Chairman, President and Chief Executive Officer
Norfolk Southern Corporation
Good morning. I am Wick Moorman, chairman, president and chief executive officer of Norfolk Southern Corporation, and it's my pleasure and privilege to welcome you to our first-quarter 2007 analysts' meeting.
In response to your feedback, we are now offering MP3 downloads of today’s meeting on our website for your convenience. I should say, of course, that for all of you who like me, use that iPod Shuffle every morning on the Elliptical, there is nothing better than downloading one of our meetings. 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 and I would encourage all of you who are 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 upon 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.
As customary, 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, our newly appointed executive vice president-Finance; Bob Fort, vice president-Corporate Communications; Rob Kesler, vice president-Taxation; Marta Stewart, vice president and Controller; Leanne Marilley, director investor relations, and Debbie Malbon, who is Hank Wolf's assistant.
Now before we crank it up, I’d also wanted to mention that we are in the process of reviewing the conduct of these meetings and communications generally with the investment community. You’ll note that we actually have changed the batting order of the presentations this morning, and have even gone so far as to take the radical step of me having a few slides in a little while. We do want these sessions to add value for you and your feedback is integral to our understanding how best to do this, and I would encourage everyone who’s here and listening to contact Leanne with your suggestions going forward.
Now I would also like to take just a couple of minutes to acknowledge that this is Hank Wolf’s 67th analyst meeting. As many of you who follow the company know, Hank plans to retire at the end of June, so this may be the last meeting he attends at least in this role. This meeting caps not only an enviable attendance record, but also commemorates a very long and distinguished railroad career. I know Hank will have an opportunity to speak with a lot of you personally in the next few months, but I know that I’m also confident that I speak for everyone here when I say thank you, Hank, for your invaluable service to our industry and to our company.
Now at our last meeting, we reported record results and indicated that it might be difficult to improve upon that performance near-term given our view of the economy, especially against the backdrop of record volumes in the first quarter of last year. Consistent with that outlook and compounded by some winter weather conditions that were more severe than the comparatively mild weather of the year earlier, we did indeed experience some challenges in the first quarter. In addition, as you will hear from Don in a moment, the effects of continued weakness in the automotive and housing sectors of the economy, along with the loss of some hurricane-related traffic, resulted in volume declines that overshadowed an improvement in revenue per unit. As a result, our revenues of $2.25 billion for the quarter were 2 percent short of the record levels reported a year ago.
However, I am happy to say that the challenges we faced showcased the strengths and dedication of our people and of Norfolk Southern. We were able to control our operating costs, which also declined 2 percent, and this when combined with our non-operating results, resulted in a $0.71 diluted earning per share for the quarter. More importantly, I think, we continued to safely handle business demands that were unimaginable only a few years ago, and we continued to improve our infrastructure, maintain our service levels, and deliver solid financial results for our shareholders.
And with all this as a preface, I’m now going to turn the podium over to Don Seale, who will walk you through our first-quarter results from a commercial standpoint, and then Jim Squires will follow with the financial overview, and I’ll close out with some views as to our operating and financial strategies for the future before we take your questions. Don?
Thank you, Jim. Well as you’ve heard, the first quarter did pose a slightly different set of challenges than those that we’ve seen for a number of preceding quarters, but I would say that overall we are pleased with our quarterly performance especially in the light of the severe winter weather and the volume declines which were discussed. Importantly, as you heard, we were able to realize an improvement in revenue per unit, which speaks to our commitment to value-based pricing, and while the severe weather in February had an impact on our operations, our operating ratio rose only slightly, largely driven, as you heard, by the weather-related expenses. While as all of you know, we always are striving to improve our operating ratio, I think it’s important to say that Steve, Mark Manion and the rest of our operating team have continued to do an exemplary job of making what I believe is the best railroad in the country operate even better, and we have more improvement on the way.
