Remarks by:
Charles W. Moorman
Chairman, President and Chief Executive Officer
Norfolk Southern Corporation
Thank you, Leanne, and good morning everyone. It’s my privilege to welcome all of you to our first quarter 2009 analyst conference call.
I am joined by several members of our management team including: Mark Manion, Executive Vice President and Chief Operating Officer; Don Seale, Executive Vice President and Chief Marketing Officer, and Jim Squires, Executive Vice President Finance and Chief Financial Officer. We also have with us Jake Allison, Vice President and Controller; Rob Kesler, Vice President of Taxation; Marta Stewart, Vice President and Treasurer; and Frank Brown, assistant vice president Corporate Communications.
As I mentioned during our January meeting, we began the year facing business conditions as challenging and uncertain as any we have experienced. Our first-quarter results were clearly under considerable pressure as volumes declined an unprecedented 20 percent year-over-year and revenues fell even further by 22 percent year-over-year. However, we were able to mitigate much of the negative impact through aggressive cost control, as operating expenses declined 19%.
The result was first quarter railway operating profit of $383 million, which was 34 percent below last year. Earnings per share were down 38 percent year-over-year, and not surprisingly, our first-quarter operating ratio also came under pressure, increasing 3.4 percentage points over the comparable period last year to 80.3.
Against this tough economic backdrop, we are focused on those things that we can control – reducing our costs while continuing to enhance our service product and the safety and efficiency of our operations. Mark Manion will be discussing our cost reduction initiatives and service performance a little later, but before turning the podium over to Don Seale, let me say that while we expect our results for the next few months to continue to be under considerable pressure, I am confident that we will emerge from the current economic downturn as the preferred transportation solution. The fundamental drivers of our success in recent years remain in place, and we continue to manage for the long-term despite near-term economic uncertainty. We’re confident that our volumes will resume growing as the economy rebounds and new Industrial Development projects come on line, and we will be strategically positioned to attract and handle that growth.
In the meantime, we will continue to exercise cost discipline, improve service quality, and pursue new business opportunities and franchise enhancements.
I’m now going to turn the program over to Don, who will provide additional details about our revenues, followed by Mark, who will review our first-quarter operations. Jim Squires will then discuss our financial results, I’ll close with some comments about the challenges and opportunities before us, and then we’ll take your questions.
Don Seale’s remarks
Mark Manion’s remarks
Jim Squires’ remarks
Thank you, Jim. As you’ve heard, the first quarter posed some extraordinary challenges for us. The word “unprecedented” is used a lot these days with good cause, and to give you a point of comparison, our volume declines y-o-y of 20 percent compare to the 10 percent y-o-y declines we saw at the peak of the 1981-1982 recession.
To successfully manage through this environment, we are focused on effectively addressing current conditions while at the same time preparing for the future. As we address these challenges, we are following two basic principles. The first is obviously that we have to reduce costs whenever and however possible.
As you know, Norfolk Southern has a long history of effective cost control, and we have demonstrated our capability to respond quickly to changing traffic conditions in the past.
However, along with cost control we are keeping our other principle in mind, and that is that we are not cutting costs in a way that will degrade our service products or customer service, or that will have a significant negative impact on our ability to respond aggressively when economic conditions start to improve. When the economy rebounds, and it will, we will be ready to capture the maximum possible benefits. One example of this is our capital program for this year. We have identified about $125 million in reductions to the 2009 program and are planning on making those reductions barring a rapid economic turnaround. However, our revised 2009 capital spending forecast of $1.3 billion is still the third highest in our history and will set the stage for future growth as well as keep our property in good operating condition. Another example is the funding, both capital and expense, for our Track 2012 initiatives. These projects, focused on service, asset utilization, workforce productivity, and fuel consumption, have solid ROIs, and they will drive NS to the next level. We are fully funding them in 2009. As part of Track 2012, we are also looking at all of the other elements in our longer term-cost structure, including our staffing requirements, to see where improvements can be made.
As we focus on cost control, we’re also being careful not to pursue what will eventually be false economies. You’ll recall that at our last meeting we discussed the potential for equipment costs to increase if service starts to slip. Mark showed you how we’ve been able to significantly reduce our equipment and crew costs while actually improving our service metrics, the result of a very disciplined and deliberate set of processes that we have in place to manage our network. Additionally, as all of you know, we have hired a lot of train and engine service employees over the past few years. Our models tell us that we’re going to need them and the valuable institutional knowledge that they’re acquiring to offset attrition in the near future. If we’re going to be able to respond to increased traffic volumes in the economic recovery in the same way that we responded in 2003, we believe that it makes great business sense to keep as many of these people working as we can, albeit at reduced pay levels.
Notwithstanding the current challenges, the long-term trends point to freight railroads as the preferred way to move goods and relieve highway congestion. Our long-term strategy remains the same: an unwavering emphasis on improving our service and a continuing process to strengthen our franchise through strong industrial development and key partnerships with our customers and interline rail partners. From a service standpoint, we are consistently ranked as the best service provider in the industry by our customers, as evidenced most recently by Toyota’s awarding us their 2008 President’s Award for overall logistical excellence for rail carriers. It’s their highest award for rail carriers, and NS has captured the award 6 times in the last 13 years. At the end of the day, we are a service company, and superior customer service will drive superior financial results.
From the standpoint of franchise enhancement, as Don mentioned, we closed last week on the Pan Am Southern, our joint venture with Pan Am Railway. This corridor’s improved access to the Boston market and its associated terminal facilities are very positive additions to our franchise as is the recently announced Mid American Corridor initiative with CN. These types of initiatives are setting the stage for us to broaden our product and market reach, and we believe that they offer significant growth opportunities in future years. They’re also great examples of the theme I touched on earlier about our willingness to continue to invest for the future.
Turning to our economic outlook, we expect that there will be continued significant pressure on volumes across all of our major business groups in the second quarter. No one has any real idea when current economic conditions will improve or at what pace that improvement will occur, but our current best hypothesis is that we might see a bottom in the second quarter, with some improvement in the second half, if for no other reason that a lot of stimulus money will be injected into the economy by that time. Let me be quick to add that this is just a hypothesis, with little, if any, real data to support it, but it seems like a reasonable assumption at this time.
Looking beyond this year, again the pace of economic recovery is very uncertain, but I will reiterate what we’ve already said, and that is that we’re very confident in the long term future of our company and our industry. All of the factors that propelled our growth over the past five years are still there, albeit somewhat overshadowed by the economic downturn, and now along with all of the other factors, the railroads’ advantages in terms of energy independence and carbon footprint are becoming more and more important in the considerations of many transportation buyers. The greatest threat to our continued prosperity is the possibility of actions in Washington, either legislative or regulatory, which might change the economic framework under which we operate. A lot has been said recently about all of this, so I’ll just say that at a time that the rail industry has at last been able to produce returns modestly in excess of its cost of capital and a time when the overwhelming majority of the population and public policy leaders are interested in moving more traffic to the rails, I find it ironic that a fairly narrow group of self-interested companies has been able to progress this idea at all. However, I’m still optimistic that when the smoke clears, common sense and sound public policy will prevail and our industry will continue to grow business and produce positive returns and positive outcomes for all of our key constituencies. When that happens, it’s our intention to keep Norfolk Southern in its role as the industry leader.
Thank you, and I’ll now turn the program over to the operator, who will instruct our telephone participants how to ask a question.
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