Second Quarter Earnings ReleaseSecond Quarter Earnings Release
Jim Young, Chairman and CEO
July 19, 2007
2
Second Quarter Results
2006
$1.44
Diluted Earnings per Share
2007
$1.65+ 15% • Challenging Quarter
– Economy
– Weather
• Pricing
• Operating Efficiency
• Strong ServiceImprovement
3
Operating Efficiency Drives Quality ServiceSecond Quarter
88.1
2004 2005
86.0
2006 2007
81.780.5
2004 2005 2006 2007
6163
69
80
Operating Ratio (%) Customer Satisfaction
Greater Service Relia
bility
Improved Efficiency
Second Quarter Marketing & Sales ReviewSecond Quarter Marketing & Sales Review
July 19, 2007
Jack Koraleski, Executive VP – Marketing & Sales
5
Second Quarter Overview
Commodity Revenue$3.9 Billion, +3%
($Millions)
IndustrialProducts$815 -1%
Intermodal$718 +3%
AgProducts$604 +7%
Autos$389 Flat
Chemicals$578 +8%
Energy$761 +4%
Highlights
• Improved Average RevenuePer Car
• Revenue
– Record Quarter: Chemicals
– Record Second Quarter: AgProducts, Energy &Intermodal
• Customer SatisfactionImprovement
6
Intermodal
Agricultural
Chemicals
Automotive
Industrial
Energy
TOTAL
Second Quarter Carloadings
-3%
-10%
2%
-4%
-2%
-6%
Flat
Drivers
• Heavy Rains & Flooding
• Market Softness
• Domestic IntermodalOutperformsInternational
• Ethanol GrowthContinues, But ExportFeed Declines
• Growth in Fertilizer andLiquid & Dry Chemicals
7
Industrial ProductsSecond Quarter
Quarterly Drivers
• Production Issues & WetWeather Impact Stone
• Softness in Lumber &Panel Products
• Natural Gas Drilling DrivesNon-Metallic Minerals
CO/UT23%
Lumber Volume*
2006 2007
60
50
-18%
Stone Volume*
2006 2007
101
86
-15%
Non-Metallic Volume*
2006 2007
2930
+4%
*Volume in (000s) of carloads
8
EnergySecond Quarter
Quarterly Drivers
• Weather Impacts
• Mine Production
CO/UT23%
SPRB Tonnage(Millions)
48
46
2006 2007
-4%
SPRB Trains Per Day
32.7
30.9
34.9
32.8
April May June JulyMTD
9
IntermodalSecond Quarter
2006
258
Domestic Volume*
2007
263
+2%
2006
571
International Volume*
2007
564
-1%
Quarterly Drivers
• New/Improved DomesticServices Driving Growth
– Southeast
– Mexico
– I-5 Corridor
• International VolumeDeclines Slightly WithSofter Imports
*Volume in (000s) of carloads
10
Customer Satisfaction Index
Good
60
70
79
63
69
66
74
67
75
2005 2006
Q1Q1 Q2 Q3 Q4
2007
Q1 Q2 Q3 Q4 Q2
80
11
Peak Season Volume Growth
2007 Commodity Outlook
• Third Quarter
– Volume: Flat +/-
• Full Year
– Volume: -1% to Flat
– Revenue: +5% +/-
2Q 3Q 2Q 3Q 2Q 3Q 2Q 3Q
2004 2005 2006 2007Est.
