Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

Ladies and gentlemen, the program is about to begin. A reminder that this webcast presentation is for Bank of America and Union Pacific clients only. If you are a member or representative of the press or media, please disconnect now. At this time, it is my pleasure to turn the program over to your host from Bank of America, Ken Hoexter.

Great. Good morning. Thanks, Paul. I'm Ken Hoexter, BofA's Airfreight & Surface Transportation and Shipping analyst here with my teammates, Adam Roszkowski and Tim Chang. We welcome you to our 6th Annual 20-minute Transport and Shipping Conference Call Series. Today's call is with Union Pacific, part of a dozen 20-minute calls we've got scheduled for midyear updates. We aim to use the 20 minutes to give you quick updates on the state of the market. Just a quick commercial. If we've been helpful over the past year, [ Exstellar II ] voting is in its final week this week, please vote for us for the 2 categories we're eligible, airfreight and surface transportation and shipping, if we've been helpful. Today, we're hosting Union Pacific's CFO, Jen Hamann, and Investor Relations, Diana Prauner. Good morning to you both. And with that, since we work hard to keep these to around 20 minutes, let me just jump in.

Jen, I'm going to ask kind of the topic of the day, and we kind of touched upon this at the conference a month ago. But Jim kind of stirred the pot with the Trains.com article that came out on Monday back in mid-May, right before we launched into our conference a month ago. He kind of opened a Pandora's box of what-if question. So let's just set the table with M&A. If the TransCon acquisition leads to improved service given the inefficient interchanges, it reasons that rails would become more competitive with truck and boost the U.S.'s ability to compete. So one, I guess, let me start out, why the comments now, was this to test the waters, ruffle some feathers and see the fallout. What should we take away from the commentary?

Yes. I mean I don't know that I would take away more than what we said, but I should go back for just a second, give your disclaimer to say check our website, SEC filings because I am going to make some forward-looking statements today. And I was feeling special until you said you had a dozen of these lined out post at the end of the quarter. So I'll try to get over that. But...

Only railroad.

In terms of Jim's comments, I mean he was asked a question, it was kind of part of the normal post-earnings conversations that happen. And you know Jim pretty well, I think and if he gets asked a question, he's going to be transparent in terms of his thoughts about it and answer it. And who knew that several weeks later, we'd still be sitting here talking about the comments from that article. But so be it, and you laid it out yourself, a transcontinental merger would, we think, be good for customers, et cetera. But to really get much further on that, I don't know that there's anything I can truly add to that conversation that you also have the regulatory backdrop that has to be considered with that. And obviously, that's why since the new rules were put into place 2001, 2002, there has not been activity against those new rules.

So let me just ask on that one. Since it's been 25 years since the rules were set after the BNSF and CN tried to merge, does the competition mandate relative to increased competition, is that only relative to increased rail to rail competition? Do they consider trucking as competition, consider peers also made moves to merge? How -- is there any concept of how they would think about that?

I mean that's really a question probably for the STB, Ken, in terms of what did they mean or how do they define enhancing competition.

Yes. Jim made comments about a book being prepared and ready to move. What would make UP be the first mover to be preemptive as opposed to waiting to have the book to see if others were to make a move?

That would be pure speculation. I mean, I think the point Jim's trying to make when he says that is we're always looking at what can we do to grow our carload base and you've seen us do a lot of different things. You've seen us buy transloads, you've seen us actually short line one of our terminals because we thought that was an opportunity to improve the service that we're providing to customers in that area and grow the business. So it's really just within that whole scope of what are all the different things that we can do to grow the railroad and keeping all of those things front and center as a management team.

Yes. All right. Last one on this, just what's been the feedback since the floating of the idea? Is there regulators, government officials, customers kind of have you -- I mean, obviously, this clearly stirred the pot because I know we've had to deal with it from the analytics side. What's been the feedback you've gotten that you can talk about, I guess, from some of those in the market?

Again, I think you've probably got more of that feedback than I have, Ken. I mean you all have different sell siders have talked to regulators, had regulators at conferences, et cetera. I don't meet with customers so I really don't have any feedback there.

