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.

G&W Operating Fell in 2nd Quarter

Genesee & Wyoming reported this week that its operating income in the second quarter of 2019 fell by 9 percent to $4.2 million.

Revenue declined 4 percent, to $571.5 million, G&W said, while earnings per share increased 23 percent, to 90 cents.

The company attributed the operating income decline to slumping international operations that offset improved North American results.

On a same-railroad basis, G&W reported higher revenue and profits for its North American operations despite a 3.5 percent decline in traffic.

Operating income rose 5 percent to $84.3 million, as revenue increased 2.6 percent, to $333,934 on a same-railroad basis.

The North American operating ratio improved by a point, to 75.4 percent for the quarter.

Traffic declined at G&W’s 114 North American railroads amid a volume slump.

“The decrease in traffic from existing operations included decreases of 11,206 carloads of coal and coke traffic, 4,221 carloads of metals traffic, 3,734 carloads of pulp and paper traffic, 2,307 carloads of lumber and forest products traffic and 1,683 carloads of other commodity traffic, partially offset by increases of 5,418 carloads of agricultural products traffic and 1,015 carloads of chemicals and plastics traffic,” G&W said in a regulatory filing.

CSX Sets Operating Ratio Record in 2nd Quarter

CSX announced on Wednesday that during the second quarter of 2018 it set a record for its lowest quarterly operating ratio and said that along with gains in profits and revenues are evidence that its scheduled railroading operations model has begun to pay off.

Net earnings were $877 million, or $1.01 per share, compared with $510 million, or 55 cents per share for the second quarter of 2017.

The operating ratio fell to 58.6 percent, which was a drop of 4.9 points compared to the operating ratio of the same quarter of 2018.

In a news release, CSX said the operating ratio announced this week is adjusted for the impact of one-time restructuring costs.

In a statement, CSX CEO Jim Foote called the operating ratio “clearly the lowest ever for CSX and, I believe, the lowest ever by a U.S. railroad.”

Revenue increased 6 percent, to $3.1 billion for the quarter.

Earnings per share rose 84 percent, to $1.01, topping Wall Street estimates of 87 cents per share.

Analysts credited the improved showing to the effects of tax reform and share buybacks.

“Two words sum up everything: Great performance,” Foote said during an earnings call with investors and Wall Street analysts.

Freight traffic on CSX rose 2 percent for the quarter, led by a 7 percent rise in coal shipments. However, CSX said utility coal was down due to competition from natural gas.

CSX officials expect a strong export coal market to continue for metallurgical and thermal coal.

A boost in international intermodal traffic enabled CSX to post a 2 percent in total intermodal traffic which came despite losses in domestic intermodal volume.

CSX executives project that revenue will increase by mid single-digits compared with their previous forecast of being up slightly.

Foote said the change in outlook came because of expectations for continued strong export coal shipments, higher fuel prices, and a healthy U.S. economy.

Chief Financial Officer Frank Lonegro said that CSX handled more freight with 9 percent fewer crew starts and 13 percent fewer locomotives.

The smaller locomotive and car fleet size meant that the railroad was able to cut its shop craft workforce by 18 percent compared with a year ago.

Overall, CSX’s costs fell during the second quarter by 8 percent with labor expenses dropping by 10 percent.

The improved operating ratio was helped by service improvements that saw train velocity up 7 percent, dwell time down 11 percent and train length up 13 percent on a year over year basis.

By commodity, CSX logged year-over-year second-quarter revenue increases in chemicals (up 7 percent), automotive (7 percent), agriculture and food products (up 2 percent), minerals (up 7 percent), forest products (up 11 percent), and metals and equipment (up 11 percent).

Fertilizer revenue declined 5 percent on an 18 percent drop in volume compared with the same quarter in 2017.

Year over year, coal revenue and volume each rose 7 percent, while intermodal revenue rose 9 percent on a 2 percent increase in volume.

Class 1s to Report Stellar 2nd Quarter Results

Wall Street analysts are expecting North America’s Class 1 railroads to report sterling financial results for the second quarter of this year because traffic has continued to rise and the railroads have also imposed rate increases.

A review of analysts’ projections that was undertaken by Trains magazine found that the Wall Street mavens are expecting earnings per share to rise by an average of 23 percent for all roads except Canadian National.

The rate increases have been made possible in part because of limited capacity in the trucking industry.

However, some analysts believe that railroad service issues have prevented them from reaping traffic growth opportunities, particularly in intermodal traffic.

The railroads have seen their intermodal traffic grow by around 5 to 6 percent and reach record-setting levels, but it could have been higher.

The demand by online retailers, such as Amazon, for brown paper and cardboard boxes has pulp and paper mills operating at high capacity yet they are relying on trucks and not rail to ship that commodity.

Pulp and paper traffic by rail is flat compared to last year and well below the five-year average.

Analysts are likely to be asking questions in coming weeks about how a trade war that is underway with the imposition of tariffs in a tit for tat fashion will affect the financial performance of railroads down the line.

The Association of American Railroads has noted that 42 percent of rail traffic and 35 percent of railroad revenue is linked to trade.

With the trucking industry operating at 100 percent, there remain opportunities for railroads to gain market share in freight volume.

CSX will report its second quarter results on July 17 while Norfolk Southern will issue its report on July 25.

Congestion Hurt G&W 1st Quarter Results

Genesee & Wyoming said that its North American 2018 first quarter financial result were hindered by congestion at several connecting Class 1 railroad that resulted in a limited car supply.

