Derailment Charge Drags Down NS Earnings Again (UPDATED, TD Cowen Insight)

(NS Photograph)

At Norfolk Southern (NS), income from railway operations and diluted earnings per share were down by double-digits in third-quarter 2023, reflecting a $163 million charge associated with the Feb. 3 derailment in eastern Ohio, the Class I reported Oct. 25.

The charge, NS said, includes an initial insurance recovery of $25 million.

First-quarter and second-quarter 2023 financial results were also down due to an initial $387 million charge and a $416 million charge, respectively. Those quarterly results did not reflect “any amounts potentially recoverable under the company’s insurance policies, or from other third parties, which would be reflected in future periods,” NS reported during both earnings reports.

Following are third-quarter 2023 highlights:

• Income from railway operations of $756 million, including the derailment charge, was down 41% or $516 million, from third-quarter 2022’s $1.272 billion. Adjusting for the charge, the railroad said income from railway operations was $919 million, down $28% or $353 million from the same quarter last year.

• Diluted earnings per share were $2.10, a decline of 49% or $2.00, compared with the prior-year period’s $4.10. Adjusting for the charge, they came in at $2.65, down 35% or $1.45 compared with third-quarter 2022.

• Railway operating revenues were $2.971 billion, down 11% or $372 million from the third-quarter 2022’s $3.343 billion.

NS provided the following data on service:

Below are the railroad’s reported quarterly productivity results:

On the safety side, NS provided the data here:

According to NS, its partnerships with CN and Florida East Coast (FEC) will help drive incremental volumes going forward. On Oct. 2, NS and CN launched a new domestic intermodal service linking CN-served Canadian markets with NS-served Kansas City and Atlanta, “the heart of the fast-growing manufacturing and consumer base in the Southeastern U.S.,” according to the U.S. Class I. Also on Oct. 2, NS and Class II FEC expanded their domestic intermodal interline services for customers doing business in Florida.

2023 Outlook

NS said it expects that revenue will be down approximately 4% this year, noting the “lower than expected third-quarter revenue including a significant decline in fuel surcharge.” It also reported that capex will be approximately $2.2 billion in 2023.

“In the third quarter, we continued to invest in our people and our assets to lay the foundation for our innovative strategy,” NS President and CEO Alan H. Shaw said. “Part of charting a better way forward for Norfolk Southern is building solid operational disciplines that move us toward consistency, all to enable productivity enhancements and growth in the quarters ahead. We are building the safe, reliable, and resilient railroad our customers and shareholders expect, and we have an incredibly bright future.”

For more third-quarter 2023 details, visit the NS Investor Relations webpage.

TD COWEN INSIGHT: ‘Cost Challenges Persist at NS’

“NS came in below our forecast and consensus expectations in Q3, as cost pressures continued to plague the network despite carloadings showing some sequential improvement,” reported TD Cowen Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Management is confident that 3Q OR is a trough, as rail inflation shows normalization and one-off events are hopefully in the rear view. We adjust our PT to $233 and reiterate Outperform.”

TD Cowen’s key takeaways:

• “NSC reported 3Q EPS of $2.65 below our estimate of $2.72 and consensus of $2.69. Results exclude $163MM in derailment-related expenses. Adj. OR of 69.1% missed our estimate by 10bps, and is ~710bps worse y/y as persistent service snags impacted the Class I’s network.
  
  
• “Costs were front and center on the call today as NSC’s OR recovery pathway remains top of mind. NSC believes 3Q OR is a trough as service-related costs from the two recent tech system outages (unrelated and not cyberattacks per mgmt.) should begin to moderate going forward. Gains should be constrained by a step up in resiliency-related costs including paid sick leave (one-third of total resiliency costs). 75% of these costs will reside in the comp and benefits line item. We assume modest sequential OR improvement in 4Q while lowering our 2024 assumption slightly though we acknowledge that NSC could be set up for significant OR recovery off very low levels in 2H24 if steady service cost recovery meets freight cycle inflection.
  
  
• “3Q intermodal volumes were supported by growth in international intermodal volumes on relatively robust East Coast imports and IPI conversion. NSC continues to expect muted peak though expects 4Q intermodal volumes will grow y/y. Pressure on intermodal pricing should continue in 4Q (-21% in 3Q) from mix shift towards international and short haul moves.
  
  
• “NSC anticipates stable coal volumes sequentially in 4Q on resilient export markets and increased production. Robust demand from China and India should support coal pricing in 4Q which mgmt expects should be flat sequentially. While domestic coal volumes face some headwinds from low natural gas prices, NSC still expects sequential growth in 4Q as service levels and mining outages improve. On the automotive front, the company still expects to haul a good amount of traffic given the backlog of finished vehicles on the ground (mgmt did not elaborate on how long this backlog could sustain traffic growth).
  
  
• “Environment clean up costs relating to the East Palestine derailment were $118MM in 3Q and will continue through April 2024 per mgmt. Total derailment-related costs amount to $966MM and NSC expects these costs will continue to accrue in the near term. NSC won its first insurance recovery in 3Q ($25MM) but expects this process to be protracted and unpredictable.”