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Union Pacific CFO Robert Knight Jr. “optimistic” about remainder of year

By: | at 08:00 PM | Intermodal  

Union Pacific Corp. (UNP) Chief Financial Officer Robert Knight Jr. recently reiterated the railroad’s third-quarter and full-year earnings guidance.

Speaking during the railroad company’s analyst day in Dallas, which was Webcast, Knight said Union Pacific hasn’t closed the books on the third quarter, but it still expects to meet the quarterly guidance it targeted in July.

Union Pacific said in July, when it reported second-quarter results, that it expected to earn between $1.40 and $1.50 a share in the third quarter. Union Pacific earned $1.38 a share in the third quarter of last year. It earned 94 cents a share excluding items.

The company is “optimistic” about the remainder of the year, with volume growth and price improvements expected, CFO Knight said. Union Pacific still expects to earn between $5.50 and $5.60 a share this year, he said, adding that the company will have a better sense of full-year numbers when it reports its third quarter results.

The Omaha, Neb., company earned $1 billion, or $3.85 a share, for all of 2005. Excluding items, it earned $3.41 a share.

Union Pacific, which is the largest railroad by revenue and with tracks in the western two-thirds of the country, will report third-quarter results Oct. 19.

In the near term, revenue growth will be driven more by pricing than volume, with volume “picking up steam” in later years as the company’s capital investments pay off, Knight said.

Although there are some areas of softness, demand overall remains strong and the pricing environment remains solid, Union Pacific executives said. President and Chief Executive Jim Young said pricing during the last 18 months was “much stronger than anticipated.” Demand has been “very strong” during that period, he added.

Looking out the next three to five years, Union Pacific is assuming a “reasonable economy,” Young said, although he added that the rail could handle a slowing in the economy.

Union Pacific expects $2.8 billion in capital spending this year and about $3.2 billion next year, targeting areas where it sees the greatest opportunities, Young said.

The company expects revenue of about $15 billion this year, up from $13 billion last year, said Jack Koraleski, executive vice-president of marketing and sales. Pricing and fuel surcharges are some of the factors contributing to the year-over-year growth, he added.

Union Pacific repriced 68% of its customer contracts between 2004 and 2006, Koraleski said. Another 5% will be repriced next year and 14% between 2008 and 2010, he said.

Union Pacific started seeing a bit of softening in some of its markets during the third quarter, including construction products, but overall demand remains solid, Koraleski reiterated.

Looking out the next three to five years, housing is a sector that looks to continue being soft, Koraleski said.

Secular drivers for Union Pacific’s growth for the next several years include increased international trade, tight truck capacity, high fuel prices, strong energy demand and more, Koraleski said.

In discussing Union Pacific’s industrial products business, Vice President and General Manager Eric Butler said that although the housing market isn’t as strong as it once was, population shifts and demographics are tailwinds for the segment.

Some of Union Pacific’s lumber business comes from the repair and remodeling residential business, so while there’s softness in the lumber business in the near term, the railroad remains upbeat about lumber for the long term, Butler said.

The industrial products business also has opportunities in steel, with the 2007 demand outlook for oil and gas, non-residential construction, machinery and equipment, aerospace and rail car/barges being solid, Butler said.

As for Union Pacific’s energy business, Vice President and General Manager Doug Glass said new coal-fired power plants will help the business, as will 65% of expiring legacy business being repriced by 2010.

Union Pacific’s automotive business will be helped in part by vehicles an