Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

[Audio Gap] and then you'll see a couple of other supportive metrics, but those are the big ones, really. If we go to the capital slide, we're very effective deployers of capital. Our ROIC has been growing over time. It's at near record levels.

What are the other things that we need to do to really fix it?

Yes, Scott. Thanks for asking the [ claff ] of 2021. We were in fits and starts struggling with some stuff, right? We got out of the bridge that was burned down on the West Coast that... [Audio Gap]

do that. As I mentioned earlier, it's not necessarily easy in every place, and we've got the best team in the industry to be able to do exactly what we need to do.

Okay. Let's do a couple of quick guidance questions, if we can. So you guys basically have guided to mid-single-digit volume growth for the year. Are you still comfortable that you can hit that even with 2Q doing what it's doing? And if so, what are the commodities that you think get better as the year goes on?

Yes. We are maintaining that guidance. And what gives us a level of comfort is even now there's more demand in the marketplace than we're shipping, right? The actions that we're taking to recover the network is limiting the amount of volume that we're shipping, for instance, in the bulk networks, whether it's coal or feed or grain. Now those are starting to improve, but it's going to be a little while before those spool up and start matching what the demand profile looks like. What's really interesting to us is while the consumer is flashing jitters, and you can read any number of confidence surveys, whether it's CEOs or small businesses just released on Monday, that seemed to flash, "We've got a problem coming", buying behavior to us looks strong, right? There's still plenty of demand in the domestic intermodal world, in the finished vehicles world. Housing, while it's softening in terms of housing sales, we're not seeing it soften year-over-year in terms of housing starts. It's because we were at such a poor level last year and the prior year, I think there's room to run there. Infrastructure hasn't even started spending yet, and our rock, gravel cement business is strong. Metals are strong. Industrial chemicals looks like they're doing fine because the spreads -- even though natural gas is way high, spread between that and $100 oil is still pretty competitive. We're just not seeing a lot of markers that tell us the back half of the year looks any different than a very strong demand year.

So the expectation, I'm guessing is that we inflect -- obviously, to get to the guidance, we have to inflect positive in the quarter. And year-over-year should accelerate third versus second and fourth versus third?

I would say, for sure, you've got to inflect positive in the back half. Exactly what happens sequentially, I can't predict. But I can predict there's enough demand out there for us to be able to hit that mid-single digits.

Okay. And then you've also got a guidance of a 55 dot x operating ratio. Since first quarter call, diesel prices have continued to rise. Are we still comfortable with that guidance?

Yes. Scott, it's getting harder and harder, but we're keeping it. And it is going to be predicated, first, on what happens with fuel long term through the year; and second, on our recovery and how rapidly we can get excess cost out of the network.

How much of that harder comment is fuel, which is an operating ratio impact but not really an earnings impact versus operationally, that is more of an actual earnings hit as well as...

Yes. So the way we look at it is we control the operational piece. And so we have more confidence in being able to control that. We have less confidence in what will happen in fuel. We just don't know.

Just focus very near term. We typically see sequential margin improvement first quarter to second quarter. You're not seeing much sequential volume improvement first quarter to second quarter. Do you think we see much in terms of margin improvement second quarter operating ratio versus first?

We're confident we'll see sequential improvement. I won't get into how much.

Okay. Makes sense. Okay. Let's talk about the yield and pricing environment. Obviously, very strong yields in the first quarter. But when we look at the yield trends, ex fuel, they decelerated a bit from -- in first quarter versus fourth quarter. I think there was some mix in there. How is mix trending year-over-year and sequentially? Any thoughts on how to think about revenue per carload second quarter versus first quarter? And then maybe just talk about the underlying pricing environment.

Pricing environment remains good. Mix remains helpful. And that's mostly about we don't book price on what we don't ship, right? So if you pay attention to what's shown in the 10 line that gets published all the time, International Intermodal is down. That's a mix help. Industrial products generally is up or benefiting. That's a mix help. And as we look into the future, it's hard to say exactly what will happen with mix because it's very dependent on how our network spools up and what ships. I'd love to be shipping more grain, grain products. Those will be very helpful. That should happen. Love to be shipping more industrial products. But/and we're definitely going to be shipping more international intermodal, and that will be a bit of a headwind. So we'll just have to see.

And when you -- I know you don't talk about pricing renewals or same-store pricing renewals, but anything that suggests that, that pricing renewal is starting to peak or decelerate? Or is that still accelerating as you progress through the second quarter?

