Union Pacific 2Q15 Earnings Call Notes

Core price gains were not enough to overcome decrease in demand

“Solid core pricing gains were not enough to overcome a significant decrease in demand. Total volumes in the second quarter were down 6%, led by a sharp decline in coal. Industrial products and agricultural products also posted significant volume decreases.”

We’ve been right sizing our resources

“first quarter volumes were down 2%, and we began realigning our resources early in the year, storing locomotives and furloughing employees. These efforts continued throughout the second quarter. We’ve made meaningful progress right sizing our resources to current volumes”

10% decrease in freight revenue

“the decline in volume and lower average revenue per car drove a 10% decrease in freight revenue.”

Feed grain impacted by export demand

“Export feed grain was impacted by the strong US dollar and abundant global grain supply, driving our export shipments down 36%.”

Automotive 7% increase in volume

“Automotive revenue was up 3% in the second quarter on a 7% increase in volume, partially offset by a 3% reduction in average revenue per car. Finished vehicle shipments were up 8% this quarter, driven by continued strength in consumer demand.”

Construction soft because of weather in the South

We experienced higher than normal rainfall in the southern part of our franchise during the quarter, which led to construction delays that impacted both cement and rock volume. We still think the construction market is fundamentally strong, particularly in Texas, and that our construction products business will rebound.”

Intermodal volumes soft because of soft retail sales

“we experienced a slowdown later in the quarter due to relatively high retail inventory levels and softer than expected retail sales.”

Consumer confidence indicators are still positive despite high retail inventory levels

“in intermodal, the relatively high current retail inventory levels could moderate our growth in the second half of the year in both domestic and international. However, many of the consumer confidence and spending indicators are still positive, so we’re preparing for a normal peak shipping season, though it could be muted.”

Not likely that we will beat last year’s earnings

“it’s not likely that we will beat last year’s record earnings is the reality of what we’re seeing in the business mix, particularly the coal volumes. We’re not calling for any dramatic turnaround in our coal volumes.”

May have lost some share to BNSF

“We also think, as we mentioned in our comments, that some of the flooding and track outages that we experienced particularly in June, had an impact that you probably won’t see in the numbers of our western competitor”

Still plenty of room for growth

“I want to reemphasize what we’ve constantly focused on with our investors, and that is we’ve got an industry best franchise. It’s got plenty of opportunity for a growth and business development. We’ve got plenty of opportunity to continue to improve the productivity and efficiency of operations. For the very long term, we feel very good about our long-term guidance.”

It’s supposed to be a pretty good crop. Storage is relatively full

“Right now, the projections are, while it may not be a record crop like the last two years, it still will be a pretty strong corn and bean crop. As you suggest, storage of crops are relatively high because US grain has not been able to compete as effectively, because there have been strong world grain crops and the strong US dollar. So there is a speculation that says if it is a strong crop, there will have to have the current products or the crop move, and so that would be a positive for us in the second half of the year. ”

There are areas of the economy that feel pretty good. Our top line is being driven by problems in energy

“there are areas of the economy that feel pretty stable and pretty good. It’s reflected in the consumer side of the economy and specifically in things like our automotive shipments in the domestic intermodal product, a couple of things like that. This acute impact in the energy side of our business, specifically coal and shale energy-related product, is largely driving that top line problem.”

Customers are feeling pretty good

“the economic indicators and the economy – customers are feeling pretty good. Trend’s already up the correct direction.”

Coals a big part of our business, but we have a diverse set of opportunities that could drive long term OR

“First of all, we’re not calling for the death of coal as a business unit for us. We’re experiencing a bit of a hiccup here. But I would say first of all, obviously that size of a business is a positive contributor to our OR. As it shrinks or any business shrinks, we have, as we’ve talked and as you know, we have a lot of diverse opportunities in front of us that give us a lot of confidence. That’s what keeps us as confident as ever that we could still meet our long-term OR guidance.”

Trucks are more competitive as fuel prices rise and workers who were in the oil fields are moving over to be truck drivers

“learly lower fuel prices will incrementally, nominally make truckers more competitive, and clearly as the shale play has gone down, there appears to be what we think is a temporary alleviation with some of the driver shortages or a temporary reduction, I should say. There still are long-term driver shortages out there, but some of the move of labor from that to truck drivers has alleviated some of the shortage”

Companies may move some goods towards the east coast, but not a huge needle mover

“So we think that there’s some risk that there might be some nominal temporary rerouting as a supply chain risk management approach. I think there’s some surveys out there that says companies might move 5% of the supply chain, risk management. We’re not really seeing that, and we still think the west coast ports have an economic and a time value for product going pretty deep into the east.