聯合太平洋集團 (UNP) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Union Pacific's fourth quarter release conference call. At this time all participants are in a listen only mode for the dour rehabilitation of the conference. I will turn the floor over to Jennifer Heyman for important disclosure information.

Thank you for accessing the Union Pacific Corporation fourth quarter 2002 conference call held at 1:00 PM eastern time on January 22, 2003 in New York City. The manners discussed on this call contain statements that are not statements of historical fact. They are or will be forward-looking statements as defined by securities act of 1933 and the Securities and Exchange Act of 1934.

Forward looking statements include without limitations statements regarding expectations as to operational improvements, expectations as to cost saving, revenue growth and earnings, the time by which certain objectives will be achieved, the estimates of costs, proposed new products and services, claims, lawsuits, environmental cost, commitments, contingent liabilities, labor costs or agreement or other matters will not have a material adverse effects on our financial position, results of operations or liquidity and statements concerning predictions expectations or forecasts on the Company and its subsidiary's business financial and operational results and future economic performance. Statements of goals an object objectives and other similar expressions concerning manners that are not historical facts.

Forward looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times that or by which such performance or results will be achieved. Forward looking information is based ion information that is available at the time and/or management's good faith belief with respect to future events and is subject to risks and uncertainties that could cause results to differ materially from those expressed in the statements.

Important factors that can affect the Corporation and its subsidiaries future results and can cause those results or other outcomes to differ materially than those expressed or implied in the forward looking statements include but are not limited to whether the Corporation and subsidiaries are fully successful in implementing their initiatives, performance and consolidation, legislative and regulatory developments including possible enactment of initiatives to re-regulate the rail business. Natural events such as severe weather, fire, floods and earthquake, the effects of adverse economic conditions both in the United States and globally any adverse economic repercussions from terrorist activities and any governmental response thereto, war and risk of war. Changes in fuel prices, changes in labor costs and the outcomes of claim and litigation including those related to environmental contamination, personal injuries relating to hearing loss, repetitive motion and exposure to asbestos and diesel fuel.

Forward-looking statements speak only as of the date the statements were made. The Corporation does not assume any obligation to update information to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking statements. If the Corporation does update one or more forward looking statements no inference should be drawn that the Corporation will make additional updates with respect thereto or with respect to other forward-looking statements. Hosting our conference call today will be Ike Evan, president and chief operating officer for Union Pacific railroad. Please stand by for the conference to begin.

We'll go ahead and if everybody is okay we'll get started. First of all, good afternoon and I can tell you that Dick Davidson planned to be here to take part in this call, but he is sicker than a skunk and he's in his hotel. And let me tell you he would rather be here. He's got a real severe case of the flu. And obviously wish he was here.

But joining us today Jim Young, our chief financial officer, we're going to give you some highlights from last year, We'll give you an update on you're operation and some comments about '03 as we look ahead. Take your questions and we'll, Jim and I will do this together with help from Jack Koraleski - he's our vice president of sales and marketing and of course Mary Jones our vice president and treasurer. So between the four of us we'll try to make sure we're able to answer your questions.

Before I give the results though let me say first how proud we are of the performance of the men and women of Union Pacific during this past year. It was a difficult year economically and factors beyond our control such as the West Coast port disruption temporarily slowed our momentum. But our employees answered every challenge, enabling us to report today another record quarter for the company and a strong finish to a historic year for our company.

We earned $1.41 a share in the fourth quarter - a 33 percent improvement over 2001. Now the results include 16 cents per share from the sale of the Valley Transportation Authority, the land sale we had in California and 15 cents for a couple of tax adjustments that if you ask Jim he'll probably be able to break out for you. But excluding those items, we were still at $1.10 per share for the year and that's really a remarkable accomplishment when you understand the impact the West Coast port closings had on our revenue stream.

For the full year, we had a 34 percent increase in earnings from last year's $3.77 to $5.05 in 2002. Again, we had some large non-core or one time items in 2002. But even when you discount those items, our target of double digit earnings growth was achieved.

Core earnings grew per share 14 percent to $4.30 a share - a record level. Our 2002 earnings performance really accelerated our ability to strengthen our balance sheet and to position ourselves for continued long-term growth.

We're working every day to take a greater piece of each revenue dollar to the bottom line. I think the slide demonstrates the progress that we were making. Our real operating margin in 2002 grew by 1.6 percentage points to 20.2 percent reaching another goal we established for the year. This is the first year that we achieved a full year margin over 20 percent since our merger with the Southern Pacific railroad.

