Greetings;
Union Pacific might now wish that it had left Leadoff to CSX, even though they beat Street estimates, and was up a little less than 10% YOY (adjusted). Most of the focus, naturally was shorter term as they adjusted 2022 Guidance, and didn’t fully discuss 2023 (seen as a “normal operating railroad in an inflationary environment with volume a question mark”. So there. Our Top 10 quick takeaways are:
- Softening near term (Q4!) demand reduced (2022!) Guidance; 300bps in OR was inflation/service issues although UP grew volumes across the board versus soft comparisons – and likely not, as claimed, best-in-class (look Northward, friends)
- 2023 questioned without answers (wait for Q4 call in January) but clearly, the expectation is that inflation and volumes are the variables
- Strong confidence in pricing above rail inflation – even at these, er, inflated levels (~5%), including labor
- Progress on T&E crews; normal into ’23; couldn’t quantify (multiple Qs) Pent-Up demand but see it across the board in Bulk plus autos, parts, and some IM. Dry Mississippi River will show up in the mix – longer LOH on unit grain trains….
- Overall safety (derailments up 2% though P/I down) and Ops/Service metrics mixed though improving sequentially, perhaps slower than expected
- To my surprise, rather significantly under-accrued for post-contract labor inflation (to the tune of $114mm charge); no significant hit to cash flows
- Confident in labor resolution – BMWE has specific issues (on payments for travel to offsite work etc)
- Raised 2022 CAPEX (solid) but “still within our envelope of less than 15% of revenues” (less so)
- Faced several questions on “managing resources down” in the event of a full-blown recession – didn’t answer to my satisfaction (which would have been on the order of “we are committed to resiliency”) but didn’t project a hardcore stance, either – committed to volume-variability
- Faced a good question – should you abandon the 55% OR goal altogether – A: we have achieved it in spots, we can
- Intermodal was curious – stronger international (“watching” domestic - -3% in Q3 - and parcel - -16% - business) – weak Trip Plan Compliance (62% down from 66%) which raised questions of share growth, pent-up demand, etc. Pricing issues may appear as TL heads south but not yet quantifiable (it’s still a service game). Noted a new asset-based domestic IM customer to onboard in ’23 – Werner? Too much to take on? And why does UP like an intact international business so much better than transload, given its new TL customer portfolio? (see BNSF)
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18