+2%
+2%
Flat
Second Quarter Operating ReviewSecond Quarter Operating Review
Dennis Duffy, Executive VP – Operations
July 19, 2007
13
CustomerCustomerEmployeeEmployee
Safety - Top Priority
2.90
1.52
48%
2001 2007*
Reportable InjuriesPer 200,000 Man-Hours
PublicPublic
3.36
2.39
29%
2001 2007*
Reportable IncidentsPer Million Train Miles
Crossing AccidentsPer Million Train Miles
4.79
3.52
27%
2001 2007*
*Through June 30
14
Network ChallengesSecond Quarter
Weather Interruptions
• 45 Network Impact Days
– Broad Midwest Area
– Outages in 5 States
• Resilient Network
– Resources
– Recovery ProcessesN. Little Rock
El Paso
EaglePass
LaredoBrownsville
Houston
NewOrleans
Omaha
Twin Cities
Ft. Worth
Duluth
Chicago
St. LouisDenver
Memphis
KansasCity
San Antonio
15
Network Performance UpdateSecond Quarter
AAR VelocityMPH
Good
2006
AAR Terminal DwellHours
Good
27.6
24.7
20072006
311
Good
20072006
325
AAR Inventory(000)
Freight Car UtilizationDays
20072006
Good
AAR VelocityMPH
Good
21.621.2
2007
10.5
10.0
16
Productivity GainsSecond Quarter
Process Initiatives
Process Initiatives
Organizational Initiatives
Organizational Initiatives
“Iron in the
Ground”
“Iron in the
Ground”
Impro
vem
ent
Impro
vem
ent
Technology Initiatives
Technology Initiatives
$$ • Operational Efficiency
– 3% fewer carloads
– 7% fewer train starts
– 4% greater train size
• Operating IncomeStatement
• Process & Technology
– Unified Plan
– Distributed Power
17
New ServiceBlue Streak Truck-Competitive Product
Premier Service Route:
• New Service via MeridianSpeedway May 21, 2007
• Shreveport Gateway
• 130 miles shorter thanMemphis Gateway
• Over 200 miles shorter thanNew Orleans Gateway
Performance Improvements:
• Premium Service – 12 hours
• Standard Service – 24 hours
AtlantaLosAngeles
18
CapitalFirst Half 2007 Highlights
Sunset Corridor Expansion
• Sunset Double Track
• Terminal Improvements
SPRB Capacity Additions
• Joint Line Progress
• Central Corridor CTC
Maintenance
• Sunset ‘07 Season - Complete
• I-5 Tunnel Project – In Process
• Central Corridor – In Process
New Locomotives
• 210 of 300 Units Delivered
TerminalImprovements
CorridorImprovements
KC
St. Louis
Yuma
NorthPlatte
LosAngeles
Ft. Worth
Tucson
SanAntonio
El Paso
Chicago
SaltLakeCity
Angleton
Shreveport
Houston
HinklePortland
Oakland
19
Third Quarter OutlookPeak Season
• Strong Gains in Safety
• Resilient Network
• Improving Productivity& Service Reliability
• Positioned for Growth
Second Quarter Financial ReviewSecond Quarter Financial Review
Rob Knight, CFO
July 19, 2007
21
Income Statement SummarySecond Quarter – In Millions
Operating Revenues $4,046 $3,923 +3%
Operating ExpensesSalaries and Benefits 1,163 1,140 + 2Fuel and Utilities 766 794 - 4Equipment & Other Rents 370 371 FlatDepreciation 327 308 + 6Materials and Supplies 186 178 + 4Purchased Services & Other 447 415 + 8
Total Operating Expenses 3,259 3,206 + 2
Operating Income $ 787 $ 717 +10
2007 2006 Pct Chg
22
Revenue DriversSecond Quarter
• 3% Volume Decline
• 7% ARC Increase
• Mileage-based FuelSurcharge
– Increased entry point to$2.30/gallon On-HighwayDiesel Fuel
$2,901
2004 2005
$3,196
2006 2007
$3,742$3,865
+3%
$1,225
2004 2005
$1,337
2006 2007
$1,490$1,589
+7%
Average Revenue Per Car ($’s)
Total Commodity Revenue (Millions)
23
Salaries & BenefitsSecond Quarter – In Millions
$1,140
2006 2007
$1,163+2%
• Workforce Levels -1%
• Increased Wage/BenefitCosts
• Lower Crew Costs
– Volume
– Training
– Increased Productivity
24
Fuel & UtilitiesSecond Quarter
Fuel PriceDollars Per Gallon
Fuel ConsumptionGallons (in millions)
20072006
$2.17$2.15
20072006
346
• Reduced Diesel Consumption
– Lower Volumes
• Higher Gasoline and UtilityCosts
• Third Quarter Diesel Fuel PriceCould Exceed Last Year’sRecord Level
– Current Spot Price =$2.33/gallon
– Third Quarter 2006 =$2.27/gallon
332
25
Equipment & Materials ExpenseSecond Quarter – In Millions
$178
2006 2007
$186+4%
Materials and Supplies:
• Inflation
• Increased Maintenance onLarger Locomotive Fleet
Rent Expense
Materials & Supplies
$370$371Flat
2006 2007
Equipment & Other Rents:
• Lower Volume RelatedCosts
• Improved Car Cycle Time
• Increased LocomotiveLease Expense
26
Purchased Services & OtherSecond Quarter – In Millions
$415
2006 2007
$447+8%
• Lower Casualty Costs
• Increased ContractExpenses
• Higher Crew Lodging andTransportation Costs
• Less Reimbursable CarWork
27
Operating Ratio (%)Second Quarter
88.1
2004 2005
86.0• Pricing Improvement
• Operational EfficiencyGains
2006 2007
81.780.5
28
Full Income StatementSecond Quarter – In Millions
($ Millions Except EPS)
Operating Revenues $4,046 $3,923 + 3%
Operating Expenses 3,259 3,206 + 2
Operating Income 787 717 +10
Other Income – Net 36 29 +24
Interest Expense (120) (120) Flat
Income Before Income Taxes 703 626 +12
Income Tax Expense (257) (236) +9
Net Income $ 446 $ 390 +14
Diluted EPS $1.65 $1.44 +15