Yes. So our pricing, when we talk about that, Scott, a lot of the attention from our perspective is on the renewals that we do in the domestic intermodal world. And that -- those pricing renewals typically happen between, call it, the very end of November, beginning of December, all the way into right now. We're at the very tail end of that cycle. And through that cycle, pricing has been strong. And it's been strong because truck is still tight. And we're, I think, still essentially playing catch-up with strong truck pricing all of last year. So the domestic intermodal products that are being repriced right now are repriced at a very attractive rate, and I look forward to shipping more then.

Okay. By the way, if there's any questions, raise your hand. We'll make sure that you...

There's a question right there.

Please.

Can I just go back just to the first part of the question? Clearly, there was a lot of extra ratings challenges in the first quarter that bridge buyers and issues that kind of came up. When you think forward to the next 6 to 9 months, it's not easy to have to prove an entire brand and efficiently deploy. How much of the recovery is predicated on like more physical crews versus using the crews that you have more efficiently as you progress through this year? Presumably as volume continues to build, we will need more approved. But just to get back to the January and February levels, is it more getting what you have to get that asset utilization higher, both on the crew side and the physical asset side? Or do you actually physically need those crews to start contributing in a meaningful way?

Eric, do you want to take that one?

You need both. And I don't mean to oversimplify the answer, but -- so -- but let's break down what you said. So if you look back, starting last year, we did start, and we got 250 people hired. And to your point, it does take time for us to train them, right? It's going to take them 14 to 17 weeks to get through their training. And then also to your point, they also have to develop a level of proficiency, which comes months and months after that. So right now, as we continue to onboard people, our focus is absolutely on how we're using those crews. Now we've talked before about re-crew rates. We've talked about deadheads. We've talked about 12-hour equivalents. Those are all terms and metrics that we use to manage at a very granular level how effective are we being with those crews. I've seen great progress in the last, say, 45 days. There's still more to go there. And behind that is then that full support of being able to bring on additional people to be able to backfill in some of those places that's been a little more challenging. So you have to do both. Yes, you're absolutely right.

Because some of your peers probably have started to add resources maybe a year ago or still trying to put catch-up. And I think it speaks to the resiliency of the network.

Sorry, can you use the microphone?

You're talking about the resiliency of the network, where within 3 to 4 months of seeing the service metrics deteriorate, you're talking about an improvement. So it's pretty remarkable recovery in a short period of time. And I was more curious if that was related to the carload volumes that you expected to see through the first quarter or you're looking forward and saying, hey, we're going to see mid-single-digit growth, and we have to be able to have the appropriate resources to handle that properly?

All of the above, right? And you're exactly right. As we look into the back half of the year, we've said we're going to be growing. And those carload numbers are going to require a more efficient network. And not one for one, but probably some more labor as well. That's baked into the plan. We've got a full pipe right now of hires. And if we continue to fill that pipeline like we have so far, we'll hit that 1,400 number and should be okay for the year.

Lance, what happens as China reopens? Should we expect a big surge of volume at the ports? Supply chain issues to reemerge? And then you've talked about rail has lost share of -- at the ports and we want to get that share back. When do we get that share back?

Boy, so there's going to be more headwinds to that, I think, through this year. You've got the ILWU negotiation that's underway. And I think both major port directors in L.A. have said they don't anticipate a deal by July 1. Now I think the labor side has also said they're not looking forward to a disruption of any kind. So I think they're going to get to a place where they strike a deal. Hopefully, that will dodge one potential disruption because every time that happens, L.A. and Long Beach lose some share to everything else as people find alternatives. But what it's going to take is it's going to take the L.A., Long Beach machine, along with Trans-Pacific shippers and ourselves and then the destination to be a very fluid supply chain. And that's been a struggle the last couple of years. The street time for boxes and for chassis is still elevated, which means they're not turning like they had before the COVID pandemic. It's not really clear if we're going to see a wall of imports hit the West Coast, call it in July, August time frame or if that's going to just be kind of steady state or a little bit of growth. I've heard all of the above. Our customers are telling us they expect some growth into the holiday shipping season. They expect it to be earlier, and they expect it to be spread out a little bit more. That's good news, right? That helps the supply chain be a little bit more ratable and a little bit more consistent. Right now, we've got a few thousand boxes on the ports in L.A. and Long Beach that are sitting excess. So we've got a game plan to be able to start cleaning those through as the network is improving over the course of the next handful of weeks. That should mirror kind of our overall improvement. My big concern is making sure that on the destination and the inland ports, our intermodal ramps, that those remain fluid. And so you're going to watch us be very thoughtful, not to repeat what happened early last year, where intermodal volumes overwhelmed the ability for distribution centers and warehouses to handle them inland. We're going to make sure that, that's a fluid network.

