Union Pacific (UNP)

Q3 2011 Earnings Call

October 20, 2011 8:45 am ET


Robert M. 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

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

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

James R. 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


Scott H. Group - Wolfe Trahan & Co.

Ken Hoexter - BofA Merrill Lynch, Research Division

William J. Greene - Morgan Stanley, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Cherilyn Radbourne - TD Newcrest Capital Inc., Research Division

Garrett L. Chase - Barclays Capital, Research Division

Michael Weinz - JP Morgan Chase & Co, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

David Vernon - Sanford C. Bernstein & Co., LLC., Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Unknown Analyst -

Justin B. Yagerman - Deutsche Bank AG, Research Division



Greetings, and welcome to the Union Pacific Third Quarter 2011 Conference Call. [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.

James R. Young

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

The Union Pacific team delivered solid financial results across the board this quarter, achieving an all-time quarterly earnings record of $1.85 per share. That's a 19% increase compared to 2010. We also set best-ever quarterly marks in operating revenue, operating income, driving record year-to-date free cash flow. We're clearly delivering on the benefits of our diverse franchise. Volumes increased in 4 of our 6 business groups. The downside was weak International Intermodal and lower export grain.

Overall, we're pleased with these results in light of the fragile economy and operational challenges related to the severe drought in Texas. Although we deal with weather every day, the extent and duration of the drought did impact network operations during the quarter. Lance will provide more details on this in a few minutes. Despite these challenges, we remain focused in delivering safe, efficient, high-quality service that generates value for customers and translates into improved financial return for our shareholders. So with that, I'll turn it over to Jack.

John J. Koraleski

Thanks, Jim, and good morning. So let's lead out this morning with a look at customer satisfaction. We've set a new third quarter record coming in at 91. That's up 1 point from last year and reflects a continued strong value proposition, even as our operating team battled lingering Midwest flooding and the effects of the severe drought in the South during the quarter.

Our volume increased 1% with the International Intermodal peak season weighing heavily on our growth in the third quarter, but interestingly enough, if you excluded Intermodal, our other 5 businesses grew 6% during the quarter even with the softer export grain market. Our core price improved 4.5%, with each of the 6 groups posting gains. Those price gains, combined with increased fuel surcharge revenue and some positive mix from the decline in Intermodal and growth in carload business, drove average revenue per car up 14%. The end result was a 16% improvement in freight revenue to a best-ever $4.8 billion.

So let me walk you through each of the 6 groups in a little more detail. Our Ag products revenue grew 9%. That's a 12% improvement in average revenue per car, more than offset a 3% decline in volume. During third quarter last year, UP's grain export hit their third highest volume ever. So against that tough comparison and with increased world production this year, exports were down 31%, driving the group's overall decline in carloading. A 7% increase in domestic feed grain shipments helped to offset at least some of the export softness, and we also saw a strength in grain products, where shipments climbed 5%, with solid gains in ethanol, biodiesel and meals.

Despite shaky consumer confidence and a weak economic indicators, the U.S. vehicle sales were up 6% versus last year for the quarter, supporting a 10% increase in our automotive shipments. The growth in volume, combined with a 12% improvement in average revenue per car, drove a 23% increase in revenue.

Our finished vehicle shipments increased 5% despite the lingering impact of the Japanese tsunami. But the good news going forward is that by the quarter's end, U.S. production had returned to normal for all manufacturers, setting the stage for a stronger fourth quarter. As production increased in anticipation of improving sales, our part shipments were up 18%.

Our Chemicals volume grew 5%, which combined with an 8% improvement in average revenue per car to produce a 14% increase in revenue.

The Petroleum Products business led our Chemicals growth as shipments increased 35%. Most of that growth came from crude oil originating primarily in the Bakken and Eagle Ford Shale regions, although we also saw a solid growth in asphalt shipments. Elsewhere, the solid performance that we've seen across the major Chemical segments continued in the third quarter. The one exception was fertilizer, where volume slipped 5% because of reduced export demand.

Energy revenue grew 21%. That's a 13% improvement in average revenue per car combined with volume growth of 7%. Weather, again, played a role as the impact of the Midwest flooding continued in July. However, almost all of that business was made up during the quarter, as was about 60% of the loads that we missed during the second quarter. New business to the Wisconsin utilities, along with the new coal-fired plant coming online near Waco, Texas produced most of the 5% increase in Southern Powder River Basin tonnage, although volume actually was up to most of our utilities year-over-year.

Colorado/Utah tonnage was up 9%, its first year-over-year quarterly growth since early 2008. Supporting that volume growth was relatively strong international market demand and also the return to production of one of the mines that had been relocating to new reserves.

Read the rest of this transcript for free on seekingalpha.com

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