Remarks by:
James A. Squires
Executive Vice President Finance and Chief Financial Officer
Norfolk Southern Corporation
Thank you Mark. I’ll now provide a review of our overall financial results for the second quarter.
Operating Results – Second Quarter 2009 vs. 2008
Let’s start with our operating results.
As Don described, railway operating revenues for the quarter were $1.9 billion, down $908 million, or 33% compared to last year.
Operating Results – Second Quarter 2009 vs. 2008
Slide 3 displays our corresponding operating expenses, which decreased by $577 million, or 29%, for the quarter. The resulting income from railway operations was $468 million, down 41%. The substantial decrease in revenues, due to lower volumes and lower fuel surcharges, was partly offset by significantly lower operating expenses, resulting in an operating ratio of 74.8.
Railway Operating Expense Analysis – Second Quarter 2009 vs. 2008
Turning to our expenses, this slide presents the major components driving the $577 million decrease.
As you can see, all of our expense categories are down this quarter with the exception of depreciation, which reflects our ongoing investment in infrastructure. Similar to first quarter, the biggest driver of our overall operating expense decline was sharply lower fuel costs, which decreased by $338 million, or 69%.
Locomotive Fuel Consumption - 2008 vs. 2009 Comparison
As Mark noted earlier, locomotive fuel consumption is down 26% year-over-year in the second quarter , which reflects efficiency gains relative to a 25% decline in gross ton miles and a 20% decrease in crew starts. This accounted for the vast majority of our $126 million consumption-related decrease in fuel expense this quarter.
Fuel Expense Analysis - Second Quarter 2009 vs. 2008
As reflected on slide 6, lower prices provided a $212 million dollar benefit.
Locomotive Diesel Fuel Average Prices – 2007-2009
This graph shows our average price per gallon for each of the last 10 quarters. The $1.55 average price in the second quarter of 2009 was a 57% decline compared with the $3.58 price per gallon in the second quarter of 2008.
Railway Operating Expense Analysis – Second Quarter 2009 vs. 2008
The next largest expense decline was compensation and benefits, which decreased by $111 million, or 17%.
Compensation and Benefits Analysis – Second Quarter 2009 vs. 2008
Slide 9 presents the major components driving this change.
First, volume-related labor was reduced by $66 million in the quarter, and I will review this item in more detail momentarily.
Second, stock-based and other incentive compensation fell $58 million, due largely to decreased performance in 2009 relative to financial measures, versus improved performance in second quarter of 2008. Share prices contributed to lower expenses as well.
Third, payroll taxes decreased reflecting lower compensation levels.
Somewhat offsetting these reductions were higher wage rates, up by $12 million, reflective of the agreement pay increase that went into effect last July. Pension benefits increased by $11 million, primarily due to reduced asset values. Also, medical benefits for active and retired employees were up $7 million.
Crew Starts and T&E Volume-Related Savings – 2008 vs. 2009 Comparison
Now turning to slide 10, as I mentioned, volume-related labor savings were $66 million for the quarter. Taking a closer look at T&E labor, road train and yard crew assignments were down 20% in second quarter. This reduction was the primary driver of a $41 million decrease in T&E volume-related expenses in the quarter. As you can see, this expense item has decreased relative to first quarter levels as we’ve further streamlined operations in light of lower volumes. The remaining $25 million of volume-related payroll savings primarily reflects reductions in Engineering and Mechanical requirements also related to lower volume levels.
Railway Operating Expense Analysis – Second Quarter 2009 vs. 2008
Materials and other expenses decreased $70 million, or 33%.
Materials and Other Expense Analysis – Second Quarter 2009 vs. 2008
Slide 12 provides additional details to define this decrease.
First, reductions in materials contributed $20 million, primarily related to materials used in operations, as we have aligned locomotive, freight-car and engineering material use to conform with lower traffic volumes. This is largely related to the increase in stored locomotive and freight cars that Mark highlighted for you earlier.
Second, casualties and other claims benefited from lower loss and damage claims, largely related to derailment-related costs incurred last year, and favorable personal injury claims development in the current year.
Third, other expenses benefited from reduced state tax accruals of $21 million resulting from settlement of a multi-year state tax dispute, as well as other volume-related reductions such as reduced travel expenses.
Railway Operating Expense Analysis – Second Quarter 2009 vs. 2008
Purchased services and rents decreased $66 million, or 17%, reflecting decreased volumes. Our success in maintaining network velocity while reducing expenses has enabled us to realize volume-related savings.
Purchased Services and Rents Analysis – Second Quarter 2009 vs. 2008
Turning to slide 14, let me give you some examples: Intermodal expenses declined $19 million; transportation services and operations fell $16 million, which includes automotive-related costs and lower crew transportation expenses; and equipment rents decreased $14 million. In addition, mechanical expenses were down $5 million, largely due to fewer freight car repairs.
Other Income – Net – Second Quarter 2009 vs. 2008
Now let’s turn to our non-operating items on slide 15.
Gains on property sales were $15 million lower than last year. Both quarters benefited from favorable adjustments to interest expense for settlement of prior years’ tax matters. The resulting difference in these favorable adjustments created a $4 million headwind. Interest income was also down by $2 million. These decreases were partly offset by higher returns from corporate-owned life insurance.
Income Before Income Taxes – Second Quarter
As illustrated on slide 16, income before income taxes decreased $342 million, or 47%, largely related to lower operating income.
Income Taxes – Second Quarter
Income taxes for the second quarter were $144 million, for an effective tax rate of 36.8%, which compares with $280 million, or an effective rate of 38.2%, last year.
Net Income and Diluted Earnings per Share – Second Quarter
Slide 18 depicts our bottom line results. Second quarter net income was $247 million, a decrease of $206 million, or 45%.
Diluted earnings per share were 66 cents, which was 52 cents per share, or 44%, below last year.
Thank you for your attention and now I will turn the program over to our President, Chairman, and CEO, Wick Moorman. |
Version 1.2.7