary to weather though this difficult period, and take advantage of emerging opportunities.  The company pays one of the highest dividend yields in the industry.  ABFS anticipates spending US$45mn on net capital expenditures in 2009, mostly on equipment replacement. Judy is now going over the company’s accolades.

Declines in tonnage weighted Industrial production, housing starts and consumer confidence have all place significant pressure on the sector.  They see some hope in upticks in US manufacturing sector and hope it translates to an increase in demand.  They feel the pricing environment has been growing increasingly competitive as the year progresses.  The company has reduced headcount by 23%, tractors by 20%, and realigned the company’s management organization.  As for 3Q09 they have seen some improvements through some modest market share/economic increments, but the majority is due to a weak base in 3Q08.  Judy is now discussing the benefits of the companies IT systems.

On a personal note, the undertones of Judy’s presentation highlight the uncertainty and fears trucking executives presently hold toward the future of the industry.  With direct customer contact it is unusual that she quoted only upticks in the ISM as an indicator of demand growth, rather than actual client actions.

Q&A Highlights: Much of the improvements in the y/y declines are due to a weak 3Q08, this trend worsened in 4Q08, so the weak base will continue.

Talk about pricing: Our approach toward pricing hasn’t changed, which is to focus on account by account profitability.  In a situation like this more of our costs become fixed, and so we do have adjustments, but the philosphical approach to the market hasn’t changed.

Where are union negotiations? We recently had a meeting and discussed the recession and agreed to continue a dialogue to address what needs to happens with wages benefits and jobs of our workers.  But, we do not want to give a lot of details as it is not good to neogtiate in the public.  We have competitors with much lower cost structures, so we must address this. On the union side we have not had cost of living increases for some time so I should note this.

Can you talk about Capex plan? For 2010 we haven’t fully developed the plan yet, but if we are to agree there isn’t much of a change in the environment we would be looking at maintenance capex, and would be doing less of that than normal. (She didn’t mention a scenario if the market picks up).

Discuss market share improvements: We are gaining share, but it is only a modest part of our improvement in y/y declines.  We can’t site any specific examples of gaining business due to economic improvements in business.

Coffee Break:

CELADON GROUP INC. (NASDAQ: CLDN): Stephen Russell, Founder, Chairman & CEO

Celadon operates 2,900 tractors, with 250 in Canada, and another 250 in Mexico.  Capex will be virtually 0 over through 2011 as they have already met new engine standards.  Average driver age is 47, which is higher than the average, very strict standards for hiring drivers.  Interestingly, if you walk around a tractor trailer 25 times it equals one mile…

The company started in the mid 80s as an automotive carrier primarily working with Chrysler, and has since diversified via acquisitions.  Income in 2008 and 09 have dropped off substantially, given weakness in the sector.  EBITDA peaked in 2007 at US$62.0mn and has since declined to US$46.1mn in 2009.  The company has significantly reduced debt to US$43.5mn in June 2009 compared to US$59.4mn a year prior.

We’ve taken costs out, we have reduced MPG, but lower utilization had the biggest impact on our results, reducing EPS by US$0.13, with lower rates per mile bringing down the EPS an additional US$0.15. We were significantly impacted by a massive slowdown in Mexico.  Recently we have begun to see improvements in miles, but rates will likely remain ‘awful’ for the remainder of this year.  Rates could see a jump in the January bidding season.

“Lean into the pain don’t run from it. Unless we lean into the pain we can’t get done what needs to get done, and we have leaned into the pain”.  They have reduced idling, fired drivers, lowered starting pay, and adjusted maximum pay.  Customers added in 2009 from a new sales force include, Home Depot, Coca Cola, LG, Best Buy, and Georgia-Pacific–to name a few.  Wal-mart is 4% of the company’s business.

Q&A Highlights: What would be potential uses for your available cash? There are differing opinions on this and the right decision will eventually be made for the shareholders.

Do you see any potential acquisitions on the non-asset based side? Definitely not on the trucking side, many companies owe more to the bank than their trucks are worth. Right now it would be ‘crazy to be good will’.

How many trucks do you have parked currently? We have 200 trucks parked for sale, and a minimal amount otherwise.  Trucking companies aren’t being put into bankruptcy because banks don’t want the trucks, but they wont make working capital loans.  What companies then do to stay alive is to park the truck and stop paying drivers, insurance, etc…  You keep collecting the cash that was already generated by that truck, without the expense, which gives the company the ability to survive.  If something breaks in a working truck, then you can take it out of a parked truck.  The longer these trucks are parked the more they will be cannibalized and the higher the cost to bring them back online.

