UP 2Q19: Record-low OR, despite volume, revenue declines

Written by William C. Vantuono, Editor-in-Chief
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Union Pacific, in the midst of implementing Unified Plan 2020, its version of PSR (Precision Scheduled Railroading), posted a quarterly record-low operating ratio for this year’s second quarter, along with increases in net income, operating income and diluted earnings per share, compared to the prior-year quarter. These improvements came despite decreases in volume and revenue.

UP’s diluted earnings per share increased 12% to $2.22, based on net income of $1.6 billion. This compares to $1.5 billion, or $1.98 per diluted share, in 2Q18. Operating income totaled $2.3 billion, up 8%. The operating ratio of 59.6% was a 340 basis-point improvement. Operating revenue of $5.6 billion was down 1%, compared to 2Q18. Business volumes, as measured by total revenue carloads, decreased 4% compared to 2018, as indicated by Agricultural Products and Industrial, up 4% each; and declines in Energy of 13% and Premium of 2%. Quarterly freight revenue declined 2%, as core pricing gains were offset by lower volumes. UP’s $2.21 per gallon average quarterly diesel fuel price in 2Q19 was 4% lower than2Q18. Quarterly freight car velocity was 195 daily miles per car, a 4% improvement compared to the 2Q18.

In addition, UP recognized a payroll tax refund of $32 million, along with associated interest income of $3 million in 2Q19. The first-half 2019 reportable personal injury rate increased to 0.87 per 200,000 employee-hours, compared to 0.76 in first-half 2018. UP repurchased 3.7 million shares in 2Q1919 at an aggregate cost of $639 million.

“We delivered record second quarter financial results driven by exceptional operating performance, including an all-time best quarterly operating ratio of 59.6%,” said Lance Fritz, Union Pacific Chairman, President and CEO. “These results are a testament to the dedication of the men and women of Union Pacific, who are embracing Unified Plan 2020 and who worked closely with our customers to overcome numerous weather [problems]. We look forward to building on the momentum from Unified Plan 2020 and providing a consistent, reliable service product for our customers. We remain focused on driving increased shareholder returns by appropriately investing capital in the railroad and returning excess cash to our shareholders.”

“UP posted a 2Q EPS and EBIT beat and a record operating ratio despite being significantly hindered by flooding,” noted Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “OR guidance was maintained, while 2H19 volume outlook was adjusted downward. Pricing gains and efficiencies from PSR should offset the anticipated volume weakness. We raise our estimates and PT and continue recommending UP as a top pick. Quarterly revenues declined 1% to $5.60 billion, below our and consensus estimates of $5.63 billion and $5.68 billion, respectively. For the second consecutive quarter, UP’s core pricing was 2.75%, as it continues to exceed rail inflation. This core pricing increase was more than offset by a 4% decline in volumes.
UP is still dealing with the effects of severe flooding, which continued on through May and even June, hurting volumes, adding incremental cost, and causing 2Q19 train speed to decrease 6%. UP does not anticipate the flooding to have a material effect going forward. Per our channel checks with shippers and rail industry contacts, augmented by UP’s 2Q results and commentary from its conference call, PSR rollout has been progressing well thus far. One piece of evidence on the expense side is the significant headcount reductions that have occurred thus far, including an 8% y/y reduction in 2Q19, with total 2019 reductions expected to be ~10% y/y. Second, we highlight the 10% increase in train length since January, roughly the same time that new COO Jim Vena, charged with implementing PSR for UP, came aboard. The increase in train length has allowed UP to increase the parked locomotive count to 2,150. In our view, this remains the early innings for PSR implementation.”

For a perspective on the current concentration on operating ratio, see:

Beware the operating ratio trap

Categories: Class I, Freight, Intermodal, News Tags: ,