Fourth Quarter 2014 Results. Donald W. Seale Executive Vice President and Chief Marketing Officer

Fourth Quarter 2014 Results Donald W. Seale Executive Vice President and Chief Marketing Officer 1 Railway Operating Revenue Fourth Quarter 2014 vs...
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Fourth Quarter 2014 Results Donald W. Seale Executive Vice President and Chief Marketing Officer

1

Railway Operating Revenue Fourth Quarter 2014 vs. 2013 Components of Revenue Change $ in Millions $2,881

Revenue

($69) ($45)

$2,870

$103

$2.9 Billion, flat

RPU $1,489, down (4%)

4Q 2013 Mix/Price

2

Volume

4Q 2014

4Q 2014 Revenue $ in Millions & y-o-y Percent Change Coal $543 (15%)

Volume 1,928,200 units, up 4%

Fuel

Intermodal $649 +5%

Merchandise $1,678 +3%

Railway Volume Fourth Quarter 2014 vs. 2013 4Q 2014 Volume (000’s) & y-o-y Percent Change

Total volume up 4% Coal down (6%) Weak shipments across most markets, with (6%) decline in Utility volume and (25%) decline in Export volume Intermodal up 6% Gains in Domestic and International markets Merchandise up 5% Gains in Metals & Construction and Chemicals offsetting losses in Agriculture and Paper & Forest Products

2,000 Coal

(6%)

Intermodal

+6%

Merchandise

+5%

1,500

1,000

500

0 4Q 2013

3

1,928.2

1,862.0

4Q 2014

Coal Market Fourth Quarter 2014 vs. 2013 Percent of Total 4Q 2014 Volume

Revenue: $543 Million, down (15%) RPU: $1,799, down (10%)

Dom Ind Met 7% Export 15% 14% Utility 64%

Drivers Utility Lower natural gas prices and reduced coal plant burn Export Weakened demand in a well-supplied global marketplace, with continued weak seaborne coal prices and a weaker Australian dollar

Units (000’s) 250 200

193.5

Weak shipments in utility and export markets

150 100

Domestic Met Customer-specific gains in coke volumes Industrial New business opportunities offset by declines of anthracite and petcoke

4

43.3

50

46.0 19.3

0 Utility (6%)

Export (25%)

Dom Met 13%

Ind 0%

Intermodal Market Fourth Quarter 2014 vs. 2013 Percent of Total 4Q 2014 Volume

Revenue: $649 Million, up 5% RPU: $662, down (1%)

Drivers

International 33%

Domestic 67%

Units (000’s)

Domestic Gains due to highway conversions, strategic corridor projects, and growth in key accounts International Gains due to customer awards and new services

700

654.5

600 500 400

324.8

300 200 100 0 Domestic 4%

5

Overall volume gain of 6%

International 10%

Merchandise Market Fourth Quarter 2014 vs. 2013 Percent of Total 4Q 2014 Volume

Revenue: $1.7 Billion, up 3% RPU: $2,594, down (1%)

Auto 16%

Drivers

MetCon Increased volumes of frac sand, iron and steel, and aggregates Agriculture Soybean volumes constrained by network velocity, partially offset by increased corn shipments Chemicals Growth in crude by rail and NGLs Automotive Downtime and model changeover at key NS-served plants Paper Gains of wood products offset by declines in graphic paper and municipal solid waste

6

Units (000’s) 200

Paper 12%

Chem 20%

180.0 155.0

150

MetCon 28% Ag 24%

Strength in Metals & Construction and 132.7 Chemicals 103.7

100

75.4

50 0 MetCon

Ag

12%

(3%)

Chem 14%

Auto

Paper

0%

(2%)

Fuel Surcharge Monthly WTI Price for FSC (2 month lag) $120

$100

$80

Fuel Surcharge Programs 85%+ of revenue contains fuel surcharges

$60

• •

$40

7

2/3 WTI based / Dominant trigger price $64 bbl. 1/3 OH Diesel based

Business Outlook

COAL • Utility coal demand weakened by lower natural gas prices as well as MATS implementation • Continued strong competition in the global metallurgical and thermal markets – strong US dollar • Weaker domestic met volumes related to customer sourcing shifts • Industrial coal volumes impacted by natural gas conversions

