聯合太平洋集團 (UNP) 0 Q0 法說會逐字稿

Good morning and welcome to Union Pacific's first quarter 2004 earnings outlook teleconference.

At this time, all participants are on a listen-only mode and the floor will be open for questions and comments following the presentation.

If at any point you wish to register your question, please press one followed by four.

At this time it is my pleasure to turn the floor over to your host, Mr. Dick Davidson.

Please go ahead, sir.

Good morning and thank you for joining us today on our conference call.

With me here this morning in Omaha is Rob Knight, our Chief Financial Officer.

The purpose of this call is to discuss and take questions regarding the press release that was issued this morning.

As we stated in the release, we received an adverse court decision last week.

When you combine the cost of that decision with the difficult operating environment that we continued to experience since mid-January, we will not meet the bottom ends of the first quarter earnings per share target.

You'll recall that we originally established a range of 30 to 40% growth over the 57 cents per share that we reported in the first quarter a year ago from continuing operations.

Last Thursday afternoon we learned that the Arkansas Supreme Court had affirmed a $30 million jury verdict against the railroad that includes $25 million in punitive damages with the interest that has accumulated since the original verdict.

We are now facing a payment of $35.4 million.

The case involved a 1998 grate crossing accident near Brinkley, Arkansas.

The original verdict was rendered in 2002 and was subsequently filed an appeal to the Arkansas Supreme Court.

Based upon a variety of factors, we had expected the jury's decision to be reversed and the case remanded back to the trial court.

Unfortunately, we were surprised and dismayed last week to learn that the court upheld the verdict and the punitive damages.

We believe strongly that this decision to affirm is unconstitutional and contrary to recent decisions of the United States Supreme Court.

In fact, our counsel is advising us that had the Arkansas Court correctly applied last year's Supreme Court decision, no punitive damages would have been awarded or the amount would have been far less.

A full review of the decision is underway and we may seek review by the United States Supreme Court.

Regardless, though, based on last weeks decision, we will report the expense of $35.4 million for the first quarter.

Now, some final thoughts on this case.

Let me assure you that we have taken numerous steps over the last six years to protect against lawsuits such as this.

I also want to tell you that this case is not the tip of the proverbial iceberg.

We believe this case was highly unusual and the confluence of circumstances that led to the case no longer exist.

Additionally, we are pleased to see that the United States Supreme Court has cut back on excessive jury verdicts and court reform is in progress in some of the states that we serve.

In fact, subsequent to this case, the state of Arkansas itself passed legislation to limit punitive damages.

The impact of the current decision is significant even enough so in this quarter that it was appropriate to make it known immediately to our investors.

When you combine this new cost with the impact of our operating difficulties over much of the past two months, the challenges to our first quarter performance are compounded.

As you know, we began the year making solid progress towards improving our service metric and traffic demand remained strong.

However , from mid-January to late February, we experienced severe winter weather conditions over much of our rail network.

From ice storms and heavy snowfalls to extreme cold temperatures, Mother Nature has challenged us repeatedly, further stretching some of our already tight crew resources and equipment supply.

Additional personnel were required to move freight, repair track, clean switches and remove snow.

Although we have winter every year, this has been one for the record books.

For example, the Salt Lake City area broke all time record areas for consecutive days below freezing with more than 18 days and consecutive days with measurable snowfall, 24 days.

Another example of the extreme effect this winter has had on operations can be seem in our track maintenance.

Severe cold causes steel rails to contract with such force that it can actually break the rail and leave a gap between rails.

Normal winter weather might cause 10 to 20 such events per day across our entiree 33,000-mile network.

Through mid-February, we had exceeded that norm on 31 days with a single-day high of 223 broken rails on the network.

Of the 223, 144 were on the northern region alone, which handles, as you know, about 40% of our entire volume.

Our locomotive and freight car utilization has also been impacted as we restricted train lengths because of the weather.

As you know, severe cold causes air leakage in the couplings between freight cars and can also bring on inherent equipment failure.

As equipment failures increased, we experienced longer cycle times, increased maintenance expense and lower availability.

On top of all this, fuel prices have stayed high in the quarter and will likely average close to the dollar a gallon we paid a year ago, eliminating any upside we might have hoped for from lower fuel price.

While it's frustrating and disappointing to estimate this call, there is a glimmer of hope on the horizon which gives us hope for the remainder of the year.

We are seeing daily evidence of a growing economy and growing demand for our service.

Commodity revenue for the quarter is up almost 5% through February with increases in every group except auto.

And even autos are starting to experience improvement.

As you know, March is typically the strongest revenue month of the first quarter, so we are hopeful to see that demand continue if not improve.

The key will be how quickly we can recover our velocity in our operating metrics to be able to handle that demand.

We are not out of the woods yet as far as winter weather is concerned.

