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From SCDigest's On-Target E-Magazine

- Aug. 15, 2012

Logistics News: Rail Carriers Enjoy Solid Q2 Results Despite Collapse of Coal Shipments

Modest Total Volume Growth Offset for Most By Strong Core Pricing Gains, Improved Productivity

SCDigest Editorial Staff

It's time once again for our quarterly review of the earnings reports and conference calls of major carriers.

Last week, we reported on the strong results from public truckload carriers, which you can find here: Truckload Carriers Once Again Post Generally Solid Q2 Results, as Asset Discipline Continues to Pay Off.

This week, we tackle the rails, followed finally next week by less-than-truckload carriers.

As shown in the table below, Q2 was generally good for the four public major rail carriers (with Burlington Northern now part of Berkshire Hathaway).

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All of the carriers battled a huge collapse in coal-related shipments, down 11-17% in the quarter across the four carriers. But that was somewhat offset by generally strong gains in intermodal and general merchandise rail car traffic.

The net result was that car loads were flat for CSX and Union Pacific, while up about 4% at Norfolk Southern and Kansas City Southern.

In aggregate, total revenues were up just 3.3%, while net income was up a total of 12.5%. However, that profit growth was spread unevenly, with CSX seeing profits rise just 1.2% for the quarter, while Norfolk Southern saw a drop of 5.9%, caused primarily by a one-time gain in Q2 of 2011.

Meanwhile, UP profit soared 27.6% percent, while Kansas City Southern net income rose even more, by 71%.

In general, the carriers said once again pricing was up 4-5%, and several offered guidance that this would remain the range for the rest of 2012, as the rail carriers continue to retain pricing power.

Operating ratios (operating expense divided by operating revenues) continue to improve, ranging from 67-70.5% in the quarter, and seem to decline continuously through a combination of price hikes and a now relentless focus on productivity. This puts the rail carriers' OR substantially better than even the best truckload carriers, driving profits.

(Transportation Management Article Continued Below)

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Results were much the same for the full first half results, as shown in the table below.

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The rail carriers are fairly brief in their management comments, but below are a few highlights for each carrier.

Union Pacific

"When combined with solid pricing, efficient network operations and continued productivity gains, the net result was our best-ever quarter by nearly every financial measure," the company said.

Five of Union Pacific's six business groups reported freight revenue growth in the second quarter, driven by core pricing gains and improved fuel surcharge recovery.

Union Pacific's operating ratio of 67.0 percent was an all-time quarterly best, 4.3 points better than the second quarter 2011 and 1.2 points better than the previous record set in the third quarter 2010.

The Customer Satisfaction Index of 93 tied the all-time quarterly record and was 1 point better than the second quarter 2011.

It said core pricing was up 4.5% in Q2.

CSX

CSX delivered its 10th straight quarter of year-over-year earnings growth despite "significant headwinds in its

utility coal business," the company said.

The company said its train crews are operating more efficiently and the company's strong service product is translating into better asset utilization.

Average train velocities back up to 22.4 mph after falling to 19.8 in Q2 2011.

Norfolk Southern

Drop in Q2 profit was largely due to non-recurring income tax-related benefits totaling $63 million in Q2 2011.

General merchandise revenues improved 9 percent to $1.6 billion on volume gains of just 3.7%.

Kansas City Southern

Results were was led by a 23% increase in intermodal and a 15% increase in automotive
revenues. Revenue from industrial and consumer products was also strong, growing 10% over 2011.

"While lower than anticipated coal traffic clearly had an impact on second quarter results, KCS still reported a 4% increase in carloads, and excluding utility coal, our volumes rose 7% compared to second quarter 2011," the company said.

It noted that automotive carloads increased 18% in the second quarter, and that it is anticipated that finished automotive production in Mexico, where it holds a dominant share, will grow by more than 30% between now and 2015.

Core pricing outlook for rest of 2012 is for rate increases in the mid-single digit range.

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