8

INTERMODAL • Focus on opportunities for highway conversions • Continued growth with strategic corridor projects • Growth from International customer awards and new service lanes • Increased consumer spending

MERCHANDISE • Strength in crude oil shipments to East Coast refiners offset by negative impact of low oil prices • Growth of NGLs along with drilling inputs such as frac sand • Strength in automotive sector benefiting vehicles and steel • Improved construction activity driving growth in aggregates, asphalt, lumber and steel • Strong corn and soybean crops

Thank You

9

Fourth Quarter 2014 Results Mark Manion Executive Vice President and Chief Operating Officer

Safety Performance 2009 – 2014*

2.4

2.4 1.8

1.20

2.6

2.3

2.1

1.0

3.0

0.83

0.75

0.89

1.10

1.5

2.9

(Per Million Train Miles) 1.21

Train Incidents

(Per 200,000 Employee-Hours) 1.18

Reportable Personal Injuries

2.0 0.5 1.0 0.0 2009

2010

2011

2012

2013

12 Mos 4th Qtr 2014 2014

Crossing Accidents

4

3.7

3.6

3.8

4.2

3.5

3.2

6

3.9

(Per Million Train Miles)

2

0.0 2009

2010

2

2010

2011

2012

2013

2012

2013

12 Mos 4th Qtr 2014 2014

 Injury rate down over the course of the year, but slightly up in 2014 overall.  Train Incident rates increased.  Grade Crossing Accident rate is up slightly for the year with a modest improvement in fourth quarter.

0 2009

2011

12 Mos 4th Qtr 2014 2014

* Based on preliminary data

Composite Service Performance 2009 - 2014 2012 90% 83.1% 85%

83.3%

81.0% 76.7%

80%

75.9%

75%

69.9% 67.3%

70% 62.8%

65%

61.6% 59.3%

60% 55% 50% 2009

3

2010

2011

2012

2013

12 Mos 4th Qtr 2014 2014

Oct 2014

Nov 2014

Dec 2014

Train Speed

Better

2009 - 2014 28

26

Miles per Hour

23.9

24

23.9

23.1 21.5

22

21.2

21.2

20.6 19.7

20

19.3

19.3

18

16

2009

4

2010

2011

2012

2013

12 Mos 4th Qtr 2014 2014

Oct 2014

Nov 2014

Dec 2014

Terminal Dwell

Better

2009 - 2014 30.9

32 29.7

Average Hours

28

26.0

26 24

29.2

29.1

30

24.4

24.5

22.4 21.6

21.6

22 20 18 16 2009

5

2010

2011

2012

2013

12 Mos 4th Qtr 2014 2014

Oct 2014

Nov 2014

Dec 2014

Operating Efficiencies 4th Quarter and Full Year 2014 vs. 2013

4th Quarter

2014

+4%

+5%

0%

-1%

+ 34 %

+ 23 %

Carloads/Units per Locomotive

-4%

0%

Diesel Gallons/KGTM

-3%

-2%

Volume Crew Starts T & E Service Overtime Hours

6

Thank You

7

2014 Financial Results 2015 Capital Plan Marta R. Stewart Executive Vice President Finance and Chief Financial Officer

1

Operating Results Fourth Quarter 2014 vs. 2013 ($ millions)

Record fourth-quarter Income from Railway Operations.

2014 Railway operating revenues

$

Railway operating expenses Income from railway operations Railway operating ratio

2

$

2013

Favorable (Unfavorable) $ %

2,870 $

2,881 $

(11)

-%

1,979

2,000

21

1%

891 $

881 $

10

1%

69.0

69.4

0.4

1%

Railway Operating Expenses Fourth Quarter 2014 vs. 2013 ($ millions)

Net decrease of $21 / 1%. $7 $56

$29 $47

$46

$2,000

2013

3

$1,979

Fuel

Compensation & Benefits

Purchased Svcs & Rents

Materials & Other

Depreciation

2014

Fuel Fourth Quarter 2014 vs. 2013 ($ millions)

Net decrease of $56 / 14%.

