Norfolk Southern's earnings rise with volume gains

Norfolk Southern reported stronger second-quarter profits today amid across-the-board volume growth.

"A lot's changed since our last call. Most importantly the sharp inflection in volumes, initially catalyzed by the Iran conflict that bolstered our energy markets. And that strength has now spread into other markets, including domestic intermodal and industrial products," Chief Executive Mark George said on the railroad's Thursday morning earnings call. "With that backdrop, we delivered a strong second quarter with results that exceeded our own expectations."

Adjusted for the impact of one-time items – including expenses related to the February 2023 East Palestine, Ohio, derailment and hazardous materials release, and the proposed merger with Union Pacific (NYSE: UNP ) – the railroad's operating income increased 5%, to $1.19 billion, as revenue rose 11% to a record $3.46 billion. Earnings per share increased 7%, to $3.52.

The railroad's adjusted operating ratio was 65.5%, up 2.1 points from a year ago, as expenses increased by 15%, mostly due to higher fuel costs and inflation.

Overall volume was up 4%, with all three of the railroad's business segments seeing growth. Intermodal was up 5% thanks to domestic loads. Coal carloads increased 3% thanks to a 25% surge in export volume. Merchandise traffic was up 2%.

"Overall, we're positive on the growth potential across the markets that we serve," Chief Commercial Officer Ed Elkins said. "Now as you would expect, however, energy prices, the consumer, and interest rates all remain wildcards and factors that we will be monitoring."

Tighter trucking capacity will help highway-to-rail freight conversions, he said, particularly for domestic intermodal.

The Atlanta-based railroad (NYSE: NSC ) has made strides in speeding up its network, which never fully bounced back after harsh winter weather. Terminal dwell was up 5.7% in the second quarter compared to a year ago, while average train speed was down 7.8%.

The railroad has a few pockets where train crews are in short supply.

"Successful railroading demands doing the simple things exceptionally well," says Brian Barr, who was promoted to the railroad's chief operating officer on June 1. "I have learned that throughout my career, including my time working directly for Hunter Harrison. Planning and execution are built on discipline, accountability, and staying relentlessly focused on the operating plan. The reality is railroading is a grind. Doing the small things over and over again very well. That is what delivers results."

Average train speeds have risen for four straight weeks, while terminal dwell has fallen for four weeks in a row. Merchandise and intermodal trip-plan compliance also have seen improvements over the past month.

"We're feeling very encouraged about where we are operationally," George said.

"This is not about changing our operating strategy. It's about continuously improving our results. The primary levers for improving service and productivity across the network are running the plan, aligning the resources with demand, improving terminal performance, and eliminating unnecessary variability. We've got more work to do, and we know it," said Barr.

NS remains on path to exceed its plan for a $150 million reduction in costs this year, as well as its three-year target of $650 million in cost reductions.

The railroad's personal injury rate improved 16% during the quarter, while the train accident rate improved 25%.

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