Annual Meeting of Stockholders
Williamsburg Lodge Conference Center
May 9, 2013
Chief Executive Officer
Norfolk Southern Corporation
At this time, I will make a few observations about the state of our company. First, however, I invite you to watch a short video about what makes Norfolk Southern a resilient, successful, and forward-looking company.
I think the video nicely summarizes where we have been and where we are going.
You may recall that 12 months ago when we met here, I reported that 2011 was Norfolk Southern's best year ever. Well, this morning I am happy to report that 2012 was an excellent year as well. In many respects, it was our second best year ever, as we recorded our second best revenue, operating income, net income, and earnings per share. More specifically:
Our railway operating revenues exceeded $11 billion for the second consecutive year. Merchandise revenues increased 6 percent, and intermodal revenues increased 5 percent, while coal revenues declined 17 percent.
Our total traffic volume for 2012 remained about even with the previous year. Our merchandise volumes were up 2 percent, intermodal volumes were up 5 percent, and our coal volumes declined by 13 percent.
In merchandise, we benefited from higher carloadings in the chemical, automotive, and forest products sectors, and we expect these trends to continue in 2013. Chemical traffic is being driven by the revival of much of the basic chemical industry in this country due to the growing production of gas and oil through directional drilling and hydraulic fracturing, along with the growth of shipments of crude oil to east coast refineries. Autos are up on account of increasing sales of automobiles, which is a good news story for the U.S. economy, and our forest products traffic is reflecting the growing signs of life in the housing industry.
In intermodal, steady traffic gains were supported by our dependable service, competitive routes, and investments in public-private partnerships to improve rail infrastructure. We continue to see strong market forces encouraging the move of container and trailer traffic from the highway to rail, and we continue to invest to make that happen.
Coal of course was a challenge, as the market continued its worldwide slump. Even though it remains a wildcard, we are confident it will stay an essential component of our business. We're optimistic that we are at or at least close to the bottom for much of our coal business, and that higher natural gas prices and more normal weather patterns will mean that our thermal coal volumes will strengthen in the next few quarters
In 2012 we did a good job managing expenses, and in fact we reduced them 1 percent, largely through improvements in system velocity.
This tight expense control and focus on improved productivity meant that even with a more than $500 million decline year over year in coal revenues in 2012, our operating ratio increased by only one 1 percentage point for the year. We obviously prefer to see it going in the other direction, but in fact such a small increase is a positive reflection of our balanced portfolio of business and efficient operations.
As a result, Norfolk Southern enjoyed strong cash flow last year. One of our priorities for using the cash generated is to distribute it to our owners. We have a solid dividend policy that when appropriate is supplemented by share buybacks. As you know, we raised the quarterly dividend 16 percent over the year and repurchased $1.3 billion of our common stock.
Our other top priority for cash is reinvestment in the company. In 2012 we allocated a healthy $2.2 billion to maintain and improve our property and assets, and to invest in growth projects, and we're continuing that reinvestment with a $2 billion capital budget this year.
I mentioned our growth in domestic intermodal volume earlier, and some of these projects involve our Crescent Corridor project covering our routes from the South and Southwest up to the Northeast and New England. Last year we opened new intermodal facilities in Memphis and Birmingham, and earlier this year, we opened an intermodal terminal in South Central Pennsylvania. In 2013 we plan to complete another terminal at Charlotte-Douglas International Airport along with significant expansions at other locations. These facilities help us build business while creating jobs in communities and strengthening local economies.
Another way Norfolk Southern and communities grow together is through our industrial development service. In 2012, we worked with customers and local and state economic development departments to locate 64 new industries along our rail lines. That represents a $2.1 billion investment by our customers and the potential for more than 6,100 new jobs.
Reducing our carbon footprint is an additional example of being a good neighbor. We're combining new technologies and productivity to move trains faster and farther on less fuel and to reduce emissions into the atmosphere. At the same time, we are increasing the energy efficiency of our buildings. In two years, we have achieved almost 60 percent of our five-year goal to reduce our greenhouse gas emissions by 10 percent per revenue ton-mile.
As we look ahead, we have many favorable things going for us.
First is safety, where your company continues to be not just a railroad leader, but a leader throughout American industry. You've heard us talk many times about the safety in our company, and it continues to be the cornerstone of all of our activities.
Another thing in our favor, quite simply, is that our railroad is running exceptionally well, and in fact I often tell people that we are running better on a sustained basis than I have ever seen in my career. We have set all-time highs for many of our service and operations metrics. Our investments in technology and infrastructure are paying off with timely, more efficiently routed trains. As 2013 unfolds, we are continuing apace with these steady, measurable operations improvements. This level of operations has two big benefits - improved service for our customers and increased productivity and efficiency.
Finally there are our employees, who are obviously the keys to everything else that we do, I will put up against any in the world when it comes to skill, dedication, and performance. And while I won't elaborate on it here, I will note that we have extensive programs under way to re-energize and re-engage our 30,000 people through enhancements to our corporate culture. This will be a real competitive advantage as we make Norfolk Southern the "employer of choice."
Our business franchise is positioned for the future. The marketing opportunities are out there for a company such as ours that looks ahead, prepares, and acts. There are many examples, one of which I mentioned a couple of moments ago. Even a few years ears ago, who could have predicted that Norfolk Southern, or any railroad for that matter, would be moving crude oil and supporting the domestic natural gas industry? Today, these are important growth categories for us.
This is an exciting time. I think it is appropriate that it comes now, as we just finished our 30th anniversary year.
On the welcome screen when you came in this morning, you saw the 20 locomotives we painted in the colors of some of our most prominent predecessor railroads. We did that not just to honor the people and companies who came before, but to remind everyone that railroading is a long-term proposition, and our best is yet to come. Our railroad is on track to continue to do great things as we continue to emphasize operating efficiency and productivity. I am excited and optimistic about our future.
Our strong first-quarter 2013 financial and operations results bear that out. The economy appears to be gradually improving, and Norfolk Southern is both resilient and prepared.
Now I invite you to enjoy a preview of Norfolk Southern's latest television commercial. It recalls a familiar song, and I am sorry, but it is one of those songs that you might not be able to get out of your head. The commercial will premier this weekend at Union Station in Washington as part of the National Train Day celebration. It then will be shown on cable television networks. You are among the first people to see it.
I don't know about all of you, but I think that it's a wonderful commercial and captures just who we are - an engine of the economy, dynamic and forward-looking, but not forgetful of our past, and perhaps most importantly with a sense of excitement and enthusiasm about where we're headed.
The material on this site does or may contain “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995 and other applicable law. These statements may be identified by the use of words like “believe,” “expect,” “anticipate” and “project.” Forward-looking statements reflect management’s good-faith evaluation of information currently available. However, such statements are dependent on, and, therefore can be influenced by, a number of external variables over which management has little or no control, including: domestic and international economic conditions; interest rates; the business environment in industries that produce and consume rail freight; competition and consolidation within the transportation industry; fluctuation in prices or availability of key materials, in particular diesel fuel; labor difficulties, including strikes and work stoppages; legislative and regulatory developments; results of synthetic fuel-related investments, as affected by production levels and the price of crude oil; results of litigation; changes in securities and capital markets; disruptions to our technology infrastructure, including our computer systems; and natural events such as severe weather, hurricanes and floods. For more discussion about the risks facing our company, see Part I, Item 1A “Risk Factors” in our annual report on Form 10-K and any updates contained in any 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 such forward-looking statements. We undertake no obligation to update or revise forward-looking statements.