Norfolk Southern Corporation · NYSE:NSC
Norfolk Southern — Citigroup conference 2006
25 slides from Norfolk Southern's conference presentation, Nov 14, 2006
Slide 1: Introduction and business conditions
Good morning. It's a pleasure to be here. I want to thank John [Kartsonas] and the Citigroup team for inviting us to participate. This morning I'll be reviewing Norfolk Southern's recent financial performance, with a few observations on current business conditions in the markets we serve. The third
Slide 2: Revenue growth
Turning to the details of Norfolk Southern's recent financial performance, in the third quarter, revenues increased 11 percent to $2.4 billion. For the first nine months, revenues increased 13 percent to $7.1 billion.
Slide 3: Twelve consecutive quarters of revenue growth
As shown in this slide, third quarter 2006 marks the 12th consecutive quarter in which NS has increased revenues. Since 2003 our railway operating revenues have grown more than $700 million.
Slide 4: Carloads and revenue per unit
Carloads in the third quarter were about even with last year, while revenue per unit improved 11%. For the first nine months, volume grew 3%, which together with a 10% increase in revenue per unit, produced a 13% improvement in railway operating revenues. The revenue increases for both periods were
Slide 5: Coal revenue
Looking at our individual markets, coal posted all-time high revenues, exceeding third-quarter 2005 despite 3% less volume. For the year-to-date, revenue of $1.74 billion surpassed 2005 by $147 million. Revenue per car for the quarter reached an all-time high as well, increasing 13%, and for the yea
Slide 6: Coal results detail
Drilling into the coal results, for the third quarter, utility coal volume declined in comparison to record volume in the third quarter of 2005. In contrast to the most recent quarter, NS' coal traffic has increased in 9 of the last 11 quarters. Factors in the utility sector in the third quarter inc
Slide 7: Merchandise business
Turning to our merchandise business, revenue of $1.28 billion increased $145 million, or 13%, over third-quarter 2005, despite a slight decline in volume. Year to-date revenue reached $3.87 billion, a gain of $500 million, or 15%, over the same period last year, with a 1% increase in carloads. Reven
Slide 8: General merchandise groups
Within our General Merchandise group, agriculture, consumer products and government volume increased 7% in the third quarter, with revenue up 21%. This strong performance reflected increased ethanol, corn and government shipments. Metals and construction volume was up 6% for the third quarter. Looki
Slide 9: Intermodal
Concluding with Intermodal, this market reached its second highest revenue quarter, at $515 million, up 9%. For the year, revenue of $1.48 billion is up $171 million over 2005. Revenue per unit was $614, up 8% over third-quarter 2005. Volume was an all-time high, and shipments were up 2% for the qua
Slide 10: International, truckload and premium volumes
International shipments led gains in the quarter, with an increase of 7%. However, the growth rate was down compared to the first half of 2006, as we started to lap new contract business acquired in the third and fourth quarters of 2005. In the fourth quarter, we expect growth in our international s
Slide 11: Intermodal capacity investments
We expect continued challenges to intermodal growth in the fourth quarter, but remain very confident in future growth. We are investing not only to improve service levels, but also in strategic capacity initiatives such as the Heartland Corridor, Columbus Rickenbacker Logistics Center, which will lo
Slide 12: Fuel surcharges
To conclude on revenues, a word about fuel surcharges. Approximately 60% of the gain in revenue per unit for the third quarter was derived from increased pricing, while 40 percent was related to higher fuel surcharges. Fuel surcharge provisions presently cover about 92% of total revenues. In the fou
Slide 13: Railway operating expenses
Turning to expenses, just as we focus on improving the top line, we have worked to control expenses. Railway operating expenses for the third quarter were almost $1.7 billion, or 3% percent above last year. For the nine months, railway operating expenses were $5.1 billion, 8% higher than 2005.
Slide 14: Operating expense variances
This slide shows operating expense variances for the quarter. There are two items I want to highlight. First, diesel fuel costs pushed expenses up by $68 million, or 36%, over third-quarter 2005. The primary reason for the increase was the absence of a $41 million hedge benefit in last year's expens
Slide 15: Operating ratio
We lowered our third-quarter operating ratio by a full 5.4 percentage points to 70.1 percent, matching our previous quarterly record, which was set in 1997. For the first nine months, the operating ratio was 72.6 percent, an improvement of 3.1 percentage points compared with 75.7 percent for the sam
Slide 16: Income from railway operations
Third-quarter income from railway operations climbed 35% to a record $715 million, an increase of $187 million over the same period last year. For the year-to-date, operating income was $1.9 billion, an increase of $420 million, and a 28% improvement over 2005.
Slide 17: Income taxes
The provision for income taxes for the third quarter was $220 million compared with $140 million last year. The effective tax rate was 34.6% compared with 31.7% last year. For the first nine months, the provision for income taxes was $595 million, compared with $274 million last year. Last year the
Slide 18: Net income
With record revenue growth and expense control, we have been able to increase our bottom line results significantly. Third-quarter net income was $416 million, an increase of 38% over last year, which included a $96 million, or 23 cents per share, credit from a change in Ohio tax laws. For the first
Slide 19: Diluted earnings per share
The same pattern of improvement is reflected in our diluted earnings per share. Earnings per share for the third quarter were $1.02, a 40% improvement over the same period in 2005. For the first nine months, earnings per share were a record $2.62, which was 17% above the $2.24 per share earned a yea
Slide 20: Dividends
Norfolk Southern has a long history of paying a regular dividend to its shareholders, and this will continue to be a principal part of our overall financial strategy. Our Board of Directors increased the quarterly dividend in July to 18 cents per share, an increase of 13 percent. Our goal is for Nor
Slide 21: Capital expenditures
At the same time, we continue to strengthen our network by making investments in keeping our system in top condition and supporting new business growth. Our 2006 capital expenditures are expected to be just over $1.2 billion, and we anticipate our 2007 capital spending will be about 10 percent highe
Slide 22: Debt-to-total capitalization
This slide shows our debt-to-total capitalization ratio, which has been reduced over the last six years from 58.1 percent to 40.9 percent as of the end of the third quarter.
Slide 23: Share repurchases
Last year our board of directors authorized the repurchase of up to 50 million shares of our common stock through 2015. We initiated our share purchases by buying 1.3 million shares in the first quarter and 2.3 million shares in the second quarter. As an indication of our confidence in our company,
Slide 24: Business strategy
This slide summarizes our business strategy. It starts with producing a higher-quality, higher-value product based on ever-improving service. This will allow us to pursue, in turn, higher-value pricing. We will also seek to grow our business. We will maintain strict cost discipline. We will strive t
Slide 25: Thank you and questions
Thank you and I will now take your questions.