For 2002, it was year of many firsts for our company, a record settling year in a whole lot of different ways. At the beginning of last year, we set performance targets and I'm pleased to report that we met each and every one of them.

Rail revenues grew 3 percent for the year. Again, again an outstanding feat when you consider the nation industrial production actually shrunk a percent. But revenue growth was just not at the railroad. Overnite's revenues were strong throughout the year. And the last half of the year marked a return to business levels not seen previously.

Our free cash flow also reached record levels. We did get some help from a couple of large land sales, but we would have surpassed our cash goal even without the transaction. The strong cash generation led to our board of directors approving a 15 percent dividend increase. It was our first increase since 1995. The board won a share of performance gains with the shareholders, a clear signal of our confidence in the future of this great company.

We also continue the trend of increasing our return on capital and as you are fully aware we're committed to the goal of meeting and exceeding our cost of capital and we've continued to make solid improvements in that regard this year. In some 2002 was a year for the record books. We focused on leveraging our great franchise and we reaped the benefits from those efforts. I'm going to turn it to over to Jim and he'll go through the financials. Jim?

Thanks Ike. Good afternoon, everyone. Before we get started here, I want to make certain you refer to the cautionary statement at the end of the press release and understand that statement applies to any forward-looking statements that any of us would make here today.

With that, we'll start with the page one of the consolidated income statement for the quarter. Overall operating income at the Corporation total $579 million, that's up about two percent year-over-year. Other income came in at $108 million that's up just over $80 million - that reflects the property sale that we did close here in December.

Interest expense was down right about 8 percent year-over-year. We've seen a continuing trend all year, about half of that came in as a result of lower debt, half came in as a result of lower rates. Overall, you'll see in the back here our net debt was down just about 8 percent year-over-year so we had good progress there.

On the income tax side, you will see the overall rate came in at 29 percent, that compares to a rate a year ago of 35 percent. Ike mentioned the tax adjustments we had. Basically they relate to recognition of foreign tax credits which are attributed to our investments in Mexico and also the resolution of IRS disputes for the years 1986 through 1994.

Put it all together, we had net income for the quarter $378 million dollar, that's up 37 percent. Now if you take out the one timers in here, the tax items, the property sale, total net income for the quarter was $293 million, that's up 7 percent year-over-year. So you can see again taking out the unusual items, a good performance for us.

Earnings per share as Ike mentioned $1.41 and in the slide packet here I did provide for you the details reported $1.41. If you take out the land sale for 16 tax adjustments you'll see where the core EPS is up about 4 percent.

Page two is the full year results for Corporation operating income came in just over $2.3 billion, it's up 12 percent. Other income, again a very good year here, $325 million, that was up substantially from year ago. You will recall that in the third quarter of this year, we closed the property sale to the Utah Transit Authority, that was about $140 million before taxes. And then the VTA sale here in the fourth quarter.

I've included a chart here for you where we take a look out at this year, 2003. What the chart shows you is fourth quarter again in '01, $26 million - the total in fourth quarter of 108 and then what it would be if you take the property sale out. Also on the right-hand the full year numbers.

Again, a year in 2001 our total other income was $162 million you take out UTA and the VTA numbers that falls to 111. And as we said in December as our investor's conference, right now we're pegging about $60 million for the year - about $15 million a quarter. Don't have any major deals on the horizon, but what we'll do if we see them coming to close to fruition, we'll advise you.

Back to the income statement for the year. Taxes came in at 34 percent. That compares to a tax rate of 37 percent for the prior year. Net income at just over $1.3 billion. Again take out all the unusuals and net income totaled $1.135 billion, that's up 17 percent for the year. So again, good results when you take out unusual items.

Take a minute here to look at page 3 of your financial package here. This is revenue for the railroad. Ike will cover it a little bit here in a few minutes. A couple of items to note, total revenue for the quarter commodity revenue is up 3 percent. Four of our six groups were up, two were done.

As we've seen all year, energy revenue has been down year-over-year. The big hit in fourth quarter was intermodal. As you recall with the West Coast Port disruption, our intermodal revenue for fourth quarter was down 2 percent. To give you a feel for the order of magnitude. Third quarter intermodal revenue was up 10 percent. Second quarter was up 9 percent. So you can see the spread there.

