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.”

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.”

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.”

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.”