July 27, 2016 / 12:37 PM / a year ago

UPDATE 3-Freight declines drive drop in Norfolk Southern profit

(Adds details on outlook, capital expenditure, stock price)

By Nick Carey

CHICAGO, July 27 (Reuters) - Norfolk Southern Corp, 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.

The company’s shares fell more than 2 percent after the announcement.

The railroad said it expects freight volumes to increase in the fourth quarter of 2016 versus 2015.

But the company said it expects high inventories of coal and retail goods to weigh on second-half results in 2016. Automotive shipments should also be down for the rest of 2016.

Norfolk Southern said a mild winter and above-average temperatures extending into the second quarter exacerbated an “inventory overhang” for coal should hurt volumes into 2017.

But, in a conference call with analysts, executives said recent hot weather and rising natural gas prices could boost coal burning by utilities.

Like other major U.S. railroads, Norfolk Southern has faced declining coal volumes 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 , which promised massive savings and thus larger profits for shareholders.

Norfolk Southern said it remains on track to cut costs by $200 million in 2016 and to repurchase $800 million in shares this year.

The company cut its planned capital expenditures for 2016 by $100 million to $1.9 billion.

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 expected earnings per share of $1.35.

The company reported quarterly revenue of $2.45 billion, down more than 9 percent from $2.7 billion a year earlier. Analysts had expected revenue of $2.48 billion.

Norfolk Southern’s operating ratio improved in the quarter 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.

In early trading on the New York Stock Exchange, Norfolk Southern shares were down 2 percent at $90.83. (Reporting by Nick Carey; Editing by Lisa Von Ahn and Jonathan Oatis)

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