Got it. All right. So let's get into the meat of the stuff. So carload growth, up 4% quarter-to-date was about a week to go, but mix looks very much in your favor, we talked a bit about this at the conference after you ran up with international volumes last year. So let me start off with the first one. Coal is up 31% given the new Colorado customer and strength in utility demand, should we expect sequential growth continuing into the third quarter in absolute volumes, given seasonality? Is there a pull forward here? Just trying to understand on the coal side, given the strength here, do we expect that to continue?

Yes. So certainly, here in the second quarter, the new customer that we have, which is LCRA which is actually in San Antonio, Texas, that's been a strength for us. It's added about a train a day. natural gas prices have stayed high, that makes our coal customers more competitive in the grid. And we're running the network very well. We're cycling the coal cars, and so that's giving our customers more opportunities for loads and the mines are performing well, we're performing well and the customers are processing the cars at their end. So that's all been a very positive dynamic. I think looking forward, it's kind of almost back to the old days of coal, Ken, in terms of what's going to be the driver. It's going to be what's happening in terms of the electricity burn and a lot of that's going to go to the summer and the cooling season. And then the assumption that natural gas prices stay high. They continue to stay at current levels. I think that's a positive dynamic and would be a good setup for us at least into the third quarter. And then you hit the shoulder season, and we'll see where things are at. But it doesn't necessarily feel like you mentioned pull forward. I think stockpiles are normalized, but I'm not reading anything or see anything that would say that they're elevated at this level.

Excellent. So given coal is no longer a baseload, can we still think of this as a margin-accretive business on the coal side like the old days or has it changed given the mix?

Yes. Coal has changed some, that's for sure. But probably the best way to talk about that is relative to the average revenue per car and coal does still have an average revenue per car that's below our system average. And so it is better than international intermodal when you start talking about that mix. And certainly, it's unit train business, we run it well. And as I mentioned, the network is running well, and so that helps us. But I wouldn't necessarily think about this as what "was the old days of coal."

Yes. So moving on to grain, up 9% quarter-to-date. That actually accelerated from our discussion in mid-May is, again, just a strong crop? Is it because of tariffs? What are your thoughts on the grain side, just given the profitability of grain?

Yes. So had a good harvest last year, and so continuing to draw off of those stocks. We continue to see strong pull into Mexico in terms of export grain. And then I would also say it's some of our business development that you've heard us talk about in terms of expansions on our network from the renewables and feedstocks. I think one of the examples we might have used at your conference is with Norfolk Crush, it's a soybean crush facility in the Northeastern part of Nebraska. We work with that customer to site them on our lines, give both unit train service and manifest so we're flexible with them and really driving some good growth there.

And then industrial right about 1.5 points, a few basis points above our target, staying steady as she goes. Any economic signs you look for within the category as far as signals that say, hey, we're starting to see something build?

Yes. I would say it's mix and continues to be mixed. So on the bright side, continues to be some of the industrial chemicals and plastics business. Those are up, I think, call it, 3%-or-so quarter-to-date. And that really ties into a couple of things. Certainly, it's continued investment that our customers are making in the Texas Gulf Coast region as well as our success in winning incremental business within that sector of the business. That's really the heartbeat of our network, great footprint, great facilities, and we're running it well. We're also seeing some strength in metals and minerals, that's up about 4% quarter-to-date. Some of that, though, is easier comps in 2025 versus 2024, where Texas was having a lot of wet weather, and that was pretty weak last year. Flip side, the housing side of the world, forest products still down 4%. So would like to see some relief come there. But probably, as interest rates stay at current levels, you're probably not going to see much activity and housing prices are still high as well. So a bit more of a mixed bag, I would say, in the industrial side of the world.

Perfect. I think Powell is literally testifying right now about rates. So intermodal, we talked about tougher comps coming up given the pause in shipments that hit our shores. Are we now done with that pause? And I guess now it's just tough comps coming down in the back half year-over-year. Is that what we look for in the second half?

