Norfolk Souther Corporation (NSC)

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Norfolk Southern Corporation (NSC)

Q4 2009 Earnings Call Transcript

January 27, 2010 4:30 pm ET

Executives

Leanne Marilley – Director, IR

Wick Moorman – Chairman, President & CEO

Don Seale – EVP & Chief Marketing Officer

Mark Manion – EVP & COO

Jim Squires – EVP, Finance & CFO

Deb Butler – EVP, Planning & Chief Information Officer

Analysts

Jason Seidl – Dahlman Rose & Co.

Tom Wadewitz – JP Morgan

Matt Troy – Citigroup

Ken Hoexter – Bank of America/Merrill Lynch

Chris Ceraso – Credit Suisse

Walter Spracklin – RBC Capital Markets

Scott Group – Wolfe Research LLC

Gary Chase – Barclays Capital

Sal Vitale – Sterne Agee

Randy Cousins – BMO Capital Markets

Cherilyn Radbourne – Scotia Capital

Bill Greene – Morgan Stanley

Carter Leake – Davenport & Co.

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the Norfolk Southern Corporation fourth quarter earnings conference call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder this conference is being record.

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

Leanne Marilley

Thank you, Scott, 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 Slide Numbers of the presenters are available for your convenience on our Web site at nscorp.com in the investor section. Additionally, MP3 downloads of today’s call will be available on our Web site for your convenience. As usual transcripts of the call also will be posted on our Web site.

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, the operator will instruct you how to do it so from your telephone keypad.

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 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 have been reconciled on our Web site at nscorp.com in the investor session.

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

Wick Moorman

Thank you, Leanne, and good afternoon. It’s my pleasure also to welcome you to our fourth quarter 2009 earnings conference call. Our goal this afternoon is to provide you with a comprehensive overview of our strategic, operational, and financial initiatives going forward.

To help do that I'm joined today by several members of our senior management team, including Deb Butler, our Executive Vice President of Planning, Mark Manion, Chief Operating Officer, Don Seale, our Chief Marketing Officer and Jim Squires, our Chief Financial Officer, all of whom you will hear from today.

Our fourth quarter results demonstrate a continuation of the momentum we have generated since the second quarter of 2009. The results reflect a high level of performance throughout Norfolk Southern and showcase the strength and flexibility of our franchise, our industry-leading safety and service performance and continuing strong cost discipline.

Income from railway operations was $549 million, down 32% year-over-year, driven by 16% decline in revenues and an 8% reduction in expenses. Net income of $307 million and earnings per share of $0.82 were also down 32% compared with our record breaking results for the comparable period last year.

While the recession exerted pressure on volumes and revenues, we gained momentum in the fourth quarter with the volume decline limited to single-digit for the first time this year at 9%. On a sequential basis, volumes improved 3% from the third quarter to the fourth quarter and as Don will address in more detail in a moment, we saw a 52-week high in several commodities late in the quarter.

Operationally, we continue to improve productivity against the 9% year-over-year volume decline, crew starts were down 10% and fuel consumption improved 9%.

Mark will review with you additional operating efficiencies which we expect to generate even more traction going forward.

As I mentioned, fourth quarter railway operating expenses were down 8% with each expense category showing improvement with the exception of depreciation and compensation and benefit. For the full year, all expense categories except depreciation declined.

Throughout the year in the face of unprecedented volume decline, our people were able to reduce our cost structure. Consistent with our balanced and deliberate approach we made these reductions in such a fashion that many of the benefits should remain when more normalized volumes return. I am especially proud that these adjustments were accomplished while maintaining industry-leading service and safety.

Given the backdrop of continuing modest economic recovery, all of this sets the stage for an improved 2010. We remain confident in the fundamentals of our business and continue to make strategic investments in our company. In fact, as will you hear more about from Deb we plan to invest $1.4 billion in capital improvements during 2010 to maintain the safety and quality of our franchise to further improve operating efficiency and service and to support future business growth.

I will now turn the program over to Don and you will also hear from Mark, Jim, and Deb, I will close with some comments about the legislative arena, and then we'll take your questions. Don?

Don Seale

Thank you, Wick, and good afternoon, everyone. In my comments today I will recap our fourth quarter and year-end 2009 revenues, volume, and yield, along with the key drivers of these results. I will then conclude my remarks with our outlook ahead.

Starting with fourth quarter revenue, sequential improvement in quarterly volume combined with continued pricing gains produced our highest revenue quarter of the year at $2.1 billion. Compared to fourth quarter of last year, revenue was down 16% or 396 million.

In the face of ongoing economic challenges, volume in the quarter was down 9% versus last year, representing 229 million of the overall revenue decline. Another large driver of the decline was fuel-related revenue which was down 245 million as the effective price of WTI oil declined by $27 a barrel in the fourth quarter versus last year.

In addition we saw a $15 million negative lag effect in our fuel surcharge program during the quarter versus $130 million positive lag of that last year. But as seen throughout the year we continued to generate improved pricing which along with favorable traffic mix contributed a positive effect offset of 78 million in the quarter.

Turning to Slide #3, revenue for the year of 8 billion was down 2.7 billion versus 2008. The primary drivers of the decline were volume, which was down 19% or a little over $2 billion and fuel-related revenue down 1.3 billion for the year. Pricing and mix effect added $581 million to total revenue for the year as we continued to match price with our high quality service delivery in the transportation marketplace.

Turning to yield on Slide #4, revenue per unit for the quarter was 13.43, falling $107 or 7% below fourth quarter 2008, which was our third highest RPU quarter ever. For the year, RPU of 13.38 fell $113 or 8%. Reduced fuel related revenue was the driver for both the quarter and full-year declines impacting RPU by $156 and $210 respectively.

Our commitment to service delivery and value resulted in an average pricing gain of 4% for the quarter and 6% for the year. We achieved these results despite excess trucking capacity, which lowered truck rates an estimated 10%. Also we saw a 17% decline in the RKF [ph] rate escalator during the quarter, which primarily impacted certain coal contracts.

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