Remarks by:
Wick Moorman
Chairman, President and Chief Executive Officer
Norfolk Southern Corporation
Good morning, ladies and gentlemen.� I am Wick Moorman, chairman, president and chief executive officer of Norfolk Southern Corporation, and it is my privilege to welcome you to our second-quarter 2006 analysts’ meeting.
I’d like to take a moment to welcome those who are listening by telephone and can only imagine the scene in here. I also would encourage all of you who are here today, when speaking, to take a microphone and please identify yourself so that the listeners who are participating on the call can hear and identify you.� I would remind both the listeners and Internet participants that the slides of the presenters are available for your convenience on our web site in the “Investors” section.
As usual, transcripts of the meeting will be posted on our web site and available upon request in a few weeks from our Corporate Communications department.
Please be advised that any forward-looking statements made during the course of this presentation represent our best, good faith judgment as to what may occur in the future.� The actual results may differ materially from those projected, that means we may be wrong, and will depend on a number of variables, some of which may be outside of the control of the company.�
Please refer to our Annual Report filed with the SEC for a discussion of all of those variables.
Additionally, keep in mind that all references to reported results excluding certain adjustments have been reconciled on our web site.
We have with us today several members of our management team, including our vice chairmen Hank Wolf, chief financial officer; and Steve Tobias, our chief operating officer.� We also are joined by Don Seale, our executive vice president and chief marketing officer; Jim Squires, senior vice president-Financial Planning; Bob Fort, vice president-Corporate Communications; Rob Kesler, vice president-Taxation; Marta Stewart, vice president and Controller, who is always as ready to answer those difficult accounting questions; Leanne Marilley, director-Investor Relations; and Debbie Malbon, Hank Wolf’s assistant.
I am pleased to report that Norfolk Southern produced record revenues and income from railway operations in the second quarter, reflecting the continuing strength of the market for our transportation products, as well as our sustained focus on providing a higher-value service product.� Demand for rail transportation continues to grow in most sectors of our business, and our second-quarter results reflect strong volume growth and an improved operating ratio.
Second-quarter railway operating revenues of $2.4 billion established an all-time record for Norfolk Southern, up 11 percent.� We reported our highest ever income from railway operations, $677 million, an increase of 14 percent over last year.
Particularly noteworthy was our second-quarter operating ratio of 71.7 percent, which was the lowest since the Conrail transaction and 0.8 percent better than the second quarter a year ago.
There were several factors which affected our net income for the quarter, particularly with regard to year-over-year comparisons, all of which Hank will review.� In particular, you will recall that the results in the second quarter of 2005 benefited from the favorable impact resulting from Ohio-enacted tax legislation as well as the settlement of two coal rate cases, which increased diluted earnings per share by 23 cents and 6 cents, respectively.
Our second-quarter net income this year of $375 million, or 89 cents per diluted share, was 23 percent higher than the $304 million, or 75 cents per diluted share, which we earned in the same period of last year excluding those two items.� This was clearly a very solid quarter for our company and a continuation of the results that we’ve been seeing since late 2003.
Our second-quarter results were again driven by our ability to handle continuing high volumes of business with consistent and reliable service levels.� Our key operating metrics held steady or improved, in spite of the service disruptions caused by the flooding in the Northeast during the second half of June, and while at the same time we handled 4 percent more volume, or approximately 77,000 additional units, in the quarter.� Year-to-date volume was up by some 171,000 carloads, and in fact we set a record in May for total coal volume, which reached 16.5 million tons, up 8.7 percent compared with May of the prior year.� This monthly record eclipses the previous record set in August of 2005 by almost 2 percent.
For the first six months of 2006, we also reported a number of financial milestones.� Railway operating revenues were a record $4.7 billion, up 14 percent compared with the first half of last year.� Income from railway operations was a record, up 23 percent over last year.� Net income was a record $680 million, or $1.61 per diluted share, an increase of 10 percent compared with the same period of 2005.
Our six-month operating ratio of 73.8 percent improved 2 full percentage points compared with the same period a year earlier and was the lowest since the integration of Conrail. At the same time that our volumes were growing, our operating performance enabled us to continue our value-pricing model and improve our yields.� We remain convinced that by continuing to improve our service levels, we can continue to grow volumes and improve margins, and that’s our #1 strategic priority.
To help us do so, as you’ve heard from me before, we are investing in the network.� We’re continuing to hire train and engine service personnel, although our hiring program for 2006, while it’s stable, is not quite as aggressive as last year.� We’re continuing our locomotive and freight car overhaul programs. �We also have a number of targeted construction projects underway to alleviate specific constraints across the network, and also at the same time we are pursuing several performance-enhancing technology initiatives, which you’ve heard us talk about in addition, including Operating Plan Developer, Unified Train Control System, Optimized Train Control and LEADER.� And I will tell you that combined, these systems which focus on dispatching train control and train handling will redefine the way we operate the railroad.�
The bottom line on all of this is that our current success is in many ways directly related to investments made in past years. We continue to manage with a long-term perspective.
We remain generally optimistic about the health of the industrial economy, and we’ve been watching carloadings carefully through July.� Thus far, our volumes have continued to demonstrate traction, albeit with some continued weakness in autos and chemicals as you will see in Don’s presentation.
While I always caution that my crystal ball is often quite cloudy, our current thinking is that volume growth in the second half of the year will continue to track along at about our current levels.� Clearly, we also remain committed to our value-based pricing, as we believe that our service efficiency gives us a competitive edge and a more valuable product in the marketplace.
Obviously we have some challenges ahead as well, including cost pressures in the form of increased wages, increased health and welfare benefits for our employees, rising diesel fuel prices, and the final phase out of our fuel hedging program.� Additionally, the locomotive, freight-car, and other maintenance programs I mentioned will continue to be reflected in our expenses.� But, as we approach peak season, we are confident that our improved operating efficiency along with the investments we continue to make in the network will position us to maintain our profitability and improve our service levels and reaffirm our formula for success going forward.
As a further indication that Norfolk Southern is on the right track, our Board increased our dividend again yesterday, as you all saw.� In addition, we’ve been repurchasing shares under the program which we announced last November, and through the first 6 months of the year we purchased approximately 3.6 million shares at a total cost of $187 million.
I am confident that the remainder of the year will continue to build on this strong quarter.� As we move into the balance of the year, we will continue to leverage our operational momentum to improve service quality, pursue new business and pursue margin improvement opportunities.
And now, I’ll turn it over to Hank to review our numbers, and Don will tell you about the specifics of our markets.� Steve does not have prepared remarks today, but will be happy to talk about operations in the Q&A, and all of us will be available to take questions after the presentations.
Hank.
Remarks by Henry C. Wolf >>
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