Two things drove it. About $50 million - we lost $50 million in revenue due to the West Coast Port disruptions in the fourth quarter. We did also lose the Hanjin contract from South Korea that was about $10 million. By far the biggest hit fourth quarter was the West Coast Ports.

On the bottom you see average revenue per car, four of the six groups were up in the fourth quarter - price, mix, length of haul. For the year we're slightly up compared to the prior year. As you know, we said when we started the year, we were shooting for an all in price increase of one percent. That means we offset General Motors, offset our legacy coal contracts, we got about half of that. A little bit of softness in RCF from where we expected. '03 looks to be a much better year for us in terms of our ability to continue to make progress on the pricing side.

Taking a look at page 4, reflects the operating income for the railroad. Operating revenues in total were up 4 percent. Our other revenue was up fairly strongly this quarter up almost 20 percent. On the operating expense side, salaries and benefits were up 6 percent.

Now included in that it's is about a $50 million increase - $27 million of that increase come from what I would call one timers. We did have a one time compensation increase in our cost of $16 million, that's where we finished the executive loan program as you recall. We've had a loan program in for three years. That came to an end in '02. The second item was severance costs. We had around $11 million in severance costs for the quarter. We will see more severance in the first quarter. Right now, we're targeting around 400-plus jobs. It will cost us about $40 million in the first quarter or about 10 cents a share.

If you take those items out of labor, basically you end up with labor up about 3 percent overall. Rent expense up 3 percent reflects additional SD 70 locomotives. We now have about 400 more on the property than we did this time a year ago. Fuel and utilities up slightly for the year. If you look on the bottom here you'll see our fuel price average 81 cents essentially flat to fourth quarter of '01. Our consumption rate did improve slightly. That reflects the new locomotive acquisitions we've had.

I want to take a minute and talk about what we're seeing this year first quarter outlook for the year. The slide in the package shows our first quarter 2002 average diesel fuel price at the railroad around 61 cents. What I included on here is what we paid in January. We average 90 cents a gallon in January. Right now through February it looks like it's 95-plus cents. And March obviously it's tough to call, it's been very volatile, but clearly going to be up 30 to 40 cents when you look for the quarter.

We do have some fuel hedged obviously looking backwards, I would like to have hedged a lot more. But we do have 7 percent hedged at 72 cents. The outlook for the year is very tough. We've seen swings here back over the last couple of months of easy - eight, nine, ten cents a gallon in terms of fuel.

What we see right now, fuel in the first half at 30-plus dollars per barrel and then second half falling off to mid to lower 20s. End of the day though still a guess. But that's the way we're looking at the year right now.

Go back to the financial statement and the railroad, materials and supplies were up around $4 million. It's expenditures on freight car maintenance and purchase services were up around 23 million. A litany of factors in there - we have state and local taxes, we have dredge, casualty costs in that line item.

As you have seen all year that line item has been higher than prior years, and we'll see that again as we continue to go forward in '03. Put them together, revenue up 4, costs up 4. Operating income up 1 percent. If you take out the impact of the ILWU strike or labor problems, that $50 million in revenue that we missed converts to about $40 million of operating income. You flat out don't take costs out that quickly to offset that revenue shortfall. If you put that in operating, it would net up about 9 percent.

Looking at a few of the key statistics here, Ike will mention on average employees we're down 2 percent for the year. Productivity continued to improve.

Our operating margin, take a minute to talk about our margin. It was down in fourth quarter as we had mentioned. Full year ahead improved. Again, you can see the impact of the ILWU strike where it cost us a good point-and-a-half in terms of our operating margin.

Take a look here at Overnite for a minute. Another great quarter for Overnite. Record results for them. Total revenue up 13 percent. If you look down below you see that was volume up about 8. Rates were up 4 percent. A couple of the key cost items salaries and benefits were up around 11 percent that includes around $2 million of one time comp costs that you would not see going long-term.

Rent expense kind of jumps out at up 42 percent for the year. That's increased rail use and contracting. A big piece of this is absorbing CF volume into the network and as Overnite continues to integrate CF items under their network you'll see shifts between salaries in this category here.

Fuel costs were up 21 percent. Overnite only had 18 percent hedge but Overnite does a great job in fuel surcharges. Put it together form total operating income up about 19 percent. And they did have an improvement in the operating ratio both for the quarter and for the year.

