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From SCDigest's On-Target E-Magazine

- Feb. 19, 2013 -

Logistics News: Q4 and Full 2012 Rail Carrier Results and Comments

Profits Really Starting Slow Down after Two Years of Robust Growth, but Rates Still Up in 4% Range for the Quarter.

SCDigest Editorial Staff

SCDigest is pleased to offer as always our exclusive quarterly reviews of the results from public traded transportation carriers after their earnings reports are released, looking for both financial and logistics trends from those announcements.

SCDigest Says:

At UP, total revenue carloads, were down 2%, but freight revenue increased 2% compared to the fourth quarter 2011, mainly "driven by core pricing gains and fuel surcharge recoveries."

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Last week, we reviewed the Q4 and full year 2012 results from seven major truckload carriers (see Logistics News: Q4 Truckload Carrier Results and Comments).

This week, it's time for a look at the just four major publicly traded US rail carriers, and as usual we include both charts of the relevant numbers as well as a few interesting comments from management in their releases or analyst presentations.

In general, the rail carriers have enjoyed boom times since 2010, with profits regularly up double digits on single digit revenue gains, consistently declining operation ratios (operating expense divided by operating revenue, a key measure of profitability), and rate gains of 5% or so for quarter after quarter.

It appears that "gravy train" is coming a bit to an end, as financial momentum and profitability clearly slowed for the quarter and the full year.

As can be seen in the chart below for Q4, revenues were basically flat in the quarter, at just over $11.3 billion in Q4, while total net income among the group actually dropped 1.1%.

Compare that to Q4 2011, when profits across the four carriers was up a whopping 17% on volume growth that was in the low to mid-single digits, depending on the carrier.

Kansas City Southern, by far the smallest of the four rail carriers, had the best quarter, seeing profits up 7.3%. Union Pacific managed a small gain, while CSX and Norfolk Southern saw profits drop slightly in Q4.

Not surprisingly of course, Union Pacific and Kansas City Southern were the only two of the group to improve their operating ratios in the quarter, with KCS managing a strong 2 percentage point gain.

The results all old, however, have to be taken in the context of the continued dramatic drop in coal shipments, which are punishing the group. Car loads of coal shipments were again down another 10-19%, depending on the carrier. General merchandise volumes were up or down in the low single digit percentages, depending on the carrier - certainly consistent with GDP declining or flat in Q4, as seems the case. The original GDP estimate was a .1% decline in Q4, but it may still be revised upward.

Q4 2012 US Rail Carrier Results

Source: Supply Chain Digest

Management comments appeared to indicate that rate growth was slowing a bit, more in the 4% range generally from the 5-6% commonly seen over the last two years.

A somewhat similar although slightly better story for all of 2012.

(Transportation Management Article Continued Below)

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As can be seen in the table below, for the full year profits across the four carriers were up just 1.3%, with Kansas City Southern and Union Pacific again leading the way, while CSX was basically flat and Norfolk Southern saw an 8.7% decline.

Compare that with 2011, when profits were up more than 40%, led by an 84% rise from Kansas City Southern and 28% from Norfolk Southern.

It's worth noting that profits as a percent of revenue continue to be strong, averaging more than 16% across the group (unweighted average). By contrast, profits as a percent of revenue in 2012 for the truckload industry were just 5.3%, or about one-third the rail carriers' profitability.

We'll also call out that the rail carriers in general have big plans for capital investments in tracks, software and more, and provided in some more details in the management comments below the chart.

Full Year 2012 Rail Carrier Results

Source: Supply Chain Digest

As always, we include some of the comments from the carrier's earning releases, though in general they were pretty brief this quarter.

Union Pacific

Noted that "Although it was a challenging year on many fronts, 2012 was Union Pacific's most profitable year in our 150-year history."

Even though Q4 business volumes, as measured by total revenue carloads, were down 2%, UP freight revenue increased 2% compared to the fourth quarter 2011, mainly "driven by core pricing gains and fuel surcharge recoveries."

Union Pacific's operating ratio of 67.1 percent was a fourth quarter record, 1.2 points better than the fourth quarter 2011 (see chart below).

Union Pacific Continues to Lower Its Operating Ratio

Source: Union Pacific's Q4 Analyst Presentation

UP said core pricing was up about 4% in Q4.

CSX

Management noted that "Pricing solid across nearly all markets," and that inflation-plus pricing achieved
on business outside of coal. Rates were up just 1.6% in total but 4% with coal stripped out.

Added that the company remains "Remains focused on pricing above rail inflation long-term.

CSX said that its active locomotive count down 8% versus Q4 2011 in reaction to softening volumes, again especially in the coal sector.

CSX said it have more than $2 billion in capital expeditures in 2013. Where is it going? The chart below provides some details.

CSX's 2013 Capital Spending Plan

Source: CSX Analyst Presentation

Norfolk Southern

Company said it would "invest $2 billion [in 2013] in capital improvements to further our strong safety performance, improve operational efficiency and service, and support future growth."

Kansas City Southern

KCS reported record fourth quarter 2012 revenues of $568 million. Q4 carloads came in at 532 thousand, also a record, an increase of 2% versus 2011.

As noted above, KCS's fourth quarter 2012 operating ratio of 69.5% was a 2.1 point improvement from fourth quarter 2011.

Next week, we will finish up with the LTL sector.

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