Norfolk Souther Corporation (NSC)

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Norfolk Southern (NSC)

Q4 2012 Earnings Call

January 22, 2013 4:30 pm ET

Executives

Michael Hostutler

Charles W. Moorman - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Donald W. Seale - Chief Marketing Officer and Executive Vice President

Mark D. Manion - Chief Operating Officer and Executive Vice President of Operations

John P. Rathbone - Chief Financial Officer and Executive Vice President

Analysts

Justin B. Yagerman - Deutsche Bank AG, Research Division

William J. Greene - Morgan Stanley, Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Scott H. Group - Wolfe Trahan & Co.

Christian Wetherbee - Citigroup Inc, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

Keith Schoonmaker - Morningstar Inc., Research Division

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

David Vernon - Sanford C. Bernstein & Co., LLC., Research Division

Presentation

Operator

Greetings, and welcome to the Norfolk Southern Corporation's Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Michael Hostutler, Norfolk Southern Director of Investor Relations. Thank you, Mr. Hostutler. You may now begin.

Michael Hostutler

Thank you, and good afternoon. Before we begin today's call, I would like to mention a few items. First, the slides of the presenters are available on our website at nscorp.com in the Investors section. Additionally, transcripts and MP3 downloads of today's call will be posted on our website for your convenience.

Please be advised that any forward-looking statements made during the course of the call 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 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, that is, non-GAAP numbers, have been reconciled on our website in the Investors section.

Now it is my pleasure to introduce Norfolk Southern Chairman, President and CEO, Wick Moorman.

Charles W. Moorman

Thank you, Michael, and good afternoon, everyone. It is my pleasure to welcome you to our fourth quarter 2012 earnings conference call. With me today are several members of our senior team, including Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; and John Rathbone, our Chief Financial Officer, all of whom you will hear from this afternoon. Deb Butler, our Executive Vice President of Planning and Chief Information Officer is also with us today and will be able to answer questions about our capital budget, which we will be discussing in the call.

Despite economic uncertainty and challenged coal volumes, we reported a solid fourth quarter, second only to last year's record fourth quarter earnings per share.

Looking at our top line, revenues for the quarter were $2.7 billion, a decrease of 4% from last year. Overall volumes fell 1%, as coal volumes declined 13%, but intermodal and merchandise volumes grew 4% and 1%, respectively.

For the full year, revenues were $11 billion, only a 1% decrease from 2011, despite a 17% decline in coal revenue. Don will provide you with all of the revenue details in a few minutes.

The combination of volume decreases, coupled with expense control, resulted in net income for the quarter of $413 million, down 14%, and diluted earnings per share of $1.30, down 8%. For the full year, net income and earnings per share decreased 9% and 1%, respectively. And John will provide you with all of the financial details.

With respect to service, Railroad continues to run extremely well. We have maintained superior service levels throughout 2012 and we saw a continued improvement in our network velocity and terminal dwell during the fourth quarter. These items were a big driver in our ability to maintain an average composite service index at an all-time high of above 83%. And as we have mentioned, an efficiently run network helps in our efforts to keep expenses under control.

Mark will provide you with all of the operating details in a few minutes and give you some more information about our continuing initiatives to drive both productivity improvements and increased service levels across the network.

In 2013, we'll also continue our focus on improving customer service in running our network efficiently. Part of that plan is strong capital investment. And John will provide some details of our planned $2 billion capital program.

At this point, I'll turn the program over to Don and the rest of the team, and I'll return with some closing remarks before we take questions. Don?

Donald W. Seale

Thanks, Wick, and good afternoon, everyone. Revenue during the fourth quarter was down $113 million, or 4%, as a weak coal market offset gains in intermodal and merchandise. Declining volumes across most coal segments and lower export pricing year-over-year contributed to a 23% decline in coal revenue. Partially offsetting this decline, intermodal revenue set an all-time quarterly record at $584 million, up 5% versus 2011, while merchandise revenue was up a solid 4%.

Negative price and mix accounted for the majority of the revenue variance in the quarter at $105 million, while volume accounted for $23 million of the overall decline. This impact was slightly offset by higher fuel surcharge revenue of $15 million year-over-year and a positive $25 million lag in the quarter.

Total volume for the quarter declined by 15,000 units, or 1%, with revenue per unit of $1,498, down $50 or 3%. Segmenting total revenue per unit, coal RPU was down 11%, while RPU levels for both merchandise and intermodal were up 2% versus last year.

With respect to volume, total shipments for the quarter were down 1%, as robust growth in domestic intermodal and a modest increase in merchandise nearly offset a 13% decline in coal volumes. Volume growth within merchandise was mixed for the quarter, as solid gains in chemicals and automotive more than offset a decline in metals and construction.

Now turning to our major markets and beginning with coal. Revenue for the quarter of $657 million was down $193 million or 23% for the quarter. Weaker demand across nearly all markets resulted in an overall volume decline of 13%, and a fundamentally weaker pricing environment for export coal contributed to an 11% decline in revenue per unit for the quarter.

Utility coal, which was the largest driver of our decline in volume, was down nearly 42,000 loads or 16%. Volumes in the North were down 19%, while for our southern utilities, were down 13%.

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