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Union Pacific (UNP)

Q4 2010 Earnings Call

January 20, 2011 8:45 am ET


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Robert Knight - Chief Financial Officer, Executive Vice President of Finance, Chief Financial Officer of Pacific Railroad Company and Executive Vice President of Finance of Pacific Railroad Company

James Young - Chairman, Chief Executive Officer, President, Chief Operating Officer, Chairman of Union Pacific Railroad Company, Chief Executive Officer of Union Pacific Railroad Company and President of Union Pacific Railroad

Lance Fritz - Executive Vice President of Operations and Executive Vice President of Operations - Union Pacific Railroad Company

John Koraleski - Executive Vice President of Marketing and Sales - Union Pacific Railroad


Walter Spracklin - RBC Capital Markets, LLC

William Greene - Morgan Stanley

Justin Yagerman - Deutsche Bank AG

Jeffrey Kauffman - Sterne Agee & Leach Inc.

Garrett Chase - Barclays Capital

John Larkin - Stifel, Nicolaus & Co., Inc.

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Ken Hoexter - BofA Merrill Lynch

Thomas Wadewitz - JP Morgan Chase & Co

Scott Malat - Goldman Sachs Group Inc.

H. Nesvold - Jefferies & Company, Inc.

Anthony Gallo - Wells Fargo Securities, LLC

Christopher Ceraso - Crédit Suisse AG

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Scott Group - Wolfe Research

Matthew Troy - Citigroup

Jason Seidl - Dahlman Rose & Company, LLC

Scott Flower - Macquarie Research

Chris Wetherbee - Citigroup Inc

Cherilyn Radbourne - TD Newcrest Capital Inc.



Greetings, and welcome to the Union Pacific Fourth Quarter 2010 Earnings. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Jim Young, Chairman and CEO for Union Pacific. Thank you, Mr. Young. You may begin.

James Young

Good morning, everyone. Welcome to Union Pacific's Fourth Quarter Earnings Conference Call. Joining me today in Omaha are Jack Koraleski, Executive Vice President of Marketing and Sales; Lance Fritz, Executive Vice President of Operations; and Rob Knight, our CFO.

We wrapped up a record 2010 with a strong quarterly performance, reporting earnings of $1.56 per share, a 44% increase compared to the $1.08 per share reported in the fourth quarter of 2009. Fourth quarter operating income totaled $1.3 billion. That's up 31% versus last year. This is the third consecutive quarter that UP's operating income has topped the $1 billion level. It's also the third quarter in a row we achieved volume gains in all six business groups.

Quarterly carloads increased 9%, with roughly 2/3 of that growth coming from Intermodal and Industrial Products. In addition, Ag products produced its best quarterly carload level in 14 years.

Another best for UP in the fourth quarter was our customer satisfaction rating, which matched our record third quarter. As density in our network increased year-over-year, we continue to provide safe, excellent service to our customers. Along with the great value proposition we offer customers, we are also improving yields as demand strengthens, better pricing, combined with improved efficiency to produce a record fourth quarter operating ratio of 70.2, 3.2 points of improvement versus 2009.

UP's strong fourth quarter results are indicative of the great performance we achieved throughout 2010, setting numerous records as we report the most profitable year in our 150-year history. Now with that, we'll turn over to Jack to talk about our business team's performance. Jack?

John Koraleski

Thanks, Jim, and good morning. Well, I thought I'd start this morning with a look at customer satisfaction. It's one of our best indicators of how customers view the Union Pacific value proposition. Our customer satisfaction remained at record levels in the fourth quarter, equaling our best-ever quarter at 90, with November and December equaling our monthly record of 91. That strong showing capped off a record year as we came in at 89, one point better than the previous record that we set, back in 2009.

Our strong value proposition and an improved economy combined to drive fourth quarter volume growth in all six of our businesses, with overall volume up 9%. Core price improved about 5½% of each of the group's posted gains. Those price gains, along with increased fuel surcharge revenue and offset by a little negative mix, produced an 8% increase in average revenue per car. So with stronger volume and increased revenue per car, total freight revenue was up 18% for the quarter to $4.2 billion.

So let's take a closer look now at each of our six businesses. Starting with Ag products, our Agricultural Products revenue grew 14%, as a 6% increase in volume combined with an 8% improvement in average revenue per car. Export whole grains were up 8%, driven by a 29% increase in wheat exports. Export feed grains faced a tough comp against last year's strong market but still posted a 1% gain.

New business helped drive a 10% increase in soybean meal, and ethanol increased 4% as the market continued to grow. Food and refrigerated volume was up 7%. We had a late start to the tomato canning season, which pushed some volume into the fourth quarter, and that resulted in a 15% growth in canned goods. We also saw a strong demand which drove a 16% increase in import beer shipments. Working together with the CSX, our improved service schedule for our produce rail express service helped grow that volume 8%.

Our Automotive revenue grew 7% as contract price increases drove a 5% improvement in average revenue per car and volume was up 3%. The volume growth rate moderated as we lapped the start of the auto industry's recovery in the latter part of 2009.

Increased production as the industry ramps up for anticipated 2011 sales levels drove a 7% increase in auto parts volume, which more than offset the continued negative impact of the closing of the Toyota General Motors NUMMI plant earlier in the year. Finished vehicle shipments were down ½% compared to last year when manufacturers were pushing to build inventory levels in the wake of Cash for Clunkers.

Chemicals volume was up 10%, which combined with a 4% improvement in average revenue per car to produce a 14% increase in revenue. Petroleum products volume increased 41% with strength in a wide range of products, including crude oil to St. James, lube oils, residual fuels from Mexico and asphalt. Strong seasonal demand drove fertilizer volume up 20%, with export potash accounting for most of that growth. Industrial chemical shipments grew 6%, benefiting from an increased demand and better inventory alignment. Our plastics volume was also up 6% as was soda ash, driven by a strong export demand.

Energy revenues grew 16%, as a 4% increase in volume combined with an 11% improvement in average revenue per car. Southern Powder River Basin tonnage was up 8%, driven by increased electrical demand as the economy has improved and stockpiles were replenished following the fourth hottest summer on record. November stockpiles were estimated to still be 15 days below 2009 levels. Colorado/Utah tonnage declined 14% as one mine shut down its longwall to move to an entirely new reserve and as demand continued to be impacted by competition from Eastern coal sources.

Our Industrial Products volume grew 23%, which combined with a 3% improvement in average revenue per car to drive a 27% increase in revenue. Demand in the Energy sector was, once again, the underlying driver of the strongest-growing segments of our Industrial Products business. Nonmetallic minerals volume was up 45% as increased drilling activity requires frac sand, barite and bentonite. Our rock shipments, which increased 23%, remained heavily tied to strong drilling activity in Louisiana and Texas. Energy-related shipments of line and drill pipe, as well as steel coils for pipe production, helped drive a 36% increase in steel and scrap, which also benefited from increased metal production.

Year-over-year growth in our Short-Haul Uranium Tailings Group for the Department of Energy drove a 66% increase in hazardous waste shipments. And last, but certainly not least, Intermodal volume grew 10%, which combined with a 13% improvement in average revenue per unit to produce revenue growth of 25%.

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