Pricing: They are confident rates will go up in January.  If demand kicks up there will be a 8% to 10% rate increase, if demand remains constant increments will be in the 3% range.   If demand diminishes further the economy is in bigger trouble…  The only thing that will help small carriers will be a virtual change in the banks’ philopshies, which I think weill be hard to turn around. Most trucking companies are small companies.

The bidding season is January to June, so it is essentially over, but spot rates have begun to move up over the past couple months, especially in the South-East.  There has been an improvement related to a shortage in capacity.

What about insurance rates? They have locked in their insurance rates through the end of 2010, which was s lightly less than they had been paying.

They consider a big issue is whether or not the Mexican border gets open to allow Mexican truckers to come into the US.  There was a pilot program that allowed Mexican companies to come into the US if they bring a load back into Mexico.  The Obama administration stopped this program, and Mexico increased tariffs on apples in response. The company would like to see the border re-open, as they receive better prices. They believe it will happen, but it has been delayed for some time, and it is now likely a back burner issue.

TRANSPLACE: Non-asset based third-party logistics provider offering manufacturers and retailers logistics technology & transportation management services

What are the issues for the transportation management logistics industry? 1) global recession, 2) globalization, 3) consolidation, 4)technology, 5) process management, 6) green, 7) brokerage proliferation, and legal and regulatory environment. The industry has annual revenues of around US$127bn., most of which come from international transportation management.

Transplace offers a portfolio of products that include everything from total management of the shipping process to technology needs.

Global recession: Demand for freight has plummeted.  The Cass Freight Index is down 15% in July y/y.

Globalization: Globalization an Asian sourcing led to a number of mega-providers.  In the US logistics providers must be able to handle imports and exports and have North American expertise, but do not need to be global to survive or even thrive.

Consolidation: M&A activity is strong, private equity interest in non-asset and asset-light businesses remains strong.

Technology: Customer demand for technology is high and growing.  Many LSPs are not meeting customer technology expectations.

Process Management: Customers expect a high level of process management and process change expertise, and this demand is growing.

Green Logistics: Increased emphasis on carbon footprint calculation and reduction.   Emphasis is on saving money and the environment.

Brokerage Proliferation: Explosion in brokerage as asset based carriers create brokerage/logistics businesses and new brokers spring up everywhere.

Legal & Regulatory: CSA 2010 FMCSA could significantly reduce the supply of smaller safety-approved carriers.

On a personal note, I am not finding this presentation to be terribly informative, but I am starting to believe that a solid logistics position could be a much better play on the transport sector versus an asset-based transport company itself, as more and more companies look to ways to reduce costs and increase productivity.

Lunch Break: What I have found most interesting thus far is the fact that banks are unwilling to seize property on companies who have fallen behind on their payments as banks don’t want to have to liquidate the assets.  This is leading to an excess supply of trucks in the market, putting additional pressure on already punished rates.  Presently, I am of the mindset that the outlook for the sector is pretty negative over the next year or two.  Compared to this point yesterday, I had better feelings toward the railway sector than I do now about trucking.

LOGISTICS LUNCH PANEL:

There has been a paragon shift to asset based carriers that realized brokerage has changed from a place where you would take your overflow fright to a standalone business. In going there they are taking some trucks off the road to subsidize their in-house brokerage.  Some say that JB Hunt could do US$3bn to US$5bn over the next several years.  “This is the most brutal supply environment I have ever seen”.  The little guys are getting beaten up to death.

What happens once demand comes back and capacity is tight what challenges will brokers face? To be a successful broker you have to be sophisticated and know when to raise your rates at the right time, and keep margins around 15%.

“Conditions are the worst I have ever seen”.  “We are shipping some loads at 1990’s rates I would bet”.  “But, BJ’s and Cosco two of our bigger customers have maintained their volumes”.

“We are not seeing any sort of uptake at this moment, and when people talk about it, it is probably based on hope.”

OLD DOMINION FREIGHT LINE, INC. (NASDAQ: ODFL) David S. Congdon, President & CEO & J. Wes Frye, Senior VP & CFO

This is ODLF’s 75th year in business.  ODFL is broken into five business segments with OD domestic being 94.2% of the company’s business.  Headcount has decrease, while the amount of trailers and tractors have increased, and this was intentional.  The company says they have enough capacity to take advantage of any market opportunities that represents itself.  The company is not unionized, which gives them wider flexibility to react to market conditions.

The company sees a lot of growth opportunity in high value areas including expedited freight.  The company has experienced a 10 year earnings CAGR of 20%.  Over the past five years revenue growth and margins have been well above the industry average.  In 2Q09 revenues shrunk 24%, compared to a decline of -32% for the peer group.  During the downturn the company has implemented the following strategies  1) emphasize growing markets, 2) improve service, 3) invest in technology and equipment, 4) maintain pricing discipline, 5)maintain strong financial position, & 56) take care of employees.

