Union Pacific: Quick Takeaways shows "Good Pro-gress", eh?

January 29, 2019

Greetings;

Last week while in Dallas I heard two major rail earnings calls – UNP and NSC, #s 2 & 3 on the USA/PSR Hits list.  I will cover NSC – good financial results/tough Q&A/few answers in advance of the February 11 Investor Conference -  later combined with a Preview of what I want/what I expect from that all-important meeting in Atlanta.  Meanwhile, later today, the PSR “Mothership’, CNI, reports Q4/18 and on its progress at full service recovery setting up what will be a pretty fair 2019 outlook.  CNI remains the PHR (Post-Hunter-RR) beacon….So, how is UNP and its new “$8B COO” faring in its PSR conversion?  So far, good pro-gress, eh?  But one discordant note – recently promoted from CIO to CIO/Strategy Lyndon Tennison is now….”retiring”, days after being lauded on the earnings call.  This follows the “WTH?” pattern of long-awaited Investor Conference in May, change the C-suite out 6 weeks later, announce the switch toward PSR not long after….this, uh, process, involves hard change but the behind the scenes aspect seems a bit muddled…..

Union Pacific’s big earnings outperformance made it 4-for-4 for the rails (later 5-for-5 – and with travel and general weakness, CN has made it, just, 6 for 6), but more importantly, as the most focused on PSR convert, they showed “good pro-gress” (as 10-day-on-property new COO Jim Vena repeatedly said).  UNP showed 39% YOY EPS growth (about a nickel above optimistic consensus, and lowered their OR 110bps to 61.6%.  Volume growth was 3%, which will shake out below the industry average – have they already been doing some PSR adjusting?  As CEO Lance Fritz stated, they are ahead of schedule on their new (gulp) G55/Unified Plan (UP)2020 plan launched before Vena’s onboarding, last October (and, to be fair, launched some 4 months after their Investor Conference).  They are accelerating into the PSR rollout, as EVP-Operations Tom Lischer stated, and expect to complete full geographic implementation by mid-year.  This, as was a lot of UNP’s call, was misunderstood by much of the audience on the webcast and led to a rather unproductive Q&A (for example asking if the new COO was coming on board too late to have an impact if PSR was completed (rather than installed) by mid-year) - more on that below.  UP laid out 2019 Guidance (similar levels of volume and price as current trend, $500mm or more in net productivity (with none too difficult comparisons, as was pointed out); the new OR target of “sub-61” – roughly 200bps improvement – and “below 60%” by 2020) was announced (and immediately questioned as being conservative or that the new COO would review and lower).  Some thoughts:

  • Intermodal growth was pretty darned good (Premium volume was up 9%; International IM revenues up 21% and domestic up 3%) – it will be interesting to compare with BNSF….

  • “Core” price was up 2.5% (again, likely the low end of the group).  Expenses were up 4%, slightly more than a point above the unit growth rate.

  • Operations are improving after a two-year plus slump – 5/6 PSR KPIs improved – freight car velocity was up 9% (from September Plan rollout), for example.  Velocity still declined a bit (3%) YOY, but dwell improved a (18%) lot.  UP proudly proclaimed that there were no more “failure costs” in the numbers going forward.  But all three safety rations (PI, derailments, public crossing accidents) declined.  Capex is planned to be flat at $3.2B – part of the usual PSR pattern but well below what I think is ultimately sustainable for a growth/service franchise (see CN, later).  The now anticipated 13% of revenues range – well blow the “15% or less” target – isn’t conducive to the “Grand Bargain” with shippers (price for spend/capacity/service) and could well raise regulatory/political concerns, as arch-rival Matt Roe (Executive Chairman, BNSF) points out in his stump speech.  I did like the breakout of $300mm in “Technology/Other” – will that change without Lyndon?  ROIC improved 1.4 points to 15.1% - that seems like a good number to invest in….

  • It was sort of amazing to hear the analysts on the webcast greet Jim Vena as the great “change agent” – I have to assume his boss was sitting right there in the same room!  And, for historical purposes, it’s worth remembering the Canadian (“Mothership”) National COO lineage – Harrison, Harris, Creel, Vena, and now Cory.  Not that he wasn’t a most effective part of the team – like a Defensive Coordinator under Head Coach Hunter.  Nonetheless, the typical (and there were perhaps 5) question ran like this: “Hiya Jim – welcome back (drool)!  When are you going to make these targets more aggressive?” 

  • Questions, redux:  There were the usual questions about hump yards (yawn), first quarter OR  and volume targets (WTH?), and “structural differences” with other PSR railways (sigh – none of note); to the latter Jim saw no reason that his new company couldn’t rank ahead of his old one, although “Keith (Creel, CP), JJ (Ruest, CN) and (Jim, CSX) Foote will not make it easy, naming three “Mothership veterans – but excluding Norfolk Southern, also going on this PSR journey!  We’ll see on February 11 how big of an omission – or pointed remark - that might have been. 

  • Still more - Lastly on webcast confusion and misinformation – UP was asked a question on PSR implementation to the effect of, where it was succeeded it was done aggressively and quickly (quicker in fact at each iteration).  Where it failed, it was not.  The tenor is fine – PSR hasn’t been done without EHH himself till now; it wasn’t been done on a measured basis (see increased regulatory interest, etc); it hasn’t been done with the old management still in place.  But – and this is important to note – PSR implementation has never FAILED (think – IC/CN/CP/CSX).  To state this on the record is irresponsible.

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com