Union Pacific Corporation (UNP)
Q1 2010 Earnings Call Transcript
April 22, 2010, 8:45 a.m. ET

Executives

James R. Young – Chairman, President, Chief Executive Officer of UPC and Union Pacific Railroad Co.
John J. Koraleski – Executive Vice President, Marketing and Sales of the Railroad
Dennis J. Duffy – Vice Chairman, Operations of the Union Pacific Railroad
Robert M. Knight Jr. – Chief Financial Officer, Executive Vice President, Finance of UPC and the Railroad

Analysts

Matthew Troy – Citigroup
Thomas Wadewitz – J.P. Morgan
Jon Langenfeld – Robert W. Baird
Christopher Ceraso – Credit Suisse
Bill Greene – Morgan Stanley
Scott Flower – Macquarie Securities
Jason Seidl – Dahlman Rose & Co.
Walter Spracklin – RBC Capital Markets
Justin Yagerman – Deutsche Bank
Ken Hoexter – Bank of America/Merrill Lynch
Thomas Marsico – Marsico Capital Management
Edward Wolfe – Wolfe Trahan
Scott Malat – Goldman Sachs
Christopher Wetherbee – FBR Capital Markets
John Larkin – Stifel Nicolaus
Jeffrey Kauffman – Sterne, Agee & Leach

Presentation

Operator

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-and-answer session will follow the formal presentation. If any one should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded and the slides for today''s presentations 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 first quarter earnings conference call. With me in Omaha today are Dennis Duffy, Vice Chairman of Operations; Jack Koraleski, Executive Vice President of Marketing and Sales and Rob Knight, our CFO.

We''re 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 car load growth in two years. Jack will provide commentary on the volume picture, but we clearly saw a pick up in demand across the network. 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 gains and attracted new customers to the railroad. The net result of increased volume, solid pricing and operating efficiency was a record first quarter operating ratio of 75.1

This achievement is consistent with our commitment to significantly leverage any volume growth in our network. Operating income was also a record, totaling $988 million, up 47% versus 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 the discussion about our volume growth. Jack?

John J. Koraleski

Thanks, Jim, and good morning. With the more stable economy, the first quarter marked the long-awaited swing back to volume growth. Against last year''s recession impact to business levels, our volume grew 13% with five of our six businesses posting gains.

Energy were 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 the intermodal that''s the lingering effect of the 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 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 wheat shipments through Gulf ports.

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