Norfolk Southern volume and pricing growth overcomes impact of congestion

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NS CEO James Squires
Norfolk Southern
NORFOLK, Va. — Norfolk Southern reported record first-quarter financial results today as traffic growth, higher rates, and lower taxes offset the impact of congestion and a slower railroad.

Net income for the quarter was up 27 percent, to $552 million, on revenue of $2.7 billion, a 6-percent increase. Earnings per share was $1.93, up 30 percent and easily beating Wall Street analyst estimates of $1.77, according to an I/B/E/S survey.

NS’s operating ratio improved to 69.3 percent, a first-quarter record, from 70.6 percent a year ago. It was the railroad’s ninth straight quarter of year-over-year operating-ratio improvement.

“We delivered record financial results in the first quarter even with operational challenges,” CEO Jim Squires said on the railroad’s earnings call on Wednesday morning.

The financial impact of Norfolk Southern’s service problems came in at $43 million in increased costs, below the railroad’s $50-million estimate. Costs rose 4 percent overall as average train speeds dipped 16 percent and terminal dwell rose 19 percent compared to the first quarter of 2017.

But the congestion, which is centered on the southern reaches of the system, also muted merchandise traffic growth, Chief Marketing Officer Alan Shaw says.

Merchandise volume was down 2 percent for the quarter. Coal volume was down 4 percent. Intermodal traffic, however, grew 8 percent amid tight truck capacity, a strengthening economy, and growth in ecommerce.

Overall, traffic volume on NS was up 3 percent — and revenue grew faster thanks to strong price growth, particularly in intermodal. Intermodal revenue per unit was up 10 percent.

“Our primary focus right now is restoring service levels for our customers,” Chief Operating Officer Mike Wheeler says.

NS has received 66 of the 90 locomotives it is leasing over the short-term. The extra power will help NS dig out of congestion amid surging volume and allow the railroad to convert 125 DC locomotives to AC-traction units this year, Wheeler says.

The railroad’s new consolidated dispatching center, currently under construction at NS operations headquarters in Atlanta, will be complete in October. All dispatchers will be relocated to Atlanta by November.

NS doesn’t expect the single dispatching center to save money. But Wheeler says it will help smooth operations by improving coordination and providing a systemwide view.

NS has stepped up hiring of conductors to help increase fluidity and handle anticipated traffic growth, Wheeler says. The railroad has 400 new hires in the training pipeline and will qualify 500 other conductors, who were hired last year, over the next four months.

Squires was asked whether NS would take a more aggressive stance on reducing its operating ratio in light of improvements at rival CSX Transportation — and whether NS would mimic some of the changes at CSX.

CSX is shooting for an operating ratio of 60 percent by 2020, which is 5 points below the NS target. Is that gap sustainable over the long-term, or could CSX’s lower costs result in NS losing market share?

“We feel a great sense of urgency to drive further financial improvements,” Squires says, noting that NS will continue to push for lower costs once it hits its operating ratio goal.

Squires was confident that once network velocity is restored, and service returns to previous levels, NS will be able to bring even more traffic growth to the railroad.

NS expects continued strong growth in intermodal volume this year, along with growth in merchandise traffic. Coal volume should remain flat this year.

NS increased its share buyback program to $1.5 billion for the year.
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