Well, certainly, to your latter point there, we are at the point where we have tough comps as we finish out the second quarter and move into the third quarter over the last year in the second half, our international intermodal volumes were up over 30%. So that's what we've been kind of talking about messaging as we've been going through 2025. We are certainly seeing what I'll call a little bit of a comeback in terms of the absolute volumes. But just to kind of give you some perspective from an international intermodal space. If you looked at our April volumes, those volumes were still up not quite 20% year-over-year, I think about 18%. Then May, when you hit the air pocket, so to speak, they were down 3% year-over-year. And right now, June month-to-date, they're down about 10%. So that gives you some idea of how that trajectory is trending.

And so it sounds like from this point, you've got those tough comps, so that continues, right?

Yes. Yes. Maybe absolute numbers don't look that different, but certainly on a year-over-year comparison, you're going to see some pressure.

So on an absolute basis, should we expect seasonal improvements in absolute carloads 2Q to 3Q or does the international outweigh that and drag it down sequentially?

Yes. So that's something we've talked a little bit about, too. I think this could be a very unusual year for us from a standpoint of potentially having some of our strongest car loadings of the year in the first quarter. Second quarter is probably going to end up being pretty close. But then when you get into those year-over-year comps in the third and fourth quarter, I think that could look different from a seasonality perspective than what you're used to seeing from us.

Yes. So your latest comments -- what are your latest comments then for annual carload growth for '25?

I don't believe we've given a target for 2025, Ken.

Okay. Yes, I was looking for it, didn't think they had put one out there for full year.

Sorry.

No, no, that's -- I guess that makes sense just given the seasonality and the unsurety of what's coming in the second half. So your concern or the concern post the CPKC from -- at least from my perspective, for a UP point of view was that business was going to move on to their consolidated network that UP would lose some cross-border volumes. Can you just give us a sense on how has that developed? CP's growth continues to outpace the industry as to you, but there -- it looks like they're taking share but are they taking share at the border? Or is it just converting truck and growing on their own from your point of view -- from a UP point of view?

Well, the only thing I can only speak to there, Ken, is what we're seeing. And I would say the data shows that we have actually grown our cross-border business since the CPKC merger and that our market share is up a couple of points since then. So we feel very good about the fact that we are continuing to compete as Kenny and team are selling the broad and diverse network that UP has to offer.

Okay. So on yields, you noted pricing dollars above inflation was the best in a decade and that it was in a market of flat truck price -- spot pricing and scaling international intermodal which impacted mix. So maybe just talk about that. Does coal -- looking at coal, does that come in at a similar revenue per car now that you've got this new contract? Or will that impact the base level at about $22.50 per car?

Yes. I mean, obviously, I'm not going to give you anything specific, but talking just about the LCRA contract. You're talking about a move that's going to go from the Powder River Basin down into Texas and so that is a good length of haul for us.

Yes. And same thing with Intermodal, revenue per car has been stable the last 2, 3 quarters, about $13.78 per car. Is there any shift we should expect given the mix of international-domestic, right as international starts to decline. Does that favor the yield per car?

Yes. I mean you've heard us talk about the fact that international intermodal ARC is about 40% to 45% of our system ARC. And the domestic ARC, to your point, is better than that. So as that mix between international and domestic moves, and that has an opportunity to improve ARC as well.

Okay. And then so given the commentary about the best pricing in a decade or however you want to phrase that, should we expect ARC to be up sequentially? I guess I'm just trying to think of the mix benefits you've walked us through and then maybe offset by fuel.

Yes. I mean, like the first and second -- or it's not first and second quarter, fourth quarter and first quarter, we continue to have very strong conviction in our pricing, and that's going to continue to be accretive to our ratios. And as we've been talking, we do expect and are seeing the mix improve in the second quarter. I'm not going to say that we're going to get to mix positive in the second quarter, but certainly, we are seeing it improve.

