Soft demand in several sectors, productivity slip hampered UP's 1Q results

Struggles to balance and adjust resources according to volume swings and compensate for soft demand in several business sectors led to mixed financial results for Union Pacific Corp. in the first quarter.

Although operating income grew 7 percent to $2 billion, net income increased 6 percent to $1.1 billion, diluted earnings climbed 9 percent to $1.30 per share and the operating ratio improved 2.3 points to 64.8, operating revenue was flat at $5.6 billion, freight revenue fell 1 percent to $5.3 billion, operating expenses rose 4 percent to $3.6 billion and volume dipped 2 percent to 2.2 million units compared with first-quarter 2014 results.

Crude-oil traffic tumbled 38 percent, coal business was negatively impacted by the mild winter, high utility stockpiles and soft export demand, and international intermodal volume was driven down by the labor dispute at West Coast ports. In addition, the railroad was operating in catch-up mode in the quarter, working to boost productivity and match resources to volume swings as traffic declined after climbing throughout 2014, said UP President and Chief Executive Officer Lance Fritz during an earnings conference call held this morning.

"While we took actions during the quarter to adjust for the volume decline, we did not run an efficient operation," he said. "We are taking the steps to align our resources with current demand, while remaining agile in an ever-changing environment."

In terms of business generation by commodity group:
• Agricultural products revenue increased 3 percent to $939 million and volume rose 3 percent to 245,000 units mostly due to higher ethanol demand and continued strength in import beer shipments;
• Automotive revenue grew 6 percent to $516 million and volume climbed 7 percent to 202,000 units primarily because of burgeoning consumer demand;
• Chemicals revenue was flat at $897 million and volume dipped 1 percent to 267,000 units in part due to the crude traffic decline;
• Coal revenue fell 5 percent to $915 million and volume dropped 7 percent to 399,000 units;
• Industrial products revenue inched up 1 percent to $1 billion and volume decreased 3 percent to 306,000 units, with demand up for aggregates and down for waste shipments; and
• Intermodal revenue slipped 5 percent to $967 million and volume dropped 3 percent to 812,000 units even though domestic volume climbed 9 percent to a record 428,700 units.

During the conference, Executive Vice President of Operations Cameron Scott provided examples as to how the Class I plans to better balance resources, namely the workforce and equipment. UP now plans to hire 2,400 new transportation, engine and yard workers this year instead of the originally planned 2,800, and has stored 475 locomotives, he said. The railroad still plans to acquire 218 locomotives in 2015.

UP also has reduced its 2015 capital spending budget by $100 million to $4.2 billion, said Cameron, adding that the reduction won't impact core infrastructure and capacity spending. In addition, positive train control (PTC) implementation now is projected to cost a total of $2.5 billion versus an initial 2011 estimate of $2 billion because the scope of work has been better defined, he said. The railroad has been field testing its PTC system since October 2013.

Looking ahead, despite uncertainty in the coal sector and low crude-oil prices, the Class I expects some business growth for the remainder of the year, as well as gradual productivity improvements. Longer term, UP is projecting a full-year operating ratio of about 60 by 2019.

"We've had some challenges to start off the year, but we're taking the steps needed to work through those challenges and realize the opportunities we see ahead," said Fritz. "We expect to see solid improvement in network performance and cost efficiency over the coming months."

— Jeff Stagl