NS 1st Quarter Net Income Up 12%

Norfolk Southern said on Wednesday that its first quarter 2017 net income rose by 12 percent to $433 million compared with the same period in 2016.

The railroad said it set records for operating ratio, income from operations and earnings per share.

The increase in net income was attributed to a 7 percent rise in income from railway operations, as well as a lower effective income tax rate.
Diluted earnings per share climbed 15 percent to $1.48 compared with the EPS for the first quarter of 2016.

Railway operating revenue rose 6 percent to $2.6 billion compared with 2016 as overall volume rose 5 percent due to growth in coal, intermodal and merchandise. Income from railway operations was a record $773 million, up 7 percent year over last year.

The operating ratio of 70.0 percent was a first quarter record, compared with 70.1 percent in 2016.

Operating expenses increased 6 percent to $1.8 billion compared with 2016. NS said that targeted expense cuts were offset by inflation, particularly related to fuel expenses, which were higher by $64 million.

Chief Marketing Officer Alan Shaw said overall traffic volume increased 5 percent. Merchandise traffic grew 1 percent, intermodal rose 4 percent, and coal was up by 21 percent.

A 71 percent spike in export coal was an aberration, Shaw said, due to the effect of cyclone damage in coal-producing regions of Australia. That tightened the global supply and created demand for U.S. coal.

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

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

“Norfolk Southern’s record results for the first quarter demonstrate the efficacy of our strategic plan, under which we are enhancing our service quality and network performance while driving significant efficiency improvements,” said Chairman, President and Chief Executive Officer James Squires in a statement. “Our focus on providing a superior service product has positioned us for growth and, coupled with our cost discipline, has contributed to a solid start to the year. Our strategy provides a strong foundation for growth at low incremental costs, a powerful formula for enhanced shareholder value.”

During a conference call with in analysts, Squires said NS is watching closely what is happening in the railroad industry, particularly at competitor CSX.

Squires said NS still plans to cut its operating ratio below 65 percent and continue to boost productivity while reducing costs by $650 million by 2020.

In 2017, Squires said NS expects to save $100 million in expenses.

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

NS Chief Operating Officer Mike Wheeler said that although the railroad has ceased yard humping operations at three yards in the past couple years its 10 hump yards are a vital part of the network and are key to providing good service to merchandise customers

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

He said NS has made improvements in key service metrics, including train length and locomotive productivity.

Train lengths grew for the sixth straight quarter largely due to an “aggressively accelerating use of distributed power.”

NS has mothballed 50 locomotives from its switching and local service operations and is eyeing the retirement of another 100 engines in the second quarter. Since early 2016, NS has sidelined 300 locomotives.

Wheeler said a smaller locomotive fleet reduces maintenance costs and improves fuel efficiency, noting that the railroad realized a 6 percent improvement in fuel efficiency in the first quarter of 2017.

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