Okay. Jen, I think at our conference, you mentioned 1Q to 2Q historical average operating ratio improvement is about 270 basis points again from 1Q to 2Q. Do I have that right? And then I think you suggested 2Q should exceed normal performance given unfavorable fuel and weather in the first quarter and strong carloads in the second quarter? I just want to, I guess, wrap that up and make sure I understand your commentary.

Yes. I actually think the 270 is your number, Ken. But if you look back historically, I take your word for it. Again, I think our position really isn't changing there. For us, the operating ratio is going to be the outcome of all the good activities that we're doing to run the railroad well, deliver strong service for our customers, be fluid, do it as efficiently as possible and grow the business, which we are doing on a carload basis, and then you've got that pricing on top of that. So we certainly believe we're going to maintain the position that we've had the last several quarters to be the industry leader and we would expect good operating ratio improvement in the second quarter, whether you're talking about it sequentially or year-over-year. So no real change in how we're thinking about it.

Okay. So if I think more on an annual basis instead of short term, then you posted a 60% last year, is there an average annual gain you target [Audio Gap] long term per year, is there a number you've given with pricing above inflation and the service improvement or a range of how we should think about that?

No. I mean, I think you know we've not given a number there, but we have laid out the target. Our goal is to be industry leading and with that we're going to deal with a few different things, obviously, we can control our service product. We can control how we're putting pricing into the marketplace. We can't unfortunately control what else happening in the market. And certainly, when we talked last September and gave this guidance, we weren't anticipating tariffs and some of the disruptions with that. I also wasn't anticipating coal was going to be up 31% in the second quarter. So there's puts and takes in all of those things. And really, it's why we have felt confident, we continue to be confident to say that we're still on track -- granted only a couple of quarters in, but still on track to meet the goals that we set out last September for the 3-year CAGR.

Yes. Great stuff. Two real quick questions on expenses. One, labor was up sequentially in the first quarter, I'm talking employee accounts, given the winter shifts or increasing carloads went up to 30,000 from 29,000-and-change. Should we expect flat levels of headcount? Or does it climb just less than the 5% carload growth or 4% that you're seeing?

Well, we're absolutely going to be more than volume variable in terms of what our headcount does relative to carloads. And you guys see the STB reports that come out. 2Q we're seeing FTEs that are flattish to down a little bit from first quarter. So good workforce productivity continuing.

Yes. That's great. Your cost per employee at $40,000, I think you said that should hold until you get to third quarter second half when the labor rate kicks in or was there anything that compressed first quarter?

Yes. So our all-in guide for 2025 is that we expect our cost per employee to be up 4%. We had a really good start in the first quarter with cost per employee up only 2%, but we are still setting aside kind of what I'll call the normal labor negotiations. We are still anticipating moving into the work rest agreement with our Smart TD craft. We've been implementing that on the engineering side, have not started that yet on the conductor side. And so that's part of what we have baked in, in terms of thinking about that all-in cost for 2025.

I just got a couple of more. I know we're coming up almost on 20 minutes. But you've noted your target EPS growth consistent with UP's 3-year target of high single digit to low double-digit growth in 2025. So at the low end, that would suggest '25 earnings of about $11.85, just guessing at 7% growth from last year. That would place you well above the Street. Is there a disbelief from The Street that you can hit your low target? Because I think, Jen, you said even you'd hit it this year, right? So just trying to understand what The Street may be missing in your commentary versus your spoken comments.

Yes. No. I mean -- so I think we've been, again, pretty consistent with that 3-year target high single digit, low double digit, really not been as specific about '25 just because of all that's been happening, tariffs, no tariffs kind of thing. And obviously, there's a number of different pathways that you can get there. And first quarter, you could say we had a slow start, flat EPS. This quarter, 5% volume growth, feeling better about how the network is running. So I'm not going to put a finer point on 2025, but again, still feel very confident that we are doing the things that we need to do as a company and can do in this company to meet the targets that we laid out for our investors.

Okay. Just a few more on that, right? So your buyback, you've targeted $4 billion to $4.5 billion at 2.8x leverage and very robust free cash flow. Is there anything we should think about what gets you to the top end of that $4.5 billion versus the $4 billion? Is there anything you'd highlight within that target?

