(The following story by Christopher Dinsmore appeared on The Virginian-Pilot website on April 22.)
NORFOLK, Va. — The national economic rebound gave Norfolk Southern Corp. a bounce in the first quarter as the Norfolk-based railroad reported record revenue and operating income Wednesday.
Revenue at the nation’s No. 4 railroad surged 8.5 percent to $1.69 billion, and income from operations rose 50 percent to $346 million, compared with the same period a year ago. Norfolk Southern operates a 21,500-mile rail system through 22 states, Washington, D.C., and Ontario, Canada.
Yet the railroad’s first quarter net income fell 24 percent to $158 million, or 40 cents per share, compared with $209 million, or 54 cents a share, in 2003’s first quarter. However, last year’s first-quarter results included one-time gains of $124 million, or 32 cents a share, related to accounting changes and discontinued operations.
Despite that dip, the quarter was momentous for the railroad that calls itself the Thoroughbred, as its results topped the 30-cent per share average estimate of analysts by a dime. The railroad’s stock climbed Wednesday $1.17 to close at $22.71.
“This is a superb performance, as we expected from Norfolk Southern as volumes were one of the best in the rail industry,” wrote Ken Hoexter, a rail stock analyst at Merrill Lynch in a report issued Wednesday.
“Norfolk Southern set a number of financial and operational records this quarter,” said David R. Goode, the railroad’s chairman, president and chief executive officer.
“We recorded the highest railway operating revenues in our history, and we posted our best-ever income from railway operations. We produced the best first-quarter operating ratio since the Conrail integration in what is traditionally the most challenging quarter.”
The railroad’s operating ratio, or operating expenses divided by revenue, fell to 79.6 percent in the first quarter from 85.2 percent a year earlier. The operating ratio is perhaps better understood as its profit margin before paying income taxes and interest on its debt. The improvement in operating ratio means that Norfolk Southern’s profit margin rose to 20.4 cents per dollar of revenue in the first quarter from 14.8 cents a year earlier.
Since Norfolk Southern split the Conrail Inc.’s northeastern rail network with eastern rival CSX Corp. in 1999, the two railroads have struggled to bring costs under control and to improve operating performance. Norfolk Southern’s first-quarter financial performance suggests that it has turned the corner.
“The operating ratio is a good index of how we’re doing,” Goode said. “Moving it from a number that starts with an 8 to a number that starts with a 7 has been an objective of mine. And it certainly represents a milestone for our company.”
Goode said it’s also a testament to employee dedication to keeping a lid on costs and running the railroad as efficiently as possible. Before the Conrail break up, Norfolk Southern had a reputation as the nation’s most efficient railroad.
Even as revenue surged 8.5 percent on 6.6 percent growth in shipments, expenses edged up just 1.3 percent in the first quarter. The expense control reflects a newly implemented operating plan designed to maximize the railroad’s capacity by moving more cars per train more quickly through the system.
“They managed their operating costs very well relative to volume growth,” said James Valentine, a rail analyst with Morgan Stanley.
Goode and other Norfolk Southern executives discussed the quarter’s results with analysts in New York on Wednesday, and audio of the meeting was broadcast to reporters and other analysts.
The railroad saw revenue growth in every one of its market segments. Merchandise revenue – the largest segment, including paper, automotive, agricultural and chemical shipments – was up 5 percent to $967 million, led by a 10 percent gain in metals and construction shipments.
Intermodal revenue jumped 13 percent to $328 million. Intermodal involves the shipment of truck trailers and the truck-sized shipping containers that can be readily switched among cargo ships, rail cars and trucks.
Most intermodal shipments involve time-sensitive consumer goods, and Norfolk Southern’s improved operating performance is paying off with growth in that market.
The railroad is setting a record, for example, among the top four railroads for “failure-free service” to United Parcel Service for 200 straight days as of Wednesday morning, said Donald W. Seale, senior vice president of marketing services.
Coal revenue rose 12 percent, thanks to rising rates and increasing demand for coal by utilities, steel mills, industrial users and in export markets. Norfolk Southern’s revenue per carload of coal grew 9 percent in the quarter to $979, due in part to favorable decisions by federal regulators in two rates cases filed by utilities who objected to their rate increases. Both decisions are under review, however.
Besides being the railroad’s headquarters, Norfolk is also its principal port for coal exports, which began recovering from an all-time low two years ago. In fact, there’s more demand for export coal than there is supply available, so export coal volume grew only 3 percent in the quarter.
The demand is being driven by three factors: the relative strength of the euro to the U.S. dollar, high ocean shipping rates that level the playing field between expensive U.S. coals and cheaper Australian coals, and the fact that China has now become a net importer of coal, Goode said. With demand rising, he expects that the supplies will also recover.
“We’ve worked very hard to turn those numbers around,” Goode said. “It’s an important piece of our franchise, and it’s certainly important for Norfolk.”
Norfolk Southern also is optimistic for the current quarter. So far in April, car-loadings are up 5 percent, driven by continued intermodal growth.
“Looking ahead, we remain optimistic about the health of the industrial economy,” Goode said. “Our strong and improving service gives us an increasingly valuable product going forward.”
(Bloomberg News contributed to this report.)