Union Pacific (UP) grew carloads in fourth-quarter 2022 as it “continued to face challenges hiring craft professionals in critical locations and experienced the impact of extreme winter weather” in December, Chairman, President and CEO Lance Fritz reported Jan. 24. As a result, he said, “revenue growth was more than offset by elevated operating expenses from operational inefficiencies and a higher inflationary environment.”
For the three months ending Dec. 31, 2022, UP posted operating revenue of $6.180 billion, up 8% from the prior-year period’s $5.733 billion due to “higher fuel surcharge revenue, core pricing gains, and volume growth, partially offset by a negative business mix,” according to the Class I railroad.
Net income was $1.638 billion, down 4% from $1.711 billion in fourth-quarter 2021. Operating income was $2.412 billion, down 1% from $2.440 billion in 2021.
UP’s operating ratio for the quarter was 61.0%, deteriorating 360 basis points from the same period in 2021 (57.4%), the railroad said, noting that decreasing fuel prices late in the quarter positively impacted the operating ratio by 20 basis points.
Business volumes, as measured by total revenue carloads, were up 1% in fourth-quarter 2022. According to UP, bulk volume was 508K, down 3% from fourth-quarter 2021, due to service and weather challenges, weaker potash shipments and increase coal demand; industrial volume was 539K, flat with fourth-quarter 2021, due to lower industrial chemicals demand, construction growth, and weaker housing and corrugated box demand; and premium volume was 941K, up 3% from fourth-quarter 2021, due to auto inventory replacement, increased international shipments and softening domestic demand.
In fourth-quarter 2022, UP said freight car velocity was 191 daily miles per car, a 3% decline from the same period in 2021; locomotive productivity was 123 gross ton-miles (GTMs) per horsepower day, a 5% decline; average maximum train length dipped 1% to 9,191 feet; workforce productivity fell 3% to 1,010 car miles per employee; and the fuel consumption rate of 1.064, measured in gallons of fuel per thousand GTMs, improved 2%.
For full-year 2022, UP reported operating revenue of $24.9 billion, an increase of 14% over 2021 “driven by higher fuel surcharge revenue, core pricing gains and volume growth.” Business volumes grew 2%. The railroad said its 60.1% reported operating ratio deteriorated 290 basis points from 2021. “Higher fuel prices negatively impacted the operating ratio by 20 basis points and the prior period adjustment related to new labor agreements added 30 basis points to [the] operating ratio,” UP reported. Operating income for 2022 came in at $9.9 billion, a 6% rise over 2021. Additionally, UP said its 2022 capital program totaled $3.4 billion.
On the operations side, UP reported that freight car velocity in 2022 was 191 daily miles per car, a 6% decline from 2021; locomotive productivity was 125 GTMs per horsepower day, a 6% decrease; average maximum train length of 9,329 feet was flat; workforce productivity of 1,036 car miles per employee was flat; and the fuel consumption rate of 1.078 improved 1%.
According to UP, full-year 2023 carloads are expected to exceed industrial production; the current industrial production forecast is -0.5%. The railroad also anticipates a 2023 capital plan of $3.6 billion with capital spending less than 15% of revenue. The plan includes $1.9 billion for infrastructure replacement (including Energy Management Systems), $7 million for locomotives/equipment, $6 million for capacity/commercial facilities (including “strategic investments”), and $4 million for technology and other items.
“Looking to 2023, we expect continued improvements in network fluidity to support business development, generating volume growth that exceeds industrial production,” Lance Fritz said. “We also expect network improvements to help us recapture lost productivity while providing customers with reliable service.”
The Cowen Insight: Soft 2022 Finish, Leaning on Second-Half 2023
“UP kicked off fourth-quarter Class I earnings with a bottom-line miss as inflationary pressure and adverse weather hurt results,” reported Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Expectations for full year operating ratio (OR) improvement in 2023 face obstacles from persistent inflation and pricing lags in our view, but could be achievable if service improves and bid season outstrips cost pressures. PT to $222 as we roll our model forward to 2024. Reiterate Outperform.”
Key Cowen Takeaways:
• “UP reported fourth-quarter EPS of $2.67 coming in below our estimate of $2.77 and the Street forecast of $2.78 as adverse weather, unfavorable mix shifts and inflationary pressures outweighed benefits from robust pricing and fuel surcharges. Fourth-quarter OR deteriorated 360 bps on a year-over-year basis; the results imply a 2022 full-year OR of 60.1%, down 290 bps from 2021 with fuel and labor costs being the main drivers of the slip in efficiency.
• “Fourth-quarter carloads came in weak, only up 0.8% year-over-year, primarily due to poor weather in December and negative mix shifts. Pockets of volume strength included automotive due to continued inventory replenishment, metals driven by construction demand, and domestic intermodal. The Schneider National Inc. on-boarding helped offset consumer weakness in intermodal, which grew 2% year-over-year. Intermodal, both domestic and international, is predicted to face weakness in 2023 on softening demand conditions. In response to our question on service, management indicated that an 80%-85% intermodal trip plan compliance rate would notably improve volume levels. Management also expects continued strength in automotives and metals in 2023 as well as in coal and biofuels as demand for these energy sources remains elevated despite slipping natural gas prices. UP guided growth above that of industrial production projections of -0.5% year-over-year, a low bar in our opinion. We adjust our full-year volume growth assumptions downward given caution expressed on the call.
• “Pricing held relatively strong in the fourth quarter, helping push up revenue/carload 8% year-over-year as UP emphasized a continued ability to price in excess of inflation. In line with our current assumptions, management acknowledged that pricing lags inflationary pressures somewhat as 50% of the book is repriced every year. Management also indicated that weakness in truck pricing is a headwind to bargaining power this bid season (since trucks are a substitute for rail transit). We modestly adjust our pricing assumptions downward to reflect this. Recall that results from our rail shippers survey suggested relatively robust pricing in 2023.
• “Inflationary pressures on the labor and fuel side are projected to persist in 2023, though UP expects to drive costs out of the system as service improves into the year. Management guided full-year improvements to OR in 2023; we are cautious of this guidance but acknowledge over 100 bps of OR negatively impacted UP in 2022 due to congestion that should normalize in 2023.
• “UP introduced a 2023 capital expenditure guide of $3.6 billion compared with $3.4 billion in 2022 with a focus on improving existing infrastructure. UP repurchased more than $6 billion of stock in 2022, reducing share count by approximately 5%; we expect continued strong repurchases that should contribute approximately $0.25 to earnings in 2023. Management reiterated commitments to dividend payouts at approximately 45% of earnings.”