Norfolk Southern’s Revenue Declines Due To Low Coal And Merchandise Volumes

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Norfolk Southern (NYSE:NSC), a leading railroad in eastern U.S., reported a decline in its first quarter revenue. Revenue declined 2% to reach $2.69 billion due to a decline in coal and merchandise volumes, which more than offset gains in the intermodal segment. [1] Unlike other railroads, Norfolk Southern’s operating expenses declined 1% year-over-year despite the severe weather conditions. However, its operating ratio (operating expense expressed as a percentage of revenues) increased 40 basis points to reach 75.2% due to the decline in revenues. The company’s earnings per share declined 17% compared to the previous year’s first quarter, primarily due to the favorable impact of gains from sale of land in the previous year.

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Overall Revenue Per Unit Declines Despite Higher Fuel Surcharges

Norfolk Southern’s overall revenue per unit declined 1% despite a $21 million increase in fuel surcharge. The favorable impact of the higher fuel surcharges was limited to the revenue per unit for Merchandise shipments, which increased 2.5% in the first quarter of 2014. [1] Intermodal revenue per unit increased 1%, slightly offset by declines in fuel surcharges. Intermodal fuel surcharge declined since it is based on East Coast highway diesel prices rather than West Texas Intermediate crude oil. [2] In the previous year’s first quarter, East coast highway diesel price was $4 per gallon, whereas in the first quarter of 2014 it averaged $3.9 per gallon. [3] Coal revenue per unit declined 2.4% due to the unfavorable product mix as a result of declines in export volumes.

Coal Volumes Decline Due To Contract Loss And Weak Export Coal Demand

Norfolk Southern’s coal revenue declined 15% in the first quarter of 2014 on account of 12.7% decline in volume. [1] Despite improvements in domestic coal demand in the U.S., Norfolk Southern’s domestic coal volume declined 11.5% due to a loss of contract at northern utilities and plant shutdowns, [2] which was slightly offset by a new contract for industrial coal.

U.S. coal is facing pressure from declining global coal prices due to the oversupply created by the comeback of Australian coal producers and declining demand from China. The weak pricing environment led to a 23% decline in Norfolk Southern’s export coal volume.

For 2014, Norfolk Southern expects it utilities coal business to be consistent with 2013 in spite of the contract loss this year. Declining inventories at utilities should be able to generate healthy demand to offset declines due to the contract loss. Export coal business should be depressed throughout the year due to the low price of coal in global markets and competition from other countries.

Intermodal Business Continues To Grow

Norfolk Southern’s intermodal volumes grew 3% in the first quarter 2014, driving 4% growth in the segment’s revenue. [1] Domestic volumes were up 4% due to increase in highway to rail conversions and growth in customer’s business. [2] International intermodal volumes were also up 1%.

Norfolk Southern expects to see continued growth in intermodal shipments in 2014 driven by its new inland port in South Carolina and new terminal in Charlotte.

General Merchandise Posts Sluggish Growth

Norfolk Southern’s general merchandise revenue grew 1.4% in the first quarter of 2014 driven by 2.5% increase in revenue per unit, which more than offset the 1% decline in volume. [1] General merchandise shipments consist of chemical shipments, which include petroleum products, automotive shipments, metals and construction materials, paper and forest products and agricultural shipments.

  • Chemical volumes grew 9.5% due to strong growth in crude oil and liquid petroleum gas shipments.
  • Agricultural shipments were stagnant due to growth in corn, wheat and soybean shipments being offset by decline in fertilizer shipments.
  • Metal & construction shipments declined 3% due to weak demand for scrap metal which was partially offset by growth in construction material shipments such as sand and cement.
  • Automotive and paper, clay and forest shipments declined owing to the bad weather conditions.

Despite a sluggish performance in the first quarter, Norfolk Southern is optimistic about growth of its merchandise business for the remaining part of the year. Growth in construction activity in the U.S. should drive demand for lumber, sand, cement and other construction material. Also, automotive shipments should increase due to improvement in weather conditions and growth in the automotive industry. Crude oil and liquid petroleum gas will continue to drive growth in chemical shipments. Additionally, strong harvest in the previous year should boost agricultural shipments this year.

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Notes:
  1. Norfolk Southern First Quarter Financial Review, April 23 2014, www.nscorp.com [] [] [] [] []
  2. Norfolk Southern’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, April 23 2014, www.seekingalpha.com [] [] []
  3. Gasoline and Diesel Fuel Update, April 21 2014, www.eia.gov []
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