Union Pacific 2Q17 Earnings Call Notes

Lance Fritz – Chairman, President & CEO

Headwinds in wheat exports

“high global production of both seed grains and wheat, coupled with a lower quality domestic wheat harvest will create headwinds in our export markets.”

Cautious with respect to auto sales

“We remain cautious with respect to auto sales due to current sales trend, higher inventory, and rising interest rates. The reduced SAR will impact both the finished vehicles and parts with a potential upset in over-the-road conversion opportunities.”

Permian could require 40-50m tons of frac sand

“the Permian is roughly 15% brown and 85% white sand. And the demand this year, call it 28 million or 29 million tons. We see estimates going into next year where there are proposed mines that would bring on anywhere from 20 million to 40 million or 50 million tons and perhaps demand in the Permian being in that 40 million to 50 million tons.”

Rob Knight

We think volume should be our friend in the third quarter

“volume, we think is going to be our friend certainly in the third quarter improving from the second quarter. And we’ll just have to see how the numbers play out.”

Lance Fritz 1Q17 Earnings Call Notes

Lance M. Fritz – Union Pacific Corp.

Frac sand and coal stabilized

“we’re seeing particular strength in a few markets such as frac sand. Coal seems to have stabilized and we’re seeing some signs of gradual improvement in other areas of the economy.”

See 3% Inflation rate

“a higher inflation rate, which for the full year we still see overall inflation in that 3% range which is obviously is higher than what we ended up with last year.”

We think the administration gets that US economy linked to trade

“in terms of trade overall, our perspective is the following: that the U.S. economy is tightly connected to our trading partners. We understand that open global trade and more markets available to U.S. manufacturers and producers is critical both for jobs in the United States as well as for the economic vibrancy of the United States. We believe that that’s well understood also in our current administration and we believe that while there are opportunities to both enforce existing trade agreements, enhance them and negotiate new ones, that the long-term answer is more markets available to U.S. manufacturers and producers is better than fewer markets available. That’s essentially the pathway towards economic prosperity and job creation.”

Elizabeth F. Whited – Union Pacific Corp.

Seeing substantial increases in demand for Frac sand in Texas

Okay. So, we are seeing substantial increases in demand in Texas, specifically in the Permian Basin. We’d mentioned that we were up 59% in the quarter. We were up almost 100% in the Permian Basin and we’re up around 40% in Eagle Ford. We’re seeing some spiking demand as well in the Niobrara, but not as substantial. I would say that that is sustaining and maybe even growing a little bit as we enter into the second quarter. And I don’t see anything right now that changes that, so that’s been a bright spot for us.

Union Pacific 4Q16 Earnings Call Notes

Union Pacific’s (UNP) CEO Lance Fritz on Q4 2016 Results

Mexican trade is inextricably linked to our economy

“Sure. So we are paying close attention to all of the talk about potential outcomes as we go forward in terms of impact on either NAFTA or other international trade agreements. Our perspective is that the United States is tightly woven with its trading partners and our consumers benefit greatly from free and open international trade, both from a standard of living perspective, making goods available to them at lower cost than they would be otherwise, as well as creating markets for U.S. goods to be sold into, creating a robust potential growth for U.S. jobs and typically the higher paying U.S. jobs. When we look at the cross-border trade let’s say specifically with Mexico, when you really dig deep, you see that a large percentage, certainly more than half, a lion’s share has value added on both sides of the border and is inextricably linked to our economy. So we’ve been giving that kind of feedback to our elected officials and regulators for a long time. ”

Rob Knight

Core pricing will continue to be challenged in 2017

“In fact, if you exclude coal and international intermodal from the calculation, our core price on the rest of our business lines would be in the neighborhood of about 2% to 3%. Given these market dynamics, our core pricing will continue to be challenged throughout the first part of 2017 before beginning to strengthen later in the year, assuming market conditions improve. That said, I want to reiterate that our pricing philosophy has not changed. We will continue to price our service product based on the value proposition that it represents in the competitive marketplace, at levels that generate re-investable returns. This should result in real core pricing gains, and contribute toward improving margins over the longer term.”