For LTL overnight and second day shipments are the biggest areas of growth in the country, but LTL on the whole has been on the decline.  OD has been focusing on their overnight and second day delivery service.  They presently have plans to open 50 additional service centers.

Yield percentage has only come down modestly since 2008, which they believe is a good accomplishment.  Capex expenditures have been heavy due to real estate, IT systems, and equipment.  They feel they are the best positioned LTL carrier to weather to storm and to come out of it with improvements and profitability. OD holds the leading margins in the LTL sector.

Q&A Highlights: Have you benefited from not cutting benefits? The results we are delivering are because the strength of our team. The idea of cutting benefits concerns us, in terms of being a competitive employer.  It delights me to be the m,sot profitable carrier out there that pays the best.

We have lost some customers in bidding to other carriers who are coming in with bids that are below what we would be willing to accept.

What will base capex be going forward? We anticipate that our real estate capex has peaked so that will come down.  US$80 to US$90mn is probably our average maintenance capex.  Capex next year on the equipment side could be as little as 0 , while real estate capex could be half of what we spent this year.  Capex was front laoded this year so we could see some cash flow going forward.

If Yellow (YRC) was to liquidate what would the impact on OD and the industry be? We are carrying excess equipment tractors and trailers to accommodate what our potential share gain might be out of that.  We have also added more real estate this year and more door capacity across the network along with the excess capacity we current have.  Our employees are working in the low 40 hour a week range and we could increase that around 30% for a short period of time before we can hire some new employees or some employees we had to let go.  We are in good shape.  I think the overall supply and demand equation for the industry will go from over supply to under demand, to an equilibrium if ROC goes out.

What happens to YRC is the msot important factor that goes into investing in LTL trucking.  How much will the rest of the industry feel if YRC goes? I think that there percentage of the industry is something around 18% or 19%.  If they went it would definitely ease the pricing situation.   Most contracts can be re-bid on 30-day notices.

Any alternative energy vehicles in the fleet right now? We have not dabbled in any hybrids, our green initiative is to increase fuel economy. They are purchasing the systems through  PeopleNet to  do so.

SAIA, INC. (NASDAQ: SAIA): James A. Darby, VP of Finance & CFO

Saia competes in second day and overnight freight market.  The company has coverage in 34 sates, compared to just 21 states in 2001.  Saia is doing everything they can to save every dollar they can.  The company is non-unionized.

Personal Note, I am surprised that none of these companies have even brought up the potential competition from railroads.  Yesterday, there was a definite theme between the railroad executives of bringing in more business from traditional trucking routes.

This presentation is very broad with a lot of backward looking information, and thus far hasn’t held much value for investors.  The company is looking to build density and not expand into new markets.

Q&A Highlights: Have YRC freight bleeds slowed down? We don’t know, but we have seen customers concerned about who will carry their freight going forward come to us, and this has been pretty steady.

You maintain a lot of self-insurance have you thought about changing that? We have, and we looked at it, and priced it; when we looked at the costs we felt like it was more adventitious for us to stay with the higher retention level.  Thus, we decided not to do it.

Has anyone gone back and modeled when CF went out what the spread looked like across the survivors? Is it a sugar rush or has it already bled off? The distribution on CF went between the remaining major players, the smaller guys got very little; it was a very different scenario back then.  Looking at YRC right now, the distribution would likely be much different than it was then.

VITRAN CORPORATION, INC. (NASDAQ: VTNC): Richard E. Gaetz, President & CEO

VC is unique in that they have a significant infrastructure in both Canada and the United States.  83% of the companies revenues are derived in LTL. 12% in logistics, and 5% in truckload.  The company faced two issues from 2006 to 2008 that included the recession and internal integration.  They anticipate debt to fall in the back half of the year.  In the US the company has a traditional asset model, while in Canada they use an asset light hybrid system.  In Canada they own the fleet and trailers, but are able to use the railways on a lot of their routes, and use owner operated tractors.  When factoring this in the company generates roughly 40% of revenues from an asset light sector.

The company has made nine acquisitions, with the most recent being L.A. Express Inc. in business to expand their footprint.  This gave them access to the Port of Long Beach. Every deal they made was accretive to EBITDA.

They may have a month ahead where activity levels could be higher on a year over year level.  Believes there are reasons to anticipate that things are improving a little bit.  The company expects its current opportunities to lie in LTL failures, improved 4Q09 retail sales, economic recovery in Canada & US, and improving US transport data points (uptick in international air cargo, rail cargo loading posted sequential improvements, & July class 8 truck orders are up sequentially).

