Norfolk Souther Corporation (NSC)

NSC 
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Norfolk Southern (NSC)

Q3 2010 Earnings Call

October 27, 2010 4:30 pm ET

Executives

Donald Seale - Chief Marketing Officer and Executive Vice President

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

Mark Manion - Chief Operating Officer and Executive Vice President

James Squires - Chief Financial Officer and Executive Vice President of Finance

Leanne Marilley - Director of Investor Relations

Analysts

William Greene - Morgan Stanley

Garrett Chase - Barclays Capital

Ken Hoexter - BofA Merrill Lynch

Thomas Wadewitz - JP Morgan Chase & Co

Scott Malat - Goldman Sachs Group Inc.

Robert Salmon

Anthony Gallo - Wells Fargo Securities, LLC

Christopher Ceraso - Crédit Suisse AG

Walter Spracklin - RBC Capital Markets Corporation

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Donald Broughton - Avondale Partners, LLC

Edward Wolfe - Bear Stearns

Cherilyn Radbourne - TD Newcrest Capital Inc.

Jason Seidl - Dahlman Rose & Company, LLC

Scott Flower - Macquarie Research

Presentation

Operator

Greetings, and welcome to the Norfolk Southern Corporation Third Quarter Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Leanne Marilley, Norfolk's Southern Director of Investor Relations. Thank you. You may begin.

Leanne Marilley

Thank you, 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 the presenters are available for your convenience on our website at nscorp.com in the Investors section. Additionally, mp3 downloads of today's call will be available on our website for your convenience.

As usual, transcript 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, an 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 could 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 such as non-GAAP numbers have 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 Moorman

Thank you, Leanne, and good afternoon. It's my pleasure to welcome all of you to our third quarter 2010 earnings conference call. Several members of our senior management team join me. Don Seale, our Chief Marketing Officer; Mark Manion, Chief Operating Officer; and Jim Squires, Chief Financial Officer, all of whom you will hear from today.

During our second quarter call, I indicated that we were optimistic that the momentum we generated in the first half of the year would continue into the third quarter as we maintained our focus on strengthening the franchise. Today, I am very pleased to report that our momentum did remain strong, as Norfolk Southern delivered double-digit percentage increases in revenues, operating income and bottom line results. In doing so, we've produced our fifth consecutive quarter of sequential volume growth and our second consecutive quarter with a sub-70 operating ratio.

Net income and diluted earnings per share were both up 47% for the quarter as a 19% improvement in revenues more than offset a 14% increase in operating expenses.

This strong operating leverage resulted in an operating ratio of 69.6%, which represents a 320 basis point year-over-year improvement. We also achieved our lowest ever operating ratio of 71.4% for the first nine months. Volumes in the third quarter improved 15% year-over-year and 2% sequentially from the second quarter. We also posted 52-week highs in several commodity groups, and Don will provide more details in a moment.

Against this strengthening economic backdrop, we continue to improve productivity as we safely handled increasing traffic levels. As compared to the 15% volume increase, crew starts were up only 8% and total employment up a modest 2%.

While we have experienced significant traffic volume swings over the past two years, our systems continue to provide us with increased flexibly and service consistency with respect to our operating plan. The third quarter also marked another significant milestone for our Intermodal service. As last month, we opened the Heartland Corridor, which represents the shortest, most direct, double-stack intermodal route linking the Port of Hampton Roads to the Midwest.

Mark will review our operations with you in a few minutes, and then Jim will provide you with an overview of our financial results. But first, I'll turn it over to Don for a more in-depth look at our third quarter business.

Donald Seale

Thank you, Wick, and good afternoon, everyone. The third quarter marked our fifth consecutive quarter of revenue growth since the beginning of last year's deep recession. Volume growth across the board and higher revenue per unit combined to generate revenues of $2.5 billion for the quarter, up $393 million or 19% over the third quarter of last year.

Each of our business groups produced year-over-year gains for the quarter. Nearly 80% or $312 million of our total revenue gain was driven by higher shipments, while continued growth in revenue per unit contributed $81 million of the increase.

Looking at revenue per unit in more detail, on the next slide, we can see that all of our business groups had a higher RPU in the quarter, resulting in a total of $1,401 per unit, up $46 or 3% over last year. Negative mix within Coal, Chemicals, Agriculture and Intermodal dampened otherwise solid RPU gains across these business segments, which were driven by improved pricing and higher fuel-related revenue. For example, Intermodal's RPU growth in the quarter was negatively impacted by increased empty repositionings, which accounted for 16% of total Intermodal volume in third quarter 2010 compared to 11% last year.

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