Some nice competitive wins in intermodal. I guess 2 things. Do you think there's potential for more wins, maybe not domestic intermodal, but in other places? And then have you seen any signs of competitive response from BN?

Yes. Let's start with the latter. BN's a very good competitor, right? They're no dopes. One response that you saw was a series of announcements by themselves and J.B. Hunt to say, "Hey, we're cooperating more strongly and more deliberately in our domestic intermodal product". I expect that's going to be a very good competitive product. What makes us excited in onboarding Knight-Swift at Schneider and having the Hub Group for a long, long period now, XPO and some other large intermodal marketing companies as customers, is that they are growth engines themselves. And so we've got a really good, stable, strong partners that can compete effectively in the domestic intermodal market. We love that. And our network serves them really well. We've got a wonderful franchise for them. So I anticipate what you're going to see is, you're going to see them being our growth engines, which will be great. And you're going to see us win other business. It will probably be in other segments like through our transloads on the industrial products side. You'll see us win in those kind of marketplaces. And it's happening right now. Kenny is taking full advantage of the cost benefit that we got from transforming the network. We are fully 650 basis points more competitive in margin than our Western competitor. That gives us a cost advantage, and we can use that to our benefit.

Regulatory wise. So obviously, a lot of focus at the STB. I think that there's connecting dots between service, PSR, operating ratio. But I think my personal view is if service gets better, maybe the other things matter less. But -- so I guess, 2 things. What do you think -- what are you worried about that they're going to do from a regulatory standpoint as it relates to service or other things? And then does -- longer term, when I think back to your Analyst Day, you guys said, we want to grow volume, still get price in excess inflation. And then as that happens, we'll get incremental margin, and our operating ratio will continue to improve. Does anything about any of the regulatory sort of heat today change your long-term view of volume plus price plus continued margin over the next bunch of years?

Yes. So let's start with -- I completely agree with your starting statement, and that is we can take a lot of the heat off, both as an industry and as Union Pacific, with a better service product. We know very clearly the best defense against bad regulation is great service. That doesn't mean customers won't complain to the STB. The STB is the complaint department for our industry, right? It's why they exist. But it means the heat of those complaints and kind of fact pattern behind them won't support regulation. What am I concerned about? I'm concerned that in the heat of the current environment, we get ill-considered regulation that is meant to do good, meant to help service, but does exactly the opposite. Four stope and access is that exact topic, right? On the surface, it looks like, oh, that's a great idea. Wonderful, why don't you just open up everybody's network to everybody else, and it will be just a wonderful service experience? No. Because you'll have increased switching at interchange, and it will be in areas where you didn't necessarily invest for the interchange. We already do reciprocal switching around the network, where it's either been negotiated or came out of the results of a prior merger. And we've been able to invest in those areas. Customers have built their networks and supply chains around it, and it works. When you turn that into wholesale enforced, it will have a big negative detriment to the service product. It won't solve a thing. And so I hope the STB is being very thoughtful about that. We're helping share that perspective. And then in terms of the long term, I don't see anything that comes out of the STB, given that it will be well-informed, considered and deliberate. And they're trying hard, right? The Board members want to get this right. So I don't see anything coming out of them that fundamentally alters either our long-term ability to grow, our long-term ability to provide really great service and be efficient at doing it and our long-term ability to generate attractive margins.

Okay. We're basically out of time, so maybe just some quick ones. You're going to be a pretty clear leader on operating ratio this year in the industry. Do you think that's the new norm? That's here to stay. You guys are now the best in OR and going to stay there?

I think we're the best in margins, and we should stay there.

When is -- realistically, when can we get a labor deal?

Well, it's going to be a while. Right now, we're in super mediation. That should accelerate things. The continuum could have us forced out of mediation and into a PEB next week. I don't think that happens, but that could happen. All the way through mediation takes us into the third quarter, and we head into a PEB in the fourth quarter. It could be later than that, but I doubt that. There's a lot of heat on the industry to get a deal.

Realistically, is there a chance for one-person crews this cycle? Or is that something more realistically for the next?

I still believe there is a chance for single-person crew deal.

Okay. All right, we got to wrap there. Thank you so much, Lance. Thank you, Eric. This was great.

Thank you, Scott. Appreciate it.