In fact, we are experiencing blizzard conditions this morning in Wyoming.

That's what makes it so uncertain about the outlook for the remainder of this quarter.

Eventually winter will pass.

In the meantime, we'll continue our ongoing effort to put the right resources in place to run a quality railroad.

We are continuing to higher and train new employees and bring them into train service.

In fact, by the end of the first quarter we will have trained and marked up over 1,000 employees for train service.

We believe these efforts will ultimately bear fruit, enabling us to increase network velocity, improve car cycle time and meet the demands of our customers for efficient and reliable service.

So with that, let me turn it over to Rob.

Rob?

Thanks, Dick.

Thank you all for joining us on such short notice this morning.

Before we take a few questions, I should mention that the key ground rule today is that we are limiting our comments and discussion this morning to the contents of the release.

We still have a month to go in the first quarter, so it's too early to get into a full-blown discussion of our quarterly results.

We will save that for next months' earnings release scheduled for Thursday, April 29.

You will note that we are not going to give any specific guidance on the quarter because, as Dick mentioned, March really is a critical month for us and there are a number of variables that could still swing the quarter.

So let's open up the line for a few questions.

Thank you.

The floor is now open for questions.

You may register your question by pressing one, followed by four on your touchtone telephone at this time.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask all participants to please utilize the handset for optimum sound quality.

Our first question is coming from John Barnes with Deutsche Bank Securities.

Please pose your question.

Good morning, guys.

Dick, in your press release you mentioned you talked again about crew shortages and I just want to get at this -- you know, 1,000 new people added by the end of the first quarter.

Does this ultimately mean that your crew shortage issue should be rectified by then or is it a continuing issue where you have having difficulty finding people to employ at the railroad and get them trained and out there, or do you think you can get the situation rectified pretty quickly?

John, let me try to narrow down the crew shortage issue.

Primarily today, the major challenge is two areas: One is the Southern California basin and the second is the Roseville area, although periodically we will have a few crew shortages around the rest of the western region, but those two places are our biggest challenges.

We have found that we can hire people, high quality people at that.

One of our limiting factors is having enough jobs that we can get people aligned with so they can get on-the-ground training.

We have at least one trainee and in many cases two, assigned these jobs, so in order to do it safely and get a good quality training product, that's kind of our limitation but there's no question that we are going to get the people hired.

We have our processes right now and our forecast and we will get them.

And we should, I don't say we'll be 100% there, but we should have substantial improvement by the end of the first quarter.

Okay.

In terms of railroad maintenance, what you saw with this winter and it just seems to me and, Dick, I moved to the northeast four years ago and every year I've been up there the winter has been a little bit worse, so maybe I attract it, but based on the winter weather you've seen the last couple of years, are you having to work at operationally making some changes to your rail maintenance procedures or are you having to do something, look at something to make sure that you don't end up with this kind of events per day record as we go into the first quarter of next year when the weather will obviously get worse again?

We always try to improve our maintenance procedures but I'll tell you, when you are fighting Mother Nature, she's a very tough opponent.

As far as the laws of physics, we can't change them as far as rail shrinkage and when it gets cold like this and the fact that it's going to break.

Another thing we have as you well know is a vast, vast amounts of tonnage that move through this central corridor from Wyoming through Omaha to Chicago and down through Kansas City, it's the heaviest rail quarter in the world.

So it gets a lot of stress and with that we've had record snowfall right here in Omaha this year.

We had over 36 inches on the ground at one time.

So that's pretty hard to cope with, but we are always looking for new technology, improved switch heaters and blowers and better ways to anchor the railroad so it doesn't break but Mother Nature is always going to be a tough opponent.

Thanks for your time.

Thank you.

Your next question is coming from Thomas Wadewitz with Bear Stearns.

Please pose your question.

Good morning, Rob.

Good morning, Dick.

I have two different questions for you here.

At what point do you have have confidence that the velocity metrics or whatever you think is most relevant to show some improvement in rail performance and cost side performance, at what point do you want to say that you are confident we are start to see that?

Should we look at that, is the end of second quarter a realistic time frame to anticipate that, or is it just difficult to really put a time frame on that at this point?

Well, you can't quantify it precisely, but as you see the weekly operating measures come out which is public to everybody, but you know what I'm going to be looking for and I think what you should look for is the very gradual uptick in metrics now.

An example, if this bad storm in Wyoming continues, we may go backwards but I would look for some gradual improvement.

In terms of weather issues if that persists a bit further maybe in second quarter we would have more confidence that would take place.

That's what we should be expecting.

Let me ask you a question.

You really characterized the prereport with the context of including that eight cents per share impact from the Arkansas judgment and I think it would be pretty fair to say that's not a continuing number.

