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Freight Declines Drive Drop in Norfolk Southern Profit

Freight Declines Drive Drop in Norfolk Southern Profit

Norfolk Southern Corp (NSC), the No. 4 U.S. railroad, on Wednesday reported a lower quarterly net profit due to a 7 percent drop in freight volumes, but the results just exceeded market expectations because of cost cutting and efficiency measures.

The decline in freight at the Norfolk, Virginia-based company was led by a precipitous 25 percent drop in revenue from transporting coal.

In presentation slides ahead of a conference call with analysts, the company said it expects freight volumes to increase in the fourth quarter of 2016 versus the same period in 2015.

But the company said it expects high inventories of coal and retail goods to continue to weigh on results in the second half of 2016. The railroad said it also expects automotive shipments to be down for the last six months of this year.

Like other major U.S. railroads, Norfolk Southern has faced declining coal volumes for the past six quarters in a row as utilities have switched to burning cheaper natural gas. A strong U.S. dollar has compounded the problem as it has hurt coal exports.

The railroads have scrambled to cut expenses, mothballing locomotives and furloughing workers. There has been extra pressure on Norfolk Southern to improve its performance after a failed takeover bid earlier this year by Canadian Pacific (CP), which promised massive savings and thus larger profits for shareholders.

Norfolk Southern posted second-quarter net income of $405 million, or $1.36 per share, down more than 6 percent from $433 million, or $1.41 per share, a year earlier.

Analysts had on average expected earnings per share of $1.35.

The company reported revenue of $2.45 billion, down from $2.7 billion a year earlier. Analysts had expected revenue for the quarter of $2.48 billion.

The company said its operating ratio improved 1.4 percentage points to 68.6 percent. This measure of operating expenses as a percentage of revenue is a key metric of efficiency and profitability for analysts and investors.

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