Union Pacific sets financial targets amidst optimistic traffic outlook

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Westbound auto racks roll on UP tracks in Rochelle, Ill., in a June 2014 file photo.
Trains: Jim Wrinn
OMAHA, Neb. – Union Pacific will be able to reduce its operating ratio to 60 percent by 2020 thanks to a combination of volume growth, price increases, cost reductions, and productivity gains.

The 2020 target, announced at UP’s Investor Day last Thursday, was pushed back a year due to congestion issues that increased costs this year. UP maintained its long-term goal of eventually reaching a 55-percent operating ratio.

But UP is not obsessed with the operating ratio, the key measure of a railroad’s efficiency and profitability. “The paramount thing we care about is operating income,” CEO Lance Fritz says.

Chief Financial Officer Rob Knight announced a new $20 billion share buyback program that will run through 2020, nearly doubling the $10.6 billion the railroad spent on share buybacks over the past three years.

UP also will reward shareholders by raising its dividend payments to between 40 and 45 percent of its net income, up from the current 30 percent.

Capital spending will remain at around the $3 billion level annually, or just under 15 percent of revenues.

Knight said he was confident the railroad could achieve its targets, noting that it has been able to reduce its operating ratio despite an 11-percent decline in traffic volumes over the past three years.

The railroad’s outlook has brightened this year amid tight truck capacity, soaring truck rates, a strong economy, and growing petrochemical, plastics, and energy-related traffic on the Gulf Coast.

UP still faces competitive pricing pressure from rival BNSF Railway on coal and intermodal shipments, executives say. But UP remains focused on profitable traffic, not volume alone, Fritz says.

And its main competitor remains the highway, not other railroads.

“We have a sizeable opportunity to convert truck traffic to rail,” Chief Marketing Officer Beth Whited says.

New traffic segments over the next few years will include tens of thousands of carloads of plastics, largely destined for export from new and expanded plants on the Gulf Coast of Texas and Louisiana.

Some of the plastics traffic will move from Houston to Dallas in covered hoppers, where it will be packaged and loaded into containers that will run in intermodal service to the ports of Los Angeles and Long Beach for export to Asia and South America.

UP also sees perishables traffic – where rail has just a 5 percent share of the market – as a big opportunity. It plans to expand its Cold Connect reefer train service to potential new terminals in Arizona, Texas, Georgia, and in the Chicago area.

“We see that being a growth engine for us,” Whited says. “It’s not hundreds of thousands of loads, but it’s a nice market.”

UP’s energy segment aims to become more nimble so that it can quickly react to and take advantage of market opportunities in a volatile industry. UP, for example, recently converted a dormant wind energy component transload facility in Oklahoma into a frac sand and steel pipe transload center that can serve the state’s nearby Stack and Scoop shale plays.

UP expects its Premium business segment, which includes intermodal and automotive, to continue to grow. E-commerce should help drive international and domestic intermodal growth. And while auto sales are expected to slow somewhat over the next couple of years, consumers’ growing preference for sport utility vehicles can help increase automotive carloads because bi-levels carry fewer SUVs than the number of cars that can fit on a tri-level auto rack.

UP’s new LOUP subsidiary, which combines the railroad’s former separate logistics groups under one roof, can help attract new business to rail by offering logistics, transloading, drayage, and warehouse services, executives say.

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