Union Pacific suffered from severe headwinds, mostly but not entirely in “Energy” (coal down 22%, sand fully 53%) and “Premium” (down 15%); overall volumes were down 11% (double-digit!), revenues -9%. EPS was off 5%. But charged by a $535mm productivity gain (versus a goal of $500mm) and (fueled by) a 17% drop in the workforce, their OR actually declined 190bps to 59.7%. That success, and the plans for another ~$500mm in productivity (and an 8% headcount reduction) – as well as a guidance of an increase in volume (second-half weighted, to be sure, although the spring flooding last year will help 2020 comparisons), led to the many (many) questions on UNP’s “conservative” guidance (~160bps in OR). UNP produced a ROIC of 15.1%, down only 0.1 points – and thank you UNP for reporting this!
Some other reflections:
- Industrials (flat) did well, on a relative basis – and that’s with Plastics up only 2% (where is that Texas boom?). Meanwhile, within Ag, grain only being down 1% during the trade war seems like a pretty good performance. However, to get a better overall idea of the markets, in this and all commodity sectors we look forward to comparing to BNSF later this month….).
- Intermodal, affected by trade “policy”, the global and US economy, and loose truck capacity, was a black hole. How much was their own rationalization wasn’t delineated, unfortunately. Domestic IM was down 8%; International down 23% (versus tough comparisons – that will continue into Q1; and this is excluding Coronavirus impacts). And finished vehicles dropped 13%, well below the overall production/sales numbers. For 2020 that latter category received a “-“ forecast while both IM sectors received a “?” from CMO Kenny Rocker. Again, the PSR-to-PHR pattern in IM since CN is a de-marketing to growth approach; UNP will lap, I believe, their de-marketing impact, and as of February 1 re-started almost 60 lanes (with CSX, and NS) that were cut at the beginning of this journey in 2018; the IM community had some questions about the scale of the announcement.
- Operationally UNP improved in all six big KPIs they list car velocity by 5% (train velocity by 1%) and dwell by 13%; car trip plan compliance by 9 points to 76%; workforce productivity by 4% (as pointed out, despite the big volume drop). The workforce was down by 17%, as noted, and train length was 16% longer – those are not unrelated statistics
- COO Vena noted that there were, uh, more yards to gain – mentioning train length (and there was $150mm in additional Capex allocated for this), utilizing newly created “latent capacity”, headcount (forecast -8%; much questioned), fuel efficiency, locomotives and terminals/yards consolidation (currently focused on Chicago).
- There was discussion of safety, and within the 5% increase in “other expenses,” there was an increase in casualty costs – but, no numbers!
- Capex will decline – from $3.2B to $2.95B, but adding back that $150mm in specific targeted siding lengthening programs brings it back to even (ish). In comparison, dividends (raised twice last year) totaled $2.6B and share buybacks were $5.8B. UNP needs no more locos for a while, and PTC Capex is winding down.