Union Pacific Corporation

Greetings and welcome to the Union Pacific second quarter 2019 conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. 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. Lance Ritz. Chairman, President, and CEO for Union Pacific. Mr. Fritz, you may begin.

Good morning, everybody, and welcome to Union Pacific's second quarter earnings conference call. With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales, Jim Venna, our Chief Operating Officer, and Rob Knight, our Chief Financial Officer. This morning, Union Pacific is reporting record 2019 second quarter net income of $1.6 billion, or $2.22 a share. This represents an increase of 4% in net income and 12% in earnings per share compared to 2018. Our quarterly operating ratio came in at an all-time best mark of 59.6%, a 3.4 percentage point improvement compared to the second quarter of 2018. This is the first time Union Pacific has ever recorded a sub-60 operating ratio for a full quarter. And while that's a remarkable achievement, it's magnified when you consider the challenges we faced from significant flooding that adversely impacted volumes and added incremental operating costs during the quarter. That's a testament to the tireless dedication of the men and women of Union Pacific. Working with our customers and the communities that we serve, the team safely restored our rail operations while continuing to drive productivity through our G55 and Zero and Unified Plan 2020 efforts. As a result, our operations have returned to normal, enabling us to focus on providing a safe reliable, and efficient service product for our customers. Unified Plan 2020 transformation at Union Pacific is full steam ahead, and I continue to be encouraged by the great opportunities we see for our customers and for our shareholders. With that, I'll turn it over to Kenny to provide some details on our results.

Thank you, Lance, and good morning. For the second quarter, our volume was down 4% as gains in our industrial business group were more than offset by decline in premium and energy. However, we generate a positive net core pricing of 2.75 in the quarter as we continue to price our service product to the value it represents in the marketplace while ensuring it generates an appropriate return. Rate revenue is down 2% driven by the decrease in volume, partially offset by a 3% improvement in average revenue per cart. Let's take a closer look at the performance of each business group. Starting off with ag products, Revenue for the quarter was up 4% on flat volume and a 4% improvement in average revenue per car. Grain car loads were down 7% driven by continued reduction in export grain shipments. This was partially offset by strength in export wheat and domestic corn. Volume for grain products was down 1% as sustained demand for biofuels and related products was more than offset by challenging environment for export. Fertilizer and sulfur carloads were up 12% due to strength in export potash, diesel exhaust fluid, and sulfur. Moving on to energy, revenue was down 13% as volume declined 9%, coupled with a 4% decrease in average revenue per car. Sand carloads were down 50%, largely due to the impact of local sand within the Permian Basin. Coal and coal volume was down 7%, driven by ongoing headwinds of contract changes and retirements. Flooding in May and June also negatively impacted shipments. In addition, coal exports were lower due to softer market conditions. However, on a positive note, favorable crude oil price spreads drove an increase in crude oil shipments, which was a primary driver for the 30% increase in petroleum, LPG, and renewable car loads for the quarter. Industrial revenue was up 4% on a 2% increase in volume and a 2% improvement in average revenue per car during the quarter. Construction car loads increased 4%, primarily driven by strong market demand in the south for rock shipment. Plastics volumes increased 6% due to higher production. Forest products volume decreased 10% driven by reduced paper shipments as a result of high container bore inventories and decreased lumber shipments associated with lower housing starts. Turning to premium, revenue for the quarter was down 2% with a 5% decrease in volume while average revenue per car improved by 4%. Domestic intermodal volume declined 11% during the quarter as a softer market coupled with weather-related service issues led to lower volume. Industrial intermodal volume was up 1% in the quarter as volume returned back to seasonal levels following a terror pull ahead in the previous two quarters. And finally, finished vehicle shipments were up 1% as second quarter U.S. auto sales were down approximately 1% from 2018. Light truck and SUV sales were stronger and able to offset declining car demand. Looking ahead for the remainder of 2019, BRAG products, we anticipate continued strength in biofuel shipments due to the increased market demand for renewable fuels to help offset the headwinds in the ethanol market pace associated with exports. We also expect stronger beer shipments along with long-term penetration growth across multiple segments of our food and refrigerated business. Furthermore, we expect uncertainty to persist in the grain market due to reduced US crop production and foreign tariffs. For energy, we expect favorable crude oil price spreads to drive positive results for petroleum products. While year-over-year comps for sand ease in the second half of the year, local sand supply will continue to impact volume. We also expect cold to experience continued headwinds throughout 2019, and weather conditions will always be a key factor for cold demand. For industrial, we anticipate an increase in plastic shipments driven largely by plant expansions coming online later this year, coupled with continued strength in the construction market in Texas. However, we are watching the forest products market as housing starts are forecasted to be down year over year in the second half. And lastly, for premium, the US light vehicle sales forecast for 2019 is 16.8 million units, down about 2% from 2018. However, consumer preference for SUVs over sedans will continue to help offset the declining car demand. Domestic intermodal volume is expected to be impacted by truck competition in the second half of 2019, which may limit opportunities for over-the-road truck conversions. But longer-term fundamentals still provide a bullish outlook for over-the-road conversions. In addition, uncertainty in trade and the economy could create a tough fourth quarter comp due to the pull-aheads we saw in late 2018 for international intermodal shipments. And so, before I turn it over to Jim for his operational update, I want to share that I continue to be encouraged how we work collaboratively with the operating team. Jim and I have been making difficult decisions to improve the overall supply chain and aligning ourselves with our customers to find the best way to serve and grow with them. In the end, this builds us a solid platform for a more reliable service product for our customers. And now, I'll turn it over to Jim.