While inflation is rising we have pricing pressures

“Yes, Justin, I guess, I would just kind of build on Lance’s point. We don’t give specific guidance as Lance pointed out, but we are – take one message from us here, that while inflation’s rising, while we have some challenges in the marketplace as it relates to pricing, we are still committed to pricing at reinvestable levels that are above the overall inflation costs in the year. ”

We’re not sitting here holding back investment decisions based on the tax rate

“. I mean, we’re not sitting here thinking about making – holding back, making capital investment decisions based on the tax rate as an example. So I would anticipate that that wouldn’t impact sort of how we treat that and I think it would be to the benefit of us and our shareholders if that played out and we would have the expectation of hanging onto it.”

CSX 4Q16 Earnings Call Notes

CSX Corporation’s (CSX) CEO Michael Ward on Q4 2016 Results

Probably an opportunity to move to a one man crew

“Well clearly as you look out technology is evolving David, there is going to be autonomous vehicles out there. There is no question, the only question is when and how much they will be deployed. And if you think about us putting the Positive Train Control system in place, which we will have in place as required by law. One does have to question why there needs to be two people on the crew when you have that kind of safety overlay in there. So over time, I think that will be an issue. I don’t think it’s in the near-term, but longer-term, that’s certainly something we’re going to have to address.”

Frank Lonegro

Expect a healthier environment in 2017

“Overall the industrial economy is more stable and energy headwinds are moderating. However, we continue to face a strong U.S. dollar and low commodity prices which constrains growth in some markets. As we think about the full-year 2017, we anticipate a healthier volume environment. ”

Labor inflation is on the healthcare side not wage side necessarily

“Ravi on your inflation question I think in the prepared remarks, you heard the $35 million inflation on labor and fringe and there are some pretty key industry drivers as part of that, it’s not really on the wage side of things, it’s on health and welfare side so medical inflation obviously there’s always going to be a little bit, little bit higher than we would like. ”

Frederick Eliasson

Pricing environment improving but may not get where we want until 2018

“Sure. So I will just remind again, we really don’t forecast pricing, it obviously has been a tough period, an extended period now from a pricing perspective and lot of excess capacity out there and our challenge to our team is of course to sell through this trough, make sure we sell the improved service product that we have, the unparalled network access that we have and provide innovative solutions to our customers and I think the fact that we, we’ve been able to do as well as we have I think is a good testament to both the fact that, it isn’t value driver of ours and it is also a good testament to the fact that we really do need to make sure to continue to value price to be able to reinvest in the business the way we want to. And so it has been a sequential downtick. We’ll see when it when it turns, I think there’s a lot of good things going on as the economy picks up. I think is good thing if we continue to low unemployment that put pressure on the wages. We know that. We see the deal demand is coming into play here as we get into the second half of 2017. So I think things are lining up for better pricing environment as move through the second half of 2017 but it might not fully be where we want to be until we get to 2018.”

Union Pacific 3Q16 Earnings Call Notes

Union Pacific’s (UNP) CEO Lance Fritz Q3 2016 Results

Remain cautious of auto sales sustaining these levels

“Turning to autos, light vehicle sales are forecasted to finish 2016 at $17.4 million, down less than 0.5% from the 2015 record rate of $17.5 million. Although we expect sales incentives, low gasoline prices and consumer preference will continue to drive demand. We remain cautious with respect to auto sales sustaining at these levels. A continued focus on over-the-road conversions will support auto parts growth.”

Some segments showing signs of life

“The macroeconomic environment still has its challenges and unstable global economy, the relatively strong U.S. dollar and continued soft demand for consumer goods. However, certain segments of the economy are showing signs of life. A recent rally in energy prices has crude oil over $50 a barrel and natural gas over $3 per million btu, which are both encouraging for our coal and shale-related businesses.”