G&W said it posted a 32 percent jump in adjusted diluted earnings per share during the period and that revenue increased 10.7 percent to $574.7 million from $519.1 million a year ago.

Operating income rose 14.5 percent to $86.9 million, while adjusted operating income climbed 2.7 percent to $87.4 million compared to first-quarter 2017.

Diluted earnings per common share rose to $1.19 versus 42 cents a year ago while adjusted diluted EPS rose 32 percent to 70 cents a share.

The operating ratio for North American operations fell 1.3 points year over year to 77.5.

The reported net income and diluted EPS included a $31.6 million, or 50 cents per share, income tax benefit as a result of the U.S. Short Line Tax Credit for fiscal year 2017.

G&W CEO Jack Hellmann said the company was also negatively affected by lower utility coal shipments in the Midwest.

“Our North American business strengthened in March and we see a favorable outlook for rates and volume for the remainder of 2018, despite ongoing pockets of rail system congestion,” Hellmann said in a statement.

Also in the first quarter, the company repurchased 800,000 shares of G&W stock.

“At the same time, we are actively evaluating acquisition and investment opportunities in all geographies in which we operate,” Hellmann said. “We expect to continue to pursue both traditional M&A opportunities as well as opportunistic share repurchases in 2018.”

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.”

NS Net Income Rose in 4th Quarter 2017

Norfolk Southern on Wednesday reported fourth quarter 2017 adjusted net income of $486 million, or $1.69 per diluted earnings per share compared with $416 million, or $1.42 per diluted share, in the fourth quarter of 2016.

For calendar year 2017, NS said it earned $1.9 billion in adjusted net income versus $1.7 billion in 2016. Adjusted diluted earnings per share were $6.61, an 18 percent increase over last year’s record diluted EPS of $5.62

Including the impact of the Tax Cuts and Jobs Act of 2017, NS had net income of $3.97 billion in the fourth quarter with diluted EPS of $13.79.

For all of 2017, net income including the impact of tax reform was $5.4 billion and diluted EPS were $18.61.

Other key fourth quarter metrics showed operating revenue rising 7 percent to $2.7 billion compared with 2016, NS said overall volumes increased 5 percent reflecting growth in intermodal, coal and merchandise traffic.

Operating expenses during the quarter fell 4 percent to $1.7 billion compared with the fourth quarter of 2016.

The effect of the tax change legislation cut operating expenses by $151 million, which more than offset increases that resulted from volume growth and higher fuel prices and incentive compensation.

Adjusted income from railroad operations rose 13 percent on a year-over-year basis to $863 million.

The fourth quarter operating ratio was 67.7 percent, a 170 basis point improvement over the operating ratio in the same period in 2016.

For the year, NS saw railroad operating revenue rise 7 percent to $10.6 billion compared with 2016.

NS attributed the increase to 5 percent growth in the major commodity categories of coal and intermodal traffic.

Railroad operating expenses increased 2 percent to $7 billion compared with those in 2016 with the increase attributed to higher diesel fuel prices, increased incentive compensation, higher inflationary costs and volume growth. Those higher costs were offset in part by efficiency savings and the benefit of tax reform.

For 2017, the operating ratio of 67.4 percent was a 150 basis point improvement over 2016’s operating ratio.

“Norfolk Southern is open for growth, and we are optimistic as we head into 2018 that the current economic environment will provide an opportunity for continuing growth,” said NS CEO James Squires.

During 2017, NS will spend more than $1.7 billion to maintain its infrastructure and support economic growth. In 2018, NS plans capital expenditures of $1.8 billion.

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 Revenue Fell 6% in 4th Quarter of 2017

CSX said on Wednesday that during the fourth quarter of 2017 its revenue fell by 6 percent to $2.86 billion when compared with the same period of 2016.

However, quarterly net income soared 25 percent, largely due to cost-cutting measures that offset the revenue decline and slumping traffic volume

The carrier said it had net earnings of $4.1 billion, or $4.62 earnings per share, compared with $458 million, or 49 cents per share in 2016.

The 2017 earnings include a $3.6 billion net tax reform benefit under the recently passed Tax Cuts and Jobs Act of 2017, as well as a $10 million net restructuring charge.

In a news release, CSX said that excluding the tax reform benefit and restructuring charge, adjusted net earnings for the quarter were $573 million, or 64 cents per share.

Also affecting the fourth quarter revenue was an additional fiscal week in 2016 in the reporting calendar.

Expenses for the fourth quarter fell by 14 percent compared with the year-ago period. CSX posted fourth quarter 2017 operating income of $1.12 billion, a 12 percent increase over the fourth quarter of 2016.

The fourth quarter 2017 operation ratio was 64.8 percent compared with 67 percent a year ago.

For all of 2017, CSX reported earnings per share of $5.99, operating income of $3.7 billion and an operating ratio of 67.9 percent.

Adjusted for the effect of the new tax law and the company’s restructuring charge, adjusted earnings per share were $2.30, adjusted operating income was $3.9 billion and adjusted operating ratio was 66.3 percent for full-year 2017.

During the fourth quarter of 2017, traffic volume fell by 2 percent on a carload basis and by 10 percent when measured by revenue ton miles.

CSX said much of the lost traffic was related to service issues related to an accelerated implementation of the precision scheduled railroading operating model.

Merchandise traffic was down 5 percent; coal was flat; and intermodal volume was up 1 percent, due largely to international traffic growth. But domestic intermodal fell 7 percent as the railroad discontinued lower-volume intermodal service lanes.

Service metrics for the fourth quarter showed train velocity up 14 percent versus a year ago, while terminal dwell declined by 7 percent.