Norfolk Souther Corporation (NSC)

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Norfolk Southern (NSC)

Q2 2011 Earnings Call

July 26, 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

Justin Yagerman - Deutsche Bank AG

Ken Hoexter - BofA Merrill Lynch

Garrett Chase - Barclays Capital

Thomas Wadewitz - JP Morgan Chase & Co

Allison Landry - Crédit Suisse AG

Benjamin Hartford - Robert W. Baird & Co. Incorporated

H. Nesvold - Jefferies & Company, Inc.

Scott Malat - Goldman Sachs Group Inc.

John Godyn - Morgan Stanley

Stephen Walker - RBC Capital Markets

Christian Wetherbee - Citigroup Inc

Keith Schoonmaker - Morningstar Inc.

Anthony Gallo - Wells Fargo Securities, LLC

Scott Group - Wolfe Trahan & Co.

Cherilyn Radbourne - TD Newcrest Capital Inc.

Matthew Troy - Susquehanna Financial Group, LLLP

Jason Seidl - Dahlman Rose & Company, LLC

Presentation

Operator

Greetings, and welcome to Second Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Hostutler, Norfolk Southern 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 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, i.e., 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 all of you to our Second Quarter 2011 Earnings Conference Call. With me today are several members of our senior management team, 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 happy to report that building on last quarter's momentum, we produced another record-breaking quarter. All-time highs for any quarter were achieved in net income and earnings per share. The quarter did include the impact of non-recurring income tax benefits totaling $63 million, or $0.18 per share. But even without this benefit, net income and earnings per share were all-time high.

We also achieved record highs for any second quarter in revenues, operating ratio and income from operations. These results were driven by significant growth in revenues of 18%. Volumes rose 4%, led by double-digit growth in intermodal and automotive. Revenue per unit rose 14%, led by both pricing and mix in our coal franchise. And Don will provide you with the revenue and traffic details in a few minutes.

Against the backdrop of these increased volumes, we saw a significant sequential improvement in our service composite measure, the second quarter composite of 76.5, represents a nearly 450 basis point improvement from the first quarter. And we're continuing to build on our operating improvement in the third quarter. Mark will give you all of the operations details a little later.

The record operating results and resulting strong free cash flow enabled us to continue to invest in the company, while at the same time, returning cash to our shareholders. This morning, we announced a $0.03 per share increase in our quarterly dividend, which when combined with the $0.04 added in January, represents a 2011 dividend per share increase of 19%.

In addition, during the second quarter, we repurchased 6.3 million shares for a total of $449 million. This brings our year-to-date shares we repurchased to 11.6 million and has reduced our outstanding share count to just under $348 million. And Jim will provide you with more details of our balanced cash deployment in a few minutes as well.

With our year-over-year volume increase -- while our year-over-year volume increase in the second quarter was somewhat lower than the first, most of the economic forecasters are predicting an improving second half. And we are moving forward with initiatives to drive business growth, as well as increased productivity and efficiency in our operations.

We strongly believe that a robust capital program of reinvestment in the business, coupled with strong returns to our owners will continue to drive superior returns in the months and years to come.

I'll now turn the program over to Don and then Mark and then Jim, and I'll return and wrap up with some closing comments before we take your questions. Don?

Donald Seale

Thank you, Wick, and good afternoon to everyone. During the second quarter, we saw continued recovery in economic activity, favorable global trade and stronger manufacturing output. These favorable trends, coupled with ongoing new business development, produced our second highest revenue quarter ever.

Revenue reached $2.87 billion, up $436 million or 18% over the second quarter 2010, with yield improvement across all business groups and volume growth in intermodal, automotive and coal. Approximately 78%, or $341 million of the revenue gained in the quarter was driven by higher revenue per unit, including increased fuel surcharge revenue and pricing gains. The remaining $95 million was the result of increased volume, which was up 4% or 67,000 orders.

With respect to yield, we achieved our highest revenue per unit ever, reaching $1,604 per unit, up $191, or 14% compared to second quarter last year. 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 in agriculture, metals and construction, chemicals, paper, automotive and coal. Coal RPU had the largest gain on a percentage basis, up 26%, or $452 per unit, driven mostly by increased export coal and longer haul and utility business to the Southeast.

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