Norfolk Southern sticking to its plan as it watches changes at CSX Transportation

Railroad reports record first-quarter earnings as traffic grows
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NORFOLK, Va. — Norfolk Southern set first-quarter records for earnings per share, operating income, and operating ratio amid growth in intermodal, merchandise, and coal traffic, the railroad reported today.

But what Wall Street analysts wanted to know is how NS will respond to the deep cost-cutting and service changes at rival CSX Transportation under new CEO E. Hunter Harrison.

“We are watching closely what’s happening in the industry with our peer and we are doing many of the same things, albeit at a somewhat more measured pace,” CEO Jim Squires said during the earnings call this morning. “We will continue to do so.”

Last week CSX said its earnings per share would increase 25 percent this year as it pushes its operating ratio to the mid 60-percent range and into the low 60s in 2018.

Squires emphasized that NS’s plan to reduce its operating ratio below 65 percent by 2020 is sustainable and is built on providing excellent service and growing with its customers.

But NS will strive to boost productivity and cut costs toward its goal of finding $650 million in annual savings by 2020.

“Cost consciousness is in our bones,” Squires says, noting NS is on track to deliver $100 million in savings this year on top of last year’s $250 million. The NS plan, he added, “will deliver the goods for shareholders.”

The NS board has added bonus incentives for executives to pick up the pace of improvements.

“We are looking at everything out there to drive acceleration of our financial results,” Squires says.

Squires was asked if NS expected to gain market share if CSX suffers service disruptions as it streamlines operations. “We’re always looking for good revenue growth opportunities,” he replied.

CSX has shut down the humps at four of its 12 hump yards since Harrison arrived on March 6, and will convert several more hump yards to flat switching facilities. Will NS follow suit?

Norfolk Southern’s 10 hump yards are a vital part of the network and are key to providing good service to merchandise customers, Chief Operating Officer Mike Wheeler says, noting that the railroad idled three hump yards over the last couple of years.

NS will rationalize terminals if it can do so without affecting service, Wheeler adds.

As evidence that its plan is working, NS cited ongoing improvements in key service metrics, including train length and locomotive productivity. Train lengths grew for the sixth straight quarter, Wheeler noted, thanks in part to “aggressively accelerating use of distributed power.”

Even as traffic volume increased 5 percent in the quarter, NS was able to remove 50 units from the local and yard locomotive fleet by refining its switching and local service operating plans. Wheeler expects to retire another 100 units in the second quarter. In all, NS has reduced the fleet size by 300 units since the beginning of last year.

Having a smaller locomotive fleet reduces maintenance costs and improves fuel efficiency, Wheeler says. In the first quarter, NS saw a 6-percent improvement in fuel efficiency.

Squires says the NS plan is about pairing efficiency gains with revenue growth. The railroad aims to align its internal service metrics with those that are most important to customers as it moves to focus on the entire supply chain, Squires says. It’s developing new technology, for example, to more reliably distribute and deliver empty freight cars.

“We are collaborating with our customers to become a more integral part of their supply chain,” Chief Marketing Officer Alan Shaw says.

For the quarter, NS reported net income was $433 million, up 12 percent versus a year ago, on operating revenue of $2.6 billion, a 6-percent increase. Earnings per share was up 15 percent, to $1.48.

The operating ratio was 70 percent, down from 70.1 percent a year ago. A 46-percent spike in fuel prices contributed to a 6-percent rise in expenses for the quarter, says Chief Financial Officer Marta Stewart.

Overall traffic volume increased 5 percent, led by growth in coal, intermodal, and steel, Shaw says. Merchandise traffic grew 1 percent, intermodal 4 percent, and coal 21 percent.

The 71 percent surge in export coal is a flash in the pan, Shaw says, due to the effect of cyclone damage in coal-producing regions of Australia. That has tightened global supply and driven up demand for U.S. coal.

NS expects demand to remain strong in the second quarter before returning to more normal levels in the second half of the year, Shaw says.

Utility coal shipments grew 14 percent in the quarter thanks in part to higher natural gas prices, Shaw says.

NEWSWIRETrains News Wire

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