NS Net Income Up in 1st Quarter

Norfolk Southern said on Wednesday that its first quarter 2021 net income was $673 million, or $2.66 earnings per diluted share, compared with $381 million, or $1.47 per diluted share during the same period in 2020.

Railway operating revenue of $2.6 billion was up 1 percent, or $14 million, compared with last year.

In a news release, NS said this gain was driven primarily by a 3 percent increase in volume.

The quarter’s diluted earnings per share was a first quarter record. Likewise, NS set an operating ratio record during the first quarter of 61.5 percent.

A year ago, the operating ratio for the first quarter was an adjusted 63.7 percent. The operating ratio is the percentage of revenue devoted to paying expenses.

First quarter 2021 railway operating expenses were $1.6 billion, down 21 percent or $433 million, compared with the same period last year.

The first quarter 2020 results included a $385 million non-cash locomotive rationalization charge as a result of productivity gains achieved through implementing the precision scheduled railroading operating model.

Last year NS sold 703 locomotives “deemed excess and no longer needed for railroad operations,” and thereby recorded a $385 million loss “to adjust their carrying amount to their estimated fair value, which resulted in a $97 million tax benefit,” NS said in a news release.

Excluding the locomotive rationalization charge, operating expenses were down 3 percent, or $48 million, compared with adjusted operating expenses in 2020.

NS said it benefited from lower fuel, compensation and benefits, and materials expenses.

Income from railway operations reached a first-quarter record of $1 billion, an increase of 79 percent or $447 million compared to 2020.

Excluding the effect of the locomotive rationalization charge last year, income from railway operations was up 7 percent or $62 million.

“The reopening of the economy provides meaningful tailwinds for continued strength in both the consumer and manufacturing sectors, and our long history of delivering sustainable transportation solutions for customers will continue to drive long-term value for our shareholders, customers, and the communities we serve,” said NS CEO James Squires.

NS executives expect 9 percent year-over-year growth in revenue, with intermodal and merchandise as the leading drivers, and coal continuing a “secular decline.”

The company anticipates a “greater than 300 basis points improvement” for the operating ratio in 2021, vs. the 2020 adjusted operating ratio of 64.4 percent

Capital expenditures are expected to be $1.6 billion.

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.

Wall Street Expects RR 4th Quarter Earnings to be Down

The financial report cards for the fourth quarter of 2019 will be released soon, but Wall Street analysts are already predicting that earnings will be down at four of the six publicly traded Class I railroads.

Wall Street doesn’t expect such steps as reducing expenses, raising freight rates and buying back stock will be enough to overcome declines in traffic volumes.

Analysts are estimating that earnings per share will be down by 1 percent.

CSX will be the first railroad to report its fourth quarter results when it announces them on Jan. 16.

Analysts expect CSX earnings to be down by 1.9 percent because its traffic has fallen by 6.5 percent during the quarter according to figures it has provided to the Association of American Railroads.

Norfolk Southern will give its fourth quarter report on Jan. 29. Its earnings are expected to decline by 8.5 percent in the face of a 9.1 percent fourth quarter falloff in traffic.

Canadian National will report earnings on Jan. 28 and they are expected to fall by 16 percent on the heels of a 7.8 percent drop in traffic in the fourth quarter.

The January earnings calls are expected to be a platform for management at Class 1 railroads to offer their financial outlooks for 2020 as well as discuss their capital spending plans.

NS Operating Revenue Down 4% in 3rd Quarter

Norfolk Southern this week reported that its third-quarter 2019 operating revenue fell nearly 4 percent to $2.8 billion.

In a news release, NS said a 2 percent increase in average revenue per unit was partially offset by a 6 percent decline in total volume.

Net income in the quarter dropped to $657 million, or $2.49 per share, compared with $702 million, or $2.52 per share, for the third quarter of 2018.

Operating expenses for the third quarter of 2019 fell to $1.8 billion compared with $1.9 billion a year ago. Third-quarter rail operating income fell to $996 million from $1 billion last year.

