Union Pacific Corp. Q1 2010 Earnings Call Transcript

Union Pacific Corp. Q1 2010 Earnings Call Transcript
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Union Pacific Corp. (UNP)

Q1 2010 Earnings Call

April 22, 2010 08:45 am ET

Executives

Jim Young - Chairman, President and CEO

Jack Koraleski - EVP Marketing and Sales

Dennis Duffy - Vice Chairman Operations

Rob Knight - EVP and CFO

Analysts

Matt Troy - Citigroup

Tom Wadewitz – JPMorgan

Jon Langenfeld - Robert W Baird

Chris Ceraso – Credit Suisse Group

Bill Greene - Morgan Stanley

Jason Seidl - Dahlman Rose

Walter Spracklin - RBC Capital Markets

Justin Yagerman - Deutsche Bank

Ken Hoexter - Bank of America/Merrill Lynch

Tom Marsico - Marsico Capital Scott Malat - Goldman Sachs

Chris Wetherbee - FBR Capital Markets

John Larkin - Stifel Nicolaus

Jeff Kauffman - Sterne Agee

Presentatio

n

Operator

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Greetings and welcome to the Union Pacific First Quarter 2010 earnings. At this time all participants are in a listen-only mode. A brief question-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded and the slides for today’s presentation are available on Union Pacific’s website. 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.

Jim Young

Good morning everyone. Welcome to Union Pacific’s first quarter earnings conference call. With me in Omaha today are Dennis Duffy, Vice Chairman Operations; Jack Koraleski, Executive Vice President of Marketing and Sales and Rob Knight our CFO.

We are starting off 2010 with a record quarterly performance as earnings grew 40% to a first quarter record of $1.01 per share. This includes the one time cost impact of the announced CSXI deal which totaled roughly $0.06 per share. Rob will give you more details on that when he discusses the financials.

A major contributor to the year-over-year gain was a 13% volume increase, our first quarter of color growth in two years. Jack will provide commentary on the volume picture but we clearly saw a pick up in demand across the networks.

For example, although coming off of a low base in 2009, steel, lumber, soda ash and fertilizer all experienced solid quarterly growth. Equally important to our quarterly results was the volume leverage we generated by running a safe service focused efficient operation. We’re utilizing our capital investments, technology and productivity enhancements to move increased car loadings with fewer resources.

Strong service levels continued to deliver value for our customers which also supported our pricing gain and attracted new customers to the rail road. The net results of increased volumes, solid pricing and operating efficiency was a record first quarter operating ratio of 75.1. This achievement is consistent with our commitment to significant leverage any volume growth in our network. Operating income was also a record totaling $988 million up 47% for 2009.

Our record financial performance enabled us to achieve strong free cash flow after dividends in the first quarter further demonstrating the power of our operating leverage and the great UP franchise. Now we’ll hear from Jack with a discussion about our volume growth. Jack.

Jack Koraleski

Thanks Jim and good morning. Over the more stable economy of the first quarter marked the long awaited swing back to volume growth. Against last year’s recession impacted business levels, our volume grew 13% with five of our six businesses posting gains. Energy was slightly down, they were the lone exception. Average revenue per car increased 3% with core pricing gains of 3.5% and higher fuel surcharge revenue partially offset by some negative mix that was largely the result of volume growth in intermodal.

Negative pricing in intermodal, that’s the lingering effect of domestic legacy contracts that have now been replaced. Once again impacted overall price performance and produced what will be our weakest reported price gains in 2010.

The growth in volume and increased revenue per car combined to drive freight revenue up to 16% to $3.8 billion with each of the six businesses posting revenue gains. So, let’s take a more detailed look at each of the six groups.

Agricultural products revenue grew 10% as 8% growth in volume combined with a 3% improvement in average revenue per car. Whole grain export car loads increased 28% led by a near doubling of weak shipments through gulf ports.

The continued impact of damaged South American crops last year boosted soybean export 13% and also drove a 48% increase in soybean meal exports. Our ethanol shipments grew 28% as the federal mandate ramped up and California blending increased and DDGs also saw a continued growth with volumes up 15% in the quarter.

Automotive revenue increased 88% as a 21% improvement in average revenue per car combined with a solid increase in shipments. Volume was up 56% from last year when the auto industry was struggling with high inventory levels of sales swamps. Average revenue per car received a boost from the renewal of the last auto’s legacy contract as well as some other contract increases.

Increased production and sales was reflected in growth for all manufacturers with vehicle shipments increasing 67% and our parts volume growing 42%. Our chemical revenue grew 14% as volume climbed 13% and average revenue per car was up 2%. Fertilizer and industrial chemicals were the primary drivers of the volume growth although car loadings were up in all major chemical markets.

After a couple of disappointing seasons, our fertilizer shipments grew 39% with a 126% increase in export potash leading the way. Compared to a weak first quarter a year ago, a modest increase in demand coupled with a more balanced inventory level position produced a 14% increase in our industrial chemicals business. Soda ash volume grew 19% as both export and domestic demand increased and LPG shipments were up 16% and plastic volumes were up 4%.

Turning to energy, while stronger economic activity increased electrical demand, it wasn’t enough to drive year-over-year growth in energy where volume decreased a little less than 1%. However a 6% improvement in average revenue per car produced a 5% increase in revenue.

The trend out of the Powder River Basin was encouraging posting year-over-year increases in February and March after running below 2009 levels in January but finished up 1% for the quarter.

Our Colorado Utah tonnage was down 4% as high stockpiles curtailed shipments for a few large customers. Franchise productivity improvements continued in both markets and if you flip to the next slide we can talk for a second about coal stockpiles.

Drawn on this graph is the monthly coal stockpile data for the Powder River Basin. The grey line shows you normal stock in terms of normal days of burn, the blue line shows how stocks are actually tracking. The most recent data available is for February, but you can see how sharply the severe winter weather cut in the coal stock piles, dropping the Powder River Basin stockpiles to 59 days of burn, compared to what would be a more normal level of 52 days.

I suspect that when the March report comes out its going to show continued improvement as well. A more stable economy, a pick up in industrial production particularly in energy sensitive industries like steel, improvement in the export market for coal as world wide demand increases and the reduction of stockpiles are all encouraging things for the coal business so, if we have normal summer burn our coal business could actually strengthen as the year progresses.

Industrial products line grew 9%; it’s the first year-over-year growth since the first quarter of 2006. Revenue grew 10% as the volume increased combined with a 1% improvement in average revenue per car.

Average revenue per car was impacted by the significant growth of our uranium tailing shipment for the department of energy. The volume for the short home (inaudible) was 450%. Improvement in the automotive industry and energy drilling as well as restocking by metal service centers pushed steel mill capacity utilization to 68% in the first quarter that was up from 43% a year-ago.

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