Reports Show Challenges Facing Railroads

Investment banking firm Cowen and Company recently released three reports that reflect tough times for railroads yet contend that things are not catastrophic either.

The New York-based firm noted that in the fourth quarter of 2019 freight volumes fell by 7.5 percent when compared to the same period of 2018.

In comparing the last quarter of 2019 to the earlier quarters of the year, carloads fell by 1.4 percent, 4.8 percent and 4.4 percent by respective quarter for a full-year decline of 4.0 percent compared with 2018.

Cowen said railroads last year handled volumes that were similar to those expected during an economic recession.

It said, though, that the advent of precision scheduled railroading has enabled Class 1 railroads to reduce their expenses, which helped to stimulate earnings growth despite volume declines.

Among the long-term forces affecting railroads are intermodal growth, decline in export coal, and the state of the overall economy.

Cowen said these resulted in Class I railroads falling short of expectations.

It likewise has lowered its expectations for 2020 on earnings per share forecasts for most Class 1 railroads.

The exception is Kansas City Southern because Cowen analysts believe that carrier will benefit from the shifting of supply chains to South and Central Mexico.

In another study released by Cowen, a survey of rail shippers found they are expecting price increases of 3.0 percent below the survey’s long-term average.

Cowen described this as a positive for railroads but noted carriers continue to confront a challenging near-term demand environment and the worst volume declines since 2009.

The report said data show that railroads haven’t sought to increase their volume by lowering their freight rates.

The average positive rating given by shippers to rail service rose to 60 percent from 53 percent the third quarter of 2019 with satisfaction rising with all railroads other than Norfolk Southern.

In a third report, Cowen said railcar demand appears to be holding at or just below the levels of the past quarter despite rail traffic declines and the continued implementation of PSR.

Cowen said about 51 percent of all shippers surveyed said they will or may order railcars in the next 12 months.

That compares with 53 percent who said that during the third quarter survey.

About 49 percent of shippers said they do not plan to order railcars compared to 48 percent in the previous quarter survey.

NS Sets 4 Quarterly Financial Records

Norfolk Southern said on Wednesday that it set four quarterly financial records in the first quarter of 2018.

The records included a new first quarter high or low for earnings per share at $1.93, up 30 percent year over year; net income at $552 million, up 27 percent; income from operations at $835 million, up 10 percent; and the operating ratio at 69.3, down 1.3 points.

In a news release, NS said that a lower effective income tax rate helped boost net income.

Railway operating revenue rose 6 percent to $2.7 billion and volume increased 3 percent to 1.9 million units compared with first-quarter 2017 results. The operating ratio was 69.3 percent, also a first-quarter record.

Intermodal revenue jumped 19 percent to a record $678 million and volume rose 8 percent to 1 million units.

NS said its intermodal business benefited from tightening truck capacity, rising truck prices, ongoing e-commerce growth and increasing rail/intermodal rates.

Coal revenue increased 3 percent to $343 million, although volume declined 4 percent to 249,100 units, and merchandise revenue inched up 1 percent to $1.6 billion while volume in the sector decreased 2 percent to 606,100 units.

Railway operating expenses increased by 4 percent to $64 million year over year due to $1.9 billion as higher fuel prices and increased costs associated with lower network velocity were offset by efficiency gains.

Fuel costs jumped 25 percent to $266 million as the price for a gallon of diesel climbed 21 percent in the quarter.

“We are pleased with the continued improvement in our financial performance and the growth in our business,” said NS Chairman, President and CEO James Squires in a statement. “We are focused on improving service for our customers to position us for future growth and efficiency that will benefit both our customers and shareholders.”

Squires said the outlook for the remainder of 2018 is promising.

“We are increasing our expected annual share repurchases to $1.5 billion, confident that we will deliver strong financial performance,” Squires said.

Winter Put CN 1st Quarter Revenue in Deep Freeze

Canadian National blamed harsh winter weather for depressing its first quarter financial numbers.

CN said first quarter revenue was flat at $3.2 billion while operating income fell 16 percent to $1 billion.

Net income declined by 16 percent to $741 million and operating expenses jumped 9 percent to $2.2 billion compared with the first quarter of 2017 results. All figures are in Canadian dollars.

The Montreal-based company said revenue ton-miles declined 4 percent to 57.2 million but carloads increased 3 percent to 1.4 million units. The operating ratio rose 6 points to 67.8.

By traffic segment, coal and intermodal revenue rose 10 percent to $142 million and $814 million, respectively, and metals and minerals revenue increased 7 percent to $388 million on a year-over-year basis.

