Norfolk Southern delivered solid profitability despite a 17% drop in coal revenue, reaching its second-best first-quarter operating income and operating ratio (74.8%–last year’s 73.3% benefited from mild winter weather). Year-over- year 9% growth in inter-modal units and 10% greater chemical carloads helped buoy results. In fact, the rail increased overall volume 3%.
Mix richer in inter-modal and weaker in coal drove down average yield 4.7%, and this reduced revenue 1.8%–still a first-quarter record high compared with all but last year. Excluding one-time property gains from this quarter (sale of a line to the state of Michigan), $1.23 in earnings per share was flat with the prior-year period.
The continuing coal volume decline challenges U.S. Class I rails, but we remain impressed by Norfolk’s ability to generate solid results amid this challenge. Coal tonnage declined as follows: domestic utility down 8.8%, domestic metallurgical coal down 11.6%, and industrial down 6.3%, but 25.2% increased export coal salvaged tonnage to only a 4.3% decline and a 4.4% drop in carloads.
Management does not expect export to be so strong in the rest of the year, but believes coal may be near trough levels. Stockpiles at utilities are near historically normal levels (at 41 days on average in NS’ network, down 7.5% from the fourth quarter) and pricing for both global met coal and European imported thermal coal have ticked up off recent bottoms.
However, this was offset by the 13.3% coal yield decline–much more severe than we projected. The rail executed well by reducing coal train starts 11% on 4% lower volume, but because Southern long haul declined more steeply than Northern shorter-haul coal, this lengthof- haul mix (and continued low export coal rates) suppressed yield. Outside coal, merchandise was flat as weak ag offset autos and chemicals gains, but NS improved intermodal units a steep 7% in domestic and 13% in international. Impressively, the rail added 1% to intermodal crew starts while handling 9% greater volume–that’s leverage at work.
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