Page 6 is the balance sheet. I'll talk about a couple of the key ratios here in a minute. Items to note, we ended the year with cash on the books of $369 million. We had a very good year in terms of free cash flow. You'll also note overall levels were down.

Take a minute to talk about cash. I do have an exhibit and separate slide in here for cash. You can see here cash from operations before pension was up 24 percent for the year. Now you'll note here we did put $225 million dollars into our pension fund for the year. Cash capital is up about $150 million. Most of that went into track about 75 percent went into track. The rest went into facilities. You can see the impact of real estate sales up about $174 million from a cash perspective year-over-year and our dividends at $201 million.

So before the pension put or free cash flow before dividends came in at $753 million up over $500 million from last year. We did make a voluntary contribution to our pension fund both the railroad and Overnite. Brought us down to free cash flow after dividends of $528 million, more than double for the prior year.

Take a minute, talk about pensions. A lot of questions on that, obviously these days. We did make the voluntary contribution. Looking forward, I tell our investors you know you need to look at the annual recurring service costs and that's a number that is plus or minus $75 million a year in terms of cash put for pensions.

Funding status right now, when we close up, when we have closed up '02 says we are funded at 97 percent. Says we do not have to make future cash contributions if we don't choose to, but I do see us making some contribution going forward in terms of making sure you don't have a bubble facing you out here years out.

We will have an equity adjustment at the end of the day on the financial statement. You'll see that our pension shortfall compared to liabilities will be around $500 million. What that requires is that we do take -- adjust our equity about $225 million. Again not a huge deal. It's around 2 percent of total equity.

And then for next year, what we're assuming for returns as you know we moved from ten to nine percent in '02. I'm moving from nine to eight percent in '03. In terms of the balance sheet, great improvement lines on the left show you our debt/cap ratios with and without leases. The straight debt/cap came in 42.6, that's a 3.5 point improvement and even adjust for lease as we had agree greater than 3 point improvement and the coverage ratios also were very strong for the years. That wraps up the financials. We'll turn it back over to Ike.

Thanks, Jim. Fourth quarter commodity revenue grew 3 percent. Again, as we've mentioned the significant accomplishment when you consider the intermodal was actually down 2 percent in the quarter. Primarily due to the Port lockout but also due to the loss of the portion of the Hanjin business. We retained the part that fit best for us.

Automotive remains strong - it was up 10 percent. In Agro (ph)- Products had an impressive quarter with an 8 percent increase in revenue on car loading growth of only 2 percent.

Our franchise diversity once again paid dividends for us. Full year revenues were up 3 percent to a record $11.2 billion and all commodity groups showed gains for the year exception of energy. We had expected that 2002 would be a tough year for coal and it was but we were coming off a record year last year as we mentioned before with the impact of some legacy contracts.

A full replay of our 2002 highlight reel would keep us here quite a while- so I'm just going to touch on a few of the major wins. It was a record setting year for automotive. Hauling more car loads and generating more revenue that than ever before. We transported 6.1 million finished vehicles, over a third of all autos sold in the U.S. last year. This is even more remarkable when you consider that our Mexican auto shipments were actually down nine percent due to plant closures and production shifts.

Ag (ph) products, industrial products and intermodal each continue to excel in the pricing front. All showing positive pricing for the third consecutive year. Both Ag (ph) product and industrial products have 3 percent arc (ph) increases versus 2001. We have consistently said that arc (ph) isn't a perfect proxy for price, but consistent improvement does indicate progress in both the mix and prices of the businesses being shipped.

We're going head to head against trucks in all quarters, industrial products along the I-5, Ag products with Express Lane and intermodal with Blue Streak. And I can tell you we're winning higher margin business as well. This revenue success story could not be told, however, without the strong operational support that we received.

Our operating folks just did a great job. Moving record freight volumes whether you measured in car loads or gross ton miles with fewer resources. We ran our operating plant smarter, increasing our tons per train, decreasing fuel consumption and minimizing the time our freight cars spent in our terminals.

Although gross ton miles or total freight activity increased 4 percent this past year, cycled time improvements enable a 7,000 car reduction freight cars on line. We simultaneously increased our traffic levels and reduced our equipment needs. Efficient operations also were enhanced by our quarter initiatives that translated into reliable service as train plant compliance and to and from industry performance both hit best ever levels.

The bottom line, the combination of top line growth and improved operation have resulted in a margin improvement. A win-win for our customers and Union Pacific.

