Union Pacific's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Union Pacific (UNP)

Q1 2012 Earnings Call

April 19, 2012 8:45 am ET


John J. Koraleski - Acting Chief Executive Officer and Acting President

Eric L. Butler - Executive Vice President of Marketing and Sales

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

Robert M. Knight - Chief Financial Officer and Executive Vice President of Finance


Brandon R. Oglenski - Barclays Capital, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Scott H. Group - Wolfe Trahan & Co.

William J. Greene - Morgan Stanley, Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Cherilyn Radbourne - TD Securities Equity Research

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

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

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

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

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

Patrick Tyler Brown - Raymond James & Associates, Inc., Research Division

Keith Schoonmaker - Morningstar Inc., Research Division



Greetings, and welcome to the Union Pacific First Quarter 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. Jack Koraleski, CEO for Union Pacific. Thank you, Mr. Koraleski. You may begin.

John J. Koraleski

Thanks, Rob. Good morning, everybody, and welcome to Union Pacific's First Quarter Earnings Conference Call. With me in Omaha today are Rob Knight, our CFO; Lance Fritz, our Executive Vice President of Operations; and I also want to introduce Eric Butler in his new role as our Executive Vice President of Marketing and Sales.

Now before we get started, I want to quickly thank all of you for the support you've expressed for Jim and his family during this time. I know Jim and the entire company greatly appreciate your thoughts and well-wishes.

So turning to the quarter, you can see that Union Pacific delivered record financial results across the board this quarter, generating a first quarter earnings milestone of $1.79 per share, an increase of 39% compared to 2011. First quarter record operating revenue, operating income and operating ratio performance drove our improved bottom line results. We're clearly delivering on the benefits of our diverse franchise, even as we saw the current coal headwinds start to build in the quarter. We remain focused on delivering safe, efficient, high-quality service that creates value for our customers and increase financial returns for our shareholders. These efforts were recognized with record marks in customer satisfaction and employee safety. So let's get started this morning, and I'll turn it over to Eric Butler.

Eric L. Butler

Thanks, Jack, and good morning. Let's start up with a look at customer satisfaction. For the quarter, customer satisfaction came in at 93, a new best-ever mark and up 2 points from first quarter last year. Along the way, we also set a new monthly record as well when he hit 94, both in January and March. We appreciate this continuing recognition from our customers, and our focus in the future is to continue our passion for service and strengthen our value proposition.

This strong value proposition and strengthening in some markets produced volume growth of 1%, even as a weak coal market drove a large decline in Energy carloadings. If you excluded Energy, our other 5 businesses grew 5% -- grew 4% during the quarter, even with lower demand for grain exports. Note that with a leap day this year, buying comparisons got a boost from an extra day of loadings.

Core price improved 5%, with all 6 businesses posting gains. Those price gains combined with an increased fuel coverage and some positive mix, resulted in a 12% increase in average revenue per car. Volume growth and the improved average revenue per car combined to drive freight revenue up 14% to a first quarter record of $4.8 billion.

Let's take a look at each of the groups in a little more detail and heading off with Energy. Although Energy volume declined 8%, a 14% improvement in average revenue per car produced revenue growth of 5%. We indicated, going into this year, that with a couple of contract losses, growth for the Southern Powder River Basin was expected to be slow to negative. Our expectation was that new business across our Energy portfolio would help offset those losses.

While business wins and losses play a role, volume decline in our Energy business during the quarter was largely the result of a dramatic weakening of demand for coal, driven by near-perfect storm of a very mild winter weather and low natural gas prices that, together, lowered electrical use in the U.S. by 4% and electricity generated from coal by 16% during the quarter.

You could see from the chart on the upper left how softening demand has played out in our weekly coal car loadings, with the volume shortfall growing as the quarter progressed, coming down 19% in March. The most significant impact has been in the Southern Powder River Basin, where tonnage declined for the quarter 8%. The rapidly changing market conditions are reflected in rising coal stockpiles for which the Powder River Basin were an estimated 17 days above normal in February, quite a swing from the level several days below normal as recently as October.

Colorado/Utah tonnage fared better, declining 3% as strong international demand and new business helped offset the impacts of utility outages, increased use of fuels other than coal by utilities in the Southeast and the mild weather.

Ag Products revenue grew 6% as an 8% improvement in average revenue per car more than offset a 2% decline in volumes. Ag faces a tough comp against strong export grain volumes through the first half of last year. As expected, with increased world production and higher U.S. corn and wheat prices, our grain exports declined 39% from last year's record first quarter levels.

Growth in other Ag markets helped to partially offset the weakened exports. Drought damaged crops in the south, and shipments to reopen forward ethanol plants contributed to the increased domestic shipments of grain, which were up 15%.

Biofuels volume increased 13% as the rising mandate in exports spurned ethanol shipments. Biodiesel growth continued with strong market demand despite last year's expiration of the tax credit.

Our Food & Refrigerated segment grew 7% with the new business in barley and flour, along with growth in import beer leading the way.

Automotive volume increased 15% with the combined 10% improvement in average revenue per car, drove up 26% -- drove revenue up 26%. With the nation's vehicles aging and numerous new models available, consumers are driving sales levels higher, with the SARs rate hitting $14.5 million for the quarter, the highest level since first quarter 2008. The industry gains came despite rising gas prices, which appear to be shifting the mix towards lower fuel-efficient vehicles, but not deterring overall sales levels. The auto industry's continued momentum translated into 16% growth in our finished vehicle shipments, while parts volume to support the growing production and sales level was up 12%.

Chemicals volume grew 8% which, combined with the 7% improvement in average revenue per car, produced a 16% revenue increase. Petroleum products loadings increased 63%, driven primarily by the rapid growth of crude oil shipments, mostly from the Bakken and Eagle Ford Shale plays to the UP-served terminals at St. James, Louisiana. A slowly strengthening was reflected in improved demand for industrial chemicals, which grew 8%; while plastic shipments increased 4%. Partially offsetting overall strength in Chemicals was the 22% decline in fertilizer, driven by soft potash demand that led to temporary shutdowns or reductions at several mines during the quarter.

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