Despite low volume growth, Norfolk Southern reports strong Q1 2012 results

Class I railroad first quarter earnings have been strong since earnings season recently kicked off, and results from Norfolk Southern were no exception.

The Norfolk, Virginia-based carrier reported first quarter net income of $410 million—or $1.23 per share—which was up 26 percent compared to the first quarter of 2011 and ahead of Wall Street expectations of $1.12 per share. Company officials said that first quarter financials included a $58 million non-cash charge that reduced net income by $36 million or $0.10 per share. 

Quarterly revenue of $2.8 billion was up 6 percent, due mainly to a 5 percent increase in revenue per unit. And income from railway operations was up 24 percent to $745 million. Norfolk Southern’s operating ratio improved 5 percent to 73.3 percent annually and matched the company’s first quarter operating ratio record.

NS CEO Wick Moorman said on an earnings call that the real story for the quarter for NS was how the diversity of its franchise, coupled with a network helping to deliver excellent results at a high service level.

“I am pleased to report another record-breaking quarter for Norfolk Southern during which we achieved first-quarter highs in revenues, operating income, net income, and earnings per share,” said Moorman. “The benefits of our steady focus on service and operating efficiency are reflected in our results, and we continue to position our franchise for sustained growth through strategic investments in infrastructure.”

General Merchandise for NS saw all-time record first quarter revenue of $1.5 billion, which was up 13 percent, and intermodal revenue also hit a first quarter revenue record at $527 million for a 9 percent increase. Not surprisingly, coal was down 6 percent. Overall quarterly yield was up 5 percent at $2.8 billion, with volume up 1 percent, as merchandise and intermodal were each up 5 percent, offsetting coal’s 12 percent volume decline.

NS Chief Marketing Officer Donald Seale said on the call that of the $169 million in quarterly revenue growth, more than 80 percent was the result of higher revenue per unit, including pricing gains and fuel surcharge revenue, as well as higher volumes.

Revenue per unit for the first quarter was at an all-time high of $1,611, representing an $80 or 5 percent gain. Individually, merchandise was up 8 percent at $2,549 per unit, and coal was up 6 percent for revenue per unit and intermodal saw a 3 percent gain.

“During the quarter, we obtained pricing in excess of rail inflation to support balanced investment across our network and appropriate returns for our investors,” said Seale.

While Norfolk Southern did not offer up any insight regarding annual same-store pricing gains for the first quarter, Stifel Nicolaus analyst John Larkin said his firm estimates it was around 5 percent.

This increase, wrote Larkin, was a function of core pricing (up about 5 percent, incremental fuel surcharge revenue (up about 3 percent), and a negative impact from mix (estimated to be down about 3 percent).

“There were a lot of moving parts related to mix in the quarter both across revenue segments and within revenue segments,” Larkin noted. “We believe the dominant factor that drove the negative change in mix was: (1) intermodal, the company’s lowest revenue per unit segment, posted 5% volume growth in the quarter while (2) coal, which carries an above average revenue per unit, posted an 11.6% volume
decline in the quarter. With those moving parts in mind, we were not surprised that management reiterated on its call that pricing exceeded the rate of cost inflation in
the quarter.”