May 08, 2014
NS Annual Meeting
Charles W. Moorman
Chairman and CEO
Norfolk Southern Corporation
Before I begin my remarks, I invite you to view a brief video presentation highlighting our performance over the past year.
Thank you. The video illustrates how our people, technology, and service capability make Norfolk Southern a successful and forward-thinking company.
As I said in the Annual Report, 2013 was a big year for us. We set new records for railway operating revenues, operating income, earnings per share, and operating ratio accomplishments. These records were propelled by significant gains in our intermodal, chemical, and automotive franchises, and the results were all the more remarkable in the face of a continuing decline in one of our traditional mainstays, the coal business.
2013 also was propelled by the same factors that have kept our company strong for years: a continuing focus on safety, service, and costs; continued strong investment in our franchise, with 2013 spending of $2 billion; another strong year for our industrial development initiatives, with $2.3 billion in customer investment in NS-served facilities; and finally and by far most important, the efforts and hard work of the almost 30,000 NS employees who have made our company what it is today.
These results drove strong returns to shareholders with a 5% dividend increase and $627 million in share repurchases. Our financial performance along with these shareholder initiatives were rewarded also by the markets, where we posted a total shareholder return for the year of 54.2%, compared to the S&P 500 TSR of 32.4%, and tops in the rail industry.
Clearly 2013 was a big year for us, but the real question now is, “What about 2014?” We came into the new year believing that most of the strength that we saw in our markets in 2013, and particularly in the second half, would continue, and we still feel that way.
What we didn’t foresee was that after a couple of very mild winters, we, and for that matter all of North America, would be impacted by the most severe winter in terms of length, conditions, and geographic spread that we have seen in many years. The result was that our first quarter revenues were dampened, our expenses such as overtime were up, and our service metrics and system velocity were well below where they have been for the past two years.
However, I’m happy to report that the Norfolk Southern operating team came through with flying colors, keeping the railroad fluid in sometimes near-impossible conditions and getting the railroad back to a reasonable operating level more quickly than the other class-one carriers. The result is that today our operating metrics are much improved, and we are steadily progressing to the high service levels we and our customers enjoyed last year.
On the market side, as I said, once the cold weather departed, we saw our business rebound almost immediately. Intermodal and energy-related materials are leading the way, and our auto business is strengthening as the national rail system velocity recovers and we are able to get more auto cars to our customers. The growth in our energy markets in particular is very strong, driven by transportation of crude oil by rail, a market that really didn’t exist five years ago.
I know that you’re all aware of some of the safety concerns about shipping crude by rail, but we strongly believe that once the issues are resolved around the need for a better tank car along with the further steps in prevention and mitigation, crude by rail is a terrific business opportunity for us, and will be for years to come.
Really, the only wild card in our business portfolio that will continue to be a wild card in 2014 is our coal business. On the positive side, one of the results of this past winter is that utility coal stockpiles are down and natural gas prices are up, which argues for a somewhat better year in our utility franchise. On the other hand, benchmark prices for both export metallurgical and export steam coal are very low, which may well result in even weaker export volumes, so we’ll just have to see.
But looking even beyond our market conditions, I’m confident that 2014 will be another very good year for our company. That confidence springs from the things I talked about before. Our safety and service levels are improving after the winter, and we know that as network velocity and operating metrics improve, the all-important service product that we provide to our customers improves. In addition to happier customers, improving network velocity also takes operating costs out, all leading to a stronger competitive position for our company.
Improvements in our service and cost structure also are being driven by the continuing roll-out of new technologies such as LEADER and UTCS movement planner. These and other new technologies are just one part of our announced $2.2 billion capital program for 2014. We’re spending to maintain and enhance the state of repair of our infrastructure, to add capacity in key areas such as our major classification yard in Bellevue, Ohio, and to add locomotives and rolling stock to ensure that we can handle the business that’s coming our way. Our first priority with the cash that we generate is to invest in the company to ensure our continuing success.
Everything that I’ve mentioned is vital to our success in 2014 and beyond, but the real key to our future and the reason for my confidence is our people. I strongly believe that we have the best people in the railroad business, and we’re working hard every day to make sure that we capture all of their good ideas on how we can make NS better. I’m proud every day to be part of this company, and I know that all of you are as well. Thank you.
However, such statements are dependent on and, therefore, can be influenced by, a number of external variables over which we have little or no control, including: significant governmental legislation and regulation over commercial, operating and environmental matters; transportation of hazardous materials as a common carrier by rail; acts of terrorism or war; general economic conditions including, but not limited to, fluctuation and competition within the industries of our customers; climate change legislative and regulatory developments; competition and consolidation within the transportation industry; the operations of carriers with which we interchange; disruptions to our technology infrastructure, including computer systems; labor difficulties, including strikes and work stoppages; results of litigation; natural events such as severe weather, hurricanes, and floods; unpredictable demand for rail services; fluctuation in supplies and prices of key materials, in particular diesel fuel; and changes in securities and capital markets. For a discussion of significant risk factors applicable to our business, see Part II, Item 1A “Risk Factors” in our annual report on Form 10-K and any updates contained in subsequent Forms 10-Q. Forward-looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements. We undertake no obligation to update or revise forward-looking statements.