Union Pacific (UNP)
Q4 2012 Earnings Call
January 24, 2013 8:45 am ET
Executives
Robert M. Knight - Chief Financial Officer and Executive Vice President of Finance
Eric L. Butler - Executive Vice President of Marketing and Sales
Lance M. Fritz - Head of Operations, Executive Vice President of Operations and Executive Vice President of Operations - Union Pacific Railroad Company
Analysts
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
William J. Greene - Morgan Stanley, Research Division
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division
Justin B. Yagerman - Deutsche Bank AG, Research Division
Ken Hoexter - BofA Merrill Lynch, Research Division
Brandon R. Oglenski - Barclays Capital, Research Division
Scott H. Group - Wolfe Trahan & Co.
Cherilyn Radbourne - TD Securities Equity Research
Christian Wetherbee - Citigroup Inc, Research Division
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Matthew Troy - Susquehanna Financial Group, LLLP, Research Division
Christopher J. Ceraso - Crédit Suisse AG, Research Division
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division
Keith Schoonmaker - Morningstar Inc., Research Division
Donald Broughton - Avondale Partners, LLC, Research Division
Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division
Thomas Kim - Goldman Sachs Group Inc., Research Division
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
David Vernon - Sanford C. Bernstein & Co., LLC., Research Division
Presentation
Operator
Greetings, and welcome to the Union Pacific Fourth Quarter 2012 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. Rob Knight, CFO for Union Pacific. Thank you, Mr. Knight, you may now begin.
Robert M. Knight
Good morning, everybody. This is Rob Knight, and welcome to the Union Pacific Fourth Quarter Earnings Conference Call. Unfortunately, Jack Koraleski is ill with a flu today and will not be joining us. But here with me in Omaha are Eric Butler, Executive Vice President of Marketing and Sales; and Lance Fritz, Executive Vice President of Operations.
This morning, we're pleased to announce that Union Pacific set a new fourth quarter earnings record of $2.19 per share, an increase of 10% compared to 2011. This record also tied our best-ever earnings performance set in the third quarter of 2012. Our diverse portfolio of business, solid core pricing gains and efficient network operations drove these results despite significantly weaker coal and grain markets. Although it was a challenging year on many fronts, 2012 was Union Pacific's most profitable year in our 150-year history. It's a testament to the strength and diversity of our franchise, with the dedication and commitment of our employees and our unrelenting focus on creating value for our customers. The results are reflected in record achievements that we've made this quarter in both employee safety and customer satisfaction. Putting it all together, it translates into an increased financial returns for our shareholders.
So with that, I'll turn it over to Eric Butler.
Eric L. Butler
Thanks, Rob, and good morning. Let's start with a look at customer satisfaction, which came in at 93 for the quarter, a 1-point improvement over last year. That continued the strong performance we saw throughout 2012, with customers' evaluation of our value proposition up 1 point from 2011 to 93 for the full year, setting a new best-ever mark. We appreciate this recognition from customers and remain focused on driving further improvement in our value offering going forward.
As expected, some of our key markets were challenged in the fourth quarter. And as a result, overall volume was down 2.5%. While Chemicals, Automotive and Intermodal group and Industrial Products was flat, it wasn't enough to offset the tough market conditions that drove these declines in Coal and Ag products. The softening of coal demand continued to significantly impact growth. Setting the 17% decline in Coal loadings aside, the other 5 groups grew 2% despite the shortfall in Ag. Coal price improved 4%, which combined with increased fuel surcharge revenue produced nearly a 5% improvement in average revenue per car. With price-driven average revenue per car gains outpacing the volume declines, freight revenue grew 2% to $4.9 billion.
Let's take a closer look at each of the 6 groups, starting with the 2 that's saw declines. Coal was down 17%, as high coal stockpiles created by a sluggish economy and lower natural gas prices continued to dampen the demand. A 12% improvement in average revenue per car held the revenue decline to 7%. With the weakened demand, Southern Powder River Basin tonnage declined 19%. Also contributing to the decline was a continued impact of contract losses, which more than offset business wins. Strong global demand for high BTU coal drove a 6% increase in Colorado/Utah tonnage despite a softer domestic market due to natural -- due to lower natural gas prices. New business also provided a boost. Late in the quarter, much publicized low water levels on the Mississippi curtailed some shipments from both of these origins, with relatively small impact on the overall volume shortfall.
Before we move on to Ag, note that this slide clearly shows the challenging comp we have in coal volumes year-over-year in the first quarter.
Ag Products volume was down 9%, mix-driven average revenue per car was flat, and revenue declined 8%. A 22% decline in carloadings was driven by last summer's drought, which unfortunately had its greatest impact in UP-served territories. The resulting tight supply of corn has reduced livestock count and lowered the domestic feed grain shipments, with increased reliance on local crops in East Texas and Arkansas also impacting our volume. Feed grain and wheat exports also declined with improved world supply and higher U.S. prices. Grain product shipments declined 6%, with reduced demand for gasoline and high corn prices curtailing ethanol production, driving a 17% decline in ethanol shipments. Food and refrigerated shipments offered some good news, growing 8%. The 78% increase in sugar shipments, driven by spot opportunity, was a big contributor, while malt and barley carloads increased over 40%.
Our Automotive volume grew 9%, which combined with 5% increase in average revenue per car produced a 14% increase in revenues. Pent-up demand and improved credit availability again drove sales in the fourth quarter, with year-end incentives also providing a boost as the auto industry's growth rate continued to outpace the overall economy. With consumer confidence reaching a 54-month high in November and new vehicles offering more features and improved fuel efficiencies, many continue to find in a compelling time to buy. For the quarter, UP finished vehicle shipments grew 7%, with parts volume up 13%.
Chemicals volume increased 14%. Mix-impacted average revenue per car was flat, and revenue grew 15%, leading the way again with petroleum products, where a 69% increase in volume was driven by over 160% growth in crude oil. As has been the case all year, while crude oil has seen substantial growth, other chemical segments continued with a solid and more modest numbers. Industrial chems grew 8%. Plastics, boosted by new business and solid export demand, was up 7%. And soda ash grew 4%, with growth in the export market. Dampening the good news was an 8% decline in fertilizer, primarily driven by soft international demand for potash.
Industrial Products revenue grew -- increased 3% even as volume remained flat, driven by a 3% improvement in average revenue per car. Rock shipments grew 14% with increased construction activity mostly in the Houston area, which also contributed to a 16% growth in cement volumes. Lumber shipments were up 17%, as housing starts showed solid year-over-year improvement. Nonmetallic minerals saw modest growth, up 2%. But a number of other investor markets faced some challenges in the quarter. Hazardous waste volume fell 48% as the ramp-down of government funding again impacted our uranium tailing shipments. Excluding this decline, our Industrial Products volume would have been up 2%. A drop in gas-related drilling activity, lower steel utilization and softer demand for export scrap was reflected in a 9% decline in steel and scrap. Continued mine production issues hampered export iron ore shipments, leading to a 28% drop in metallic minerals.
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