$63

$12 $5

$403 $347

2013

Price* 17%

*% reflects locomotive fuel only 4

Consumption* +3%

Other Fuel

2014

Compensation and Benefits Fourth Quarter 2014 vs. 2013 ($ millions)

Net decrease of $47 / 6%.

• Lower post-retirement, pension and health and welfare costs • Lower incentive compensation • Increased pay rates

$761

$714

• Increased overtime • Temporary transfer program costs

2013

5

2014

Purchased Services and Rents Fourth Quarter 2014 vs. 2013 ($ millions)

Net increase of $46 / 11%.

• Higher volume-related costs: – Intermodal operations – Equipment rents – Joint facilities • Slower network velocity

$406

2013

6

$452

2014

Materials and Other Fourth Quarter 2014 vs. 2013 ($ millions)

Net increase of $29 / 15%.

• Less favorable personal injury adjustment • Higher materials expenses • Higher T&E travel and temporary housing costs

$197

2013

7

$226

2014

Depreciation Fourth Quarter 2014 vs. 2013 ($ millions)

Increase of $7 / 3%.

• Increased capital base

Properties Balance

$233 $37,032

$240

$38,508

Dec DecDec 2013 Dec 2014 2013

8

2014

2013

2014

Income Taxes Fourth Quarter 2014 vs. 2013 ($ millions)

Effective tax rate for the quarter was 35.3%.

$270 Eff. Rate

Eff. Rate

34.5%

35.3%

2013 9

$279

2014

Net Income and Diluted Earnings per Share Fourth Quarter 2014 vs. 2013 ($ millions except per share)

Earnings per Share ties 4th quarter record. Diluted Earnings per Share

Net Income Change vs. Prior Period:

$513

2013

10

$511

2014

-%

Change vs. Prior Period:

$1.64

2013

$1.64

2014

-%

Operating Results Year ($ millions)

Record operating results.

2014 Railway operating revenues

$

Railway operating expenses Income from railway operations Railway operating ratio

11

$

11,624 $

2013 11,245 $

Favorable (Unfavorable) $ % 379

3%

8,049

7,988

(61)

(1%)

3,575 $

3,257 $

318

10%

1.8

3%

69.2

71.0

Net Income and Diluted Earnings per Share Year ($ millions except per share)

Record Net Income and Earnings per Share. Net Income Change vs. Prior Period:

Diluted Earnings per Share + 8% *

Change vs. Prior Period:

$ 1,910

$1,850 *

2013

$ 6.04

$2,000

2014

$5.85 *

2013

$6.39

2014

*Excluding Michigan land sale gain - please see reconciliation to GAAP posted on our web site. 12

+ 9% *

Cash Flows and Balances Year End ($ millions)

Cash from operating activities

2014

2013

$ 2,852

$ 3,078

Capital expenditures *Free cash flow

(2,118) $

734

(1,971) $ 1,107

Returns to shareholders:

Dividends

$

(687) $

(637)

Share repurchases

$

(318) $

(627)

*Please see reconciliation to GAAP posted on our web site. 13

2015 Capital Expenditures ($ millions)

Projected spending - $2.4 billion.

$2,160

$2,395

$2,241 $1,971

2011

14

2012

2013

$2,118

2014

2015B

2015 Capital Improvement Budget Core vs. Growth vs. PTC

Maintain the network, improve service, invest for growth.

 Core/Replacement Investments  Rail, Tie, Ballast programs 9%

 Freight car replacements

20%

 Locomotive rebuild program

 Growth/Productivity Investments  Intermodal terminals and equipment 71%

 Used locomotives  Infrastructure improvements

 Positive Train Control 15

2015 Capital Improvement Budget ($ millions) $199

Total Spending = $2.4 Billion

$220 Roadway $65

$927

Infrastructure Facilities & Terminals Locomotives Freight Cars

$404

Technology PTC Other Projects $104

$238 $238 16

Thank You

17

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