North American rail operator Union Pacific (NYSE:UNP) wasn't able to fully overcome the effects of extreme weather in the first quarter of 2019, as its earnings report issued Thursday revealed. However, the rail giant was largely able to offset weaker volume through pricing actions and improved productivity. Let's walk through the headline numbers and zero in on the quarter's essential details below. Note that all comparative numbers are presented against the prior-year period.
Union Pacific results: The raw numbers
|Metric||Q1 2019||Q1 2018||Year-Over-Year Change|
|Revenue||$5.01 billion||$5.12 billion||(2.1%)|
|Net income||$1.39 billion||$1.31 billion||6.1%|
What happened with Union Pacific this quarter?
- As I discussed in my earnings preview, Union Pacific's volume was challenged by exceptionally bad weather during the last three months, from heavy winter snowstorms to widespread flooding in the Midwest in March. Total volume slipped by 1%, as declines in energy and agricultural shipments were partially offset by increases in industrial and premium categories.
- Freight revenue fell 2%, a better-than-expected result given the impeded volume. Management pointed to core pricing gains and higher fuel surcharges as factors softening the impact of the negative traffic trend and an unfavorable product mix.
- As expected, Union Pacific's operating ratio (a measure of operational efficiency calculated by dividing total expenses by total revenue) improved against a high prior-year reading. In Q1, the company's operating ratio dipped by 1 percentage point to 63.6%.
- Management attributed the operating ratio improvement to continuing efforts to implement principles of precision scheduled railroading (PSR) as part of the company's "Unified Plan 2020" productivity initiative.
- Some of this progress is evident in Union Pacific's quarterly rail statistics. Average freight car velocity improved by 7% to 185 daily miles per car, while average terminal dwell time dropped 19% to 26.6 hours. However, weather impacts were evident in a 6% reduction in average train speed to 23.3 miles per hour.
- Operating margin improved by 100 basis points to 36.4% as a result of the productivity enhancements, as well as cost control in compensation, purchased material, and "equipment and other rents." Fuel expense also dropped during the quarter due to a 3% decrease in average fuel price per gallon consumed.
- During the quarter, the company announced a 10% increase in its quarterly dividend to $0.88, which at current the share price yields 2% on an annual basis.
- Union Pacific repurchased $3 billion worth of its own shares over the last three months, as well as an additional $500 million in shares under an accelerated repurchase program that is awaiting final settlement. This $3.5 billion in stock buybacks falls under a new repurchase authorization issued in February, which allows the company to repurchase 150 million shares by 2022, or roughly $26 billion of stock calculated at the current share price.
In Union Pacific's earnings press release, CEO Lance Fritz made a somewhat subtle observation concerning the quarter's favorable results: "We delivered record first quarter financial results driven by improved operating performance, while dealing with significant weather challenges. Unified Plan 2020 created a more resilient and robust network, allowing us to quickly return to normal operations."
Fritz alludes to the point that before adopting PSR principles last fall, it's likely that such weather events would have crimped both the railroad's revenue and profits. A proactive focus on improving network fluidity gave the organization a bit more control over its destiny than it has enjoyed in similar situations over the past few years.
Looking ahead, Union Pacific doesn't issue quantitative earnings guidance. However, Fritz provided the following commentary in the company's "outlook" section of its earnings release: "We look to build on the momentum we had prior to the weather challenges and provide a consistent, reliable service product for our customers, while at the same time improving our operating efficiency. We remain focused on increasing shareholder returns through appropriate capital investments and returning excess cash to shareholders."
In short, Union Pacific is striving for service stability, and further improvement to its operating ratio -- the company intends to bring its full-year operating ratio below 61% in 2019 compared to 62.7% last year. Achieving these two objectives alongside higher revenue should help supply the cash flow for additional shareholder-friendly returns, which have amounted to $3.6 billion between share repurchases and dividends paid in the first quarter of 2019 alone.