Norfolk Southern sets all-time operating ratio mark as volume and revenue climb

Railroad gains some traffic due to CSX service problems
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NORFOLK, Va. — Norfolk Southern’s net profit climbed 23 percent for the second quarter as traffic and revenue growth combined with productivity gains to help the railroad set an all-time record for operating ratio.

NS on Wednesday reported its revenue rose 7 percent, to $2.6 billion, as gains in coal and intermodal traffic led to a 6-percent increase in volume. Income from operations was up 15 percent, to $888 million. The railroad’s operating ratio improved for the sixth straight quarter, to 66.3, down from 68.6 a year ago.

“Norfolk Southern’s strong financial results and all-time record operating ratio reflect the power of our team, successful execution of our dynamic plan, and focus on operating even more efficiently while providing high quality service to customers,” CEO Jim Squires said on the railroad’s earnings call.

NS executives were asked whether any traffic had shifted from CSX Transportation, whose service was rated worst in the industry on a recent Cowen & Co. shipper survey.

“We have seen some business move over to us. It’s a small amount, but it’s early,” NS Chief Marketing Officer Alan Shaw says. The railroad’s primary competition remains trucks, Shaw says, but NS will take market share from CSX where it makes sense to do so.

CSX officials have acknowledged service issues related to broad operational changes being made under new CEO E. Hunter Harrison. But they have said that only a couple customers could say they have experienced significant service failures.

NS intermodal traffic grew 6 percent overall during the quarter. Domestic business picked up 6 percent due to highway conversions and new service offerings, Shaw says. International intermodal business was up 5 percent, thanks in part to a 13 percent increase in volume from East Coast ports. NS continues to see international volume shift from West Coast ports to the East Coast as a result of the expanded Panama Canal, Shaw says.

Coal traffic was up 27 percent as shipments of utility and export metallurgical coal both soared. NS gained market share for utility coal moves, which increased 23 percent due to lower utility stockpiles and higher natural gas prices. Export coal volume spiked 78 percent due to constrained Australian supply and increased steelmaking in China.

NS merchandise traffic was flat. Metals and construction was the only business segment that grew. It was up 5 percent, but that was offset by a 7-percent decline in chemicals traffic, and smaller losses in automotive, agriculture, and paper, clay and forest traffic.

Norfolk Southern’s key operational metrics slipped during the quarter, due partly to flooding near its Cincinnati terminal and on its line linking Louisville, Ky., and Kansas City, and issues related to fires in northern Florida.

Average train speed decreased, while terminal dwell grew.

“We’ve turned the corner on that,” Squires says. Train speed has increased 10 percent and terminal dwell bounced back to previous levels.

NS executives expect the railroad to reach $100 million in productivity gains this year. During the quarter, NS idled the hump at its yard in Chattanooga, Tenn.; eliminated the Central Division; and retired 100 locomotives. The railroad also handled 6 percent more carloads with 3 percent fewer employees compared to last year and 10 percent fewer people compared to 2015.

NS set new quarterly marks for locomotive productivity, fuel efficiency, and train length, Chief Operating Officer Mike Wheeler says.

For the rest of the year, NS expects continued growth in intermodal and coal traffic. Merchandise traffic is likely to decline slightly, executives said, due in part to slowing auto production and assembly plant downtime.

NS said it would boost its share buyback program by 25 percent, to $1 billion for the year.

NS reported earnings per share of $1.71, up 26 percent. Wall Street analysts were expecting NS to report earnings of $1.65 per share, according to Thomson Reuters I/B/E/S.

NEWSWIRETrains News Wire

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