NS posted an operating ratio of 64.9 percent, which was third-quarter record and a half point improvement over third quarter 2018 operating ratio.

The carrier attributed its lower operating ratio to positive results of its new TOP21 operating plan, followed by the “swift transition to the plan’s second phase,” said NS Chairman, President and Chief Executive Officer James Squires in a news release.

“These efforts produced an 11 percent reduction in crew starts and recrews compared to the third-quarter last year, robustly outpacing the 6 percent volume decline while maintaining resilient service that supported an 11th consecutive quarter of year-over-year revenue per unit growth,” Squires said.

NS said that it also made headway toward more efficient mechanical operations during the quarter.

“Looking ahead, additional productivity will be generated as we advance to the third phase of TOP21 and execute initiatives surrounding fuel efficiency, distributed power, intermodal operations, and our mechanical network,” Squires said.

However, NS said it will miss its target of a 1-point reduction in the operating ratio this year, partly due to the effect of one-time actions being undertaken.

Squires said management remains confident about reaching its target of a 60 percent operating ratio in 2021 through a program of cost-cutting, efficiency gains and revenue growth.

Overall traffic volume declined 6 percent during the third quarter of 2019 with merchandise down 4 percent intermodal down 5 percent and coal off by 15 percent.

Revenue per unit climbed in all three business segments as NS continued to raise rates, said Chief Marketing Officer Alan Shaw.

Last August NS launched the second phase of its TOP21 operating plan, which is based on the principles of precision scheduled railroading.

The initial phase of the operating plan began on July 1 and involved consolidating trains and boosting the use of distributed power.

NS is mixing some intermodal, bulk, and carload traffic together in the consists of longer but fewer trains. Train starts and recrews per day have declined 11 percent.

NS has cut its active locomotive fleet by 22 percent and its number of train and engine crews by 13 percent to a record low.

The Class 1 carrier also has lopped 3,200 workers from its rolls and expects to employ 23,300 at year’s end, said Chief Financial Officer Cindy Earhart.

During an earnings call, Wall Street analysts asked Squires why the NS operating ratio has not declined as quickly as it did at CSX and Union Pacific after those carriers adopted the PSR operating models.

Squires said NS continues to push as hard as it can on costs, efficiency, and revenue growth and is controlling what it can in a declining volume environment.

NS also lags behind other Class 1 carriers on fuel efficiency, although Squires said NS is working to improve that.

CN Revenue Rose 4% in 3rd Quarter

Canadian National reported this week that its third quarter 2019 revenue increased 4 percent to CA$3.8 billion.

Diluted earnings per share rose 8 percent to CA$1.66, operating income increased by 8 percent to CA$1.6 million and net income was up 0.5 percent to CA$1.2 billion compared with the third quarter of 2018.

The third quarter 2019 operating ratio was 57.9 percent compared with 59.5 percent a year ago.

“Our team of railroaders swiftly aligned resources with the weaker demand to achieve solid efficiency gains,” said CN President and Chief Executive Officer JJ Ruest in a statement.

“We remain committed to our long-term agenda of growing faster than the economy at low incremental cost, and to taking scheduled railroading to the next level by deploying advanced operating technology.”

In a news release, CN said the revenue growth came from freight rate increases and higher intermodal revenue.

Operating expenses for the quarter were up 1 percent to CA2.2 billion due to higher purchased services and material expenses as well as higher depreciation and amortization expenses.

A slowing demand for rail service led CN to revise its profit outlook for 2019.

It is now projecting adjusted diluted EPS growth in the high single-digit range for 2019 versus last year’s adjusted diluted EPS of CA$5.50.

This past July CN’s financial outlook called for low double-digit growth in adjusted diluted EPS.

The carrier also expects a “slightly negative volume growth” this year in revenue ton miles.