Current initiatives include selling real estate (Cleveland planned to close Sep 30 US$800K & offers for St. Cloud in process), reduce legacy LOC’s US42.0 to US$2.5mn, reduce DSO further two days net US$4.0mn, adding new logistic accounts, Canadian LTL business adding new accounts on competitor opportunities, and launch new marketing and branding campaign.

Q&A Highlights: Can your feel good number in logistics continue and where will the margins go to? My view is the market should always prevail, and in this type of model there will be a point you can’t improve the margin.  I don’t know if we can make the margin much better, but they are sustainable and we can continue to find opportunities for our clients.

When will you get rid of the 5% wage reduction? At the end of the month the message will be that we are all working hard, and that the pricing environment remains tenuous.  Once prices come back to where we can make a reasonable profit we will reinvest back into our business.

What has pricing been doing? We think we are seeing fewer re-bids, but it has not improved yet. I dont think it is worsening, but it is still in a bad spot.  The longer we have wounded players operating in the business the hard it will be to move price as quickly as we would like.

Why did the June and July dip in activity occur? I cant answer for June, but July is seasonally slow.

We anticipate our LTL growth to grow more significantly as we come out of this economic malaise, leaving or percent of revenues for the logistics business to be around current levels.  Truckloads will likely remain around 5%

Acquisition focus? That would be on LTL or logistics if  it is accretive to our shareholders and business.

How much market share growth do you expect from your re-branding? I cant give you numbers but what I anticipate is that the model we have put together is attractive to our customer’s and the management team we have im place is a solid team and we expect to make enhancements that way.

Are you looking more toward acquisition or organic growth? I think both we are more likely to organically grow in the northeast and use acquisitions to grow in the southwest.  There have been some informal deal talks, that could eventually turn into something, and we will continue looking.

Any plans to employ Canadian rail assisted shipments in the US? Maybe on a limited basis.

The conference has concluded…

*Real Time Notes Updated Frequently

BNSF: Thomas Hund, Executive VP & CFO

I am currently attending this conference and will be doing some random live updates throughout the day.  I am currently listening to a presentation by BNSF’s Thomas N. Hund, Executive Vice President & Chief Financial Officer.  He is presently discussing the important of coal in US power production, and the drop in the overall volumes in railroad activity this year.  He is now discussing how economic slowdowns do not typically effect coal shipments to this extent.  The primary cause for this year’s drop in coal shipments is the fact that temperatures have been well below their 5-year averages.  This has led to an increase in stock piles, reducing coal demand.  He said they are starting to see overall volumes stabilize and increase not due to coal but due to increased shipments in consumer products.

He mentioned ag exports will be a growth spot for the company as diets around the world begin to change.  Most of these shipments leave from the Pacific Northwest.  In industrial products their greatest opportunity is to increase efficiency of the business.

As for their biggest sector, consumer products, especially domestic and international inter-modal transport.  They do not have a large exposure to the automotive sector.  China is a major driver of business.  They don’t anticipate getting back to 2006 international inter-modal levels until 2012 or 2013. Much of the Trade form LA that moves onto the Midwest goes on BNSF or Union Pacific. The port of LA has the largest intermodal capacity in the US by far, second is NY/NJ.

Business plan for the economic downturn: 1) Maintain strong network, 2) Emphasis on cost control, & 3) Maintain financial flexibility.  Most of the company is on a profit sharing plan, so in bad times they are able to pay out less.  Many of the costs they took out will not come back, so they feel positive about that.  Example of cost savings: Fuel, ramp activities, equipment ownership, crews, property and taxes, workforce, and depreciation.

Q&A Highlights: Will coal demand be effected by natural gas? They do not believe a lot of coal demand will switch to natural gas, but it will depend on how far natural gas falls.  Right now they think amount of coal at risk is modest.

Do you think you will gain more auto exposure? “As automotive business comes up in the West we will be interested in competing for that business, if we can get prices and rates that would justify the investment and consumption of resources that it takes to handle that business”

How much of your IT budget have you spent so far? They have spent roughly 75% of IT budget year to date.

How are current pricing trends? If volumes recover can prices? As we go forward we are looking at inflation + pricing, we probably wont be as robust as we have been over the past 5 years but we should still be north of where we have been historically and are expecting 3% to 4% this year, which is probably a good range for the future.  As volumes continue dropping off we could see some further pricing pressure this year though.

Union Pacific (UNP): Robert Knight, Executive VP & CFO

Volumes are still declining in every category, but some categories are starting to show a little rebound, cash for clunkers helped. 3Q domestic intermodel volumes also look slightly better, but international still looks weak. Ag and energy also remain weak.   Customers have continued to keep inventories at low levels.  He is now discussing improving economic indicators in the US, which is hopeful.  He also believes the US harvest should lead to an increase in grain shipments.  Steel production has begun to pickup slightly with some mills re-starting production. He has also seen an increase in paper production.  These tend to be positive forward looking indicators for the economy.

