Union Pacific Corporation. (UNP)
Q4 2009 Earnings Call Transcript
January 21, 2010 08:45 a.m. ET

Executives

Jim Young - Chairman and Chief Executive Officer
Rob Knight – Chief Financial Officer
Jack Koraleski – Executive VP, Marketing and Sales
Dennis Duffy - Vice Chairman, Operations

Analysts

John Larkin - Stifel Nicolaus
Walter Spracklin - RBC Capital Markets
Matthew Troy - Citigroup
Thomas Wadewitz – JP Morgan Chase
Gary Chase - Barclays Capital
Randy Cousins - BMO Capital Markets
William Greene - Morgan Stanley
Ken Hoexter – Bank of America Merrill Lynch
Christopher Ceraso - Credit Suisse
Edward Wolfe - Wolfe Research
Jon Langenfeld - Robert W Baird
Rob Simon [ph] for Justin Yagerman - Deutsche Bank
Donald Broughton - Avondale Partners
Jeff Kauffman - Sterne Agee
Cherilyn Radbourne - Scotia Capital
Scott Flower [ph] - Macquarie Bank
Jason Seidl - Dahlman Rose & Co

Presentation

Operator

Greetings, and welcome to the Union Pacific Fourth Quarter 2009 Earnings. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) If anyone should require operator assistance during the conference please press “*0” on your telephone keypad. As a reminder, this conference is being recorded and the slides for today''s presentation are user controlled.

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 – Chief Executive Officer

Good morning, everyone. Welcome to Union Pacific''s fourth quarter earnings conference call. Joining me in Omaha are Rob Knight, our CFO, Jack Koraleski, Executive Vice President, Marketing and Sales, and Dennis Duffy, Vice Chairman, Operations.

For the fourth quarter, we’re reporting earnings of a $1.08 per share, that''s off $0.23 from 2008’s record quarter. As we experienced throughout 2009, our quarterly results reflected the global recession with total volume down 5% year-over-year. For the full year, volumes declined 16% producing our lowest business levels in over a decade. We finished 2009 in an upswing, however, as fourth quarter car loadings were the highest of the year, both in absolute terms and year-over-year.

Of course, the 2008 comparison period was already seeing the impact of the recession. As you’ll recall, volumes were on a virtual free fall at the end of 2008, but it does point to some stability in freight demand as we enter the New Year. Over the last several years, we''ve been executing our long-term strategy designed to drive Union Pacific''s performance across every area of the business, efforts to strengthen our infrastructure, deploy new technology, and engage our employees positioned to act as quickly when the economy faltered. We idled resources, modified our operating plan and adjusted our cost structure to the new lower demand levels. Despite the lower volumes, we achieved a number of performance milestones that demonstrate the focus and commitment of our organization. UP safety performance set new records in employee, customer and public safety.

Our operating team achieved best in virtually all metrics as we increased network fluidity, improved asset turns and delivered a highly reliable service product to our customers. The scores on our customer satisfaction surveys validated our internal data with customers giving us their highest marks ever. We kept commitments, expanded our service offerings and provided our customers with cost efficiencies through the benefits of rail transportation. In addition, UP’s increasing value proposition continues to support our long-term pricing objectives. We also achieved the best, full year operating ratio in the history of our company at 76%. Solid efficiency gains, continued pricing strength, and lower year-over-year fuel prices helped us overcome negative volumes and generate better margins. Importantly, this sets the stage for us to produce strong bottom-line leverage as volume returns.

In addition, we ended the year with our balance sheet in great shape, solid free cash flow after dividend and a strong year-end cash position. Overall, we feel satisfied by what we have accomplished in 2009 given the challenges. Our objective coming into this year was to manage through the recession the best way possible, emerging at the end, as a better company and we believe we''ve attained that goal.

With that, let me turn over to Jack to walk you through the business themes. Jack?

Jack Koraleski – Ex Vice President Marketing and Sales

Thanks Jim and good morning. So as we close the books on 2009, we ended the year with some positive momentum which we''re hoping carries forward here into 2010. Three of our six business groups, Ag products, automotive and intermodal posted gains during the fourth quarter as volume made its strongest showing of the year but still ended the quarter down 5% against 2008. Our pricing came in at just under 5% for the quarter but the decrease in RCAF fuel brought our net price realized to 3.5%. Much like in the third quarter, the timing of our legacy explorations didn’t give us much of a fourth quarter boost and our legacy intermodal contracts actually resulted in negative pricing in our intermodal business lines. We should see that situation improve over time with our new Pacer arrangements in place.

At the same time volume growth in intermodal created negative mix for us. All of our other businesses had positive pricing although the economy didn’t help especially in industrial products and Ag products where tariff based pricing was more reflective of what''s going on in the economy. Taken all together, average revenue per car declined in all the groups and many of our customers realized the net year-over-year reduction in their freight bills as a result of lower fuel surcharges. Overall, average revenue per car was down about 9%. With volume and average revenue per car down from 2008, revenue declined 13% to $3.5 billion.

Now let me take you through a look at each of our six businesses. We''ll start with Ag. Our Ag products volume grew 3%, but a 10% decline in average revenue per car, resulted in a 7% reduction in revenue. Soybean volume increased 68% over fourth quarter 2008''s record level as damage to the South American soybean crop combined with a plentiful U.S supply to create a strong export market. Demand was also strong for soybean meals with the Pacific Northwest export shipments more than doubling the previous best achieved back in 2003. With all the former VeraSun plants now operational and under new ownership, ethanol volumes grew 13% and DDG’s also saw continued growth. They were up 11%. Record unit train shipments supported the growth in whole grains and grain products throughout the quarter.