Baird 2016 Global Industrial Conference November 9, 2016 Marta R. - - PowerPoint PPT Presentation

baird 2016 global industrial conference
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Baird 2016 Global Industrial Conference November 9, 2016 Marta R. - - PowerPoint PPT Presentation

Baird 2016 Global Industrial Conference November 9, 2016 Marta R. Stewart Executive Vice President Finance and Chief Financial Officer 1 Forward-Looking Statements Certain statements in this presentation are forward-looking statements within


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Baird 2016 Global Industrial Conference

November 9, 2016 Marta R. Stewart Executive Vice President Finance and Chief Financial Officer

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Forward-Looking Statements

Certain statements in this presentation are forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995, as amended. In some cases, forward-looking statements may be identified by the use of words like “believe,” “expect,” “anticipate,” “estimate,” “plan,” “consider,” “project,” and similar references to the future. Forward-looking statements are made as of the date they were first issued and reflect the good-faith evaluation of Norfolk Southern Corporation’s (NYSE: NSC) (“Norfolk Southern” or the “Company”) management of information currently available. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. These and other important factors, including those discussed under “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2015, as well as the Company’s other public filings with the SEC, may cause our actual results, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. Forward-looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual

  • utcomes and results may differ materially from those expressed in forward-looking statements. We undertake no
  • bligation to update or revise forward-looking statements, whether as a result of new information, the occurrence of

certain events or otherwise, unless otherwise required by applicable securities law.

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Business Update

  • 2016 Overview
  • 2016 Outlook
  • Strategic Plan to Reduce Costs and Accelerate Growth
  • Capital Allocation Priorities

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Financial Results

Nine Months 2016 vs. 2015 ($ millions, except EPS)

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Strong cost controls resulted in a record 68.7% operating ratio 2016 2015 * $ % Railway operating revenues $ 7,398 $ 7,993 $ (595) (7%) Railway operating expenses $ 5,085 $ 5,751 $ 666 12% Income from railway operations $ 2,313 $ 2,242 $ 71 3% Railway operating ratio (%) 68.7 72.0 3.3 5% Net income $ 1,252 $ 1,195 $ 57 5% Earnings per share $ 4.21 $ 3.90 $ 0.31 8% (Unfavorable) Favorable

* 2015 included restructuring costs of $44 million, which increased the railway operating ratio by 60 basis points.

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Railway Operating Revenues

Nine Months 2016 vs. 2015

1. Please see reconciliation to GAAP posted on our website.

Revenue RPU RPU Less Fuel (1) Volume $7.4 Billion $1,365 $1,334 5.4 Million units down (7%) down (3%) flat down (5%) Revenue $ in million & Y-o-Y Percent Change

Merchandise $4,678 (2%) Coal $1,085 (22%) Intermodal $1,635 (11%) $7,993 $7,398 ($269) ($229) ($169) ($1) $73

YTD 2015 Coal ex. Fuel Fuel TCS ex. Fuel Merch ex. Fuel IM ex.TCS

  • ex. Fuel

YTD 2016

Revenue Change $ in millions (1) Low commodity prices pressured revenue line

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Railway Operating Expenses

Nine Months 2016 vs. 2015 ($ millions)

Streamlining operations to strengthen NS and drive productivity

$5,751 $236 $163 $139 $128 $5,085 Depreciation $ ---

Materials & Other Compensation & Benefits 2015 Purchased Svcs & Rents 2016

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Fuel

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3Q15

Consolidation of regional headquarters

3Q15

Acquisition of Delaware & Hudson South line

4Q15

Restructuring of Triple Crown operations

1Q15, 1Q-2Q16

Reductions in capital spending

1Q16

Consolidation of operating divisions and regions

2Q16

Idling of Ashtabula Coal Terminal

2Q16

Idling of Knoxville, TN Yard operations

2Q16

Shortline of West VA Secondary

2Q16

Restructuring Pocahontas Land coal subsidiary

1Q-3Q16

Line rationalizations - concentrating flows & speed reductions

Efficiency Initiatives

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20 22 24 26 28

Service Metrics – Nine Months

Velocity Remains Near Record Levels

15 17 19 21 23 25

Speed (mph) Dwell (Hours)

Better ( ) Better ( )

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50% 60% 70% 80% 90%

Composite

Better ( )

2015 2016

  • Service Composite

14%

  • Train Speed

11%

  • Dwell

9%

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SLIDE 9

Source: Wells Fargo; IHS Markit; WardsAuto Forecast; EIA; EVA; Census Bureau; NYMEX

Indicator

Dec 2015

2016 (F) 1Q 2Q 3Q

(Prelim)

4Q (F)

Current

2016 (F)

GDP +2.7% +0.8% +1.4% +2.9% +1.5% +1.5% Housing Starts (millions, annual rate) 1.23 1.15 1.16 1.18 1.15 1.16 N.A. Vehicle Production (millions, units) 18.2 4.5 4.7 4.5 4.5 18.2 Industrial Production +1.0% (1.6%) (1.0%) (0.8%) (0.4%) (1.0%) Real Consumer Spending (annual rate) +3.1% +2.4% +2.7% +2.8% +2.8% +2.7% Henry Hub Nat Gas Price ($/mmBtu) $2.88 $2.00 $2.14 $2.88 $2.83 $2.46 USD Exchange Rate With Major Trading Partners +4.7% +4.3% (0.4%) (1.7%) (2.5%) (0.1%)

