The positive view for 2018 performance at Union Pacific delivered Tuesday by its CFO took some of its cues from what Rob Knight is seeing in the trucking market.
“If I look at what is happening in the trucking space, where the truck is our competitor, we like the signs we’re seeing,” CFO Knight said at the J.P. Morgan Aviation, Transportation & Industrials Conference. “I hear record pricing announcements. The stars are aligning when we look at what’s happening in the truck market.”
Knight noted that spot trucking rates have no direct correlation to the rates that a railroad can achieve in the market, “but there is a relationship between supply and demand. Stay tuned, because it’s certainly a factor to look at for our pricing in 2018.”
Earlier in his address, which was available via webcast, Knight said Union Pacific “expects truck capacity to continue to tighten, and it could drive higher volumes and margin expansions for us.”
Union Pacific’s carload volume is currently pointing to a 1% volume increase from the first quarter of 2017, Knight said. For the full year, UP expects carload volume to be up in the “low single digits,” but he did not provide any greater specificity.
The relatively lackluster first quarter performance was driven in part by a 4% decline in agricultural carloads, and 14% of that is in grain. “We expect undertainty in the grain markets as high global supples and unknown crop production potentially effects our ability to participate in the export market,” Knight said. Additionally, coal volumes were down 7%.
Growth in UP’s refrigerated business was projected as healthy, and Knight specifically noted tight truck capacity as giving a boost to that UP line of business.
UP posted a fourth quarter operating rate of slightly more than 62%. Knight said the target is to drive that down to 60% by next year, with a longer-term goal of 55%.
The railroad industry has its own equivalent of an ELD rule: the positive track control system. It is a safety feature being installed throughout various railroads, and just like the ELD mandate, PTC has been viewed as a cause of slow system performance.
Knight showed a slide that showed significant declines in network velocity for UP. Average network speed dropped to 25.1 mph from 26.5 in the fourth quarter of 2017. The declines have continued this year, with a drop to 25.4 from 26 in January year-on-year, and to 24.5 in February from 25.5 the year before. (And those figures also reveal that month-to-month, velocity went from 25.4 to 24.5).
Terminal dwell time, the railroad’s equivalent of detention, jumped to 32.5 hours from 29 in the fourth quarter of 2017 compared to the fourth quarter of 2016. Similar jumps for the first two months of the year were to 35 from 32.8 in January and to 32.6 from 30.2 in February.
Knight would not blame all of it on PTC. “That’s some of it, but some of it is human learning and training, some of it are technical glitches beyond our control,” he said. “It is an execution issue. We have to execute flawlessly on the ground, and that’s where we have had a little bit of a misstep. The good news is that we have the resources, and we have the track capacity and locomotives, and we may do some spot hiring to work on some of the effects of attrition.”
UP’s pricing in 2018 should “well exceed the dollars per yield we spend on inflation this year, and obviously, that’s a plus,” Knight said. In the fourth quarter, the dollar yield per pricing action was 1.75%. He cited intermodal and the coal business as “headwinds” for that number, and said excluding those two admittedly large parts of the business, the figure was 2.75%. “I kind of like that number,” he said.
Cost inflation for UP this year is expected to be less than 2%, Knight said, driven primarily by costs in the health & welfare category. He said that was something of an anomaly, and he would not expect that to continue in 2019.
One of the strongest growth businesses for UP has been fracking sand, with volumes by one measure up 55%. It’s been driven, Knight said, not just by more wells but by more fracking sand used per well. That may not continue for UP, according to Knight, if drillers, particularly in the Texas oil and gas formations of the Permian and Eagle Ford, turn more to local sand supplies. But in the meantime, it’s been a strong business for UP and presumably is translating into “last-mile” demand for trucks.