However, grain and fertilizers revenue fell 11 percent to $539 million, forest products revenue dropped 6 percent to $422 million, automotive revenue declined 4 percent to $197 million, and petroleum and chemicals revenue decreased 3 percent to $564 million.

Aside from bad weather, CN also said its flat revenue resulted from a negative translation impact from the stronger Canadian dollar, which partly was offset by higher fuel surcharges and rates. The increase in operating costs was caused by weather, higher training costs for new employees and higher fuel prices.

CN officials said the harsh winter affected train lengths and caused operational performance to further slip after eroding since fall because of an unexpected double-digit traffic gain last year.

“We had lower resiliency in some high-volume areas going into winter, [which] made maintaining fluidity very challenging. Fluidity is the most important thing,” said Executive Vice President and Chief Operating Officer Mike Cory. “This lower resiliency, coupled with the extreme harsh winter conditions in those same areas, resulted in a decline in the service levels and an increase in [operational] costs.”

CN officials said they expect to spend $400 million — compared with a previously announced $250 million — to complete 29 major infrastructure capacity projects, mainly in western Canada. This includes new double track, more and longer sidings, and yard capacity expansions.

The railroad is also acquiring additional locomotives and box cars, along with hiring more train crew members.

“Our metrics are showing sustained, sequential improvement, and that momentum will build as we continue to expand track capacity, add crews and bring on new locomotives,” said interim CN President and Chief Executive Officer Jean-Jacques Ruest. “With the people, equipment and infrastructure in place, and with a solid pipeline of growth opportunities ahead of us, we are confident in our ability to bring long-term value creation to our customers and shareholders.”

CN Net Income Falls 6% in 4th Quarter 2017

Canadian National said on Wednesday that its fourth quarter adjusted net income fell 6 percent to CA$897 million and adjusted diluted earnings per share fell by 2 percent to CA$1.20.

The financial figures include the effect of the Tax Cuts and Jobs Act approved in the United States in December.

Including the tax benefit, CN reported that quarterly net income rose 156 percent to CA$2.6 billion and diluted EPS jumped 164 percent to CA$3.48 compared with the fourth quarter of 2016.

Operating income for the quarter fell 7 percent to CA$1.3 billion, but revenue climbed 2 percent to CA$3.3 billion compared with a year ago.

Quarterly operating expenses increased 9 percent to CA$1.98 billion compared with 2016. The operating ratio was 60.4 percent, an increase of 3.8 points over 2016.

For all of 2017, CN’s adjusted net income increased 6 percent to CA$3.78 million and adjusted diluted EPS rose 9 percent to CA$4.99. Operating income increased 5 percent to CA$5.6 billion compared with the previous year.

CN’s revenue rose 8 percent year over year to CA$13 billion. Operating expenses for 2017 jumped 11 percent to CA$7.5 billion.

The operating ratio in 2017 was 57.4 percent, an increase of 1.5 points over 2016.

“Our growth continues to outpace the strengthening economy and I am pleased with the results our dedicated team generated in 2017,” said CN CEO Luc Jobin in a statement.

“Throughout the year we faced rapidly changing market demands and in the fourth quarter dealt with challenging operating conditions, including harsh early winter weather across the network, impacting our performance.”

Jobin said CN will add this year additional train crews and increase capital spending to a record CA$3.2 billion, which includes the acquisition of 60 new locomotives, expanding track capacity and improving intermodal terminals.

Capital spending will include CA$1.6 billion for track infrastructure maintenance and CA$400 million for installation of positive train control in the United States.

CSX Expects Dip in 4th Quarter Earnings

CSX is projecting that its fourth quarter earnings will be below those that it posted in the same period of 2014.

At the Baird International Conference in Chicago this week, CSX Chief Financial Officer Frank Lonegro said the company expected mid-single digit, full-year earnings per share growth.

Longegro said intermodal growth and efficiency initiatives are offsetting a $450 million decline in coal revenue.

“CSX has leveraged its diverse portfolio and network reach to consistently deliver record earnings per share growth, despite declines in coal revenue of more than $1 billion over the past four years,” Longegro said in a statement. “While we expect the energy market headwinds to continue in 2016, we are focused on capturing opportunities in intermodal and industrial markets, and on delivering excellent service for customers to support our pricing, growth and efficiency targets.”

The railroad expects to continue to see growth in 2016 in intermodal traffic due to highway-to-rail conversions.

CSX also expects that efficient service for automotive customers will lead to industrial market growth as North American production of light vehicles increases.