Norfolk Souther Corporation (NSC)

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Norfolk Southern (NSC)

Q3 2012 Earnings Call

October 23, 2012 4:30 pm ET

Executives

Michael Hostutler

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

Donald W. Seale - Chief Marketing Officer and Executive Vice President

Mark D. Manion - Chief Operating Officer and Executive Vice President

John P. Rathbone - Chief Financial Officer and Executive Vice President

Analysts

Christian Wetherbee - Citigroup Inc, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

William J. Greene - Morgan Stanley, Research Division

Scott H. Group - Wolfe Trahan & Co.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Keith Schoonmaker - Morningstar Inc., Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Kevin Crissey - UBS Investment Bank, Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

David Vernon - Sanford C. Bernstein & Co., LLC., Research Division

Wilson Chen

Presentation

Operator

Greetings, and welcome to the Norfolk Southern Corporation Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. 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 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 in the Investors section.

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

Charles W. Moorman

Thank you, Michael, and good afternoon, everyone. It is my pleasure to welcome you to our Third Quarter 2012 Earnings Conference Call. With me today are several members of our senior team, including Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; and John Rathbone, our Chief Financial Officer, all of whom you will hear from this afternoon.

In the third quarter, our company produced earnings per share of $1.24, which is 22% below last year. As we discussed in our earnings pre-release, these results were driven by the continuing weakness in coal volumes, which were exacerbated by further declines in export coal shipments and coupled with sequential declines in merchandise volumes.

Revenues for the third quarter were $2.7 billion, a decrease of nearly $200 million or 7% from last year. In addition to the 14% reduction in coal volumes, merchandise traffic declined 1% and fuel surcharge revenues were down 20%. Don will provide you a breakdown of the revenue details in a few minutes.

On the service front, our network performed at a very high level with our composite service index averaging above 83% for the quarter. As all of you know, a more fluid network is a more efficient network. For example, the trains we had to re-crew on line of road fell by 32% year-over-year. Mark will provide you with all of the operations details along with some other productivity numbers.

During the third quarter, we were able to hold expenses to just over 0.5% increase compared to last year. While productivity-related efficiency enabled us to do a good job of expense control as related to inflation, the decrease in these expenses, obviously, could not offset the revenue declines.

John will give you all of those financial details a little later. But at this point, I'll turn the program over to Don and then the rest of the team, and I'll return with some closing remarks before we take your questions. Don?

Donald W. Seale

Thank you, Wick, and good afternoon, everyone. As a result of weaker fundamentals in our merchandise and coal markets, coupled with negative year-over-year comparisons in fuel and mix, revenues for the third quarter was down $196 million or 7% versus third quarter last year. $84 million of the revenue variance was due to negative mix and price. And of this total, negative mix amounted to $69 million. Lower fuel surcharge revenue accounted for $72 million of the decline, and the remaining $40 million of the decrease was a result of weaker volumes.

Coal revenue decreased $198 million or 22% for the quarter. Merchandise revenue was down $14 million or 1%, and Intermodal revenue set an all-time quarterly record of $567 million, up $16 million or 3% versus 2011.

Revenue per unit in the quarter was $1,509, down $87 or 5%, and total volume declined by 25,000 units or 1%. In terms of yield, overall revenue per unit for the quarter fell $87 or 5% versus 2011.

Negative mix, fuel and pricing for export coal were the key drivers of this decline. Coal revenue per unit declined $205 or 9% from 1 year ago, due to material declines in the marketplace for export coal, combined with negative length of haul impacts in coal. Intermodal RPU decreased by $14 or 2% for the quarter, while merchandise RPU was up $14 or 1%.

Within the business groups, negative mix adversely impacted revenue per unit performance during the quarter. For example, coal volumes declined by 57,000 loads, with an average RPU of $2,000, while intermodal volume increased by 40,000 loads at an average revenue per unit of $630. Similar mix impacts were seen in metals and construction and agricultural commodities.

With respect to volume, total shipments for the quarter were down 1%; coal volume was down 14%; intermodal was up 5%; and merchandise declined 1% compared to last year.

On the plus side, intermodal volumes set a quarterly record high led by continued gains in highway conversions in our domestic intermodal segment. Within merchandise, volumes of metals and construction and paper traffic were down 7% and 5%, respectively, while agricultural volumes were flat compared to a year ago. Chemicals volume increased 4%, and automotive traffic was up 7%.

In total, the month of September accounted for over 90% of the entire third quarter volume decline, as both coal and merchandise volumes materially weakened at the beginning and through September. This is a data point that I will return to in my comments on the outlook for the fourth quarter, as we expect our volumes ahead will somewhat reflect those that we saw in September.

Drilling down into our major markets, starting with coal. Revenue for the quarter of $701 million was down $198 million or 22%; coal revenue per unit was $2,014, down 9%; and volume was 348,000 units, down 14%, as I previously mentioned.

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