Norfolk Southern (NYSE: NSC) is in the midst of deploying longer trains and increasing car velocity as ways to enhance the railroad’s productivity, executives said during a call on Wednesday to discuss NS’ financial results for the first quarter of 2021.
To make these operational adjustments, NS is targeting investments in certain parts of its network, including a long siding extension in its Chicago-Atlanta corridor that will be completed ahead of this year’s peak season, according to Chief Operating Officer Cindy Sanborn. Two other areas could also see siding construction this year, she said.
NS also completed in the first quarter an initial assessment of incremental infrastructure that will aid its long-train initiative, Sanborn said.
“We’ve undertaken a series of focused initiatives to improve capacity and drive down dwell at our major terminals, including current humps as well as flat switching operations,” Sanborn said. These improvements support the longer and heavier trains we are running, allowing us to operate efficiently with fewer resources.
NS has hired team members who have experience with precision scheduled railroading, including the February appointment of Hunt Cary, a 28-year railroad veteran who most recently served as vice president of intermodal operations at Union Pacific (NYSE: UNP). These new members will serve alongside NS’ field team to increase productivity inside NS’ major hump and flat switching terminals, Sanborn said.
She added that NS has “some structural work that we need to do — whether that’s from a train size perspective or continuing to move forward with some terminal efficiencies beyond the footprint that we have today — but that’s going to depend on volume and where traffic wants to go. We want to make sure that we serve our customers well and we do it in an efficient, reliable way.”
Meanwhile, as the company deploys a number of operational modifications, NS is also working on incorporating more technology into its operations.
NS has introduced new mobile apps and redesigned its customer portal to make the interface more user-friendly for customers and to provide more real-time shipment information, and it is working on new information systems to better utilize intermodal equipment and improve efficiency at its intermodal terminals, according to President and CEO Jim Squires. These technological developments are on top of safety technology tools it is deploying for track and freight car inspections.
Integrating technology is one way NS is preparing itself for a future that includes autonomous trucks.
Autonomous trucks are “a threat and we view it as such. The time horizon is somewhat uncertain, but it’s certainly something to be aware of and to be planning for, and we are,” Squires said. “We are doing so through efforts to automate our own operations and to go down the path of more efficient and productive railroading via automation, via digital investments ourselves.”
NS’ expectations for 2021
Like other Class I railroads, NS expects volumes to increase in 2021 in light of several factors, including growth expectations for gross domestic product and manufacturing output.
According to Chief Marketing Officer Alan Shaw, continued expansion in the manufacturing sector will drive carload growth for NS’ merchandise segment, which includes chemicals, automotive, metals and construction, and agricultural, forest and consumer products.
“Elevated demand levels coupled with low dealer inventories in the automotive segment will drive volume gains. However, the current semiconductor chip shortage creates uncertainty as to the timing of the recovery,” Shaw said. “U.S. light vehicle production currently is expected to exceed pre-pandemic levels in 2021. That production growth along with the return of total industrial production to pre-pandemic levels will drive steel demand, which is another market where we expect to generate volume growth as the year progresses. We also anticipate our energy markets within merchandise will benefit from the return of gasoline demand in the consumer travel sector as the economy fully reopens.”
Meanwhile, intermodal is expected to “lead our growth for the next couple of years,” Shaw said. The ongoing U.S. economic recovery, as well as low inventory levels, a tight trucking market and higher consumer spending, should support NS’ intermodal franchise in 2021, he said.
Because of expectations that the tight trucking market will persist, NS is “feeling pretty good about the pricing environment for the remainder of this year and as we move into 2022,” Shaw said.
NS executives declined to discuss efforts by Canadian Pacific (NYSE: CP) and CN (NYSE: CNI) to acquire Kansas City Southern (NYSE: KSU). That included discussion about merger activity in general among the Class I railroads as well as how the Surface Transportation Board (STB) would review a proposed merger.
“I recognize that this situation is kind of dominating the airwaves right now, and there are a lot of interested industry stakeholders focused on the proposed transaction, including NS, and we will be protective of our shareholders’ interests and our customers’ interests. We will be active participants in any transaction that may transpire out of this …,” Squires said. “I really think it would not be fruitful for us this morning to focus on other people’s deals — you know, hypothetical knock-on effects, what the STB may do, etc.”
First-quarter financial results
NS’ first-quarter net income was $673 million, compared with adjusted net income of $669 million a year ago. The adjusted figure accounts for NS’ sale of 703 locomotives that it deemed were longer needed. The sale resulted in a $385 million loss, which was the estimated value of the locomotives.
Operating revenues were $2.64 billion, compared with nearly $2.63 billion a year ago, amid a 3% increase in rail volumes.
Within that, merchandise revenue fell 4% on “difficult” year-over-year comparisons in the energy sector, Shaw said. But NS also experienced gains for soybeans, steel and automotive shipments, he said.
Intermodal revenue and volume were both higher year-over-year, Shaw said. Inventory replenishment, a tight truck market and strong consumer activity boosted volumes, while continued strength in the LTL market as a result of e-commerce growth supported NS’ intermodal revenue.
NS also reached an all-time quarterly record operating ratio (OR) of 61.5% in the first quarter of 2021, compared with an adjusted OR of 63.7% in the first quarter of 2020. On an unadjusted basis, first-quarter 2021 OR was 78.4%.
For more on NS’ first-quarter financial results, go here.
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