Nevertheless, Intermodal volumes remain well below last year’s levels as activity at LA’s ports remains mute.  Uncertainty remains in the market.  Total volumes still around 18% below last year’s levels, but 15% above this year’s lows.  Believe it could be some time before economy fully recovers, but they will be well positioned to take advantage of this.  They can’t control economy but they can control how they manage their company. The company has worked hard to cut costs while increasing safety.

Company has consolidated intermodal an auto business to increase efficiency.  They have also increased efficiencies in the coal loading process.  They have a 2-month fuel cost lag.  During the first half of the year, fuel costs helped the company, but the effect will likely be opposite in the second half given rising prices.  They are also attempting to reduce fuel consumption to help reduce cost, currently getting diesel for roughly US$1.91/gallon.  But, prices have been volatile and have recently exceeded US$2.00/gallon.

Q&A Highlights:

Aggressive effort under way to look at markets they have walked away from in years gone, and markets that have not traditionally been heavy rail users.  “There will probably be more bunts and singles than home-runs”.  Brought up example of used car market.  In the past this market has been fully trucked. They will only do it if they wont damage core network and the returns are justified.

Industry taking a cautiously optimistic view on the world, and dont see a big uptick in 2010, and haven’t made 2010 price forecasts yet.  They are hoping for a modest uptick, but would be able to handle lower volumes with current business plan.  Their customers are in a steady as she goes mode, and expect improvements, but not a big uptick.

Does the privatization of Queensland rail have any impact on you? Probably not.

Have you seen any Christmas re-stockings? Over the last several years they would peak in 3Q09, right now they aren’t seeing anything.  Christmas re-stocking is going to be at a much lower level this year. They are cautious.

15 Minute Coffee Break… Thus far my general thoughts on the presentations is that companies seem cautiously optimistic about the outlook for the sector, and don’t see what we would consider a full recovery until 2012/2013.  With that said, companies seem well positioned to maintain business until that point, but with limited upside.  I will admit I am rather new to this sector, but the outlook seems to parallel my views for the shipping sector, which seems natural given the sectors linkages.  All in all an uptick in rail would likely coincide with increase demand for shipping.

Norfolk Southern (NSC): Donald Seale, Executive VP & CMO

NSC is seeing declines across all business units.  They have begun to see a noticeable (not significant) increase in volumes with activity rising modestly in areas hard hit by the economy.  As with the other companies NSC has been reducing costs, including headcount.

Domestic intermodal will be a growth engine ahead.  Growth in utility and metallurgical coal will reitrn for both the domestic and international market.  The steel industry in this country will also continue to grow in this country.  They also see room for growth in manufacturing. 3/4 of country work, live, and consume withing their business territory.  They have noticed a significant number of truck routes at 500+ miles, which would be good targets for rail conversion. 27% of their budget is for growth and productivity investments.

Intermodal volumes are down 19% overall from Jan to August 2009.  However, they launched 14 new intermodal services since the beginning of this year including refrigerated service from LA to Atlanta and service from Chicago to Orlando.  Next year NSC will be opening the Heartland Corridor, which will be the fastest overnight service from the Atlantic.  They will also be opening the mid-Atlantic corridor form Chicago to the South-East.  The Crescent Corridor will also be opening in phases that will link Austin to Boston.  Many of these corridors have been partially financed using public funds.

As for coal, electricity demand is down due to weather and natural gas prices.  But, they do not expect natural gas to remain competitive over the longer-term.  Export activity for metallurgical coal is beginning to move in a positive manner.  They will soon begin shipping coal to be exported to China.

Weak manufacturing and automotive have significantly impacted the company, but anticipate this will improve and they are well positioned.  Ford motor company is their largest automotive account.  They service 11 international plants, some of which are being expanded.  They also see good potential in the ag sector.   Steel production as slowly begun to ramp up especially since Aug 1.  Capacity has gone from 44% to an expected 66% by year’s end; 14 facilities remain closed.

*Personal Note NSC thus far has given the most optimistic outlook, especially in terms of what they believe to be positive impact from the steel and automotive industry.

They do not expect a rapid ramp up in activity, but do see sustained activity.

Q&A Highlights:

Do you know the driver behind the demand for export coal growth? 1) Metallurgical coal production in Europe slowed down, and major steel companies began using existing inventories. 2) Australian ports and supply started to show high congestion to meet requirements of China ans Asia. & 3) World continues to look to US for highest quality coal.