Going to continue to push our pricing power

“Scott our philosophy is not changing and as a matter of fact, our top line this quarter reflects that it’s not changing. We are pursuing business in the marketplace that we can price for the value that we represent and that’s re-investable. And if we can’t find that we walk away from it. So nothing has changed about that philosophy.”

Port strike bigger than the Canal in terms of west to east coast traffic shift

“No, I think the Panama Canal story is what we’ve been saying for the last several years and certainly I think the last couple of quarters we’ve been mentioning that the amount of traffics hitting the West Coast versus the East Coast did – there was traffic that moved to the East Coast because of the strike and BCO’s trying to diversify their risk and not be dependent upon the West Coast. We did see that phenomena. We have seen some of that business start to come back, but it hasn’t all come back from before the strike. That has probably been a larger factor than any Canal opening factor. The fact that the BCOs are diversifying their flows and a lot of ways just to not have that risk.”

Eric Butler

Container ship companies face tough times

As you mentioned Cherilyn there is a significant volatility going on in the international container ship business. There have been three major mergers, one bankruptcy, there are a number of other entities that are in dire or questionable financial shape. One of the things that all of the container ship companies are looking at doing is finding ways to have match backs or exports from the U.S. to Asia.”

$3 natural gas is good for coal

“The below $2 natural gas prices has created a headwind for coal in the past. We’re excited or we think that with natural gas being above $3 now and even some of the futures market showing it in the mid-3s that that certainly will improve the competitive condition for coal, but that has clearly had an impact likewise.”

CSX 3Q16 Earnings Call Notes

CSX’s (CSX) CEO Michael Ward on Q3 2016 Results

Revenue declined 8% in line with volume decline

” Revenue declined 8% in the quarter, consistent with an overall volume decline of 8% which included a 21% decline in coal volume.”

Need to have some growth to improve operating efficiency

“But growth does have to be a critical component as we move to the mid-60s operating ratio. We’ve got already tempered economy here for the last two years and clearly growth has to be part of that equation. And we think with the service partners we have Fredrick’s team can grow it once we see any signs of vibrant in the economy, but that is part of the equation.”

Frank Lonegro

Automotive expected to grow, ag neutral

“Automotive is again expected to grow as light vehicle production remained strong and new business continues to ramp up. Agricultural and food products is expected to be neutral, the record grain harvest will drive year-over-year gains. However market dynamics for ethanol remained challenged near-term for CSX due to increased movements in storage in the Gulf region. Export coal is also neutral as we are seeing some near-term increase in meteorological demand, driven by reduced Chinese supply such that volume should be similar to last year’s levels.”

Significant amount of excess capacity impacts pricing power

“Sure so in terms of overall same store sale pricing we’re obviously very transparent. What we’re doing there each and every quarter you’ll have an opportunity to see that in the fourth quarter. There is clearly more difficult sale environment and it’s been there for a period of time as we see a significant amount of excess capacity. Our focus continues to be to price the value that we provide our customer to be able to continue to reinvest. We have an improved service product year-over-year that is very helpful. And what we are trying to do is to sell through this trough so to speak and sale that kind of the long-term access to a network and the capacity that we have.”

Coal inventories have come down, natural gas prices up a bit and that is helpful but we generally need to see those higher

“Sure so clearly the hot summer has been helpful the cooling degree days has been very helpful especially in the South we’ve seen significant reduction in the inventory levels, I think in the South in terms of days burn we’re down to from 150 a year ago to somewhere around 100 now. And even in North we have come down a little bit, I would say though overall that they’re probably still slightly above where they would like for them to be, in certain places they are less, certain places they are more, but they’re probably still a little bit above where they would like it for them to be.

But it is good news that we’re starting to see that and also to your point about natural gas prices they have come up a little bit, that’s also helpful. But generally though we do need to see those natural gas prices closer to 350 or above to make really meaningful impact and we’re excited where we’re heading we’ll have a much better view I think as we get into the fourth quarter and early next year in terms of what coal will do for 2017 not just on the domestic side, but also on the export side.”