Our history of strong productivity gains continues in the fourth quarter with a 5 percent increase in gross ton miles moved per employee. For the year we experienced nearly a 7 percent productivity boost confirming once again our ability to consistently improve productivity and take costs out of the business.

Head count reductions don't just occur as a result of mergers, but they're also from a long-term commitment to quality and process improvements. That's why between '99 and 2002 our average yearly head count is decreased by over 5,000 people and as the previous slide showed you, the 47,000 people currently employed by Union Pacific are doing more every day.

But we must never become complacent. Long-term wage inflation continues to be a challenge and we need to stay ahead of the curve. We've asked every department to develop very aggressive plans to reduce their overhead costs. So our '03 head count is expected to be down by 2 percent over last year to a combination of attrition and the forced reductions that we're looking at.

Making cuts like this are never easy and as Jim mentioned there will be a one time cost associated with the severance. But we believe it's necessary to take action today from a position of strength to ensure our ability to effectively compete.

We strongly believe that quality service costs less. And our data supports it. Doing things right the first time such as issuing accurate weigh bills, spotting the right cars and preventing derailments saves money. Our 2002 cost of quality decreased by a full percentage point saving us approximately $133 million.

Best of all, reduced failures correlate directly to improved service and customer satisfaction. We're going to show you a slide where our cost of quality goes like this [laughter]. And it's down a full point - [laughter] we are never going to show you a slide where customer satisfaction goes like that and they do correlate. It's in the handout.

Can you follow me with your handouts? Great. Our approach to the market place really doesn't change every year. We've got a consistent strategy and we've discussed it with you before. It's our yield strategy, but it has produced consistent results. And as we go forward, we are growing our revenues faster than - you want to go to seven. Okay. Our yield strategy has resulted in growing revenues faster than GDP. Controlling our costs and of course improving our asset turns.

When we look at our revenue piece we break it down into three segments: market, price and penetration. In the short-term, we really can't control the markets that we participate in. They are what they are. We will grow at our customers and their markets as their markets grow. Our price goal is to get at least one percent of price every year.

We didn't quite get there last year, but price was positive as Jim mentioned. Despite the fact of softer RCAF (Rail Cost Adjustment Factor), coal contracts and our deal with GM. However, for 2003, with favorable RCAFs, the pricing focus of our marketing team leaders and minimal legacy and GM impact we should certainly be able to surpass that goal.

During our meeting in December, the analyst meeting in December, we talked about many of our penetration or business development issues initiatives and I'll take a minute to kind of recap what we think our best opportunities are for '03. Again, our challenge is to prove to our shippers that we are changing the game. With our great UP franchise, expanding the alliance partnerships and a steadily improving service we have markets and customers available to us that have been unreachable before.

A real example of this is automotive parts. Building on our great relationships with the auto assemblers we're now reaching out to their suppliers. The time sensitive nature of parts delivery has generally made trucks a more attractive option. But our increased liability and our auto network is making UP a great alternative. We received a proof statement of our improvement in service just a few days ago when GM presented us with an award for recognition for outstanding achievement. This award was given out at the Detroit auto show, and this is important, on suppliers day, and it was presented to only eight GM suppliers world-wide. And UP was the only transportation company of the eight recognized.

Our Express Lane opportunities continue to grow. We're expanding to include Washington state and destinations to include Texas and Mexico. The demand for this product really has been phenomenal. It continues to improve our Ag pricing and it's really one of our real success stories.

The growth story in chemicals is the expansion of our pipeline service. Building off our success of the first pipeline between Dow and Occidental and our fantastic chemicals franchise, we're now expanding pipeline service to new customers, destinations and commodities.

After studying another record year in 2002 for tons pulled out of the Powder River Basin, our energy team is focusing on eastern market opportunities. A western coal source shift is clearly occurring and it's our challenge to play a major role in that conversion. Working with alliance partners, CSX and Norfolk Southern we are aggressively targeting eastern utility plants.

Like Ag products and its Express Lane service, the industrial products group and its 579 service continues to grow. Since the exception in 2000, service along the I-5 corridor has improved by 33 percent and revenues have grown at a compounded annual growth rate of over 5 percent. We are attracting new customers to this corridor almost daily as our fluid operations provide an economic alternative to congested west coast highways.

And finally, intermodal will leverage its strong performance last year into new growth opportunity as well. Capitalizing on the success of our Blue Streak product, we are expanding our line of service with Norfolk Southern connecting California markets to destinations in the Northeast. We are offering six morning services west-bound and fifth morning availability westbound.