No. I mean -- and I think we talked about this some at your conference. We started off very solidly in 2025. We did the debt issuance in February, did an ASR. And then we've also seen that our shares, we think, are pretty undervalued right now. So we've been opportunistic with that. We're a buy on UP. And so as cash flows come in, we'll look at that. But I think the $4 billion and $4.5 billion is very doable for us.

Okay. I guess that's good. We have a buy too, Jen so we're aligned.

Good, we're aligned.

Any -- I just -- I'm going to squeeze 2 more in as we hit the 20-minute mark. Any update on union negotiations? I know you had the NCFO done in March and been relatively quiet unless I missed anything. Base wages are set. Is it just dealing with work rule changes? Is there something you'd highlight territory interoperability or anything other? And kind of any operating leverage we should expect out of the agreement?

No. I mean we continue to have, I would say, very constructive dialogues with our other unions moving forward, I think making some good progress. We don't have anything new to update in terms of any new ratifications. But I feel very good about that conversation. I think our workforce understands what we're trying to accomplish, what the strategy of the company is and how being able to have maybe a little bit more flexibility in some of those work rules can help us be just that much more reliable for our customers. And so it's just working through some of those details, but I feel very confident in our ability to reach agreements.

Okay. Last one for me is thoughts on service levels. So car velocity is at 217 miles per day, actually down a bit from 226 at our conference a month ago. Train velocity down a touch to 19.4 from 20.5 is -- while dwell, by the way, is really strong at low points. Is that a product mix? Is there anything else, I don't know, maybe some weather that crept in or anything else here recently or just seasonal moves?

Yes. I mean you maybe have a little bit of mix impact there with Intermodal coming down a bit and coal rising. I would say the bigger really issue though has been we have had a couple just episodic things that happened on the railroad. We had some fires out in Oregon that slid things down for a little bit. We've had some flooding down in Texas. In fact, we're washed out in a couple of places in Texas right now. Nothing significant. The team is doing a great job of recovering, bouncing back from those things, communicating with the customers. And so overall, I would continue to say that the network is extremely fluid. Eric and team are doing a great job there and putting a very solid service product forward for our customers.

Okay. So Jen, we've hit just about 20 minutes. I really appreciate you taking the time to join us. So if I were to try and sum up, I know real fast, but I think about kind of on the M&A side, Jim was looking, trying to make the point as to how do I grow the railroad and whether it's through M&A. But I don't know, it seems like there was a lot more feedback and continuity, but it seemed to open a can of worms that I think as expected, just given all the discussion and what that opens after 25 years, really, and it makes sense, right? It's something that truly makes sense, but who knows where we go from here. Carloads, really staying on track here, 4% up, strong, but really, the mix is the pleasant surprise, right, given the coal and the grain and what that can mean in terms of the mix. The seasonality, you might have some tough upcoming absolute numbers in the second half, mix can work in your favor to offset that; we'll see. On yields, again, still solid core pricing, but too early to talk about kind of the overall impact. And then -- I'm sorry, just given the mix change. And then the operating ratio, you were aligned with our 270 basis point being a historical average as you took our word for it. But you're saying that the OR just should continue to improve and sequentially year-over-year maintain the position to be the industry leader. Nothing on a full year target, but near term, it's tough just really volume dependent and that should help you out. I'm trying to sum up real quick, is there anything else -- and good strong buyback. Is there anything you'd want to make sure we're taking away real quick?

No. I think the key point, Ken, is we're almost up on the 2-year anniversary of when Jim came back from sabbatical. I think the team is doing a great job on executing on the vision of safety, service, operational excellence, leading to growth. We're probably going to be the fourth or fifth quarter here that we've had volume growth, revenue growth. That's a dynamic that is great for us, great for our industry, and we feel very good about the future of Union Pacific.

Thank you so much, Jen. Truly appreciate it. Diana, appreciate you setting this up. Thank you very much for your time and thoughts.

All right. Thanks Ken.

Have a great afternoon, everybody.

Have a good one.