Union Pacific profit rises in fourth quarter

Railroad expects traffic to grow this year
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OMAHA, Neb. — Union Pacific’s profit rose 2 percent in the fourth quarter of 2016 as traffic declines eased and the railroad kept a tight lid on costs.

Revenue was down just 1 percent for the quarter despite a 3-percent decline in carloads. UP’s operating ratio declined by 1.2 points, to 62 percent.

“While full-year volumes were down substantially year over year, we did see declines moderate in the fourth quarter,” Lance Fritz, Union Pacific chairman, president and CEO, said in a statement.

Shipments of agricultural products were up 7 percent in the fourth quarter. Chemicals and intermodal were flat, while industrial products (minus 2 percent), automotive (minus 6 percent) and coal (minus 6 percent) all declined.

For the year, UP officials say the railroad’s profit declined 11 percent to $4.2 billion. Revenue was down 9 percent, while carloads sank 7 percent versus 2015, as chemicals, coal, industrial products, and intermodal all saw declines. The 2016 operating ratio was 63.5 percent, up 0.4 points. Operating ratio is the measure of a company’s operating expenses as a percentage of revenue.

“Looking to 2017, we are fairly optimistic about some of the macro-economic indicators that drive our core business. Higher energy prices, favorable agricultural markets, and improving business and consumer confidence all support a return to positive volume growth this year,” Fritz said. “We continue to have confidence in the strength and diversity of the Union Pacific franchise, which will position us well to safely and efficiently leverage stronger volumes as our markets begin to rebound.”

The railroad expects traffic volume to grow in the low single-digit range, says Rob Knight, chief financial officer.

UP is closely watching the Trump administration’s trade and tax proposals, Fritz says.

“We’re optimistic that those decisions ultimately will benefit U.S. trade and the U.S. economy,” he said.

The economies of the U.S. and its trading partners are tightly woven together, Fritz says. American consumers benefit from free and open trade, he says, and many high-paying American jobs depend on export markets.

About 40 percent of UP’s revenue is tied to international business, says Beth Whited, the railroad’s chief marketing officer. This traffic includes grain, grain products, and industrial products. About 45 percent of UP’s intermodal business is international. And auto parts and finished vehicles make up a “big chunk” of UP’s cross-border Mexico traffic, Whited says.

UP’s operating metrics — including overall velocity and terminal dwell — improved for the quarter, while the recrew rate of 2.4 percent remained a record low levels, says Cam Scott, chief operating officer.

UP set annual records for train length in its manifest, grain, and automotive networks. Scott says UP has lots of room to continue increasing train length.

“We’re not close to optimizing our network,” he says.

The railroad will reduce its capital expenditures for 2017. UP aims to spend $3.1 billion, down from $3.5 billion in 2016. UP had been scheduled to take delivery of the final 100 units of a multi-year locomotive order this year, but will push off delivery of 40 of those units to 2018, Knight says.

Capacity improvements will be centered on the railroad’s Southern Region, Knight says.

For the fourth quarter, UP reported net income of $1.1 billion, or $1.39 per diluted share, on revenue of $5.1 billion. For the year, earnings per share stood at $5.07, versus $5.49 in 2015. Operating revenue for the year was $19.9 billion, versus $21.8 billion in 2015, while operating income sank 10 percent, to $7.3 billion.

NEWSWIRETrains News Wire

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