Indicator

Dec 2015 Mar 2016 Jun 2016 Sep 2016 Oct 2016 Utility Coal Stockpiles (days, in NS

Territory, data from 1 month prior)

92.9 95.1 104.2 86.8 84.8 Inventories/Sales Ratio (total business,

adjusted, data from 2 months prior)

1.39 1.41 1.40 1.39 1.39

Economic Backdrop

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120,000 125,000 130,000 135,000 140,000 145,000 150,000 155,000 160,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44

Weekly Volume Week

2015 2016

Q2 Q3 Q4

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2016 Weekly Volume

Volumes are ~ flat with last year in 4QTD

Q1

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Coal Drivers

Source: EIA; Platts; SNL; NYMEX; EVA

$40 $60 $80 $100 $120 $140 $160 $180 $200 $220 1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016 4Q 2016*

Export Prices

Queensland Coking Coal API 2

* API 2 for 4Q projected from forward curve

  • Utility:

‒ Weather ‒ Natural gas prices ‒ Stockpiles

  • Export:

‒ Market prices ‒ Production availability

20 40 60 80 100

Days of Burn

Utility - Total Stockpiles

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$0 $1 $2 $3 $4 $5 $6 $7

Dollars per MMBtu

Natural Gas Prices - Henry Hub

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Merchandise Drivers

Source: EIA; WardsAuto; Federal Reserve

  • Industrial production muted
  • Crude oil limited by low prices and

narrow WTI/Brent spread

  • Automotive tied to North American

vehicle production

$20 $40 $60 $80 $100 $120 $140 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16

Dollars per Barrel

Brent and WTI Oil Prices

Brent WTI

15,801 16,501 17,423 17,955 18,207

2012 2013 2014 2015 2016

North American Vehicle Production

+5.6% +3.1% +1.4% +4.4%

98 100 102 104 106 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16

Industrial Production

(Index 2012 = 100)

Manufacturing

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Intermodal Drivers

Source: Census Bureau; BEA; Truckstop.com

  • Truck competition
  • Consumer demand
  • Retail inventory levels

1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16

Inventory/Sales Ratio

Retail Total Business 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016

Consumer Spending

(% Change vs. Preceding Period, Seasonally Adj)

5 10 15 20 25 30 35

Truckstop.com Market Demand Index

2012 2013 2014 2015 2016 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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Current Railway Volume

Fourth Quarter through Week 44 (ended November 5, 2016)

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Total Units (000’s) 0.2% Increase in Units 4QTD 2016 vs. 2015

12,795; 3% 3,010; 5% 1,676; 3% 589; 1% (2,414); (9%) (6,467); (13%) (7,776); (8%) Paper Chemicals Coal Intermodal MetCon Agriculture Automotive 730.2 731.6 2015 2016

Lapping Triple Crown restructuring and inventory builds

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4Q16 Revenue Outlook

Volume Pricing

 Fourth quarter year-over-year, flat to

moderate growth expected, despite continued challenges

Excess capacity in the trucking market

Stockpiles and weather impact coal volumes

Crude oil and Automotive declines

Stronger intermodal as we clear Triple Crown comparison

Metals market laps fourth quarter 2015 declines Fourth quarter volumes stabilize, solid pricing leveraging value of service, mix headwinds continue

 Focus on Pricing

2016 pricing remains strong

Domestic truck rates lower

Leveraging value of service product

 Long-term view of markets and pricing

Volume and Resource Alignment

 Flexibility to adapt to changing market

conditions and volume expectations

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$163 $119 $113 $82 $49 $50 $67 $0 $50 $100 $150 $200 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Revenue ($M)

Fuel Surcharge Revenue

4Q16 fuel surcharge decline to moderate relative to lower prior year comp

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4Q16 Expense Outlook

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3Q16 Actual

  • vs. 3Q15

4Q16 Outlook

  • vs. 4Q15

Compensation and benefits: Headcount

~ 2,400 ~ 2,200

Wage and H&W rates

$26M ~ $26M

Incentive compensation

$39M ~ $39M

Triple Crown – purchased services

$37M ~ $20M

Fuel

$40M Price and consumption driven

Depreciation

$17M ~ $25M

Materials

$15M ~ $15M Improving efficiencies and reducing costs to drive shareholder value

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Strategic Plan Enhancing Shareholder Value

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 NS well positioned to achieve 2016 financial and operational targets

− Operating ratio below 70% − Productivity savings of ~ $250 million − Capital spending of ~ $1.9 billion − On track for $800M in share repurchases

 Dedicated team focus on delivering long-term shareholder value

− $650M of annual productivity savings by 2020 − Top line growth − Operating ratio below 65% by 2020 − EPS double digit compound annual growth rate by 2020 − Returning capital to shareholders

Agile NS team reliably delivers shareholder value in the near- and long- term

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Thank you

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 NS well positioned to achieve 2016 financial and operational targets

− Operating ratio below 70% − Productivity savings of about $250 million − Capital spending of $1.9 billion − On track for $800M in share repurchases

 Dedicated team focus on delivering long-term shareholder value

− $650M of annual productivity savings by 2020 − Top line growth − Operating ratio below 65% by 2020 − EPS double digit compound annual growth rate by 2020 − Returning capital to shareholders

Agile NS team reliably delivers shareholder value in near- and long- term