Our business plan for 2003 is simple. It's to achieve a minimum of one percent of price, penetrate new markets and improve our asset turns. We're got the franchise, we've got the products. We've got the alliances, our challenge is to execute and we will.

I'm going to switch gears and wrap up our session today. And these will be Dick's closing remarks. As I mentioned, the overall market is a piece of our revenue equation. As we look closer at the market drivers, economic expectations from the various pundits are mixed. There are a lot of opinions out there about the direction of the economy and we have got our own views based on current business levels.

We are encouraged by the continued demand for construction materials and paper products as well as some segments of our chemical business. Unfortunately, we went over this entire market our tentions with Iraq, Korea, political unrest in Venezuela, high fuel prices and the continued threat of terrorism. So it's too soon to make a prediction of how '03 will really turn out. So we're going to play it close to the vest and stay alert for signs of expansion or contraction.

Looking at particular at the first quarter, we've got some challenges. At first glance this slide may seem to show some negative you views but we really see it as half full versus half empty. Revenue and productivity gains remain positive and the major cross hurdles that we in 2003 are temporary and short natured. Much like last year, our expansion in the second half of the year shore stronger than the first year.

Now having said that, we would still expected to the see revenue growth in the first quarter. Our revenue growth target is between two and four percent while Overnite should be looking at growth in the 7 to 9 percent range. As we've done every year and I'm confident in our ability to continue our productivity improvements, we are committed to continuous process improvement reducing our failure costs, leveraging our technology to make our operations run more efficiently.

Offsetting our revenue growth however will be increased operating expenses. As we mentioned in the December meeting our labor expenses will see some upward stress with additional protection pay costs. We estimate these costs to be between two and four cents per share for each quarter of '03. These costs fall off rapidly after this year and I would argue although painfully in the short-term, these increased costs are a good new story illustrating how rapidly we've improved our ongoing cost structure following the merger.

We've also mentioned additional costs pressure in areas that many other companies are facing as well such as pension and insurance expense. Jim and I have talked about our efforts to stay ahead of the curve and we're talking about the initiatives with intense cost reduction programs. As Jim referenced the severance costs for these programs will be about ten cents per share and will be front ended disproportionately affecting our first quarter.

These costs will be a drag on earnings per share in the first half, but it does position us well for a strong second half and longer term. While these costs present a challenge, we believe that our revenue growth, our productivity improvements, would have more than offset the added costs in a more normalized fuel environment.

Unfortunately though fuel prices have been increasing dramatically over the past few months. Diesel fuel prices for January and February are 30 cents higher than the price we paid for at this time last year. Obviously this has a huge impact on our bottom line. In fact, if fuel prices continue at the current levels throughout the entire first quarter, we could be looking at 15 to 20 cent per share decline versus 2002. I should point out though that the range includes the one time severance costs.

To put it in perspective if you strip out the impact of fuel and one time severance costs we would have expected to see continued margin improvements and double digit growth in quarterly earnings. Well just like you we prefer to see continuous growth in earnings per share that seems unlikely in our first quarter. But when you look past the fuel and severance cost distortions, the fundamentals of our business remain very sound and continue to get better.

Looking ahead, we truly believe that the current fuel prices don't reflect the underlying economics and are not a long-term proposition, especially when you consider how this impacts the overall economy. Looking back over the last ten years, fuel prices have averaged around 70 cents a gallon and we would expect fuel prices to fall into more normal levels later in the year.

As we look at our full year 2003 our business plan assumes a GDP growth of two to three percent, positive levels of industrial production and fuel prices moderating to the mid-70 cent range. If our assumptions hold true, we would expect to see revenue growth in the three to five percent range. At the high end of that range despite added cost pressures we still look to make an improvement in our real earning operating margin over last year.

As a result, our earnings per share should increase between five and ten percent even with our severance costs over the $4.30 core earnings we referenced earlier. As for capital spending, we'll approach our program much like we did last year. If we have strong revenue we'll probably spend closer to $2 billion, but if it's slower we're prepared to hold back on the spending.

Free cash flow should again be strong this year, somewhere between 400 and $600 million and again our commitment is to improve our return on our capital as we go forward to the year. If you look back at the results over the past few years, a key takeaway is the continuing growth and strength of our core business. The implementation and execution of our yield strategy is producing positive returns, growing revenues, cash, earnings and margin every year since 1999.