Going forward, as Don outlined, we do continue to expect volume headwinds at least through the second quarter, and as a result of those expected headwinds, we are taking some steps to temporarily restrict some of our hiring, and we’re looking very hard at all the other components of our cost structure, including making sure that our TOP plan is right-sized for the traffic that we are currently handling. However, we do believe that demand for our transportation services will continue to grow, and we remain committed to strategically investing in safety, capacity and new technology and thereby strengthening our service and financial performance. As you may recall, this is consistent with our strategy in prior years, most notably in 2003, when we made the investment necessary to position ourselves for the unprecedented volume growth that we then saw begin late in 2003 and continue for the next three years.
We’re also obviously continuing to keep a close eye on the economy. Our overall volumes in April are experiencing continued downward pressure, especially in the automotive and housing sectors. But I think the most important and positive aspect of our current traffic levels is that they remain at levels that are very high in historical terms, even in what is clearly a softer economy than we’ve seen for the past few years.
Now let me take a few minutes to talk about some issues that have to do with our financial structure and strategy that seem to be on everyone’s radar these day, and I thought that since we talk about this from time to time but haven’t really set forth all of our principles, that I would take a few minutes today to do this, and then obviously in the future, you’ll be hearing from Jim Squires and the rest of us about how we’re progressing on these issues.
The first issue is capital expenditure. The bottom line here is what I’ve already said -- we believe that the fundamental drivers of growth that we’ve seen in the past few years in our business and in our industry are structural and long-lived in nature, and we are committed to taking the steps necessary to strategically position ourselves for when the volume growth resumes. As you know, we have budgeted $1.34 billion in capital spending in 2007, and that reflects that commitment to maintain our rail system and invest for growth.
Now our capital expenditures over a long period of time have averaged around 15 percent of our total revenue, excluding fuel surcharges, and our goal is to maintain that trend going forward. Now I will tell you that that percentage will vary a little bit from year to year, particularly given the fact that we do have some heavy capital expenditures coming up for new coal cars, but we’re comfortable that the 15% average will give us the ability to do what we need to do, namely to continue to invest in infrastructure, equipment and technology.
Railroad Credit Ratings
While we’re making significant investments, we’re also generating substantial free cash flow, and as you know we have used that in part to pay down debt in recent years. I will tell you that we are comfortable now within the range of our current rating, we show it here along with ratings of the other major rail companies, and after this May our intention is to refinance future debt maturities and direct our free cash flow to increase returns to our shareholders through increased dividends and share repurchases.
As you can see, the Board of Directors has increased our dividend in each of the last five years. Most recently, the Board increased the dividend by another four cents per share, or 22 percent, in the first quarter of this year. Our goal is to move towards a payout ratio of about a third of net income and a dividend yield above the average of the S&P 500, understanding, of course, that the timing and the ultimate payout ratio will always be dependent upon business conditions.
Finally, Share Repurchases.
We do remain confident in the strength of our long-term fundamentals for our business. As an indication of our confidence, our Board, as you know, recently amended the share repurchase program we had in place to increase the number of shares repurchased from 50 to 75 million. And in addition, the authorization term for that program was shortened by five years. From the announcement of the program in November 2005 through the end of the first quarter of this year, 27.4 million shares have been repurchased for $1.2 billion, including 5.6 million shares repurchased in the first quarter of 2007 for $276 million.
This chart, which I know a lot of you have seen before, shows the daily share repurchases since February 10th of last year, the first day that shares were purchased under the current program, and it’s plotted against Norfolk Southern’s daily closing stock prices through the end of the first quarter of 2007. You’ve heard me say before that Hank and I are firmly committed value shoppers, and you can see that we increased the purchases concurrent with declines in our stock price. I will tell you that we plan to take this same opportunistic approach to share repurchases going forward whenever we can, given our firm belief that that’s the best way for such a program to add shareholder value.
As we look to the balance of the year, we expect to see improvements in operations and further efficiency gains along with better customer service. At the same time, we’re committed to value-based pricing and we expect our favorable service trends to continue. We’re working hard to become more efficient, more reliable, and more adaptable and I look forward to seeing where we can go when a rallying economy enables us to regain our stride.
Thanks very much and we’d be happy to take questions now if you have any.
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