Why don’t you think natural gas will remain a strong competitor to coal? Demand for energy has dropped, which led to an increase in natural gas inventories, but once demand comes back the overhang will be worked down and natural gas prices will once again rise.  Most projections tell them natural gas from the Shell deposits will be around US$6 to US$8.

What are you looking at for pricing in 2010? The pricing plan for 2010 will continue to look for value in the marketplace plus looking for a return over inflation.  We are happy with the prices that we have already realized for 2010 as they are above the rate of projected cost inflation for the year.

The company is seeing its highest growth rate today in the domestic intermodal market.

Canadian Pacific Railway (CP): Fred Green, President and CEO

As debt and deficits continue to grow funding for public projects will likely come under pressure, but see a favorable environment over the next 3 to 5 years, once the current situation has been overcome. CP’s priorities for the short-term are 1) Create and preserve options for growth, 2) sustain price increases, 3) drive productivity and reduce unit costs, 4) reduce structural costs, & 5) strengthen balance sheet.  45% of CP’s business is in the bulk business, with 45% of overall activity servicing ports. 30% of CP’s business is domestic transportation.  If the Asian economies come out faster than the rest they will be well positioned to take advantage of this growth.

They see potential growth in what could be a new industrial complex Northwest of Edmonton.  They have already sourced the land rights for the area once and if the complex is constructed.  The company sees growth potential in the ethanol sector.  However, they admit that where public policy and demand for the product goes remains to be seen. But, they think it is materializing in a beneficial way.

Car load volumes in April and May were down up to 30%, but have come up modestly in 3Q09, but still roughly 20% less than the same period last year.  For the remainder of the year they believe there will be a fall peak that will be far less significant than those experienced in years past.  Grains have been an area of strength for the company, and anticipate it will remain so given a good crop year in the US. They also expect the Canadian crop may come in slightly better than forecasted at around 42mn-44mn tons with good carry-over from last year.  The long-term average is around 47mn tons.  The Canadian coal sector  has been somewhat softer than anticipated, and the future is still uncertain.  The fertilizer sector has been very weak, and the outlook remains uncertain.  But, the capability is in place to take advantage of any uptick.

They presently see no signs of improvements in housing construction products (i.e. lumber).  CP is conservative on the intermodal market, and dont expect much upside in the near-term.  Overall, CP is targeting  4%+ price increments for customers, but certain exceptions might be made.

CP has begun to experiment reductions to long-term structural costs through faster car cycles, facility and yard redesign, and reduction in headcount.  They are trimming capex and plan to keep it down through next year, and have monetized some assets.

Q&A Highlights:

The recent acquisition of DM&E will benefit shareholders, and could allow them to develop in the PRB.  They haven’t done the ecological or all of the engineering work, but they are maintaining the right to develop the land in the future.  They have not yet pursued aggressively the condemnation rights in Wyoming, but they are still interested and will maintain the right to do so in the future when timing is correct.  Fred made it very clear it is important that the company maintain this right for eventual development.

Canadian National (CNI): Claude Mongeau, Executive VP Soon to be CEO

The environment over the past several months has been quite challenging.  Claude has never seen a decline anywhere near this magnitude.  April and May was a very scary time as they weren’t sure how long or deep this recession would go for, but since they have seen evidence of a floor with modest increments in volumes. They do not believe there will be a V shaped recovery, and a recovery make take up to several years. But, the good news is there is a floor and that floor is firm, and they see the makings of a gradual build up of volumes, which should help lead to solid performance. They believe they have shown solid results in a challenging environment.

Productivity has been up for the company on the back of fewer trains and other initiatives.  (This has been a trend across all the railway companies).  CN connects the Pacific, Atlantic, and Gulf of Mexico. 60% of business is merchandise, which is very competitive to the trucking industry and an area for growth.  Believe they could see gains from US housing market in the future.  24% of their business is based from off-shore business, mostly from the Port of Canada in Vancouver.

Future initiatives to gain market share include: Prince Rupert, which would land containers in Canada and ship into the US. A smaller distance from Asian to Rupert help shippers saves 48 hours in shipping turn-around time.  This port has been a growth point for the company during the 1H09, and is running at around 50% of capacity.  There is also a potential to develop a new potash terminal at the port to compliment Vancouver.  But, potash activity remains suppressed, so this likely would not be in the short-term.  However, when this changes they will be well position to take advantage of the growth. The company is also making headway on canola and ethanol in the US.

Q&A Highlights:

Will a weak US$ hurt business? It is tougher for Canadian producers but we are in the range of PPP with weaker suppliers already gone, while current suppliers have access to the US market on good terms. But, we can not see a sustained increase in the CAD if this is to continue. But, at the current levels things are good.

