Rare Dip for Norfolk Southern

By GREGORY RICHARDS

BY GREGORY RICHARDS

THE VIRGINIAN-PILOT

NORFOLK — Norfolk Southern Corp., the fourth-largest U.S. railroad, said Wednesday that its first-quarter profit fell 6.6 percent amid reduced shipments of vehicles and home-building products.

The Norfolk-based company said its net income for the January- through-March period was $285 million, or 71 cents per share, down from $305 million, or 72 cents per share, in the same period in 2006.

The slip didn’t come as a surprise, as Norfolk Southern warned of an earnings shortfall on April 4. Wall Street analysts surveyed by Thomson Financial had projected earnings of 70 cents per share.

“Right now, you play the hand you’re dealt in transportation,” Jason H. Seidl, an analyst with Credit Suisse in New York, told Bloomberg News. “And the hand is a sluggish economy.”

First-quarter operating revenue was $2.2 billion, down 2.4 percent compared with the year-ago period. Rate increases averaging 4 percent helped offset a 4.4 percent decline in cargo shipments during the quarter, said Donald W. Seale, the railroad’s chief marketing officer, at a meeting with analysts in New York that was broadcast on a conference call. He said more than half of the fall in freight volume was due to weakness in the housing and automotive sectors.

The three other large U.S. railroads also reported this month that they had been affected by cutbacks in vehicle and home production. Norfolk Southern, however, is particularly vulnerable to auto industry fluctuations because it hauls the most vehicles and auto parts.

“If you look at our traffic volumes on a historical basis, they remain very high,” said Wick Moorman, Norfolk Southern’s chairman, president and chief executive, in an interview.

Shares of Norfolk Southern gained a nickel Wednesday to close at $55.62 on the New York Stock Exchange, after falling earlier in the day.

None of the railroad’s three business groups posted revenue gains this quarter.

Revenue from hauling general merchandise – a diverse category that includes chemicals, vehicles and agricultural products – slumped 3.9 percent from the same period last year to $1.2 billion. Intermodal revenue – from shipments of truck trailers and shipping containers – was $462 million, a slight decline from the previous first quarter. Coal revenue was $557 million, roughly the same as last year.

Seale said the first quarter of 2006 was a tough comparison because it was the company’s best first quarter ever for both volume and revenue.

This year-over-year decline of quarterly earnings per share was the first since the first quarter of 2000, when Norfolk Southern was still struggling with its acquisition of Conrail Inc.

Among the other big railroads, both CSX Corp. and Burlington Northern Santa Fe Corp. had profit declines in the first quarter. Union Pacific Corp.’s earnings jumped 24 percent because of a spike in shipments related to ethanol.

Norfolk Southern’s operating expenses declined 1.9 percent in the first quarter to $1.7 billion, owing largely to lower compensation and diesel fuel costs. The decline came in spite of increased costs from the “more severe” winter this year, said James A. Squires, the railroad’s executive vice president of finance.

Moorman said he expects “volume headwinds” to persist at least through the second quarter. Certain sectors likely will fare worse: He anticipates fewer automotive shipments into 2008 as the traditional Big Three automakers continue scaling back production.

Because of the slower economy, the railroad will “temporarily restrict” some of its hiring this year as well as scrutinize other expenditures to contain costs, Moorman said. He does not foresee any layoffs, which some other railroads have done this year.

Norfolk Southern, however, will continue investing about 15 percent of its total revenue in capital improvements, such as new track and locomotives, he said.

“We are committed to taking the steps necessary to strategically position ourselves for when the volume growth resumes,” he said.

Moorman also said that after May, the railroad will refinance some of its debt, allowing more money to be directed to its shareholders through increased dividends and stock buybacks. Norfolk Southern has increased its dividend for each of the last five years, he said, most recently in January. And it has been steadily repurchasing stock, spending $1.2 billion on 27.4 million shares between November 2005 and the end of March.

Additionally, Wednesday’s analyst meeting was likely the last for Henry C. “Hank” Wolf, Norfolk Southern’s vice chairman and chief financial officer, who will retire in June, Moorman said. That’s when Wolf will turn 65, the railroad’s mandatory retirement age for senior officers. Wolf began his railroad career in 1973 when he joined the Norfolk & Western Railway, one of Norfolk Southern’s predecessors, as a tax attorney.

Wolf is being replaced by Squires, who in April was promoted from senior vice president of financial planning to executive vice president of finance.