We are seeing a continued shift towards more east coast intermodal vs west coast

“Sure this is Fredrick, so what we’re seeing and have been seeing is a continued shift towards more East Coast internationally intermodal coming in versus West Coast. And as a result the ports are clearly making investment not just Savannah, but other ports as well. And we are as well to make sure we can serve that. And that is attractive business that we want to get more of. And as we see additional investments come online we’ll have an opportunity.”

Our pricing power should get better eventually

“Sure, I mean it is clear that we’ve had a tough market for an extended period of time now in terms of excess capacity. And it does impact not just intermodal business, but certain markets within our merchandise business as well. Generally shorter haul also generally lower contributory traffic that are more susceptible to being switched over to truck. As the market turns and it will turn we see new orders of truck of Class A trucks have come down significantly 30% 40% year-over-year , year-to-date. We know ELDs will be coming in by sometime in the second half of next year. And if the economy continues to expand and unemployment stays low that should lead to a much better environment as we get into late ‘17 and that will be helpful.”

Shift to east cost intermodal not necessarily due to Panama Canal widening

“Sure, so this is Fredrik again. We have seen the shift for an extended period of time, that we see more of our international cargo coming in on the East Coast porch. We have not seen a significant change in the amount of volume coming in since the Panama Canal got widened. What we are seeing that there are some bigger vessels coming in, but generally it is not necessarily adding capacity.””

Union Pacific 2Q16 Earnings Call Notes

Union Pacific (UNP) Lance Fritz Q2 2016 Results

Volumes declined in five of six groups

“Total volume decreased 11% in the quarter compared to 2015. Carload volume declined in five of our six commodity groups, with coal, Intermodal and industrial products all down double-digits. Agricultural products was the only group to show positive year-over-year growth, with volumes up 2% this quarter, reflecting stronger grain shipments versus 2015.”

Soft global economy will continue to pressure volumes

“A soft global economy, the negative impact of the strong U.S. dollar on exports, and relatively weak demand for consumer goods will continue to pressure volumes through the second half of the year.”

Eric Butler

Reduced drilling activity continues to negatively impact minerals

“In industrial products, reduced drilling activity will continue to negatively impact our minerals and metals rock volumes for the remainder of the year. The improving construction and housing market should drive growth in our lumber and rock volumes.”

Cameron Scott

Robert Knight

Expect 2% wage inflation

“Labor inflation was about 1.5% in the second quarter, driven primarily by health and welfare, which is partially offset by some favorable pension expense. We expect full year labor inflation to be around 2%.”

We have a lot of strong competitors

“Yeah, Chris I think you said it right, we compete vigorously every day for business we have strong real competitor, strong truck competitors. We have strong water barge shipping competitors and you’re exactly right we compete vigorously. We do think we have a strong value proposition and we think that with that strong value proposition we can compete effectively on that value proposition and price for the value that we’re providing to the marketplace. As I said earlier you’re seeing capacity tighten and many of those modes and we think that’s positive for the competitive environment, but, yes, we compete vigorously every day.”

Eric Butler

There will probably be more opportunity to move grain in the second half than the first

“if you look at the crop there was something like 6 million more acres of corn planted this year and it’s still dependent upon kind of the weather and the harvest, but right now it looks like it’s going to be pretty decent yields from the current crop. And so if you look at the pretty decent yields from the current crop if you look at the high storage levels on a historical basis, if you look at some of the challenges — in particular South American crops that have had, it suggests that there’s going to be opportunity to move grain in the second half of the year at a higher run rate than what we saw in the first half.”

Half of auto business is to or from Mexico

“Yeah. So, about half of our franchises to or from Mexico that’s all unfinished vehicles and parts. We — the Mexico volume is growing as you know. Historically, it was like 2 million vehicles, I think they are probably up to about 3.7 million vehicles produced in Mexico. The forecasts is they are going to get close to about 5 million vehicles produced in Mexico.”

