Union Pacific's (NYSE:UNP) third-quarter 2018 earnings report, released Thursday before markets opened, revealed credible revenue execution. The organization was able to take advantage of brisk freight shipping demand, the primary driver of a near-double-digit revenue increase over the last three months.
Union Pacific results: The raw numbers
|Metric||Q3 2018||Q3 2017||Year-Over-Year Change|
|Revenue||$5.93 billion||$5.41 billion||9.6%|
|Net income||$1.59 billion||$1.19 billion||33.6%|
What happened with Union Pacific this quarter?
The railroad's top line was paced by industrial shipment revenue, which rose 13% over the prior year to $1.5 billion, and premium revenue, which advanced 18% to $1.7 billion. Energy revenue rose 1% to $1.2 billion, while Union Pacific's fourth freight category, agricultural products, improved by 6% to $1.1 billion.
Both industrial and premium shipment volumes expanded by 9% during the quarter, while agricultural volume rose 2%, and energy volume dipped by 2%.
Core pricing gains and higher fuel surcharges also played a role in advancing freight revenue over the last three months. While slightly offset by a negative mix of traffic, average revenue per carload across all segments increased 4% year over year.
Union Pacific wasn't able to leverage its top-line success any further, however, as operating expenses climbed 10% in tandem with revenue. While the organization limited expense creep in major categories like compensation and purchased services to the low single digits, fuel expense spiked by 46%. This was due both to a higher activity level and to an average diesel fuel price per gallon of $2.38, which represented a 34% spike against the third quarter of 2017.
The inability to clamp down on expense was reflected in the company's operating ratio (expenses divided by revenue) of 61.7% -- a flat metric against the comparable quarter. Recently, Union Pacific has notably lagged competitor CSX Corporation (NASDAQ:CSX), which has drastically reduced its operating ratio (lower readings equate to higher efficiency) in recent quarters by implementing a "scheduled railroad" business model.
- Operating statistics provide insight into the disappointing productivity metric; most notably, average train velocity declined year over year. Quarterly train speed of 24 mph lagged last year's average speed by 6%. On a slightly positive note, the organization reduced average car terminal dwell time by 2% to 29.3 hours.
Last month, Union Pacific's management team allowed that it hasn't made enough progress toward the company's long-term operating ratio goal of 55% or better, and it introduced the "Unified Plan 2020," which adopts many of the scheduled railroad principles successfully employed by CSX. As I've recently discussed, while implementing portions of the scheduled railroad model is a positive step, significant improvements are unlikely to happen overnight.
While operating expense climbed last quarter, Union Pacific still posted a net income improvement of nearly 34%. This is primarily the result of a lower tax rate versus the third quarter of 2017 following last year's U.S. corporate tax legislation. The company's tax expense dropped by $306 million in the third quarter of 2018, which comprised 25.6 percentage points of the 33.6% increase in net income versus last year.
Union Pacific repurchased $331 million worth of its shares during the quarter, bringing its year-to-date repurchase total to more than $7 billion.
What management had to say
In Union Pacific's earnings press release, CEO Lance Fritz assured investors that healthy revenue alone isn't satisfactory and that management's attention is centered on delivering the productivity enhancements which will bring the railroad's long-term operating ratio goal of 55% closer within sight:
While we reported solid financial results, we did not make the service and productivity gains that we expected during the quarter. However, we are making progress implementing our new Unified Plan 2020 and we are well positioned to drive improvement going forward. I am confident we have the right people and plans in place to improve our operations, provide more reliable service for our customers, and achieve industry-leading financial performance.
Union Pacific typically avoids providing quantitative, forward-looking guidance in its earnings releases, instead choosing to provide a brief qualitative outlook every three months. For the current quarter, CEO Fritz stated the following: "Looking ahead, I am confident that the recent progress we have made on our Unified Plan 2020 will accelerate in the near term. As we move forward with its implementation, along with other G55 + 0 [productivity] initiatives, we will regain our productivity momentum and improve the value proposition for all of our stakeholders."