What will demand from China look like? We have a small franchise that is leveraged in China Japan and Korea, there is no question Asian steel production is increasing, and we are seeing some of that benefit suppliers we serve, but it has only been a gradual uptick.

Pricing in 2010: We tend to have shorter term contracts, so our business book rolls fast.  Presently, slightly more than half of our business has been priced into 2010, in the range of 4% to 5% increments.

In the next cycle do you think you will grow faster than your peers? There is no question we ar emore economically sensitive as a portfolio than most railroads.  We have less coal exposure and our ag business tends to be less than other railroads.  Steel and merchandise are a bigger part of our business, so once the economy finds its pace, and housing starts picks up, the business should improve.  Additionally, as steel blast furnaces come back on line there should be some meaningful upside, however, this won’t all happen within the next year. As for ag, grain looks like an offset to business given an anticipated below average Canadian crop in 2009.

Lunch Break: The mood continues to be that of cautious optimism, with companies hunkering down for what looks to be well below average activity over the next couple years.  But, company executives continue to indicate that they are well positioned to take advantage of any eventual upticks in demand, and are ready to delve into new areas of business presently under-utilized by the railroad sector, which includes areas like used car transportation.  NSC has made the most optimistic presentation regarding the outlook for the sector.

Dahlman Rose & CO. Analyst Panel:

Ground Transport: We are seeing a bottoming in the economy, and slight improvements in the overall economy with rail volumes showing some modest y/y improvements  from its April/May lows.  Trucking has faced a similar fate.  However,  a solid US crop combined with modest improvements in the economy could help the sectors in the later half of the year.

Coal: Thermal coal exports for power plants will continue to be adversely effected due to 30 year high stockpiles in US and Europe stemming from unseasonal weather and the global economic slowdown.  Estimated US cost of coal in Europe with transport would be around US$110/ton compared to the European domestic price of US$77.  But, once demand returns these prices should normalize, however this is unlikely over the next 1.5 years.

A global decline in demand for metallurgical coal has been offset by a massive increase of demand from China.  Only recently have we seen US coal shipments head toward China, however, this is quite expensive.  They believe that demand will depend heavily on China.

Coal vs Natural Gas:  Natural gas has become cheap enough to make it a viable alternative to coal energy production, which has shut-down some coal plants.  But, they anticipate gas prices will rise in the future increasing domestic coal demand.

Metals & Mining: After a widespread global shutdown in steel production, plants are slowly being brought back online as inventories reach record lows.  Presently, carbon flat-rolled steel inventories stand at 1.9 months of consumption, compared to over 3 months at the end of 2008.  But, whether or not the effects of inventory restocking will be sustained is yet to be seen.  On a personal note, this will depend heavily on a rebound in US consumer consumption, which will weigh heavily on the performance of the US labor market. They also believe that on the back of declining international steel prices domestic prices have likely peaked.  This price discrepancy could also lead to increase steel imports.

Marine Transport: Dry bulk has come off of its highs as China begins to ‘tighten the screws’ on the domestic market, which has been driving dry bulk rates.  This has led to a decline in Chinese steel prices, which raises the question “Is the steel market strong enough to go on its own or will effects of the stimulus disappear?”  With that said, steel continue to come under pressure, while dry bulk fixtures have declined significantly.

Q&A Highlights:  How much capacity has switched from coal to natural gas and what is the potential? 11BCF is the hypothetical max switching of that roughly half is realistic.  10mn tons a month of coal demand could be lost.  There is more potential damage that could be seen in the fall and winter.

CSX Corporation (CSX): Lester M. Passa, Vice President of Strategic Planning

CSX is well diversified with 35% of volumes coming from consumer products, 28% from coal, 14% from agricultural products, 12% from housing products, and 11% for the industrial segment.  All of these segments were down during 1H09, with third quarter to date declines showing some improvement.  Les highlighted the fact that coal is presently a tough spot in the business.

Like the other railroads CSX has been increasing productivity while decreasing costs.  Fixed costs are down by 10%, while ST and LT costs are down 43% and 14% y/y during the 1H09, respectively.  The company anticipates that the economy will remain weak through 2009, but are looking for an eventual sustainable recovery.

The company has a technology platform called ONE Plan, which services the scheduled train network.  CSX takes real-time demand for services and runs the information through ONE Plan, which can evaluate and optimize service in a much more responsive and efficient manner.  (i.e. reducing or increasing transit volume as needed in near real-time).  This allows for better use of capital and reduces operating expenses.

Once the company’s NW/OH gateway opens they will be able to  significantly increase capacity across the country.  It will allow for single-line reach into Florida, New England, and Illinois Basin.  The National Gateway will also help link ports to producers and consumers, and leverage public-private partnerships for future growth.  Les is now going over the benefits of rail over trucks.

