Norfolk Souther Corporation (NSC)

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Norfolk Southern Corp. (NSC)

Q1 2010 Earnings Call Transcript

April 27, 2010 4:30 pm ET

Executives

Leanne Marilley – Director, IR

Wick Moorman – Chairman, President and CEO

Don Seale – EVP and Chief Marketing Officer

Mark Manion – EVP and COO

Jake Allison – VP and Controller

Analysts

Jason Seidl – Dahlman Rose

Chris Ceraso – Credit Suisse

Bill Greene – Morgan Stanley

Tom Wadewitz – JP Morgan

Ed Wolfe – Wolfe Trahan & Company

Walter Spracklin – RBC Capital Markets

Scott Malat – Goldman Sachs

Justin Yagerman – Deutsche Bank

Matt Troy – Citi

Chris Wetherbee – FBR Capital Market

Gary Chase – Barclays Capital

Anthony Gallo – Wells Fargo

Ben Hartford – Robert W. Baird

John Larkin – Stifel Nicolaus

Ken Hoexter – Banc of America/Merrill Lynch

Jeff Kauffman – Sterne Agee

Carter Leake – Davenport & Company

George Pickral – Stephens Inc.

Presentation

Operator

Greetings and welcome to the Norfolk Southern Corporation first quarter earnings conference call. At this time, all participants are in a listen-only mode. A 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 your host, Leanne Marilley, Norfolk Southern Director of Investor Relations. Thank you, Ms. Leanne Marilley, you may begin.

Leanne Marilley

Thank you and good afternoon. First, we remind our listeners and Internet participants that the slides of the presenters are available for your convenience on our website at nscorp.com in the Investor section. Additionally, MP3 downloads of today's call will be available on our website for your convenience. As usual, transcripts of the call also will be posted on our website. 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 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 the words such as belief, 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 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 such as non-GAAP numbers have been reconciled on our website at nscorp.com in the Investor section. Now, it is my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Wick Moorman.

Wick Moorman

Thank you, Leanne and good afternoon, everyone. It is my pleasure also to welcome you to our first quarter 2010 earnings conference call. With me today are several members of our management team including Mark Manion, our Chief Operating Officer, and Don Seale, Chief Marketing Officer. Jim Squires, our CFO, is in a middle of a session of – at Harvard and there for our Vice President and Controller, Jake Allison, is here to discuss the financials.

Norfolk Southern generated strong first quarter results, demonstrating solid volume and revenue growth along with improved productivity and aggressive cost control, which resulted in a 5.1 percentage point year-over-year improvement in the operating ratio, which declined to 75.2%.

Income from railway operations was $555 million, up 45% compared with same period last year. Net income and earnings per share were also up 45%, as a 15% gain in revenues more than offset an 8% increase in operating expenses as well as increase income taxes, which included a $27 million or $0.07 per share deferred tax charge due to the recently enacted healthcare legislation.

Of particular significance, volumes continue to gain momentum, strengthening not only year-over-year, but also and perhaps more significantly, on a sequential basis from the fourth quarter, which as you know, is almost unheard of in our industry. As Don will discuss in a moment, we posted a number of 52 week highs during the quarter.

Operationally, we continue to improve productivity and saw significant operating leverage. Against the 9% year-over-year volume increase, crews starts declined 1%, locomotive fuel consumption was up only five%, and total headcount as well as T&E headcount both declined 7%.

On a sequential basis in the fourth quarter, volumes were up one% while overall headcount and T&E headcount remained essentially flat. Mark will review these and other operating efficiencies, which we are confident, we’ll continue going forward.

Expenses were also reflective of this operating execution as we posted improvement in all expense categories except fueling compensation. Those increases were driven by higher fuel prices, health care costs and wage inflation and improved financial performance measures rather than activity. And Jake will discuss the details later in the call.

Norfolk Southern's first quarter performance provides a strong platform from which to build momentum throughout the remainder of the year. And it reflects the strength of our high-value transportation product and operating efficiency. Against the backdrop of an improving economy and continuing operating leverage as volume grows, the stage is set for a favorable 2010.

We remain bullish on the fundamentals of our business and we continue to make strategic long-term investments in our company. I will now turn the program over to Don, who will be followed by Mark and then Jake. I'll wrap up with some closing comments before we turn the program over to the operator for your questions. Don?

Don Seale

Thanks, Wick and good afternoon, everyone. Starting with a recap of revenue, sequential volume improvement combined with the effect of higher fuel revenue and improved pricing, generated revenue of $2.2 billion for the quarter, up $295 million, or 15%. Approximately 58% of this increase was driven by higher volume, which represented $170 million.

Fuel related revenue was up $65 million in the quarter, contributing 22% of the gain. This included the effect of a $7 million unfavorable lag in the quarter compared to a $10 million positive effect in the first quarter of last year. And we continued to generate improved pricing along with $4 million of positive mix effect, contributed $60 million or 20% of the first quarter revenue increase.

Turning to yield, on slide three, revenue per unit of $1414 was up $79 or 6%, increased fuel revenue, impacted RPU by $41, while rate and mix contributed $38 of the gain. Record automotive RPU was driven by a successful major legacy contract negotiation and a change in our vehicle service network, which resulted in an extended length of haul.

Intermodal and paper revenue per unit was impacted by strong motor carrier competition and increased volumes of shorter haul – shorter haul business. And agriculture saw an increase in shorter haul phosphate rock and grain traffic.

Finally pricing improvement of 3% was recorded during the quarter, as strong competition from rail, barge and trucking along with the impact of a modest 1.6% gain in the RCAFU moderated yield growth. Over the past four rolling quarters, we now realized an average of 5% in price increases and we believe that tightening transportation capacity in the truckload market in particular, bodes well for continued price improvement in the months ahead.

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