Union Pacific profits sag under the weight of broad quarterly traffic declines

RELATED TOPICS: UNION PACIFIC | FINANCIALS
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OMAHA, Neb. — Union Pacific on Thursday reported lower revenue and earnings for the fourth quarter as traffic declined 11%, led by steep drops in coal and intermodal volume.

For the quarter, operating income fell 5%, to $2.1 billion, as revenue decreased 9%, to $5.2 billion. Earnings per share slumped 5%, to $2.02, missing Wall Street analyst expectations.

UP’s operating ratio declined to 59.7%, a 1.9-point improvement over a year ago as the railroad cut expenses by 12%, thanks in large part to a 17% decline in employment levels.

For the full year, operating income was flat, at $8.5 billion, despite a 5% decline in revenue, to $20.2 billion. Earnings per share rose 6% to $8.38 due partly to the impact of share buybacks.

The railroad’s operating ratio for 2019 was a record low 60.6%, down from 62.7% in 2018. The quarterly operating ratio was 59.7%, the third straight quarter for a sub-60% operating ratio.

“That’s a remarkable achievement given the volume challenges we experienced in 2019,” CEO Lance Fritz told investors and analysts on the railroad’s earnings call. Fritz praised UP employees for helping to transform the railroad and improve its service as it adopts an operating plan based on the principles of Precision Scheduled Railroading.

The quarterly traffic decline was led by a 25% drop in coal volumes and a 15% drop in premium traffic, which includes intermodal and finished vehicles. International intermodal was down 23%, reflecting the impact of the surge in traffic a year ago as importers raced to beat tariff deadlines. Industrial products traffic was flat, while agricultural shipments declined 2%.

For 2020, UP expects slight volume growth despite continued headwinds for coal, frac sand, and automotive volumes. The railroad has a positive outlook for biofuels, food and beverage shipments, plastics, construction materials, and petroleum products.

UP was uncertain about the direction of grain and intermodal volumes, with grain and international intermodal dependent on global trade developments and domestic intermodal volume growth hinging on tightening of truck capacity later in the year.

Executives said the recent initial U.S.-China trade deal should benefit agricultural exports, especially soybeans, and help boost international intermodal volumes later in the year.

“The Phase I trade deal essentially takes China as a headwind and sets it up to be a potential tailwind,” CEO Lance Fritz told analysts and investors on the railroad’s earnings call.

Benefits of the trade deal are likely to be felt over the next two to three years, Fritz says.

It’s going to be another tough year for coal volumes if natural gas prices remain at near record lows, Fritz says.

UP will continue to reduce costs and sees productivity gains of at least $500 million for this year, which includes an 8% reduction in employment levels. The railroad aims for an operating ratio of around 59% for this year.

Overall, UP will spend $2.95 billion in capital expenses this year, down 8% from 2019. The spending plan includes $1.85 billion for infrastructure replacement, $620 million for capacity and commercial facility improvements, $295 million for new freight cars and locomotive modernizations, $95 million for technology, and $90 million for positive train control.

NEWSWIRETrains News Wire

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