Union Pacific Profit Falls 19% as Demand Remains Under Pressure -- Update

By Imani Moise and Tess Stynes 

Union Pacific Corp. said its second-quarter earnings fell 19% as freight demand remains pressured, a trend the railroad operator expects to continue throughout the second half of the year.

Chief Executive Lance Fritz cited the negative impact of the strong U.S. dollar on exports, and relatively weak demand for consumer goods. In an interview, he also said business was being affected by competition due to excess capacity in all modes of freight transport, including barges, trucking, shipping and rail.

"To varying degrees all of our commodities are subject to modal competition," Mr. Fritz said. A vast amount of commodities transported by rail are subject to competition from trucks, he said, and some commodities that can't, such as grain, can be carried by barge.

Mr. Fritz said he expects capacity surpluses to tighten over time, due to shipping consolidations and driver shortages.

Freight revenue dropped 13% as weaker freight volume and fuel surcharge revenue more than offset higher core pricing.

Union Pacific took a $240 million hit on fuel surcharge revenue in the second quarter compared with last year. However, Mr. Fritz said during a call with analysts Thursday that the trend is beginning to turn around as fuel prices get higher. "Assuming fuel prices remain where they are today we will collect fuel surcharge revenue at some level on almost all of our programs going forward," he said.

Although consumer spending surged this spring, railroads have not felt the effects, Mr. Fritz said.

"If consumers are consuming more services like travel, data plans or health care, that doesn't really impact our top line," he said. "We need consumers to buy a house and fill it with goods."

The company said it is considering a reduction in ongoing future capital spending to about 15% of revenue from roughly 17% of revenue.

It said its operating ratio rose 1.1 percentage point to 65.2%. In the long run, the company expects to reach its goal of 60% by 2019.

For the three months ended June 30, Union Pacific's total freight volume fell 11% as a 2% increase in shipments of agricultural products was offset by declines in volume for other commodities. Coal volume slumped 21% and industrial products volume dropped 11%. Volume in its intermodal business, which moves freight using a combination of trains and trucks, fell 14%.

In April, Union Pacific said it expected total volumes for the year to decline in the mid-single digits.

Over all, Union Pacific reported a profit of $979 million, or $1.17 a share, down from $1.2 billion, or $1.38 a share, a year earlier. Revenue decreased 12% to $4.77 billion.

Analysts polled by Thomson Reuters expected per-share profit of $1.17 and revenue of $4.8 billion.

Write to Tess Stynes at [e-mail]

(END) Dow Jones Newswires

July 21, 2016 16:28 ET (20:28 GMT)

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