Remarks by:
Charles W. Moorman
Chairman, President and Chief Executive Officer
Norfolk Southern Corporation
Introduction by:
Leanne D. Marilley
Director Investor Relations
Thank you, and good morning. Before we begin today’s call, I would like to mention a few items. First, we would like to welcome you to our third-quarter conference call. We remind our listeners and Internet participants that the slides for presenters are available for your convenience on our website at nscorp.com 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 also will be posted on our Web site and will be available upon request from our Corporate Communications department. At the end of the prepared portion of today’s call, we will conduct a question-and-answer session. At that time, if you choose to ask a question, an operator will instruct you how to do so from your telephone key pad.
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 the 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 and quarterly reports filed with the SEC for discussions of those risks and uncertainties we view as most important. Additionally, keep in mind that all references to reported results excluding certain adjustments, for example non-GAAP numbers, have been reconciled on our Web site.
Now, it is my pleasure to introduce Norfolk Southern’s Chairman, President and CEO, Wick Moorman.
Wick Moorman
Chairman, President and Chief Executive Officer
Thank you, Leanne, and good morning. It’s my privilege to welcome you to our third-quarter 2007 analysts’ conference call.
As part of our initiative to enhance communications with you, we are reporting today’s results via teleconference. This format will provide the opportunity for many listeners to ask questions at the end of the prepared portion of today’s call, time permitting. As always, we value your thoughts and opinions on how best to share our results with you, so please let us know what you think of today’s call.
We have with us today several members of our management team, including our vice chairman and chief operating officer Steve Tobias, along with 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 Rob Kesler, our vice president-Taxation; Bill Romig, vice president and treasurer, and Marta Stewart, our vice president and controller. Norfolk Southern’s vice president-Corporate Communications Bob Fort, whom many of you know and who has been a familiar presence at these events, retired in August after 30 years of service to our company, and I know that you join us in wishing him the very best in retirement.
Turning to the third quarter, I’m pleased to report that Norfolk Southern continued to deliver solid results, reflecting the strength of the market for our transportation products, as well as our sustained focus on providing a higher value service product. Softness in certain segments in the economy resulted in reduced traffic volumes, which we were substantially able to offset through pricing gains and cost control. We remain confident in the overall strength of our franchise, and we continue to take a long-term perspective as we plan new traffic corridors, improve technology, and support our workforce with the tools necessary to provide superior service.
Despite fewer intermodal and coal shipments as well as continued weakness in the housing sector of the economy, we produced improvement in revenue yield, and total revenue was only slightly below last year’s record level. We were also able to control operating costs where appropriate given the business environment. The result was net income of $386 million, or $0.97 diluted earnings per share for the quarter.
And as you know, this includes the effects of Illinois tax legislation enacted during the third quarter that reduced net income by $19 million, or $0.05 per diluted share. Jim Squires will provide you with the full details of our financial results in just a moment.
Operationally, we continue to safely and reliably handle what are still strong business demands. We also continue to improve our service performance by strategically investing in the network and carefully managing all our assets. I’ll have a little more to say about our service metrics for the quarter later, and Steve Tobias is also ready to answer your questions and provide commentary on our service initiatives.
We also remain focused on our long-term growth initiatives. Work commenced in this quarter on the tunnel clearances on the Heartland Corridor, and we remain on schedule to complete this initiative in 2010. Additionally, construction continues on our Rickenbacker Global Logistics Park in Columbus, Ohio, with operations set to begin in early 2008. We have a number of other new service initiatives in the works for next year as well, which we’ll be telling you more about as they develop.
I’m now going to turn the program over to Don Seale, who will walk you through our third-quarter results from a revenue and traffic perspective. Jim Squires will follow with the financial overview, and then I’ll return with some closing comments before we take your questions.
Mr. Don Seale’s remarks
Mr. James Squire’s remarks
Mr. Wick Moorman final remarks before questions and answers session:
As you’ve seen, the third quarter presented us with some challenges similar to those we experienced in the first half of the year, as we continue to see volume declines on a year-over-year basis. But even in the face of these volume headwinds, as Don had said, we were able to realize an improvement in revenue per unit, which speaks to our continuing ability to improve yield for our services. Despite some near-term economic and legislative uncertainty, we are confident that the long-term fundamentals continue to favor the market for our transportation services. We are also convinced that, while the fundamentals are on our side, our future success will depend to a large extent on our ability to provide a superior level of customer service.
As I mentioned earlier, we’re seeing continuing improvement in our service as the result of our ongoing investments and initiatives. All of our internal operating metrics improved both quarter-over-quarter and year-over-year, as did two of the three public metrics, terminal dwell time and cars online. System velocity remained constant, but this is in the face of the elimination of several of our automotive-related schedules. These were some of our faster schedules so that the result has been that our theoretical maximum system velocity has been slightly reduced, so we’re very comfortable with the fact that our overall velocity has remained constant. The important point here is that our overall asset velocity continues to improve with resulting benefits in both customer service, and reduced costs.
Now, on the cost side, as Jim mentioned, we are continuing to work on our operating costs wherever possible, but with the philosophy that we are not cutting in those areas where we will know that it will cost us additional dollars to catch up in the future. Jim gave you a couple of examples. Another is head count. You’ll see that our employment numbers are down quarter-over-quarter for the past two quarters, as we have cut back on hiring, and we expect that trend to continue. However, having said all of this about costs, we think that while an operating ratio of 71.1% for the quarter was good, we know it was still higher than last year’s. We are still intent, as we always have been at Norfolk Southern, on operating ratio improvement over the long term, and we remain focused on reducing costs wherever possible.
On the legislative and regulatory front, as you all know, we, along with the rest of the rail industry, face some significant challenges. We at Norfolk Southern are committed to promoting fiscally sound legislative policy that encourages rail investment and offers an environmentally friendly solution to our nation’s growing infrastructure crisis. The rail industry has an important role to play as transportation capacity inevitably becomes more constrained in this country, and I remain optimistic that policy makers understand that. As we move forward, Norfolk Southern will continue to closely monitor business conditions, and as I said, exercise cost discipline wherever and whenever possible, but without sacrificing service quality or deferring maintenance, continue to review our operating plan commensurate with demand and make adjustments where necessary to ensure optimum asset utilization and network efficiency.
Looking at the fourth quarter and at least the first half of 2008, as Don indicated, we are somewhat guarded as to economic conditions. We do expect to remain on course to price our service to reflect the value that we are delivering. Widening the lens, as I’ve said, we remain confident in our long-term opportunities and anticipate that demand will strengthen as the domestic and global economies expand. We continue to focus on new products and innovative service solutions to meet this growing demand as we move forward. Our track record for volume growth over the past five years shows you what Norfolk Southern can do in a strong economy, and we fully expect that growth to continue as the economy rebounds. Thank you, and I will now turn the program over to the operator so we can begin the question-and-answer session.
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