Union Pacific (UNP)

Q2 2010 Earnings Call

July 22, 2010 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

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

Dennis Duffy - Vice Chairman of Operations

James Young - Chairman, Chief Executive Officer, President, Chairman of RailRoad, Chief Executive Officer of Railroad and President of RailRoad


John Mims - BB&T Capital Markets

Allison Landry

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

Ken Hoexter - BofA Merrill Lynch

Thomas Wadewitz - JP Morgan Chase & Co

Garrett Chase - Barclays Capital

Bill Greene - Morgan Stanley

Salvatore Vitale - Sterne Agee & Leach Inc.

Scott Flower - Banc of America Securities

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Walter Spracklin - RBC Capital Markets Corporation

Rob Salmon - Deutsche Bank

Benjamin Hartford

Edward Wolfe - Bear Stearns

Cherilyn Radbourne - TD Newcrest Capital Inc.

Chris Wetherbee - FBR Capital Markets & Co.



Greetings, and welcome to the Union Pacific Second 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 Second Quarter Earnings Conference Call. With me today are Dennis Duffy, Vice Chairman, Operations; Jack Koraleski, Executive Vice President of Marketing and Sales; and Rob Knight, our CFO.

Union Pacific set a new quarterly earnings record of $1.40 per share, 52% increase over last year's recorded earnings of $0.92 per share. Last year second quarter included about $0.14 per share from a land sale, so on a more apples to apples basis, we actually increased earnings almost 80% versus 2009. Operating income was a record $1.3 billion, a 71% increase. A key contributor to our strong earnings performance was the return of business volume to our railroad. In fact, this is the first time in six years that we've reported volume growth in all six of our businesses in the same quarter.

Beyond the strong earnings growth, the real quarterly highlight was achieving a 69.4% operating ratio. This is our first ever quarter under 70%, and is a tremendous achievement for the men and women of UP. We are demonstrating great volume leverage, efficiently handling an 18% increase in business with little incremental cost. It's really a team effort, beginning with our employees who are dedicated to running a safe, efficient railroad. Our commitment to rail infrastructure investment, a disciplined yet flexible transportation plan, and our continuous safety improvement efforts are all paying off in the form of enhanced productivity and resiliency.

These are the keys to delivering high quality service for our customers. Customers increasingly recognize the great value that UP franchise has to offer, allowing us to reach new markets and supporting our pricing plans. Not only are customers rewarding us with their business, second quarter customer satisfaction scores were an all-time best. With another record quarter in the books, we feel good about the direction of our company and the opportunities we have in front of us. With that, let’s turn it over to Jack for a review of our business team.

John Koraleski

Thanks, Jim, and good morning. I thought I’d lead off this morning with a look at our customer satisfaction which came in at 89% for the quarter. As Jim said, that's a new best ever result, and we believe it's a pretty good indicator of how customers view the value proposition that Union Pacific is offering them today.

I wanted to lead off with this slide because it's not only the stronger economic activity that drove our growth in the second quarter but also a stronger value proposition that’s been driven by excellent service and our new product offerings as well.

The second quarter of last year marked below point for volume as the impact of the recession was felt across the business. This year with all six commodity groups posting gains, overall volume climbed 18%. We saw stronger core price improvement driven in part by a reversal of intermodal’s recent trend of negative pricing. With our major domestic legacy deals behind us, intermodal joined the other five groups in posting core price gains during the second quarter. Overall, core price improved about 5%, which combined with the increased fuel surcharge revenue and a little negative mix to produce an 8% increase in average revenue per car. The volume gains and improved revenue per car combined to drive freight revenue up 27% to just shy of $4 billion. So let's take a closer look now at each of our six businesses.

Our Ag products volume grew 5%, which combined with an 8% improvement in average revenue per car to produce a 13% increase in revenue. Ethanol volume grew 24% as U.S. production expanded to meet the government mandate.

Soybean meal shipments declined 5% with the stronger South American crop now finding its way into world markets at the expense of a higher priced U.S. production. Whole grain exports increased 16% with shipments of both corn and wheat up in all three of our markets, Mexico, Pacific Northwest and Gulf. Domestic feed grains grew 9% with a boost from corn shipments to forward ethanol plants in both California and Idaho that have now resumed production. Overall, our whole grain shipments were up 9% against record low volumes a year ago.

Our Produce Railexpress perishable service in conjunction with the CSX grew 16% attracting business off the highway with a strong value proposition.

Automotive revenue was up 105%, driven by a 71% growth in volume and a 19% increase in average revenue per car that reflects some contracts that have been re-priced over the past several years.

U.S. vehicle production is estimated to be up just over 70% in the second quarter reflecting the industry's continued recovery from last year's low sales levels and financial turmoils. For Union Pacific, that recovery was reflected in a 77% increase in finished vehicle shipments and a 67% growth in auto parts volume.

Our chemical volumes grew 11%, which with a 6% improvement in average revenue per car produced a 19% increase in revenue. Fertilizer volume increased 36% with export shipments accounting for two-thirds of that growth. With inventory levels more balanced than a year ago, improved demand resulting from the stronger economy translated into 11% growth in our Industrial Chemicals segment. The results were strong demand for both export and domestic soda ash, but a 35% increase in exports is what really drove the segment to 18% increase in volume.

LPG volumes increased 13% and petroleum products shipments grew 11%, even as asphalt demand remains relatively weak.

Energy revenue increased 13% as a 3% growth in volume combined with a 13% improvement in average revenue per car. First overall volume growth we've seen in our energy business since we saw the economy start to slide in late 2008 was driven by a 5% increase in tonnage out of the Southern Powder River Basin. The largest driver was a new coal-fired unit that came online in San Antonio, but shipments to other mid-western and southern utilities have picked up as stock piles reached near normal levels, economic activity picked up, and the summer burn kicked in.

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