Closing our books on 2002, let me say that again, what a great effort it was by our people. We celebrated our 104th year of operations in a record fashion. As in years past, '03 will have challenges but it will also have opportunities. We're going leverage those opportunities, face the challenges with a renewed commitment to our customers, employees and shareholders as we re-dedicate ourselves to the vision that successfully brought us to this point. Thank you. Jim, you want to join me up here and we'll take your questions. Yes, Scott?

Just a couple of quick ones. I was wondering if you might be able to understand your macro-revenue forecast give us some sense of how you see the energy markets Burlington Northern was here earlier this weekend with somewhat more conservative I guess given the weather environment et cetera. And I was just wondering if you could elaborate on how you see the coal or energy markets as you look at '03 and a couple of other quick follow-ups.

I'll start with first of all, stockpiles are at normalized level and we see the shift of Powder River Basin to the eastern plant, Scott and there's some opportunities there and with our alliance relationships we're working them hard. Jack, I don't know, do you want to add anything to that?

I think that's a pretty fair assessment of where we are, Scott. I think we're looking for our coal business probably to grow in the neighborhood of 3 percent and no real surprises there. No major shifts. We really don't have any major contracts this year and so if we just have a continuation, kind of a normal summer burn and things like that, we should be fine.

Two other quick questions. Overnite, although certainly improving, didn't see the kind of improvements that Arkansas Best and Roadway have seen, obviously those are national longer haul carriers I was wondering were there incremental costs that will go away over time that some of those contracting costs to handle the quick surge of business ate up some margin that will go away over time as efficiencies build in? And then one other question. The other revenue line as you mentioned did go up to the higher range. Is that more of a run rate or were there some recaptures on other backed up bills and such?

Let's take the first one Overnite. I think that's the right way to look at it. I did mention there's about 2 million in one time comp, there was some catch up in pension costs, three to four million, I don't see that increase being as strong going forward. They clearly are being smart about integrating CF into their network. That's what I said earlier, I know we'll see improved efficiency going forward for Overnite.

On the other revenue line, the run rates about 125, 130. That covers everything from demurrage, detention, logistics companies and its been nice revenue growth for us.

Thanks. Two questions for you. One, the severance impact here you're talking about in first quarter, does that carry through to second quarter at all as well or is that purely ten cents a share in first quarter and then it's really kind of a one time thing? Can you expound on that a little bit?

Right now, if we get it all done it will be first quarter. I'm just telling you us up to ten cents. There could be a little bit of carryover, but quite honestly, way weren't to get it down to done in first quarter.

So with that out of the way in the second quarter would you expect, if fuel prices moderate you can go back to earnings growth, is that kind of reasonable?

Sure, absolutely. Okay. The fuel expense side impact is pretty easy to quantify, we can come up with numbers for the gallons you're going consume and average price and so forth and look at hedges. The revenue side to offset that is much more difficult for us to quantify.

Can you give us some input in terms of how much of your book of business do you expect to give fuel surcharge revenue on? And you know, break that down to maybe intermodal and you know industrial, what do those things look like.

The percent that is the fuel surcharge should be applicable to the entire business is about 30 percent. That just happens to also be the same percent to the intermodal piece. So it's about 30 percent of the total business. It's about 30 percent on the intermodal piece as well.

On the Ag side are you asking for anything.

Absolutely. We're going to fuel surcharges across all six commodities, well, five. The energy business is pretty well set with RCAF. But all will have a fuel surcharge for all other five commodities.

Okay. Thank you.

Thank you. Two questions. The first, there were some comments recently out of your organization and I saw this in a trade publication, someone in your organization was talking about your looking at identifying another major round of headcount reductions, the number was a little bit surprising, somewhere in the neighborhood of 5,500 or 11 percent of your organization. Is that correct or just a misquote somewhere?

You shouldn't read those articles.

I shouldn't. You're right.

No, that's not true.

Are you looking at anything like that over and above what you're targeting in the first quarter until we see something in the latter half of the year?

No. But remember, we're targeting, I think I said about 2 percent, so if look at that that's a thousand-plus jobs. The math though you're looking at how many you would get through attrition, there's also the variable with growth. In terms of we will do some hiring if growth is out there. So again, the 2 percent is a pretty good target for us this year.