Les believes there is a lot of headroom from where we are now to the amount of value we can provide into the marketplace, so they continue to re-invest into the company. They have been able to maintain stable margins despite volume decline, and are leveraging the current enviroment to strengthen network recovery.

Q&A Highlights: Where are we on ONE Plan? We have used it to optimize our assets and they believe it still has tremendous capability to reduce cycle times as they improve technology.

What are your future pricing plans? They have increased guidance to above 6% for 2009, and expect inflation + pricing for 2010, full plans will come later.

Is some of your cycle improvements due to less traffic or Capex? There are fewer trains on the railroads and the railroads are in better shape. The dispersion between the two is hard to measure.  These improvements create a great baseline for us to work with as we grow and have to place additional trains on our lines.

In the present form of the ONE Plan, when the economy gets better, how will the company deal with restrained capex spending in the future? The ONE Plan is a cultural epiphany for CSX.  On the issue of capex we will look at long-term capex toward the spring, but the base of capex goes into core infrastructure, and will make other investments as the economic recovery deems it appropriate.

Given the stability in margins during the downturn, the company believes once business comes back shareholders will be pleased.

*On a personal note comments I have heard form attendees include ‘The companies seem cautiously optimistic, but are having trouble showing any real proof as to why’

Genesee & Wyoming Inc. (GWR): John C. Hellmann, President & CEO

GWR is an owner and operator of world-wide short-line railroads, currently operating in nine regions.  GWR has made 34 acquisitions since 1985, with five taking place in 2008.  They are presently looking at opportunities in natural resources development.  Freight revenues make up roughly 62% of total revenues, with coal, coke, and ores making up 21% of that.  Intermodal revenues run through their port business, which are not counted in freight revenues.  During 1H09 steel and metals has been the hardest hit segment falling 38%, while GWR’s farm and food business has risen 22% during the same time period.  The company’s contract business has also increased by 11%, mostly due to a new contract in Australia for China bound goods.

As with the other companies, GWR has undergone cost cutting and taken steps to increase productivity.  They have also strengthened their balance sheet through and equity offering in June to explore some investment opportunities.   Non-freight revenues have been relatively stable, due to increased demand for storage and Australian ore imports, offsetting losses elsewhere.

Since October of 2008 carloads have dropped off substantially bottoming in May 2009, and have since begun to climb modestly with a small decline in August.  They see no specific evidence of carloads increasing, but conversations with shippers have seemed more positive now than they have in the past.

Q&A Highlights: Can you provide some examples have how conversation with shippers are turning more favorable? We have seen some steel customers shut for good, and we are seeing some industries consolidate to their most efficient plants, and steel is an example, and these plants are beginning to discuss future production.

Have you seen any declines in rail car storage? No real material changes.

Where can you spend money in North America right now? There are some opportunities with both regional and resource related assets, but I can’t be specific as there is some competition for these assets.    There is some pricing discovery to be done for some of these assets, before they can be properly valued.  But, few are capitalized enough to take advantage of these opportunities.

Kansas City Southern (KSU): Michael W. Upchurch, Executive VP & CFO

Presently, only rail carrier servicing the growing port of Lazaro in Mexico.  KSU also believes there is a lot of potential over the next few years from converting truckload/container volumes between US to Mexico.  They are also in the process of expanding their intermodal business, which they feel will benefit the company once the economy picks back up.  The economic slowdown was clearly the biggest factor impacting earnings, which they hope to improve going forward through cost cutting and various other measures.  The company does not foresee issuing an additional equity in the near future.  Looking ahead the company anticipates volume trends will continue to increase, as they have sen chemical shipments increase, which they believe could be a forward looking indicator for industrial production.  They have also been receiving feedback from customers that indicates 2H09 performance should be better.  The remain cautiously optimistic for 2H09, and expect that the company is poised for improvement, and has ample cushion with bank covenants.

Q&A Highlights: What impact are you expecting from incremental increase in volumes? A lot of this depends on where traffic is coming from and what type of increases.  It is cheaper to add a car or two (+85% to margin) than it is to add a train (+50% to margin).  Therefore, we expect it could be somewhere above 50% overall.

How much of the improvement has been from Mexico? It has been pretty split between US and Mexico.

Past 2011 what is your plan on debt? Assuming business didnt get any better we think we would have the cash flow to retire the revovler in April 2011, which pushes maturities out another year, which should allow business to improve.  We aren’t in the position to refinance this stuff today, but it is possible in the future.  We think we will be in a position to push out some of this debt, and if business gets better so will our position on this.

Which sectors has the improvements been in beside autos? Chemicals, automotive, and appliances have all been strong.

The Conference Has Concluded…