Union Pacific 1Q16 Earnings Call Notes

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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.”