Canadian Pacific (CP) Chief Operating Officer Keith Creel And CSX Chief Financial Officer Frank Lonegro

Canadian Pacific (CP) Chief Operating Officer Keith Creel said that due to technological advancements, railroads don’t need as many employees as they used to which should help keep expenses in check

“We use to pay too much for too little.  People would effectively come in 6 hours for 12 hours of pay.  We don’t need as many people.”

CSX Chief Financial Officer Frank Lonegro said driverless locomotive trains will also help to improve efficiency 

“Labor is our largest cost.  In 5 to 10 years, we’ll move to less labor intensity, from two to one person in a cab, and maybe in my lifetime to zero.”






Union Pacific 1Q16 Earnings Call Notes

Lance M. Fritz – Chairman, President & Chief Executive Officer

2016 has brought continuation of trends from 2015

“2016 has brought a continuation of many of the same trends that we experienced throughout most of last year. An energy market recession, low commodity prices, the strength of the U.S. dollar and soft global economy, and muted domestic retail demand have all contributed to overall market weakness across many of our business lines. And it’s likely that many of these themes will be with us for some time. That said, we are stronger coming into this year than we were a year ago.”

I think we’ll continue to invest in the southern tier of our network

“as we look forward, our capital spend will depend on the first three things I mentioned. First and foremost, what’s the outlook for volume, what’s that environment look like, where is that volume showing up, and what are the projects that we have in front of us that generate attractive returns? In my mind’s eye, you’re still going to see us spend down in our Southern tier of our network. That’s still an area where we would like to continue to enhance our capacity.”

Eric L. Butler – Executive Vice President-Marketing & Sales, Union Pacific Railroad Co.

Auto sals are forecasted to be 17.8m vehicles, but we’re cautious about sales supporting these levels

“Turning to autos, light vehicle sales are forecasted at 17.8 million vehicles, a 2% increase above the 2015 seasonally adjustable annual rate of 17.5 million vehicles, driving both finished autos and parts, including over-the-road conversions. While we expect low gasoline prices will continue to sustain demand, we remain cautious with respect to auto sales supporting these levels.”

Expect growth in intermodal impacted by sluggish retail inventories and sales

“in Intermodal, we see growth potential in domestic Intermodal from highway conversions, though muted by high retail inventories and sluggish retail sales. With trans-Pacific market challenges, we expect continued volatility in international Intermodal”

US is still a great producer of global ag

“if you look at our Ag business, it really is dependent on the fact that the U.S. still is a great producer. Generally speaking, long term it is in the sweet spot in terms of world competitiveness. We have had wins this year with the strong dollar, but it’s in the sweet spot, and the U.S. as a producer will continue to be a good producer.”

The dollar is still very high in any relative sense

“I’m not a central banker, but I would say the dollar is still very high in any relative sense. It has dropped a little from the peak, but it still is very high. And as you know, dollars impact the competitiveness of U.S. exports across the board. So whether it’s Ag, whether it’s things like steel, whether it’s things like our iron or metals business or other commodities business, it impacts all of those things. And so I don’t have any prediction of how much the dollar needs to fall. It still is very high in any relative historical sense…The dollar is still a headwind. The strong dollar is still a headwind to U.S. exports.”

West Coast port entry is still fastest option to Eastern markets

“that West Coast port entry still is the fastest option to get to the Eastern markets, usually by two weeks. Another factor is with all of the rationalization going on in the container shipping industry, all of the alliances and the mergers and all that’s going on, there does seem to be a migration to the larger ships. ”

Coal was even softer than we anticipated

“So clearly, as Rob said earlier, the coal side was a lot softer than what we anticipated. Again, warmest winter on weather, we did not expect these low natural gas prices. The shale impact is significant. But if you set aside the shale impact, the energy, the coal impact, you do have some variability going on in terms of retail sales that is probably a little softer than what we anticipated.”

There is general economic strength in our industrial products business

“there is general economic strength that we’re seeing in our industrial products business in terms of construction coming back, housing coming back. Chemicals has the benefit of plastics going to the automotive industry as you see automotive sales. And so there’s a slowly strengthening economy out there and we’re doing a lot of business development to go after it, which again is being overshadowed by just the huge volume numbers for coal and shale and the other headwinds we have.”