If you take that out, do you still think that you would be in a position where you would have had to prereport or would that not be the case?

I tell you, Tom, my crystal ball isn't that good and I am not going to answer that precisely because we don't know what the rest of the quarter is going to hold here.

I can tell you, though, what we experienced so far has been major costs and some lost revenue probably exceeding what we announced in the fourth quarter.

Fair enough.

One last one, off the coal side we've seen a bit of a pickup and I think we know the comparison is quite easy in March versus some of the storms you had in the PRB last year.

Does coal continue to look pretty strong for you and can you give us any kind of a sense what realistic coal volume growth might be in March and maybe next two months or so?

No, that's too precise but I will tell you that we are looking for strong demand in coal, not just in March but moving on into the year.

Okay.

Great.

Thank you for the time.

Thank you, sir.

Thank you.

Our next question is coming from Jennifer Ritter from Lehman Brothers.

Please pose your question.

Just looking at the reasons why you prereleased winter weather, fuel costs, crew shortages and the jury verdict.

It feels to me like all except for the fuel costs could be things that will be resolved very shortly and might not impact future quarters.

Would you agree with that?

Well, I hope so, Jennifer.

Now we are trying to say that the first quarter has been badly impacted but with the strong demand for our transportation service which we are seeing almost in every sector of our business.

We've seen some, as you see our carloading, some weakness in automotive even though that's been improving in February and we hope that will continue.

Same with chemicals and everything else the demand has been very strong.

So we are hiring people like crazy.

We hired something over 2,500 people in '03.

We hired over 1,000 people, believe it or not, just in the month of January alone and we are going to hire something north of 3,500 this year.

So we are going to fix the employee shortfall.

We are looking for better days.

Glad to hear it.

Thank you.

Our next question is coming from Ken Hexter with Merrill Lynch.

Please pose your question.

Good morning.

Just wanted to get a kind of scale of what we are talking about on the weather on a year-over-year basis.

Last year we clearly had some horrendous weather going on in February and March.

Knowing that March is your strongest quarter and I understand you are talking maybe there's a big storm coming, but can you put it in perspective, you gave some numbers up front in certain regions.

Is there an overall way to look at this on a year-over-year basis that we might see going forward?

Thanks.

I don't know that we can nail it down that precisely.

In fact, there are so many things going on in my life I don't remember last year precisely.

It seems like the bad weather affected the Powder River Basin more than any one single thing.

This year, the bad weather being in kind of the jugular vein of the railroad, affected everything that was flowing through it: coal, grain, automobiles.

It slowed down the whole network as opposed maybe to just impacting the coal fields which is what I recollect last year was.

That was our major area of focus.

So, no, I probably can't do as precise a job of that as I would like except to say that we really got hammered right in our jugular vein and that impacted everything else.

I'm trying to compare with the metrics that we see on a weekly basis like velocity and cars online and such and dwell time.

But like you said, if it was across the network in a much wider base this year, even though we had a lot of bad storms last year, you are suggesting they were more refined.

Yeah, this was more in the jugular vein of the railroad, which when you spread out the consequences of that, it reduces locomotive utilization, it reduces brake car utilization.

It ended up compounding our crew situation out on the West Coast due to the network basis of the railroad business, it compounds itself well beyond just the local events.

If I can continue that.

Last year it seemed like everyone anticipated a quick snap back then in the velocity numbers because if it was so relegated it seemed like there was hope that we were going to see an improvement through the year and it seemed like it just dragged on.

Is there something that you can highlight for us that gives us a little more confidence that we can see this a bit more refined this time as opposed to what we saw last year?

Because it seemed like last year should have had easy comps throughout the year, I'm sorry, this year should have had easier comps, but obviously we are having a tough time at it.

What gives us confidence that this is something we can see rebound in the second quarter?

Well, we do have the pump primed this year and we did not last year.

When we, you remember back in mid-August is when with recognized it looked like business was starting to come back for real then got confirmed as the year went along.

We really started our full court stress on trying to source and hire and train people more or less in the final third of the year, basically the fourth quarter.

This year we have got the pump primed, as I said.

We have so many people being trained out there we don't have any more room to train them.

We have every conductor has a student with him already or in some cases two students.

The process is we have 75 to 100 people graduating every week and that's going to go on until at least the third quarter this year.

So they are coming.

The cavalry is on the way but not as quick as you or I would like.

Are you having trouble getting people for these jobs?

Not really.

We had some trouble originally.

We had to go beyond our normal methods of making the fact known that we were hiring people.

We used to do it with employment agencies and government agencies and that really wasn't turning out the kind of numbers that we wanted.

So we're resorting now to newspaper advertising, radio advertising.

Working with the various state political entities to make sure that we are leaving no stone unturned and it is turning out the people.

We have to interview about ten people for every one that we finally higher.

