January 24, 2018 / 1:47 PM / a month ago

UPDATE 2-For Norfolk Southern, 2018 is all about more stable service

(Adds CEO comments, goals for 2018)

By Eric M. Johnson

Jan 24 (Reuters) - No. 4 U.S. railroad Norfolk Southern Corp is working to stabilize its rail service in 2018, it said on Wednesday, but faces concerns over pricing and its stagnant headcount despite rising freight volumes.

The Norfolk, Virginia-based carrier, whose network spans 22 states across the eastern United States, struggled with service disruptions in recent months that included weather-related outages and crew shortages. Its service metrics deteriorated to levels not seen in years. tinyurl.com/y9lzz2cn

“We did not live up to all of our customers’ expectations - but the commitment to do so is there,” Chief Executive Jim Squires told analysts after the railroad beat Wall Street’s quarterly earnings estimates on growth in commodity volumes.

Its shares slid more than 1 percent as investors weighed concerns over pricing and its ability to lower its operating ratio - a closely watched measure of operating costs as a percentage of revenue - to under 65 by 2020, Stifel analyst Chris Horan said.

On Wednesday, it reported an operating ratio of 67.4 percent, a 150 basis point improvement over the prior year.

It posted quarterly net income of $3.97 billion, or $13.79 per share, up from $416 million, or $1.42 per share, a year earlier. After adjustments for one-time items, the railroad earned $1.69 per share, versus the $1.57 analysts expected.

The railroad benefited from the new tax law, which decreased expenses and added $3.48 billion to net income in the fourth quarter and full-year, it said. Without the impact of tax reform, fourth-quarter 2017 adjusted profit was $486 million, it said.

Higher expenses related to diesel fuel prices, increased incentive compensation, inflationary costs and volume growth were partly offset by efficiency savings and a $151 million benefit from tax reform, the railroad said.

Despite the tax savings, the company does not expect to boost employee pay, its Chief Financial Officer Cynthia Earhart told analysts.

The railroad also drew business from CSX Corp as its main rival underwent a dramatic operations overhaul that triggered persistent service disruptions beginning in the summer.

Volumes of the freight Norfolk Southern carried were up 5 percent on growth in coal, merchandise, and intermodal - or containers that transfer from ship, to truck, to rail.

Norfolk Southern said it will invest $1.8 billion to improve its network in 2018, up from $1.7 billion in 2017.

Reporting by Eric M. Johnson in Seattle; Editing by Steve Orlofsky and Susan Thomas

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