Norfolk Souther Corporation (NSC)

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Norfolk Southern (NSC)

Q1 2011 Earnings Call

April 27, 2011 4:30 pm ET

Executives

Donald Seale - Chief Marketing Officer and Executive Vice President

Michael Hostutler -

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

Analysts

Walter Spracklin - RBC Capital Markets, LLC

Peter Nesvold - Bear Stearns

William Greene - Morgan Stanley

Jeffrey Kauffman - Sterne Agee & Leach Inc.

Justin Yagerman - Deutsche Bank AG

Ken Hoexter - BofA Merrill Lynch

Garrett Chase - Barclays Capital

Thomas Wadewitz - JP Morgan Chase & Co

Scott Malat - Goldman Sachs Group Inc.

Christopher Ceraso - Crédit Suisse AG

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Donald Broughton - Avondale Partners, LLC

Edward Wolfe - Bear Stearns

Christian Wetherbee - Merrill Lynch.

Jason Seidl - Dahlman Rose & Company, LLC

Matthew Troy - Susquehanna Financial Group, LLLP

Cherilyn Radbourne - TD Newcrest Capital Inc.

Scott Flower - Macquarie Research

Presentation

Operator

Greetings, and welcome to the Norfolk Southern Corp. First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Hostutler, Norfolk Southern's Director of Investor Relations. Thank you. Mr. Hostutler, you may 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 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, Michael, and good afternoon, everyone. It's my pleasure to welcome you to our first quarter 2011 earnings conference call. I'm joined by several members of our senior team today, including Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; and Jim Squires, our Chief Financial Officer, all of whom you'll hear from this afternoon.

I am very pleased to report that Norfolk Southern had an excellent first quarter, delivering all-time first quarter highs in revenues, income from railway operations and earnings per share. We achieved these records in the face of severe winter weather, sharply higher fuel prices and an unfavorable arbitration ruling, which decreased earnings per share by $0.10.

Our results were driven by strong top line growth of 17%, which was achieved through a balance of increased volume, as well as increased revenue per unit. We saw an overall volume increase of 8%, driven by double-digit volume growth in coal, intermodal and automotive. Revenue per unit rose by 8% as well, driven by our continued emphasis on market-based pricing, along with higher fuel surcharges. Don will provide you with the revenue and traffic details in a few minutes.

With respect to service, we, along with all of the other North American rails, battled some unusually disruptive winter weather in the first two months of the quarter. But our performance improved substantially later in the quarter and on into April as we worked through these weather issues.

As most of you know, we constantly measure all aspects of our service and Mark will give you all of the details a little later. Our improved service and handling of increased traffic volumes were largely the result of the targeted hiring that we have been describing to you. Mark will give you an update on that as well, and I'll give you a little more color on overall employment in my closing remarks.

Our record operating results and strong free cash flow enabled us to continue our focused efforts on investing in our company while at the same time returning cash to our shareholders. We got off to a good start with our capital expenditure program and at the same time, we were able to increase our dividend 11% during the quarter and repurchase over $340 million worth of our share.

We anticipate that our continued focus on service delivery will result in customers moving more traffic on our system. This in turn makes our railroad more efficient, which then leads to our ability to generate more cash to invest and provide superior returns to our owners.

Finally, I would be remiss if I didn't mention the best news of the quarter, which is that we received formal notice that Norfolk Southern will receive its 22nd consecutive Harriman gold medal for employee safety next month. The award, which is for calendar year 2010 is another tribute to the best workforce in the railroad business. But having said that, we know that there is still room for improvement and we're intent on continuing to drive safety and service to new all-time highs.

With that, I'll turn it over to Don for a look at our business in the first quarter. He'll be followed by Mark and then Jim, and I'll conclude with some remarks before we take your questions. Don?

Donald Seale

Thank you, Wick, and good afternoon, everyone. During the first quarter, our markets continued to rebound, led by new business initiatives, increased manufacturing output and improving global trade patterns. Strong volume growth and favorable pricing combine to generate revenue of $2.6 billion, up $382 million or 17% over the same period last year. This was our highest revenue quarter since the third quarter of 2008 and our third highest revenue quarter ever.

Approximately 53% or $201 million of the revenue gained in the quarter was driven by higher revenue per unit and the remaining $181 million was the result of increased volume. As with the fourth quarter of 2010, our volumes and related revenue could have been higher but were impacted by harsh winter weather conditions, particularly in February.

Turning to yield for this quarter on Slide 3, you'll note that we achieved our highest revenue per unit ever, reaching $1,531, up $117 or 8%. Improved pricing, based on market demand and tighter transportation capacity across all modes, combined with higher fuel surcharge revenue, drove this record performance. For the quarter, we set new RPU levels for agriculture, metals, chemicals and coal. Higher RPU in coal was driven by favorable export business, increased rates from contract renewals effective January 1 and escalators in existing coal contracts. Favorable traffic mix consisting of increased volumes of longer haul utility coal to our Southern utilities also contributed to improved revenue per car.

In our merchandise sector, improved pricing and favorable mix drove record RPU results for agricultural and chemicals while metals record RPU was the result of higher pricing and fuel-related revenue. Finally on automotive, changes in traffic mix due to higher volumes of lower RPU bi-level traffic and reduced volumes of higher rated auto parts and tri-level traffic generated flat revenue per unit for the quarter.

With respect to pricing, network investments and improved service combined with tighter capacity in the truck load and barge markets across all commodities bode well for continued price improvement as the year progresses. In this regard, and as we've previously stated, our plan to price at levels that exceed the rate of rail inflation. We're pleased to advise that we're clearly meeting this objective on a quarterly basis.

Now turning our attention to our volume performance in the first quarter as shown on the next slide, total shipments of 1.7 million loads were up 128,000 units or 8% over the first quarter last year. With the exception of agriculture and chemicals, all of the remaining business units posted year-over-year gains.

During the quarter, we saw our total volume reached a 52-week high, as well as individual market highs in our paper and automotive business groups. And I might add that for the week ending April 2, a new 52-week high was again realized in automotive, along with a new 52-week high in coal as well.

Now transitioning to our major business sectors and starting with our coal markets as shown on Slide 5, coal revenue of $816 million was up $187 million or 30% over the first quarter 2010 and it was our second highest revenue quarter ever. Volume of 406,000 units improved by nearly 42,000 loads or 11% driven by increased global demand, changes in coal sourcing and stockpile replenishment. Volume weakness in domestic metallurgical coal following a 36% increase in the fourth quarter of last year was driven primarily by reduced coal availability and was more than offset by strong utility and export volumes.

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