CN said it sees signs of two economies, one of which is a strong consumer sector that’s boosting intermodal and automotive traffic and the other a struggling industrial economy that’s depressing demand for carload freight.

Volume for the third quarter was down 1 percent on a revenue ton-mile basis and by 0.4 percent on a carload basis.

In recent months, CN has responded to softening traffic by reducing its motive power and freight car fleets.

“We’re in process of returning nearly 3,000 railcars that were on lease, scrapping another 2,000 railcars, and have parked over 6,000 cars to saving car hire expense,” said Chief Operating Officer Rob Reilly.

CN has 150 locomotives in storage and will return remaining leased units this quarter.

It has furloughed train and engine crews, as well as mechanical employees.

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.

NS Operating Net Income Up 14% in 3rd Quarter

Norfolk Southern posted a 14 percent increase in operating net income during the third quarter, earning $1 billion when compared with the same period in 2017.

Net income during the quarter jumped 39 percent to $702 million as result of the railway operations income increase and a lower tax rate.

Diluted earnings per share were $2.52, up 44 percent year over year and a third-quarter record, NS said in news release.

NS posted railway operating revenue of $2.9 billion, a 10 percent year-over-year increase due to higher volumes and revenue per unit, including more fuel surcharge revenue and increased rates.

Overall, volumes rose 5 percent, which reflected growth in intermodal and merchandise traffic. The growth in those major categories helped offset a decline in coal volume.

Railway operating expenses increased 9 percent to $1.9 billion in the quarter compared with a year ago, driven by higher fuel prices, additional volume-related expenses and increased costs associated with overall lower network velocity.

The operating ratio for the quarter was 65.4 percent, a third-quarter record. The OR in the third quarter of 2017 had been 66.5 percent.

“Norfolk Southern continues to deliver record financial results that reflect our careful and determined pursuit of a balanced and flexible strategy,” said CEO James Squires in a statement. “Our demonstrated progress toward the goals of our strategic plan is significant, and our ongoing pursuit of new initiatives to benefit customers and shareholders will further strengthen our organization.”

Squires also confirmed that NS is considering moving its corporate headquarters from Norfolk, Virginia, to Atlanta.

CN Net Income Up 18.4% in 3rd Quarter

Canadian National saw its third-quarter net income rise 18.4 percent to CA$1.1 million from CA$958 million in the same quarter a year ago.

Diluted earnings per share increased 21 percent to CA$1.54 over the 2017 third-quarter mark.

Adjusted net income jumped 11 percent to CA$1.1 million, while adjusted diluted EPS climbed 15 percent to CA$1.50.
CN posted a 14 percent increase in third-quarter revenue to CA$3.7 million, which the railroad attributed to higher volumes in the quarter.

Revenue ton-miles were up 4 percent and carloadings were up 3 percent.

In a news release, CN described the quarter’s results as “solid top-line growth with record revenues.”

Revenue rose on a year-over-year basis for petroleum and chemicals by 25 percent; coal, 25 percent; intermodal, 8 percent; and automotive, 3 percent. Revenue rose 15 percent in the categories of grain and fertilizers, forest products, and metals and minerals.

CN attributed the revenue increase primarily to higher applicable fuel surcharges, freight rate increases, the positive translation impact of a weaker Canadian dollar and higher volumes.

Operating income in the quarter rose 8 percent to CA$1.5 million and operating expenses rose 19 percent to CA$2.2 million.

The operating ratio increased 2.3 points during the third quarter to 59.3 percent compared with OR in the third quarter of 2017.

CEO J.J. Ruest said CN sees “strong opportunities ahead, across multiple existing rail commodities and new supply-chain services.”

“The balance of our expansion projects remains on track for completion before winter and our one team is energized to execute our proven operating model as we meet the growing economic needs of our customers,” he said.

CN is seeking a 2018 adjusted diluted EPS in the range of CA$5.30 to CA$5.45, versus last year’s adjusted diluted EPS of CA$4.99.

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.”