2007 2006 Pct Chg
29
Share Repurchase Program
• Second Quarter Purchases
– 3.6 million shares
– $116.40 average price/share
• Year-To-Date
– 5.7 million shares; 2% ofoutstanding shares
– 28% of program
First Half 2007
5,700
20,000
Shares Repurchased (000’s)
Total Program
30
2007 Outlook
3rd Quarter 2007 Outlook:
• EPS Growth = + 10 to 15%
Full Year:
• Revenue Growth = +5% +/-
– Volume Growth = -1% to Flat
• Operating Ratio below 80
• EPS Growth = + 10 to 15%
• ROIC Improvement
Second Quarter Earnings ReleaseSecond Quarter Earnings Release
Jim Young, Chairman and CEO
July 19, 2007
32
Second Half 2007 Drivers
Opportunities
• Coal Demand
• Intermodal
– “Normal” Peak Season
• Agricultural Products
– Record Corn Harvest
• Productivity Initiatives
• Continued YieldImprovement
Challenges
• Coal Supply Chain
– Mines, Rails, Utilities
• Industrial Products
– “Have we seen the bottom?”
• Economy ?
• High Fuel Prices
– Current Spot Price =$2.33/Gallon
Cautionary InformationThis presentation and related materials contain statements about the Corporation’s future that are not statementsof historical fact, including specifically statements regarding the economic outlook and improving the Corporation’sfinancial returns through productivity initiatives and operational efficiency. These statements are, or will be,forward-looking statements as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934.Forward-looking statements also include, without limitation, information or statements regarding: expectations as tocontinued or increasing demand for rail transportation services; expectations regarding operational improvements,including the effectiveness of network management initiatives that have been or will be implemented to improveoperations, customer service, and shareholder returns; expectations as to increased returns, cost savings, revenuegrowth, and earnings; expectations regarding fuel price and our ability to mitigate fuel costs; the time by whichcertain objectives will be achieved, including expected improvements in operations and implementation of networkmanagement initiatives; estimates of costs relating to environmental remediation and restoration; proposed newproducts and services; expectations that claims, lawsuits, environmental costs, commitments, contingent liabilities,labor negotiations or agreements, or other matters will not have a material adverse effect on our consolidatedfinancial position, results of operations, or liquidity; statements concerning projections, predictions, expectations,estimates or forecasts as to the Corporation’s and its subsidiaries’ business, financial, and operational results, andfuture economic performance; and statements of management’s beliefs, expectations, goals, and objectives andother similar expressions concerning matters that are not historical facts.
Forward-looking statements should not be read as a guarantee of future performance or results, and will notnecessarily be accurate indications of the times that, or by which, such performance or results will be achieved.Forward-looking information, including expectations regarding operational and financial improvements and theCorporation’s future performance or results are subject to risks and uncertainties that could cause actualperformance or results to differ materially from those expressed in the statement.
Important factors, including risk factors, could affect the Corporation’s and its subsidiaries’ future results and couldcause those results or other outcomes to differ materially from those expressed or implied in the forward-lookingstatements. Information regarding risk factors and other cautionary information are available in the Corporation’sAnnual Report on Form 10-K for 2006, which was filed with the SEC on February 23, 2007. The Corporationupdates information regarding risk factors if circumstances require such updates in its periodic reports on Form 10-Q and its subsequent Annual Reports on Form 10-K (or such other reports that may be filed with the SEC).
Forward-looking statements speak only as of, and are based only upon information available on, the date thestatements were made. The Corporation assumes no obligation to update forward-looking information to reflectactual results, changes in assumptions or changes in other factors affecting forward-looking information. If theCorporation does update one or more forward-looking statements, no inference should be drawn that theCorporation will make additional updates with respect thereto or with respect to other forward-looking statements.References to our Web site are provided for convenience and, therefore, information on or available through thewebsite is not, and should not be deemed to be, incorporated by reference herein.
Second Quarter Earnings ReleaseSecond Quarter Earnings Release
July 19, 2007
Q&A