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Reach Gregory Richards at (757) 446-2599 or gregory. richards@pilotonline.com. BY GREGORY RICHARDS

THE VIRGINIAN-PILOT

NORFOLK — Norfolk Southern Corp., the fourth-largest U.S. railroad, said Wednesday that its first-quarter profit fell 6.6 percent amid reduced shipments of vehicles and home-building products.

The Norfolk-based company said its net income for the January- through-March period was $285 million, or 71 cents per share, down from $305 million, or 72 cents per share, in the same period in 2006.

The slip didn’t come as a surprise, as Norfolk Southern warned of an earnings shortfall on April 4. Wall Street analysts surveyed by Thomson Financial had projected earnings of 70 cents per share.

“Right now, you play the hand you’re dealt in transportation,” Jason H. Seidl, an analyst with Credit Suisse in New York, told Bloomberg News. “And the hand is a sluggish economy.”

First-quarter operating revenue was $2.2 billion, down 2.4 percent compared with the year-ago period. Rate increases averaging 4 percent helped offset a 4.4 percent decline in cargo shipments during the quarter, said Donald W. Seale, the railroad’s chief marketing officer, at a meeting with analysts in New York that was broadcast on a conference call. He said more than half of the fall in freight volume was due to weakness in the housing and automotive sectors.

The three other large U.S. railroads also reported this month that they had been affected by cutbacks in vehicle and home production. Norfolk Southern, however, is particularly vulnerable to auto industry fluctuations because it hauls the most vehicles and auto parts.

“If you look at our traffic volumes on a historical basis, they remain very high,” said Wick Moorman, Norfolk Southern’s chairman, president and chief executive, in an interview.

Shares of Norfolk Southern gained a nickel Wednesday to close at $55.62 on the New York Stock Exchange, after falling earlier in the day.

None of the railroad’s three business groups posted revenue gains this quarter.

Revenue from hauling general merchandise – a diverse category that includes chemicals, vehicles and agricultural products – slumped 3.9 percent from the same period last year to $1.2 billion. Intermodal revenue – from shipments of truck trailers and shipping containers – was $462 million, a slight decline from the previous first quarter. Coal revenue was $557 million, roughly the same as last year.

Seale said the first quarter of 2006 was a tough comparison because it was the company’s best first quarter ever for both volume and revenue.

This year-over-year decline of quarterly earnings per share was the first since the first quarter of 2000, when Norfolk Southern was still struggling with its acquisition of Conrail Inc.

Among the other big railroads, both CSX Corp. and Burlington Northern Santa Fe Corp. had profit declines in the first quarter. Union Pacific Corp.’s earnings jumped 24 percent because of a spike in shipments related to ethanol.

Norfolk Southern’s operating expenses declined 1.9 percent in the first quarter to $1.7 billion, owing largely to lower compensation and diesel fuel costs. The decline came in spite of increased costs from the “more severe” winter this year, said James A. Squires, the railroad’s executive vice president of finance.

Moorman said he expects “volume headwinds” to persist at least through the second quarter. Certain sectors likely will fare worse: He anticipates fewer automotive shipments into 2008 as the traditional Big Three automakers continue scaling back production.

Because of the slower economy, the railroad will “temporarily restrict” some of its hiring this year as well as scrutinize other expenditures to contain costs, Moorman said. He does not foresee any layoffs, which some other railroads have done this year.

Norfolk Southern, however, will continue investing about 15 percent of its total revenue in capital improvements, such as new track and locomotives, he said.

“We are committed to taking the steps necessary to strategically position ourselves for when the volume growth resumes,” he said.

Moorman also said that after May, the railroad will refinance some of its debt, allowing more money to be directed to its shareholders through increased dividends and stock buybacks. Norfolk Southern has increased its dividend for each of the last five years, he said, most recently in January. And it has been steadily repurchasing stock, spending $1.2 billion on 27.4 million shares between November 2005 and the end of March.

Additionally, Wednesday’s analyst meeting was likely the last for Henry C. “Hank” Wolf, Norfolk Southern’s vice chairman and chief financial officer, who will retire in June, Moorman said. That’s when Wolf will turn 65, the railroad’s mandatory retirement age for senior officers. Wolf began his railroad career in 1973 when he joined the Norfolk & Western Railway, one of Norfolk Southern’s predecessors, as a tax attorney.

Wolf is being replaced by Squires, who in April was promoted from senior vice president of financial planning to executive vice president of finance.

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Reach Gregory Richards at (757) 446-2599 or gregory. richards@pilotonline.com.

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