May 10, 2018
NS ANNUAL MEETING
James A. Squires
Chairman, President and CEO
Norfolk Southern Corporation
Last month, after our first-quarter earnings call, Jim Cramer singled out Norfolk Southern for special praise. He said our senior management team had set the benchmark for explaining our company’s story in a very positive way. Then he added the obvious: You have to have good numbers to tell a good story.
This morning, it is my privilege to be here with shareholders to talk about our good story – our financial achievements in 2017, and our strong start in 2018.
Our business is about movement, and I can tell you that we are moving forward. We are meeting or exceeding our financial targets; we are improving operating efficiencies; and we are advancing sustainable growth. In the process, we are building long-term value for our shareholders.
In 2017, Norfolk Southern achieved an all-time best operating ratio and record results for earnings per share and free cash flow. Annual revenue grew by 7 percent; that’s the largest increase in six years, driven by 5 percent growth in total shipment volumes and gains in revenue per unit across our three main business segments. Net income grew by double-digits.
In addition, we achieved annual productivity savings of $150 million. Operating efficiencies adding to the bottom line included record train lengths and record locomotive productivity and fuel economy.
What’s particularly noteworthy is that we achieved these record results even as a series of hurricanes and winter storms in the third and fourth quarters disrupted train service and slowed freight rail operations across the industry. Knowing that we will never be immune to severe weather, we are fully engaged in efforts to ensure that we can provide stable, resilient service over the long-term. Our commitment to operational excellence is unwavering.
While our strong financials give us a good story to tell, the true story lies behind the numbers – in the people and the plan that enabled us to achieve them. Here, I give credit to our diverse and experienced board of directors. I give credit to the members of my talented senior management team and to our deep bench of seasoned managers at all levels of the company. And I give credit to an incredibly hard-working team of railroaders, the employees across our system who dedicate themselves every day to safely and efficiently serving our customers.
Thank you all for your efforts to make Norfolk Southern the industry leader in transportation.
After I became CEO nearly three years ago, Norfolk Southern began developing a new strategic plan. Since revealing our plan in late 2015, we have streamlined operations, improved profitability, and achieved growth. In short, we are delivering on our commitments to shareholders.
Norfolk Southern’s strategic plan is the unifying theme of our story. It is built on the company’s core strengths. This is what our plan is about:
Our plan is about safe operations. In 2017, we experienced our lowest-ever train accident frequency, and we had zero employee fatalities. As you all know, our ultimate goal – and the only one that will satisfy us – is zero accidents and zero injuries – for us, our customers, and our communities. To that end, Norfolk Southern’s safety train in 2017 provided hands-on training and other resources to more than 3,200 first responders across our network to help them safely respond to potential rail incidents.
Our plan is about quality customer service. In 2017, we continued working hard to enhance our service product and to make it easier for our customers to do business with us. We understand that our job is to help our customers serve their customers, and we are striving to provide service that meets the unique shipping needs of each customer.
Our plan is also about being good stewards. To us, stewardship of assets is about being more efficient and more productive. Over the last two years, we have generated $400 million in productivity savings. As an example, in 2017, we achieved record locomotive fuel efficiency for the second consecutive year through use of onboard energy-management technologies and smart operating practices. Over the past eight years, we’ve saved millions of dollars in fuel costs and reduced greenhouse gas emissions intensity by nearly 10 percent.
Finally, our plan is about investing for growth. While Norfolk Southern remains steel wheels on steel rails, we are moving ahead with 21st century technologies that improve our competitive edge. In 2017, we continued expanding our use of digital and remote-sensing technologies. With them, we are helping customers better manage supply chains in this demanding era of E-commerce, and we are improving the way we monitor and manage things from locomotive performance to rail wear. We envision leveraging our investments in Positive Train Control to create a platform for next-generation rail operations, enhancing both safety and service.
The NS team’s continued success in executing our plan is driving long-term value – and that’s a good story for our shareholders. In 2017, we paid shareholders $703 million in dividends and repurchased $1 billion in company stock.
Norfolk Southern’s strong performance in the first quarter of 2018 underscores my confidence in the company’s strategy and direction. Despite operating challenges that slowed train movement on the network, our team delivered another quarter of record financial results.
Income from operations increased 10 percent year-over-year, producing quarterly records in net income and earnings per share. Boosted by corporate tax reform, the company’s net income rose 27 percent over last year, while earnings per share increased 30 percent.
Overall shipment volumes increased 3 percent year-over-year, led by intermodal, which rose 8 percent. All three of our business units saw revenue gains, including a record 19 percent increase in intermodal revenue compared to last year.
With overall year-over-year revenue growth of 6 percent and ongoing efficiency gains, we achieved another record first-quarter operating ratio – the ninth consecutive quarter of year-over-year improvement.
All of these accomplishments drive shareholder value. In the first three months of 2018, we repurchased $300 million of company stock, up 50 percent compared with last year. For the year, we plan to increase share buybacks over first-quarter levels, with a target of $1.5 billion.
Favorable economic conditions and market trends point to continued business growth. So far in 2018, our railroad has handled some of the strongest traffic volumes we’ve seen on our network in over a decade. As we implement operational changes to improve network velocity, I am confident we will have the capacity to support growth and deliver the service our customers expect.
Norfolk Southern is in an excellent position to capture growth. Our network reaches two-thirds of the U.S. population, and the East Coast markets we serve offer a wealth of opportunities to convert freight from highway to rail. Through strategic investments in our primary intermodal corridors, we are open for the business.
Norfolk Southern is a company on the move. We are supporting our customers' growth and investing strategically for the future. We are pushing for new and better ways to drive shareholder value.
As we look at the year ahead and longer-term, we are optimistic about the opportunities in front of us. We have confidence in our plan and in the ability of our people to execute it. That is Norfolk Southern’s good story.
Thank you for your confidence and continued investment. Most of all, thank you for being a part of our story.