UP Sets Quarterly OR Record, On Declining Revenues—Again

Written by Andrew Corselli
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“Demonstrating the transformation our company is experiencing through the implementation of Unified Plan 2020, we were able to largely mitigate the impact of that volume loss," said Lance Fritz, UP Chairman, President and CEO.

Union Pacific (UP) today reported 4Q19 net income of $1.4 billion, or $2.02 per diluted share. This compares to $1.6 billion, or $2.12 per diluted share, in the 4Q18.

The railroad kept up the good work on the heels of a similar record-setting 3Q, as its 59.7% operating ratio represented a 4Q record and the third consecutive quarter below 60%, improving 1.9 points compared to 4Q18.

4Q19 Summary

UP’s operating revenue of $5.2 billion was down 9% in 4Q19, compared to 4Q18. Fourth quarter business volumes, as measured by total revenue carloads, decreased 11% compared to 2018. Industrial volumes were flat compared to 2018, while agricultural products, premium and energy shipments declined.

In addition:

  • Quarterly freight revenue declined 10%, compared to 4Q18, as core pricing gains and a positive business mix were offset by lower volumes and decreased fuel surcharge revenue.
  • The $2.16 per gallon average quarterly diesel fuel price in 4Q19 was 7% lower than 4Q18.
  • Quarterly freight car velocity was 220 daily miles per car, a 5% improvement compared to 4Q18.
  • Terminal dwell was 23.3 hours, a 13% improvement compared to 4Q18.
  • UP repurchased 3.6 million shares in 4Q19 at an aggregate cost of $599 million.

“Given the challenging volume environment, we leveraged strong productivity to deliver solid financial results including the third consecutive quarter with an operating ratio below 60%,” said Lance Fritz, UP Chairman, President and CEO. “The work our employees are doing as part of Unified Plan 2020 has been transformational and key to providing a safe, reliable and consistent service product for our customers.”

4Q19 Freight Revenue Summary

  • Industrial flat.
  • Agricultural Products down 2%.
  • Premium down 14%.
  • Energy down 25%.

2019 Full Year Summary

For the full year 2019, UP reported net income of $5.9 billion or $8.38 per diluted share, which represents a 1% decrease and 6% increase, respectively, when compared to 2018.

Operating revenue totaled $21.7 billion compared to $22.8 billion in 2018. Operating income totaled $8.6 billion, which was flat compared to 2018.

In addition:

  • Freight revenue totaled $20.2 billion, a 5% decrease compared to 2018. Carloadings were down 6% vs. 2018, with growth in industrial volumes more than offset by fewer agricultural products, premium and energy shipments.
  • UP’s operating ratio improved to a best-ever 60.6%, 2.1 points lower than 2018.
  • Average diesel fuel prices decreased 7% to $2.13 per gallon in 2019 from $2.29 per gallon in 2018.
  • Fuel consumption rate, measured in gallons of fuel per thousand gross tonne miles, improved 2% in 2019 compared to 2018.
  • UP recognized a payroll tax refund of $78.5 million, along with associated interest income of $31.3 million in 2019.
  • Freight car velocity was 208 daily miles per car, a 6% improvement compared to full year 2018.
  • Terminal dwell was 24.8 hours, a 17% improvement compared to full year 2018.
  • UP’s reportable personal injury rate of .90 incidents per 200,000 employee hours increased 11% compared to full year 2018.
  • UP’s capital program in 2019 totaled $3.2 billion.
  • UP repurchased 35 million shares in 2019 at an aggregate cost of $5.8 billion.

2020 Outlook

“While we are pleased with our progress in providing a highly consistent, reliable and efficient service product for our customers, we must improve our safety results,” Fritz said. “As always, we remain focused on growing the business and improving margins while driving shareholder returns.”

Download Union Pacific’s earnings presentation:

The Cowen Insight

“UP reported 4Q EPS of $2.02, down 5% year-over-year, above our $1.98 estimate, but below consensus’ estimate of $2.04 (which had been falling into the print),” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Operating income also decreased 5% to $2.10 billion, above our $2.06 billion but below the Street’s forecast of $2.11 billion. 4Q record operating ratio (OR) of 59.7% was roughly 190bps better than last year, roughly 110bps better than our estimate, but slightly worse than consensus’ expectation. Quarterly revenues declined 9% to $5.21 billion, below our and consensus estimates of $5.25 billion and $5.22 billion, respectively. Relative to consensus, the revenue weakness was in UP’s Premium and Energy businesses, while their Industrial business beat and Agricultural Products was in line.”

“UP issued initial volume guidance and updated their existing OR guidance,” Seidl added. “Initial volume guidance for full-year 2020 is for volumes to be slightly positive yearly, while UP updated its OR guidance from ‘below 60% by 2021’ to expecting an OR of about 59% in 2021. However, this new guidance is in line with our 58.8% estimate and consensus’ expectation at the time of the release.”

“UP’s carloads in 1Q19 decreased by roughly 1.8% year-over-year,” he said. “This included a few weeks of increases to begin 2019 (including increases of nearly 10% in Weeks 2 and 3, and a roughly 4% increase in Week 4), followed by declines in most of the remaining weeks of the quarter. The first week of declines in 2019 was Week 5, which saw a 4.8% decline. As we approach Week 5, UP’s carloads will face an easier weekly comparison followed by increasingly easier comparisons as 2020 progresses.”

“With this in mind, we viewed UP’s slightly positive yearly volume guidance as conservative, given how easy the comps get,” he said. “That being said, the Class I’s PSR progress is encouraging, with management noting that they believe they aren’t even halfway done with implementation. The railroad noted it expects to achieve $500 million of productivity gains this year and that any increase in volumes would not curtail their benefits rather it would add to their overall outlook.”

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