Norfolk Southern sees higher 2017 volumes on coal comeback

(Reuters) - Norfolk Southern Corp NSC.N on Wednesday reported a higher fourth-quarter net profit on cost savings and said strong pricing and an expected rebound in coal volumes should help the railroad's business grow in 2017.

“We actually think we’ll see a pretty significant uptick in our coal volumes in 2017,” said Norfolk Southern Chief Executive Jim Squires in a phone interview.

Norfolk Southern shares ended the day 3.4 percent higher after the Virginia-based company’s fourth-quarter earnings per share beat analysts’ estimates.

Earnings per share in 2017 are expected to grow in the double digits as coal volumes rise, Credit Suisse analyst Allison Landry wrote client note. Landry had previously expected a decline in coal, the note said.

Coal volumes at the major U.S. railroads had fallen in 2016 as utilities switched to burning cheaper natural gas, while the strong U.S. dollar has hurt exports.

Squires said he is also closely watching talks initiated by U.S. President Donald Trump to change the North American Free Trade Agreement (NAFTA).

“We certainly do have customers that operate internationally within the NAFTA region and who could be affected by changes in trade policy,” he said.

Squires said the company expects to cut $100 million in costs in 2017, on top of $250 million achieved last year, as part of a five-year plan to deliver $650 million in productivity savings by 2020. This year’s savings would be achieved in part by keeping a flat headcount despite rising volumes, he said.

Through 2020, the No. 4 U.S. railroad said it expects compound annual volume growth of around 1 percent for coal volumes, roughly 4 percent growth for intermodal, or consumer goods shipments, and 2 percent growth for general merchandise.

The company reported fourth-quarter net income of $416 million, or $1.42 per share, up 18 percent from $361 million, or $1.20 per share, a year earlier. Analysts on average had expected $1.36 a share.

Revenue fell to $2.49 billion from $2.52 billion, roughly in line with analysts’ expectations of $2.5 billion, but expenses declined to $1.73 billion from $1.88 billon.

Norfolk Southern’s operating ratio, a key metric showing efficiency, improved more than 5 percentage points to 69.4 percent. The ratio measures operating expenses as a percentage of revenue.

Squires expects to further improve the railroad’s operating ratio in 2017.

Reporting by Nick Carey. Additional reporting by Allison Lampert in Montreal; Editing by Lisa Von Ahn and Meredith Mazzilli