What Are The Key Drivers of Norfolk Southern’s Expenses?

Norfolk Southern’s (NYSE:NSC) expenses are largely driven by compensation & benefits, and purchased services & rents. These two combined account for over half of the company’s total expenses. Over the recent years, Norfolk Southern has seen steady revenue and expenses growth, while its total expenses as a percentage of revenue has been on a decline. The company has been focused on reducing its operating ratio by controlling expenses in the recent quarters. In this note we discuss the key drivers of Norfolk Southern’s total expenses. You can look at our interactive dashboard analysis ~ How Does Norfolk Southern Spend Its Money? ~ for more details.

Compensation & Benefits And Purchased Services & Rent Account For Over 50% of Norfolk Southern’s Total Expenses.

Norfolk Southern’s Total Expenses As Percentage of Revenue Has Been On A Decline, Driven By The Company’s Focus On Reducing Its Operating Ratio.

• Norfolk Southern’s total expenses as a percentage of revenue has been on a decline over the last few years.
• It stood at 76.7% in 2018, and it is expected to be 75.4% by 2020. This compares with the 83.1% figure seen in 2016.

Breaking Down Norfolk Southern’s Total Expenses

• 1. Compensation & Benefits
  • Compensation & Benefits, which accounted for one-third of the company’s total expense in 2018, includes employee related costs, and post-retirement benefits.
  • Compensation & Benefits as % of revenue has declined over the years from 27.7% in 2016 to 25.5% in 2018. Trefis estimates the metric to hover around the 25% mark in the near term.

• 2. Purchased Services & Rent 

• 3. Fuel
  • Fuel accounted for 12% of the company’s total expenses in 2018. It refers to the cost of locomotive fuel as well as other fuel used in railway operations.
  • Fuel as % of revenue increased from 7.1% in 2016 to 9.5% in 2018., following the growth in average fuel prices. WTI prices averaged $51 in 2017 and $65 in 2018. The figure will likely see slight growth in the near term, as the expected lower average for crude oil prices in the near term, will likely be offset by growth in the volume.

• 4. Depreciation
  • Depreciation accounted for 13% of the company’s total expenses in 2018.
  • Depreciation as % of revenue has declined from 10.4% in 2016 to 9.6% in 2018. While it could see a slight decline in 2019, we estimate it to hover around the 10% mark in the medium term. This can be attributed to the expected investments in the infrastructure, primarily on equipment, to cater to the railroad demand.

• 5. Materials & Other
  • Materials & Other accounted for 7% of the company’s total expenses in 2018. It refers to costs associated with the repair and maintenance of the assets. It also includes casualties and other claims related to personal injury and property damage, among others.
  • Materials & Other as % of revenue declined from 8.1% in 2016 to 6.7% in 2018, and we estimate the figure to be around the 6.0% mark by 2020.

• 6. Interest & Other Expenses

• 7. Income Taxes
  • Income Taxes saw a sharp increase in 2017, due to the impact of the tax reform. The effective tax rate for Norfolk Southern stood at 23% in 2018, and we estimate it to remain more or less around the same mark in the near term.

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