Union Pacific Corporation

Greetings. Welcome to the Union Pacific Third Quarter Earnings 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 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 presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President, and CEO for Union Pacific. Mr. Fritz, you may begin.

Thank you, Rob, and good morning, everybody, and welcome to Union Pacific's third quarter earnings conference call. With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales, Jim Venna, Chief Operating Officer, and Rob Knight, our Chief Financial Officer. I've also asked Jennifer Heyman, our newly appointed Chief Financial Officer, effective January 1st, to join us for the Q&A portion of the call. So before we get started today, I want to take a moment and thank Rob for his service and contributions to Union Pacific over his 40-year career, particularly the last 16 years as CFO. Rob's been a critical member of our senior team and was instrumental in driving Union Pacific's financial success. We wish him all of the best in his upcoming well-deserved retirement, and thank you very much, Rob. And I also would like to welcome Jennifer to the CFO role. She and Rob are doing a great job working through the transition, and I'm confident that Jennifer is the right choice to lead our financial initiatives into the future. This morning, Union Pacific is reporting 2019 third quarter net income of $1.6 billion, or $2.22 a share. This represents a 3% increase in earnings per share and a 2% decrease in net income compared to 2018. Our quarterly operating ratio came in at a 59.5%, a 2.2 percentage point improvement compared to the third quarter of 2018. Once again, this represents an all-time record quarterly operating ratio, beating our previous low established last quarter. That's quite an achievement when you consider the fall-off in volume during the quarter. We are continuing to drive productivity through our G55 and Zero and Unified Plan 2020 efforts, which are also producing a safe, reliable, and consistent service product for our customers. The work our employees are doing as part of Unified Plan 2020 is foundational to the company's success, and there are additional improvement opportunities going forward for both our customers and our shareholders. With that, I'll turn it over to Kenny to provide more details on our results.

Thank you, Lance, and good morning. For the third quarter, our volume was down 8% as gains in our industrial business group were more than offset by declines in ag products, premium, and energy. At the same time, we generated positive net core pricing of 2.5% 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 was down 7%, driven by the decrease in volume, partially offset by a 1% improvement in average revenue per car. Let's take a closer look at the performance of each business group. Starting off with ag products, revenue for the quarter was down 1%, on a 2% decrease in volume and a 2% improvement in average revenue per car. Grain car loads were down 3%, primarily driven by continued reductions in export grain shipments. Partially offsetting feed grain declines was strength in wheat. Volume for grain products was flat, as sustained demand for biofuels and supporting products was offset by reduced exports. Fertilizer and sulfur car loads were down 5%, primarily due to soft global demand for potash. Moving on to energy, revenue was down 20% as volume declined 15%, coupled with a 5% decrease in average revenue per car related to negative mix with the loss of long-haul sand volume. Sand car loads were down 45%, largely due to the impact of local sand. Coal and coke volume was down 17%, due to the softer market conditions resulting from lower natural gas prices and wheat export demand. In addition, contract changes and retirements also impacted volume in the quarter. However, on a positive note, favorable crude oil price spreads drove an increase in crude oil shipment, which was the primary driver for the 18 percent increase in petroleum, LPG, and renewable carloads for the quarter. Industrial revenue was down 1% on a 2% increase in volume and a 3% decrease in average revenue per car due to negative mix with increased shorter haul business. Construction car loads increased 16%, primarily driven by strong market demand in the south for rock shipments. Plastics volume increased 7% due to higher production. Forest products volume decreased 11% driven by softness in the lumber and paper markets. Turning to premium, revenue for the quarter was down 9% on an 11% decrease in volume, while average revenue per car improved by 2%. Domestic intermodal volume declined 11%, primarily driven by an abundant truck supply coupled with softer demand during the quarter. International intermodal volume was down 12% during the quarter, reflecting weak market conditions related to trade uncertainty, escalating tariffs, and challenging year-over-year comparisons driven by accelerated shipments seeking to avoid tariffs in September 2018. And finally, finished vehicle shipments were down 4% for the quarter. Third quarter U.S. auto sales were down approximately 2% from 2018. Strong light vehicle and SUV sales did not fully offset declining car demand. Looking ahead for the rest of 2019, for ag products, we anticipate continued strength in advanced biofuel shipment and associated feedstocks due to an increase in demand, which will help offset challenges in the ethanol marketplace. We also expect stronger beer shipment along with long-term penetration growth across multiple segments of our food and refrigerated business. And furthermore, With the recent outlook with China to take more ag products, we hope to see some relief as those exports resume. However, we will continue to keep a watchful eye on foreign tariffs within our ag markets. For energy, we expect favorable crude oil price spreads to drive positive results for petroleum products. Local sand supply will continue to impact volume, although the comps should improve over the long term. We also expect coal to experience continued challenges with volume throughout the balance of the year, and weather conditions will always be a key factor for coal demand. Looking at 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 the south. But we continue to watch housing stars and the projected softness in the overall market. And lastly, for premium, the light U.S. vehicle sales forecast for 2019 is 16.8 million units, down about 2% from 2018. Although we remain encouraged by the tentative agreement between General Motors and their autoworkers, we're still keeping a close watch on it and the associated volume impact. Domestic intermodal volume is sequentially strengthening, but When compared to 2018, it is expected to be impacted by truck competition in the fourth quarter. In addition, we expect International Intermodal to return to its normal seasonal flow but face tough year-over-year comparisons due to accelerated shipments seeking to avoid tariff increases in 2018. And now, I'll turn it over to Jim.