But our people tell me we are actually getting a higher quality employee than we've hired in many, many years.

We are being selective and we are getting plenty of applicants now and we are getting good people.

Thank you.

Our next question is coming from James Valentine from Morgan Stanley.

Please pose your question.

Hi.

Rob, I wish it was different circumstances that you had your first conference call.

The question I have is given where fuel prices are slightly above a dollar here for the quarter and people that you are bringing on board for the quarter, even though you've got revenues running plus 5% thus far, I'm getting the sense that it's going to be tough to see any improvement in operating ratio on a year-over-year basis, probably the OR is probably going to come in flat maybe is have a slight rise.

Does that kind of feel about right as you come through the quarter?

Jim, you know, were you were chopping up a little bit.

I don't know if you were asking about the full year or first quarter or what, but you were asking about the operating ratio and it's real clear I think at this point that the operating ratio will not be as good this quarter as it was the same quarter a year ago.

That helps.

I hope this connection is a little bit better.

That's much better.

I don't know what you did, but you started coming through much better.

Great.

Could you give us a feel for -- in the past you had mentioned the net headcount for the year, probably would be flat to up 1% depending on volumes.

Granted we are only two months into the year.

But does that still seem to hold track or are you gravitating towards the higher end of that range?

Once again it all depends on volume, but if the volume demand continues like it is, it seems to me we will be up somewhat and it will be up in P&E employees.

Great.

One last question for Rob.

Could you give us any range or any help on the other income for the quarter, the number can bounce around quite a bit and if I look here last year it was about $13 million and in '02 it was $21 million in the quarter.

Any guidance here would be helpful?

No, not at this point.

March is a critical month and there are still some variance there so, at this point, no.

Thank you, gentlemen.

We are going to have to just take a few more then I have to go catch an airplane.

Our next question is coming from Gregory Burns from J.P. Morgan.

Please pose your question.

Hi, guys, a couple quick questions.

On the settlement, Dick, is there a cash flow impact in the quarter?

Will this be paid into an escrow or how should we treat it on the cash flow statement?

Well, wait a minute.

It's not out of the question that we might take $5 million of that,which was the damages that were awarded because of the medical care and that sort of thing, all the part except the punitive.

It's not out of the question that we might recognize that, but the rest of it will not be recognized for some time.

Is the interest clock still going to accrue on the entire balance as you..

No, not if the $5 million is paid.

It would only accrue on the remaining portion.

Okay.

Your comments on coal, is there anything incremental there either from your customers or is it just the same inventories look low and gas is high, et cetera?

Very strong demand.

They are running their plants and burning a lot of coal.

The weather has been quiet severe and there is just extremely strong demand.

Then finally...

There is a factor at work here, too, that you are probably well aware of, is in the east, coal prices have become extraordinarily high and demand is high.

Imports, as I understand it, from South America has been reduced somewhat so there's quite a strong demand in the east as well for western coal.

And the shipping costs are helping as well.

Right, exactly.

On the fuel, is there anything you can do, it looks like fuel costs has been thicker than a lot of people expected.

Anything you can do with the hedging going out or can you move the surcharge protection needle anywhere to the fuel stays sticky here you get better protection as the year goes on?

What can you do about this?

I guarantee you you are a the head of marketing here's that same litany every day and I'll repeat your question to him, too.

We are working hard to increase our recovery there but we can't find, we have not been able to find for several months a point of entry to do any hedging.

Hedging right now you could ends up with the worst of all world's, lock in higher prices ran being open like we are now, or substantially open.

One more question and I am going to have to run out on you here.

Our next question is coming from Dan Hemme with Prudential Equity Group.

Please pose your question.

Good morning.

Thanks for taking the question.

Dick, quickly on the context of your characterization of your court decision is not the tip of the iceberg.

We didn't see this in any previous management discussion, analysis on the risk side.

Can you confirm that there are not others out there, and then secondly, what gives you the confidence that there won't be future events similar to this?

Here's the situation quite honestly.

As you know the plaintiff's attorneys are numerous.

They are always after American business trying to find some way or some new legal model theory in order to attack us.

The only thing I can tell you on that, I can't give you 100% guarantee that they won't find some other way of finding a way to damage us, but I've got great confidence in our legal department.

They come very, very close every year to sizing up the claims that we have outstanding, evaluating the potential payouts, something that we review with our audit committee many times a year.

And they have a great track record, so I have great confidence in them.

But, no, I can't give you 100% guarantee but I can give you the assurance that we have a great record of recognizing what our exposure is and accruing for it.

Thanks.

Okay.

Well, thank you all.

I'm sorry we had some news to report but the sun will shine again and our business book is very solid and so we have better things to look forward to, I hope.

Thank you.

Thank you for your participation.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.