Norfolk Southern's streamlined operations delivered strong earnings last quarter, even excluding boosts from insurance payouts related to the disastrous derailment in East Palestine and the sale of two rail lines.
The Atlanta company recorded a $287 million gain on the sale of rail lines in Virginia and North Carolina, and for the second quarter in a row it collected more insurance payments than it paid out for last year's derailment near the Ohio-Pennsylvania border. The railroad has now received more than $650 million in insurance payments towards the roughly $1.7 billion it estimates that it will spend on the cleanup and recovery in East Palestine.
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Norfolk Southern earned $1.1 billion, or $4.85 per share in the quarter, up significantly from a year ago, when profits were hurt by mounting costs related to the derailment. Excluding one-time items, the railroad earned $737 million, or $3.25 per share, beating the $3.15 forecast by analysts surveyed by FactSet Research.
Shares of Norfolk Southern Corp. rose more than 4% in midday trading Tuesday.
New CEO Mark George, who took over last month, isn't expected to implement any strategic changes because he helped craft the plan a couple years ago that calls for keeping more employees on hand during a downturn, so the railroad can respond better when the economy recovers.
“It’s really about building out consistent, safe, reliable service with a network that’s resilient and can bounce back from events,” like it did when Norfolk Southern got all its major lines running again within 72 hours after Hurricane Helene hit, said George, who was promoted from Chief Financial Officer after Alan Shaw was fired for an inappropriate relationship with an employee.
George said the railroad is working to improve the relationship it has with unions to help ensure workers are engaged and feel willing to speak out if they have concerns or ideas to improve operations. Norfolk Southern has already made strides by agreeing to new contracts this fall with 10 of its 13 unions early. Over the past two years, it has also offered paid sick time to all its employees to address quality-of-life concerns about the job.
Norfolk Southern has been in the spotlight ever since the February 2023 derailment in East Palestine triggered a national focus on railroad safety. Earlier this year, the railroad also had to fend off a takeover bid from investment firm Ancora Holdings. The investor ultimately won only three seats, insufficient to make the sweeping changes it sought.
The railroad redoubled its efforts to lower costs in the spring, hiring Chief Operating Officer John Orr to help reduce the number of times railcars get switched and enable Norfolk Southern to operate fewer, longer trains. It’s operating expenses, when adjusted to remove costs related to the Ohio derailment and other one-time items, fell 6% to $1.93 billion. Norfolk Southern is working to improve its profit margin enough to catch up with the other major freight railroads.
“We’re seeing the results. And I don’t have a whole lot of patience for lack of execution or acceptance of mediocrity,” George said.
Edward Jones analyst Jeff Windau said the railroad delivered a really good quarter and it's clear “they're really focused on efficiencies in the operations.”
George said the railroad is on track to deliver $250 million in cost cuts this year and will likely exceed next year's target for an additional $150 million in cuts.
Norfolk Southern delivered 7% more shipments during the quarter despite the hurricane disruptions at the end of the period, although automotive and steel shipments were weak. The railroad’s revenue of $3.05 billion was just below analyst expectation for $3.09 billion.
Norfolk Southern is one of the nation's largest railroads, with tracks crisscrossing the Eastern United States.