Remarks by:
Charles W. Moorman
Chairman, President and Chief Executive Officer
Norfolk Southern Corporation
Introduction by:
Leanne Marilley, Director–Investor Relations
Good morning. I’m Leanne Marilley, director of investor relations with Norfolk Southern Corporation. Before we begin today’s meeting, I would like to mention a few items. First, we would like to welcome those who are listening by telephone and on the Internet. We 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. Additionally, MP3 downloads of today’s meeting will be available on our Web site for your convenience. As usual, transcripts of the meeting will also be posted on our Web site and will be available in a few weeks upon request from our Corporate Communications department. During the question-and-answer session, please identify yourself before you ask a question so that everyone can hear you, including our satellite listeners.
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. Statements that are forward-looking can be identified by use of words such as “believe,” “expect,” “anticipate” and “project.” Our actual results may differ materially from those projected and will be subject to a number of risks and uncertainties, some of which may be outside of our control. Please refer to our annual report filed with the SEC for discussion of those risks and uncertainties we view most important.
Now it is my pleasure to introduce Norfolk Southern Chairman, President and CEO, Wick Moorman.
Remarks by:
Charles W. Moorman
Chairman, President and Chief Executive Officer
Thank you, Leanne, and good morning. It’s my privilege to welcome you to our second-quarter 2007 analysts’ meeting.
We have with us today several members of our management team, including our Vice Chairman and Chief Operating Officer Steve Tobias, along with Deb Butler, executive vice president-planning and chief information officer; Don Seale, our executive vice president and chief marketing officer; and Jim Squires, executive vice president-finance and chief financial officer. We are also joined by Bob Fort, vice president-corporate communications; Rob Kesler, vice president-taxation; Bill Romig, vice president and treasurer; Marta Stewart, vice president and controller; and Debbie Malbon, Jim Squires’ assistant.
I am pleased to report strong second-quarter financial results, particularly during a quarter characterized by continued softness in certain segments of the economy. Norfolk Southern produced a second-quarter record for income from railway operations, reflecting the strength of the market for our transportation products, as well as our sustained focus on providing a higher value service product.
Despite continued volume pressures in the automotive and housing sectors of the economy along with some softness in our intermodal business, we produced improvement in revenue per unit. Of equal importance, we were able to control operating costs, which declined 2 percent, and when combined with our non-operating results, resulted in a 5 percent increase in net income, or $0.98 diluted earnings per share for the quarter.
Particularly noteworthy is our second-quarter operating ratio of 71.0 percent, down from 71.7 percent in the second quarter a year ago and the lowest for a second quarter since the Conrail integration. For the first half of the year, our operating ratio of 73.7 percent is the lowest six-month ratio post-Conrail.
As a further indication that Norfolk Southern is on the right strategic track, our Board increased our dividend 18 percent yesterday, resulting in an annual dividend of $1.04. As you will recall, we also increased our dividend by 22 percent in January as well, and we’ve now nearly tripled our dividend in the past three years. Jim Squires, our CFO, will provide you with details of the financial results in just a moment.
Operationally, we continue to safely and reliably handle very strong business demands, improve our infrastructure, and maintain strong service levels. We continually strive to improve our service performance by intensively managing all of our assets: our people, track, equipment and information. In that regard, our Board yesterday authorized an increase in the capital budget for the purchase of an additional 50 locomotives to begin delivery in the fourth quarter. This additional power will aid us in continuing to improve our service performance, particularly in our unit train network, primarily on the coal side, where we’re implementing a new service plan to increase velocity and reduce car requirements. We’re also keeping an eye on long-term improvements. This quarter we made significant progress in preparing for the Heartland Corridor clearance work, and we should be working on nine tunnels on the route by October.
We also announced recently the creation of the Michigan Central, a joint venture with Watco Companies. We believe that it creates a new model for such transactions, which will be a win-win proposition for both parties, and we’re currently in the process of seeking approval for the transaction from the Surface Transportation Board. I’m now going to turn the podium over to Don Seale, our chief marketing officer, who will walk you through our second-quarter results from a traffic standpoint. Jim Squires will follow with the financial overview, and then I will return will some closing comments before we take your questions.
Mr. Don Seale’s remarks
Mr. James Squire’s remarks
Mr. Wick Moorman’s final remarks before questions and answers session:
Thank you, Jim. Well, as you’ve seen, the second quarter did pose some challenges for us, not unlike, what we experienced in the first quarter, in that for only the third time in three years we saw volumes decline on a year-over-year basis. However, as I said earlier, even in the face of that decline we were able to realize an improvement in both revenue per unit and our operating ratio, which speaks to our commitment to value-based pricing and our focus on operating efficiency and cost control. As we look to the balance of the year, we do expect the resumption of volume growth, although those expectations are tempered by the continued pressure in the automotive and particularly the housing sectors. What remains important to note here, though, is that our current volumes remain at historically high levels, even in what is clearly a softer freight transportation environment. In fact, with the exception of a couple of brief periods, our traffic levels have been at or above our 2005 traffic levels, which were very strong.
Despite some near-term economic uncertainty, we’re confident that the structural factors that have driven our growth over the past few years are still in place, and that long-term demand for our transportation services will continue to grow. We’re committed to strategically investing in safety, capacity and new technology to capture that growth. Our goal is to offer a premium level of service to our customers across our network and all facets of our enterprise to support that goal. In terms of our service metrics, as you can see from the public metrics of cars on line, velocity and terminal dwell, the second quarter was improved over the first quarter of this year, and we saw some improvements year-over-year, as well, in terms of some of our internal metrics.
While our service is judged to be good by our customers, we know we can improve even further, and that remains our primary focus. The recently approved purchase of additional locomotives and our wheel replacement program that Jim mentioned are but two example of this focused effort, along with initiatives in locomotive and car maintenance and infrastructure improvements that we’ve already discussed with you. We strongly believe that our continued investments, both on the capital side and the expense side, will enable us to drive further operating efficiencies and deliver solid financial results for our shareholders.
On the financial front, in addition to our first priority of investing in the business, we remain committed to increasing shareholder distributions. Our dividend increase is a strong indicator of that commitment. We’re also committed to continued share repurchases on an opportunistic basis, and you’ll see us acting on that commitment when market conditions are right.
I hope we’ve illustrated to you today the progress that we’re making on all fronts. As you’ve heard me say before, superior service is the catalyst for improved profitability and free cash flow, which creates long-term value for our owners. As we move into the balance of the year, Norfolk Southern will continue to leverage our operating momentum to improve service quality, and pursue new business and margin improvement opportunities.
Thanks very much for your attention, and we’ll now be happy to take your questions.
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