There is a lot of grain stockpiled in storage

“There is a lot of grain in storage. There is about 200 million bushels that were carried out from last year. I think the USDA estimates are that can grow by another 500 million bushels based on the number of acres that are being planted and the types of yields that are expected. So there is a lot of grain out there. We believe that eventually it has to move. And so we are certainly optimistic that when it does move, we’re going to get our fair share of that, and it will move. It’s just right now, U.S. grain is not competitive on world markets. The strong dollar is an issue. There are other issues in terms of really good crops in other places, growing regions around the world. But we do think it will ultimately will move, and we’re going get our fair share of it when it does.”

Cameron A. Scott – Executive Vice President-Operations

Adjusting aspects of business to lower demand

“we also continue to adjust other aspects of our business to lower demand. At the end of the first quarter, we had around 600 total engineering and mechanical employees on furlough as well.”

Robert M. Knight – Chief Financial Officer

Operating revenue down 14% driven by significantly lower volumes

“Operating revenue was $4.8 billion in the quarter, down 14% versus last year. Significantly lower volumes, a challenging business mix, and lower fuel surcharges more than offset solid core pricing achieved in the quarter.”

JS Earnings Call Notes – Canadian National Railway (CNI)

Canadian National Railway (CNI) Chief Operating Officer Jim Vena said they were able to wring out more productivity out of their employees

“Our gross ton miles per crew hour worked increased by 3%. Therefore, each train handled more freight, moved faster, and our employees were more efficient in getting them from origin to destination. So a great job by the team on moving the trains.”
Canadian National Railway (CNI) Chief Operating Officer Jim Vena also highlighted his team’s cost efficiency 
“Our engineering and mechanical departments both delivered results in line with the overall results on a productivity and cost efficiency basis which helped us deliver a car velocity improvement of over 16% in the quarter and in the year of 13%.”
Their business tied to oil & energy fell off of a cliff
The crude market caused a 32% drop in crude by rail carloads and a drop of 43% in frac sand for drilling. And steel is suffering the cutback of the energy sector capital program. This same segment would be a major headwind for this year.”
Yet they have continued to increase prices in excess of inflation
We continue to produce pricing above inflation which, at this point, we would define as 3% inclusive of the impact of the negative Canadian grain cap. We are in position to support those shippers for whom the weak Canadian dollars has become a cost advantage like the manufacturers, like the service industry that are selling into the U.S. market, for example the forest product industry and the Canadian port terminal industry.”
The company also benefitted from lower fuel cost
The fuel expense stood CAD 304 million or 42% lower than last year. Fuel price was 38% lower versus last year, while volume reduction accounted for CAD 19 million betterment, as fuel productivity came in 2% better.”
They have the lowest exposure to hauling coal of any of the North American Class 1 railroads
Coal was in retreat. And in 2016, that will continue. Coal was only 4.5% of our fourth quarter of total revenue, the lowest of any railroad.  We have a very low exposure to coal, while our network allows us to serve key U.S. consumer projects. This, along with a stronger U.S. currency, provides us with a natural hedge that helps to mitigate the weak commodity environment.
Canadian National Railway (CNI) Chief CEO Claude Mongeau wants his company and his director competitor, Canadian Pacific Railway, to remain disciplined on pricing their services rather than chasing volume
It’s quite remarkable you have CN that is leading the industry, achieving new records in terms of efficiency. You have CP which, over the last four years, has done a remarkable turnaround and is in every core respect in terms of operating metric, is getting very close to our level of efficiency. There’s something to be proud here. We have two Canadian railway road really leading the way in terms of performance.  I hope that going forward, we will protect that profitability and use it to generate a capacity to invest in our networks and to grow the business, grow it through innovation and not chase volume for the purpose of chasing volume. It’s precious that we are able to achieve the efficiency level, and it’s incumbent on us to manage for the long term.”