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 fourth-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’re also joined by Jim Squires, senior vice president-Financial Planning; Bob Fort, vice president-Corporate Communications; Rob Kesler, vice president-Taxation; Marta Stewart, vice president and Controller; Leanne Marilley, director-Investor Relations and in the back, Debbie Malbon, Hank Wolf's assistant and the person who actually runs this thing.
Well, last time at this year I have to tell you that I had some concerns as the new CEO of Norfolk Southern. We had just reported record results for the third straight year, and I thought that it might be difficult to improve upon that kind of performance in my first year on the job. However, I'm glad, and I will say a little relieved, to say, that 2006 was another record year for Norfolk Southern capped by a fourth quarter that reflects the strength of our higher value transportation products and our strategic focus.
Throughout 2006, we continued to improve upon our financial and operating performance, sharpening our customer focus by investing in new capacity to handle our growing business, and by developing and integrating new technologies to increase reliability, efficiency, and safety. And our plan for 2007 is to continue the progress and further strengthen those initiatives in order to drive our service levels and subsequently our financial performance to new heights.
Our financial results for 2006 demonstrated a sustained healthy demand for efficient freight transportation by rail. Our railway operating revenues were the highest of any year in Norfolk Southern's history reflecting service consistency and reliability as well as our focus on value-based pricing. We posted our best-ever income from railway operations, net income, and earnings per share. We significantly improved the railway operating ratio, and stockholders benefited from a fifth consecutive year of dividend increases that together raised the dividends 38 percent.
As an indication of our confidence in the strategic direction of our company, as you all know, we repurchased 21.8 million shares of our common stock in 2006. For the seventh consecutive year, we lowered our debt to total capitalization ratio, which currently stands at 40.7 percent, excluding operating leases. Naturally, I am pleased to report these results. But more significantly, I'm proud because our performance continues to showcase the strengths and dedication of our people and our organization. We continue to handle business demands that were unimaginable only a few years ago, and do so safely and efficiently, often in the face of considerable challenges. And we continue to produce historically good results that benefit customers and investors alike, as illustrated by the board's decision yesterday to increase our quarterly dividend by $0.04 a share or 22%.
In the fourth quarter, we faced a slightly different set of challenges than those we have seen for a number of preceding quarters. For the first time in over three years, we saw volumes decline slightly, on a year-over-year basis. More on that in a moment, but the most important thing to recognize is that we were still able to realize significantly improved financial results on a year-over-year basis.
For the fourth quarter, net income was $385 million, or $0.95 per share, an increase of 6% compared with the $362 million or $0.87 per share for the same period last year.
For the year net income was a record $1.5 billion or $3.57 per share, an increase of 16%, compared with the reported net income of $1.3 billion, or $3.11 per share, for 2005. And let me remind you that our 2005 results included a $96 million benefit from the effects of Ohio tax legislation, which increased diluted earnings per share by $0.23. Excluding this item, net income for 2006 was 25% higher than the $1.2 billion or $2.88 per diluted share earned in 2005.
The fourth quarter operating ratio improved to 73.5 compared with 73.7 for the same period of 2005. For the year, the operating ratio improved a full 2.4 percentage points, to 72.8%. And as all of you know, and as we say consistently lowering the operating ratio on a consistent basis has always been -- and continues to be -- a primary goal for us, and we remain committed to further improvement in the operating ratio.
Railway operating revenues set records for the fourth quarter and for the year. Fourth quarter railway operating revenues of $2.3 billion were up 3% for 2006. Railway operating revenues totaled $9.4 billion, compared with $8.5 billion in 2005, an increase of 10%.
Railway operating expenses were $1.7 billion for the quarter, up 3% compared to the fourth quarter of 2005, and were $6.9 billion for 2006, an increase of 7% over 2005. And the increases were primarily the result of higher diesel fuel prices, compensation and benefits and some volume-related expenses.
Income from railway operations set records for the fourth quarter and the year, increasing 3% to $614 million for the quarter, and climbing 21% to $2.6 billion for the year, compared with the same periods of 2005.
And you will hear all about the details of our financial results and of our revenues in just a moment from Hank and Don. In addition, at this meeting, I've asked Steve to talk with you for a few minutes about the improvements that we've made and are planning to make in service delivery. Steve, along with Mark Manion and the rest of the operating team, has done a great job of making what I believe is the best railroad operation in the country even better, and we have even more improvements on the way.
Looking ahead, we continue to keep a close eye on the economy from where we sit.
For January, we're seeing that like in the fourth quarter, overall carloadings are experiencing some downward pressures, especially in the automotives and metal sectors. Now, over the past couple of the years, one of the ongoing questions that I’ve been asked is how sustainable is the so-called railroad renaissance. And my stock answer has always been that we believe that the fundamental drivers of the growth that we have seen in this business are structural and long-lived in nature. But we would know a lot more when we saw the economy get soft. Now, we're clearly facing a somewhat softer economy, at least in terms of some of our important markets such as autos, and seeing softness in the overall surface transportation market. But still, our traffic volumes are at levels close to our all-time highs, and I think that alone provides ample evidence that the railroad renaissance is alive and well. We're working aggressively on new business development plans and as we move forward, we will continue our commitment to value-based pricing. We're confident that our service efficiency gives us a very competitive and valuable product going forward.
2007 presents hurdles very similar to those we’ve tackled in the last couple of years, including cost pressures in the form of increased wages and health and welfare benefits for employees and continuing high diesel fuel prices. In addition, I will tell you that we plan to continue our aggressive locomotive and car overhaul programs that we initiated last year in order to ensure that we can continue to respond to our customers' demands. At the same time, we will obviously be seeking more cost-effective ways of doing business while always first and foremost improving safety and service to our customers.
Now, I’ll ask Hank to review our numbers. Don will then tell you about the specifics of our markets. Steve will follow-up with the operations overview. And then we will all gladly take your questions.
Remarks by Henry C. Wolf >> |
