Union Pacific 4Q15 Earnings Call Notes

Union Pacific’s (UNP) CEO Lance Fritz on Q4 2015 Results

Auto continues to be a bright spot, but volume declined in 5/6 commodity groups and industrial products

“Carload volume declined in five of our six commodity groups with coal and industrial products down 22% and 16% respectively. Automotive continued to be a bright spot for us in the quarter with the volume up 8% versus 2014.”

There are questions about the US consumer

“I will share with you though there is also questions that we have about U.S. consumers. There are indicators that the consumers are healthy like the unemployment rate is at a comfortable 5% level, the consumers are buying automobiles as Eric outlined. But labor participation rate isn’t that great and fourth quarter retail sales for goods was not that great.”

The drop-off in volume has been pretty dramatic, but nowhere near as bad as 2009

“Ken it is hard for me to speak and predict on whether the economy is going into a recession. Certainly our volume drop off as the 2015 year progressed quarter to quarter and as we are entering 2016 is dramatic and it is dramatic in historical reference but it is nothing, it is not approaching what we experienced in 2008 to 2009. I will tell again, a 6% decrease year-over-year and a quarterly 6%, 7%, 8%, 9% decrease year-over-year is pretty dramatic volume change.”

Eric L. Butler

Ag was down driven by lower exports

“Ag products revenue was down 12% on a 5% reduction and a 7% decrease in average revenue per car. Grain was down 12% in the fourth quarter. High worldwide production and a strong U.S. dollar reduced grain exports by 23%. Ethanol shipments were down 3% driven by lower exports.”

Auto was up

“Automotive revenue was up 1% in the fourth quarter as an 8% increase in volume was largely offset by a 6% reduction in average revenue per car. Finished vehicle shipments were up 8% this quarter, driven by continued strength in consumer demand.”

2% reduction in volume in chemicals

“Chemicals revenue was down 7% for the quarter on a 2% reduction in volume and a 5% decrease in average revenue per car. Lower crude oil prices and unfavorable price spreads continued to impact our crude oil shipments which were down 42% in the fourth quarter. Partially offsetting this decline was continued strength in the LPG markets including Propolene, Propane, and Bueten demand.”

Industrial products volumes down 16%

“Industrial products revenue was down 23% and a 16% decline in volume and 8% decrease in average revenue per car during the quarter. Reduced rig counts and shale drilling resulted in a 42% decline in minerals volume, primarily driven by a 52% decrease in frac sand car loadings. Metal shipments were down 27% from softening industrial production, reduced drilling activity, and a strong U.S. dollar.’

Intermodal revenue down 7%

“Intermodal revenue was down 14% in the fourth quarter and a 7% lower volume and an 8% decrease in average revenue per unit. ”

I think across the board you hear every customer talking about trying to right size their inventories

“I would say that every BCO is looking at rationalizing their inventories because they expect the holiday season higher than I think expected on inventories with sluggish retail sales. I think across the Board you hear every customer talking about trying to right size their inventories.”

Chemicals volumes from the gulf coast should come online in 2017-2018 time frame

‘We are seeing capital investment occurring specifically along the Gulf Coast in our chemical franchise. Those investments just haven’t yet turned over into operating units and so that’s a matter of time. That’s an end of this year 2017-2018 kind of impact. We are still hopeful for that impact”

Consumers are doing something with lower energy cost, but it’s not spending on goods

“The other part of it is consumers doing something with the windfall of lower energy cost and that’s where it is really hard to see that showing through in the goods that we shipped for retailers. And their feedback is while maybe services consumption is relatively healthy, goods consumption isn’t necessarily showing that.”

Robert M. Knight, Jr

We currently expect volumes to be slightly negative in 2016. Preparing ourselves for volume and mix pressures throughout March of 2016

“For the full year we currently expect total volumes to be slightly negative depending on coal and the strength of the overall economy as the year plays out. Fuel prices will have a negative impact on earnings at least in the first quarter given the $0.08 positive fuel benefit that we reported in the first quarter of 2015. While it is still early we are preparing ourselves for volume and mix pressures particularly in the first quarter and likely throughout March of 2016.”

At this point in time we do not see record earnings

“That is correct. Now nothing would please us more than to see the economy turn and things are going to go favorable. So we are going to fight like heck to do the best we can. But yes, you are correct. At this point in time, we do not see record earnings.”