Remarks by:
Wick Moorman
Chairman, President and Chief Executive Officer
Norfolk Southern Corporation
Good morning, everyone. I am Wick Moorman, Chairman, President and Chief Executive Officer of Norfolk Southern Corporation, and it's my privilege to welcome you to our third-quarter 2006 analysts' meeting.
I'd also like to welcome those who are listening by telephone, and on the Internet. I remind our listeners and Internet participants that the slides of the presenters are available for your convenience on our web site in the "Investors" section. I encourage those here today to take a microphone and before you speak please identify yourself so that everyone can hear you.
As usual, transcripts of the meeting will be posted on our web site and will be available in a few weeks upon request 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 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 those variables.
We have with us today several members of our management team, including our vice chairmen: Hank Wolf, chief financial officer; Steve Tobias, chief operating officer along with Don Seale, our executive vice president and chief marketing officer. We are also joined by Jim Squires, senior vice president-Financial Planning; Bill Romig, vice president and Treasurer; Bob Fort, vice president-Corporate Communications; Rob Kesler, vice president-Taxation; Marta Stewart, vice president and Controller; Trevor Pardee, assistant vice president Finance, and Debbie Malbon, Hank Wolf's assistant.
Leanne Marilley, our director of investor relations could not be with us today. Leanne became a mother on October 12th when she gave birth to a baby boy, and I know that you all join us in wishing both of them well.
Well this was an excellent quarter for Norfolk Southern. We continued improving our financial and operating performance, setting all-time revenue records and equaling our best operating ratio in the history of the company.
The story of this quarter was our ability to generate those strong results in spite of flat year-over-year volumes and historically high diesel fuel prices. At the same time, we maintained strong service levels, even with a severe disruption caused by a major landslide in the Pittsburgh area.
First, allow me to highlight some of our numbers. We set several financial milestones in the quarter with record revenues and record income from railway operations. We reported our highest-ever railway operating revenues of $2.4 billion, an increase of 11 percent compared with the same quarter of last year, and our income from railway operations improved 35 percent over last year to $715 million.
Net income of $416 million, or $1.02 per diluted share, was 38 percent higher than the third quarter of 2005, and this would be an all time record quarter, save for the second quarter of last year when, as you may recall, we realized a $96 million, or 23 cents per share, credit from a change in the Ohio tax laws.
We lowered our third-quarter operating ratio by a full 5.4 percentage points to 70.1 percent, matching our previous quarterly record, which was set in 1997. As all of you who follow Norfolk Southern know, improving our operating ratio on a continuing basis is a primary goal for us, and we remain clearly focused on achieving that goal.
Our quarterly results were driven by the strength and stability of our operations and our value-based pricing. We believe our reliable service, which continues to be rated at the top of the industry by many of the surveys which the financial community conducts, gives us a competitive advantage and represents increased value to the customer in the transportation marketplace.
As I mentioned, our network is operating well and continues to exhibit an impressive amount of flexibility. Our third quarter operating metrics held steady during the quarter, as we remained focused on providing economical and efficient transportation services to our customers. Following a major landslide in Pennsylvania, as I mentioned, in September that led to a service disruption, we were able to reroute our traffic, quickly reopen our primary east-west rail corridor, and recover. We also just encountered another serious disruption this past Friday on this route, some of you may have seen, following a derailment west of Pittsburgh, and have again fully restored our operations. I think it's yet another example of our operating team's ability to overcome a significant challenge and maintain the service that our customers require and count on.
Volume in the third quarter was flat compared to last year. But I'll remind you that we moved exceptionally large volumes of intermodal and coal shipments during the same period in 2005. All three of our business segments reported revenue growth in this year's third quarter. Coal posted all-time high revenue records, and general merchandise and intermodal revenues set third-quarter records.
Don will give you the details on our markets, but clearly this was a very good quarter for our company.
As an indication of our confidence in the strategic direction of our company, we were actively purchasing our stock during the third quarter. As you may recall, last year our board of directors authorized the repurchase of up to 50 million shares of our common stock through the end of 2015. We initiated our share purchases by purchasing 1.3 million shares in the first quarter and 2.3 million shares in the second quarter. When our share price fell to $40 per share in the third quarter, we concluded that the market had decided to have a sale on our stock, and since Hank and I are both value shoppers, we aggressively purchased stock over the balance of the quarter, finishing up by repurchasing 17.1 million shares for about $730 million, and Hank will fill in a few more details on that in a moment.
Diesel fuel remains the highest expense increase on the cost side. We continue to benefit, however, from pricing that reflects how attractive good rail service is when energy costs are high.
As you know, the STB has proposed regulating the way that railroads calculate fuel surcharges. Norfolk Southern, along with others in the rail industry, was invited by the STB to comment on their proposals. We strongly believe that imposing restrictions on how surcharges are computed would put railroads at a commercial disadvantage. We believe that such regulation is unnecessary, is bad public policy and it will not encourage reinvestment in the rail industry.
Infrastructure investments in our rail network are critical to ensure that we are positioned to handle increasing traffic volumes and to attract new business with improved service levels. As you know, we have an infrastructure team that identifies and targets investments for our network. During the fourth quarter we will be increasing the capacity on our line from Memphis through Chattanooga to Atlanta and on down to Jacksonville. In addition, we decided to purchase 400 new rapid discharge coal cars this quarter as a first step in what will be a 10-year program to replace most of our aging fleet of some 33,000 coal cars. We'll continue to purchase new coal cars and increase line capacity in 2007. At this time we expect that our total capital spending in 2006 will be just above $1.2 billion and that our 2007 capital spending will be about 10 percent higher than 2006. We're still in the process of formulating our 2007 capital budget and will announce the final numbers after our Board of Directors approves them at our November board meeting.
We've been watching carloadings closely through October and, as of yesterday, they are about even with last year. Clearly, the rate of volume growth has slowed, and we are continuing our ongoing process of adjusting our TOP service plan, as necessary to reflect some of the changes in our business, but with the understanding that our first priority is to handle our current traffic volumes fluidly and efficiently. We see continued strength in coal, offsetting some downward pressures in the automotive sector caused by cutbacks at The Big Three. We believe our diverse traffic mix will continue to enable us to produce healthy results going forward. While there is some uncertainty as to the near-term direction of the economy, our strategy remains to attract more business by continuing to improve our service.
And from that perspective, demand for rail transportation remains robust, and our third-quarter results reflect this. I'm confident that this positive trend will extend through the remainder of this year, and into 2007.
And I'll now ask Hank to review our numbers, and Don will then tell you about the specifics of the markets. And finally, we'll all be available to take questions.
Thank you.
Remarks by Henry C. Wolf >>
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