Very Good. The second question, the western railroads got through 2002 relatively quietly on the right case, but there were some higher profile cases in the east. But Roger Novers (ph) has come out and said the PPL rate case against B&I is going to be the most hot profile going into '03. B&I was a little bit more optimistic on western rail pricing going into '03. Are these the kind of watershed events we should be looking for that there's a material change in the way the western rails are now viewing pricing and that it's less competitive on that front?

No, I wouldn't say that at all. And I mean that's the only way I can answer that. No.

Thanks. Fred Blanchard here. Continuing our discussions about the car load business and how UP is a car load railroad. I'm very interested in the fact that your automotive chemicals and industrial products had nice bumps in the revenue, car load and arc in the fourth quarter all being slightly greater than the annual. Does this tell us there's a bump in the fourth quarter that could be, could continue on into the first quarter? Could we begin to see a recovery of car load business here.

Our car load business, so far in 20 days doesn't set the quarter, has been okay. The economy obviously is the biggest factor there. We continue to be very aggressive on the pricing side and our new services, I mean that's really what the game is for us on the car load side. We're going after, you know, the trucks. Getting business off the highway and every one of those new products and services we've talked about are coming in at higher margins and are displacing trucks offer the highway.

Thank you. Could you talk a little bit about how you view hedging your fuel costs on a sort of regular basis? Because it seems like some years you're heavily hedged and others you're not.

Jim you want to?

Sure. I wish I could look backwards here, but I can't. You know, our policy we look at is when you start getting into a kind of a ten year mean we'll do more hedging. If you look, last year, we had just under half of our fuel about 45 percent of our fuel hedged at 71 cents. That's kind of the sweet spot.

What's happened this year, you can throw most of the models out when you throw in the war premium that's out here. You can argue whether Venezuela is in or out at times. That's probably a normal part of the process. As we look this year, we've got in 7 percent, we actually were able to get about 2 percent in later in the fourth quarter. That's how volatile it's been.

But the futures market at the end of the day when I looked at it, it was too high for me to lock up.

Second question. Could you talk a little bit about sensitivity of your automobile business, you had a big increase last year if that end market flattens out somewhat this year how that's going to impact you?

Sure. Chris, we really are excited about our automobile business. We've got the dominant share of that business in the West. And right now, it looks like vehicles will be down. You're saying we did 16,8 this last year the industry did and we're looking at 16,5. So we're not going to see the strong growth on the automotive piece. If you recall from my presentation we actually were stronger in '02 than we reported because we were down, we lost about $50 million in Mexico due to plant closures and line shifts. But the big opportunity for us is in parts and so even when the assembly piece is going to be down, you're going to see us up in automotive. We've got some great opportunities on the part side.

We are putting the same new products and services that we've been talking on the car load side into auto parts and leveraging the networks and the relationships we've got with the OEMs are going to pay dividends for us.

Thank you and the last question I had is are you still making progress on your work related injury safety programs?

Yes, we did. Our reportable injuries were down about 14 percent in '02 versus '01. And we continue to make progress there in that regard. The whole industry by the way has made wonderful progress and that's good for the companies and good for employees.

How are your alliances doing?

Our alliance are doing very, very well. We meet quarterly with the CP, the CM, the CSX and the Norfolk Southern and we just, Jack has led the effort with the FXE and the TFM. So we're doing it with all f them. And the neat thing about these alliances, first of all, they're sponsored at the highest level of their companies and they're not about relationships. They're about markets and customers. So as people change, these alliance are going to survive. And they're really mergers without the pain. And it's just, that's just marketing side. We're blocking deeper into each oh, we're taking out switches and cars, I mean us absolutely exciting and helping all of the industry, not just Union Pacific and our customers are excited about it as well. Because they're getting the seamless service they've asked for all along.

Big opportunities in the chemical area?

Absolutely. Our pipeline services that we're offering are reaching well into the east as well and we're working with both the Norfolk Southern and the CSQ in that regard. That's one of the true really exciting, I would call it almost a paradigm shift. It's really exciting what's going on with the alliance shift in the whole industry. It's not just us, everybody is doing it. It's good. Roy?

Following my question about the alliances. What percentage of the total car loads did you originate or terminate on UP has the other end, another one of your alliance partners?

We actually either from origination or termination interchange 40 percent of our traffic. So you talk about why this is important. There's no other industry that doesn't control, you know, the sort of operation one to operation ten like this. We truly are a network that the why it's so important that we continue to work on the alliances.

Thank you very much.

Thank you this does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.