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Norfolk Southern Says "Loosening" Truck Markets Will Not Stop Its Intermodal Growth


Norfolk Southern Corp. (NYSE: NSC) posted strong fourth quarter and full 2018 results thanks to gains in its intermodal and coal car businesses.

It further consoled investors as it said it was well on its way to 2020 plan to lower its operating ratio, thanks to ongoing tightness in truck markets.

The soon-to-Atlanta-based railroad saw its operating income for the full year rise $3.96 billion, up 17 percent form a year earlier. Net income was up an even stronger 39 percent to $2.267 billion.

The full-year operating ratio of 65.4 percent was a "record for our company and our third consecutive year of OR improvement," said Chief Executive James Squires.

Overall revenue was up 9 percent for the year to $11.4 billion, with each business unit seeing revenue-per-unit growth of 7 thanks to improved pricing and higher fuel surcharge revenue, said Alan Shaw, chief marketing officer.

"Year-over-year pricing was the highest in seven years in all business units, with strength in all units throughout the year."

Its biggest segment, merchandise revenue, saw smaller revenue growth of 7 percent on flat volume.  Chemical and agricultural carloads are growing most recently, but those increases were offset by weakness in automotive and construction materials

Intermodal business saw a "record breaking revenue and volume results for the quarter," thanks in part to "tightness in the trucking sector and high levels of consumer spending has generated three consecutive quarters of record intermodal volumes," Shaw said.

Fourth-quarter intermodal revenue gained 13 percent to $755 million with full-year revenue improving 17 percent to $2.89 billion.

(Source: SONAR)

(Source: SONAR)

"Throughout the year, the trucking industry experienced capacity constraints and high rates, which supported strong growth in intermodal," Shaw said. International intermodal volumes were up 9 percent while domestic intermodal volumes were up 4 percent.

The intermodal business looks set to grow this year thanks to the opening of the ExpressRail facility serving the GCT Bayonne container terminal and the increasing number of inland destinations it is reaching from the largest seaport on U.S. East Coast. . Norfolk Southern is also benefiting from increasing volumes coming from the Port of Charleston, which is linked to its service out of the Inland Port of Greer.

Shaw acknowledged that weakness in the truck spot rates means there's more supply in the market, ready to take containers. But he says the outlook for intermodal remains strong as trucking supply still remains constrained.

"We've seen some loosening in the truck market," Shaw said. But "the market is still tight."

"We are encouraged about what we hear in bid season and we are encouraged by what we hear from our channel partners with respect to their outlook for price and volumes as we move through 2019," Shaw said.

Coal-related revenue was also up for the quarter thanks to strong utility demand during the run-up to winter and high natural gas prices in the quarter. Some utilities are "screaming for coal," Shaw said as inventories dip down to 17 days in some cases.

"Increased demand for U.S. coal and favorable fuel price differentials led to revenue gains in export coal and crude oil, respectively," Shaw said.

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As for operating metrics, those were mixed as Norfolk Southern saw train speed dip in the fourth quarter from the third quarter, but terminal dwell dropped one hour to 26 hours.

It also pointed to improvements in train length, closing in on 6,000 feet for the fourth quarter. This, despite storing 300 locomotives in the fourth quarter and returning 100 locomotives, while "handling record volumes and record gross ton miles," Squires said.

Squires said the company will introduce more plans for driving efficiency at its upcoming investor day, which is February 11.

Squires said the company started out with the goal of having a sub-65 percent operating ratio by the end of 2020. "here we are with a 65.4 in 2019, which represents excellent progress under our strategic plan," Squires said.

The operating ratio was positively impacted by the one-time gains of $111 million from property sales. But the company says top line results will benefit the operating ratio. "The benefits to the operating ratio will come from improved revenue and continuing to push on productivity," said chief financial officer Cynthia Earhart.

The operating ratio is still the highest among the Class 1 railroads that have reported so far, so "we recognize that we have much more to do," Squires said.

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