Norfolk Souther Corporation (NSC)

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Norfolk Southern Corp. (NSC)

Q3 2009 Earnings Call

October 27, 2009 04:30 PM ET

Executives

Leanne Marilley - Investor Relations

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

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

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

James A. Squires - Executive Vice President Finance and Chief Financial Officer

Analysts

Jason Seidl - Dahlman Rose & Co.

Matthew Troy - Citigroup

Thomas Wadewitz - JPMorgan

William Greene - Morgan Stanley

Edward Wolfe - Wolfe Research LLC

Christopher Ceraso - Credit Suisse Group

Jon Langenfeld - Robert W. Baird & Co.

Gary Chase - Barclays Capital

Walter Spracklin - RBC Capital Markets

Ken Hoexter - Bank of America Merrill Lynch

Randy Cousins - BMO Capital Markets

Justin Yagerman - Deutsche Bank

Donald Broughton - Avondale Partners

Presentation

Operator

Greetings and welcome to the Norfolk Southern Corporation Third Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce Leanne Marilley, Norfolk Southern, Director of Investor Relations. Thank you. You may begin.

Leanne Marilley

Thank you Jim and good afternoon.

Before we begin today's call, I would like to mention a few items. First, we remind our listeners and Internet participants that the slides of today's results are available for your convenience on our website at www.nscorp.com in the investor section. Additionally mp3 downloads of today's call will be available on our website for your convenience. As usual transcript, for the call also will be pasted on our website and will be available on 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 the telephone keypad.

Please be advised that any forward-looking statement made during the course of this presentation represent our judgment as to what make sure in the future, statements that are forward-looking can be identified by the uses of words such as believe, expect, anticipate and project. Our actual results may differ materially from those projected or we said it to a number of risks and uncertainties, some of which maybe outside of our control.

Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we deal with. Additionally keep in mind that all references to the reported result excluding certain adjustments, which is non-GAAP has been reconciled on our website at nscorp.com in the investors section.

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

Charles W. Moorman

Thank you Leanne and good afternoon everyone. It's my pleasure to welcome all of you to our third quarter 2009 earnings conference call.

I'm joined today by several members of our senior management team including Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; and Jim Squires, Chief Financial Officer, all of whom you'll hear from today.

We are pleased with our third quarter results, which continue to demonstrate the strength of our franchise, our solid operating performance and aggressive cost control. While third quarter results was clearly impacted by the recession with a 20% reduction in volume, we did reduce operating expenses by 25%. The result was third quarter railway operating profit of $562 million, which was 37% below last year.

Earnings per share were down 41% year-over-year and our third quarter operating ratio was 72.8%, an increase of 3.7 percentage points over the comparable period last year, but an improvement of 7.5 percentage points and 2 percentage points respectively from the first and second quarters of this year.

While revenues and volumes remained under pressure, we continue to take a balanced approach to exercising cost discipline and improving network efficiency while meeting our customer service requirement. Importantly even as we realize significant efficiencies in the quarter, all of the measures within our service composite performance index, planned adherence, train performance and connection performance either improved or were stable year-over-year. We posted a 7% year-over-year improvement in system average train speed in the quarter.

And this improvement was achieved by careful planning and execution that resulted not only in the overall average speed improvement, but also continued improvements in fuel consumption, which declined by both by more than both cruise starts and gross ton miles. But the overall economic outlook remains clear. We are encouraged on a sequential basis. As you may remember from our last call, we indicated that the erosion of traffic volumes was beginning to moderate. And our third quarter traffic volumes continue to suggest stabilization.

Volumes improved 8% sequentially from the second quarter to the third quarter. And while the outlook and shape of the economic recovery remain uncertain, we are increasingly confident that we have seen the bottom. As the economy does revive, we remain focused on ensuring that the efficiencies we have achieved will remain in place as we emerge from this recession and we will continue to leverage and enhance the strength of our network.

I am now going to turn the podium over to Don, who will provide full details about our revenues followed by an operation overview from Mark and then a discussion of our financial results by Jim, I'll then wrap up with some closing comments before we take your questions. Don?

Donald W. Seale

Thank you Wick and good afternoon everyone.

As seen in the last few quarters, we continue to be impacted by economic weakness led by the automotive, housing and retail sectors. But signs suggest that the bottom was likely reached during the second quarter and our third quarter performance, which improved sequentially, which Wick mentioned, is reflective modest improvements we're now beginning to see in the economy.

As shown on slide two, third quarter revenue totaled 251 million, down 831 million or 29% and we will be extremely tough comparisons to our all time high revenue of 2.9 billion one year ago. Over two thirds of the quarterly decline was driven by a 20% reduction in volume, representing $570 million. The next largest driver was fuel related revenue, which declined 436 million in the quarter precipitated by the 50% fall in WTI oil prices. Within that total, we experienced a $10 million negative fuel surcharge lag effect during the quarter, compared to a $55 million positive lag effect one year ago.

To illustrate the impact of the volatility in oil prices, without the effect of the fuel related revenue, total revenue would have declined by 17%, our 395 million versus the 29% decline reported for the quarter. This non-GAAP reconciliation is posted on our website for your review. And we also saw a $22 million unfavorable impact in the quarter from coal-related adjustments in the third quarter of last year.

On the plus side, continued improvements in pricing and a favorable traffic mix, partially offset volume and fuel revenue declines and provided a positive offset of a $197 million.

Turning to yield on slide three, revenue per unit was $1,355 falling $172 or 11%, below record third quarter 2008 revenue per unit. All business segments posted year-over-year declines, primarily driven by lower fuel revenues.

Pricing improvement continued during the quarter with an average pricing gain of 6.2%. As you know, our strong service product is a major diver in improving yield in the marketplace. In this regard, we recently completed the tabulation of our 2009 customer survey, which showed a 6% improvement in our customers overall satisfaction, with transit performance and a 10% improvement in services consistency. Service consistency is the number one priority for most of our customers and the magnitude of improvement here is significant for future price support.

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