Remarks by:
Charles W. Moorman
Chairman, President and Chief Executive Officer
Norfolk Southern Corporation
Introduction by: Leanne 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 first-quarter earnings conference call. We remind our listeners and Internet participants that the slides for presenters are available for your convenience on our Web site 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 the 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.
Now, it is my pleasure to introduce Norfolk Southern’s Chairman, President and CEO, Wick Moorman.
Remarks by: Wick Moorman - Chairman, President and Chief Executive Officer
Thank you, Leanne, and welcome back and good morning everyone. It’s my privilege to welcome all of you to our first quarter 2008 analyst conference call.
We have with us 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, Jim Squires, our Executive Vice President Finance and Chief Financial Officer, and John Rathbone, our Executive Vice President of Administration. We’re also joined by Rob Kessler, our Vice President of Taxation, Bill Romig, Vice President and Treasurer, and Marta Stewart, our Vice President and Controller.
Turning to the first quarter, Norfolk Southern delivered strong financial performance, reporting the highest railway operating revenues in its history in spite of a less than robust economy. We earned record first quarter revenues of $2.5 billion, which produced operating income of $578 million, an increase of 9% over first quarter of 2007, even with the increase in legal expenses related to the settlement of litigation tied to the Graniteville accident. First quarter net income grew year-over-year to $291 million, or $0.76 diluted earnings per share. Our results continue to validate our focus on delivering a higher value service product, which allows us to maintain strong pricing across our commodity groups. The economy is turning out to be a little softer than we had originally anticipated when we looked at it towards the end of 2007. But Norfolk Southern’s balanced business portfolio, which is something you’ve heard us talk about a great deal in the past, along with our service, has helped to offset the downturns in some of our consumer and housing-related businesses.
From an operations standpoint, the railroad is running smoothly, and our service metrics improved year-over-year for the first quarter. Capacity enhancements that we’ve put in place and our continued focus on the reliability of our locomotive fleet and other assets are allowing our system to run more and more efficiently. Additionally, the inclusion of the composite performance measure in our compensation package, which we talked about in last quarter’s analyst meeting, has sharpened our employees’ focus even more on our operations, which translates directly into better service levels. I’ll talk more about this a little later, but it is worthwhile to note that a recent Morgan Stanley Shipper Survey confirmed the improvement in our already industry-leading service.
Finally, we continue to plan for the future. We believe that the factors that support long-term growth in rail freight demand remain in place, and we’re confident that volumes will resume growing as the economy rebounds. When that happens, we will be poised to capture and handle that growth just as we did in 2003. Rickenbacker Global Logistics Park in Columbus, Ohio, opened during the quarter, and work is in progress on the tunnel clearances on the Heartland Corridor, which remains on schedule for completion in 2010. As you’ll see in Don’s presentation, these improvements will provide a significant competitive advantage for Norfolk Southern as global trade patterns continue to shift towards East Coast ports. Additionally, we are continuing our dialogue with the federal and state governments about the win-win opportunities presented by the Crescent Corridor, and work is already under way with support from the Commonwealth of Virginia to add capacity in this key domestic freight lane.
I’ll now turn the program over to Don Seale who will walk you through our first quarter results from a revenue and volume perspective. Jim Squires will follow with the financial overview, and then I’ll return with some closing comments before we take your questions.
Don Seale’s remarks
Jim Squires’ remarks
Thank you, Jim. As you’ve heard, the first quarter was another very strong quarter for our company, even in the face of some economic head winds, substantially higher fuel prices, and some unanticipated legal expenses. It’s worth noting that our operating ratio for the quarter would have been lower year-over-year but for those legal expenses. Our results continue to showcase our superior service product and our ability to recognize value from those products, and they also show the strength of our balanced portfolio of businesses.
Before turning to your questions, let me talk a little more about our operations and service levels for the quarter. Last quarter we discussed the composite performance measure that we’ve incorporated into our bonus calculation. You will recall that it is comprised of three key internal performance measures: how well we adhere to our Thoroughbred Operating Plan, how well we do in making the right connections in our terminals, and the on-time performance of all of our trains, measured within tight performance standards. We put this measure into place in an effort to more closely align the interests of our employees in the field with the service goals of our company. It’s been in place since the first of the year, and we’re already seeing the benefits of this approach in our operations.
For the first quarter, the composite metric improved 7% as compared with first quarter 2007, driven by improvement in all three of the internal performance metrics: TOP adherence, connection performance, and train performance. Practically, that means that we’re doing an even better job of running our trains according to plan, moving cars more efficiently through our yards, and running our trains on time – not too early and not too late.
You also can see the results in our public performance metrics. As you would expect, average terminal dwell time – which is directly correlated with these three metrics – has decreased year-over-year for the quarter.
Both average train speed and cars on-line improved as well. You would expect to see cars on-line go down, given lower volumes and better network connectivity, but the velocity improvement is particularly noteworthy given changes in the mix of trains that we’re running. As faster intermodal and automotive trains are rationalized due to softening demand, our average theoretical system velocity actually decreases, and the effect is magnified by the addition of unit trains on the coal and grain side. However, as Steve Tobias described at our last meeting, we’re now in the process of scheduling our unit train network, and the benefits in terms of asset velocity and utilization, not to mention improved customer service, are substantial, with more to come.
Looking at the rest of 2008 we know that we’ll be facing some challenging economic conditions. Despite the fact that I spent a lot of time recently talking about whether railroads serve as a harbinger of the overall economy, I can tell that you my crystal ball is no better than any of yours. However, the good news for all of us at Norfolk Southern is that the project-driven growth we discussed at our last meeting, and that Don just mentioned, is still in place and coming on line, and we expect that the strength we’ve seen in key parts of our business will continue. In the current economic environment, we will continue to operate our business in a prudent and nimble manner, which will allow us to react as necessary to whatever the economy throws our way. At the same time, we will not lose sight of, or stop planning for, the opportunities that will exist for us as the economy strengthens.
Thank you, and I’ll now turn the program over to the operator so that we can begin the Q&A session.
Question & Answer Session |
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