Norfolk Southern’s Q4 2016 Earnings Review: Improved Demand Conditions And Productivity Savings To Boost Results Going Forward

by Trefis Team
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NSC
Norfolk Southern
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Norfolk Southern reported its Q4 2016 earnings results and conducted a conference call with analysts on January 25. [1] The company reported a significant improvement in its operating ratio as a result of a combination of a recovery in revenue and the impact of the company’s productivity improvement initiatives. A recovery in coal volumes drove the recovery in the company’s top line in Q4 2016. Rising natural gas prices have driven a recovery in the demand for coal from utilities, which underlies the reversal in the trend of declining coal shipments. In addition, an improvement in asset utilization as a result of a 3% reduction in the company’s locomotive fleet and a 7% reduction in workforce translated into $250 million in productivity savings in 2016, which helped drive the improvement in the company’s results. [1]

Going forward, the year 2017 is likely to witness an overall increase in shipment volumes, in contrast to the decline seen in 2016. Shipments of coal, steel, and petroleum related commodities are likely to benefit from improved demand conditions in 2017. Coal shipments are expected to benefit from improved demand conditions amid an environment of higher natural gas prices. Steel shipments are likely to benefit from an improved demand outlook driven by the U.S. government’s plans for an increase in infrastructure investment. [2] Lastly, petroleum related shipments are likely to benefit from an increase in drilling activity enabled by higher oil prices. While improving demand conditions bode well for Norfolk Southern’s top line, the company remains focused on improving productivity, targeting $100 million in productivity savings in 2017. [1] Thus, a combination of improved demand conditions and productivity savings should translate into better results for Norfolk Southern going forward.

NSC Q4 2016 Earnings Review

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Norfolk Southern

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Notes:
  1. Norfolk Southern’s Q4 2016 Earnings Call Transcript, Seeking Alpha [] [] []
  2. States Send Trump Lists for Promised Roads-and-Bridges Plan, Bloomberg []
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