Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

[ I'm Dan ] Moore, I'm the senior transportation analyst here at Baird. I have part of the executive leadership team, a substantive part of the executive leadership team at Union Pacific that's joining us today. Very, very pleased to have you here. We're going to walk through some questions. I have a feeling it will have a way of taking it where it takes us, if history is any precedent.

I wanted to start off just very big picture. Your arrival at Union Pacific several years ago as a consultant and then ultimately as essentially Chief Operating Officer...

Did you just call me a consultant?

Well, I think there was a period there where you were described as a consultant, which I never really agreed with that view. But in any event, I'd be curious to just frame the Union Pacific, the opportunity set you saw when you arrived, the things you wanted to achieve, the things you did achieve and where Union Pacific is today relative to your initial view. So just kind of a post view of Jim Vena and his arrival at UP and where we find ourselves today.

Okay. So listen, why don't we -- real quick because I know we only have 30 minutes.

Pardon me. We do have a slide show...

If it takes us longer, Jennifer and I, than 2 minutes to tell you the story about the slides, and we don't know what we're talking about. This is first one, you guys better read it. There's 5 page of boiler plate now. It used to be 1. But when you -- anything time you go through a merger, there's somebody who wants to add about 4 pages. I think lawyers make a lot of money. Next page. So bottom line is anybody that's followed us, best operating ratio, real good car velocity, real good operating ratio, #1 in the industry for a while. Service performance, real high. Jennifer?

So my stuff is even quicker. So just a little time line. Big week for us this week on Friday is the shareholder meeting. It will support both us and the Norfolk Southern for Union Pacific. It's to approve our issuance of shares. After that, we'll be working -- obviously, we're already working on it. But the next big milestone will be our application with the Surface Transportation Board. We're still expecting that to be early part of December, likely that first week. And then the process really begins. And so we'll be communicating with that. It's a very open process. So there will be a lot of opportunity for folks to understand what we're offering, but very convinced that it will be a strong compelling case. Back to you.

So the question you asked was interesting in that you said, with the work that you did with Union Pacific before, where are we today? And what do I sort of see moving forward? Was that the gist of the question?

In essence, as a stand-alone, not as a merged company, but the journey of where you started and where you find yourself today?

Right. So listen, I'd love people to be able to ask me questions and Jennifer and I, and that's why I come up to these things is to get some questions asked. So let's pound through this as quick as we can. So if you look at what we've done since -- I can only talk about when I showed up in 2019. I think Union Pacific operates at a way higher service level. And in fact, our service numbers are very high, where they're in the high 90s and some of it at 100%. And remember, we measure what we sold the customer, not our own measure. It's if we agree to this, are we delivering that? And is there pockets that might have a problem? Yes. So that sets us up pretty good as a stand-alone company. Operationally, we figured out a way to be able to have the best margin, the best operating ratio in the business. And we actually have a pretty complicated -- I've worked at another railroad, not as many grades, not as much disbursement of traffic the way it moves, everything else. And I think we've done a really good job of using technology and how we move ahead, and we're very good, comfortable of where we are. So you put those 2, good service, good operations, financially in a good place where we get -- have good free cash flow. We stopped our share buyback. But at the end of the day, otherwise, we were going to do about $4.5 billion this year of share buyback, but we did that on purpose. We just paid back $1 billion of debt that came up last quarter on purpose. It came up and we had the cash to do that. So stand-alone, we stood to what we said at our Analyst Day that we were going to be high single-digit to low double-digit growth over the next 3 years. And we had clear sight of that. No ifs or buts. So that's who we are standalone. So what we -- our stand-alone is high single digit, let's just stay with that instead of the double digit. So if we can be high single digit, our dividend this morning was at $2.44. So you add the value of growth, EPS plus what we have for -- I don't know we're not a tech company, but I think we're pretty good. And we are a company that has assets and hard and value in land, millions of acres of land. We were well set up all by ourselves. Why are we doing this? Is that the next question? But there -- I answered the first one. I'm going to stop there. Otherwise, I could go on for half an hour.

You mentioned safety, though, because that's...

Yes. Absolutely. And you have to be the 3 foundation, foundations that we have to have is we also have to be safety. And we're talking -- we think the way the trend line is going this year, we are going to be the safest railroad in the United States of America when it comes to personal injuries. And that's a heck of an improvement and a heck of a lot of work. And we've dropped our accident rate down by over 20%. So the trend line is accelerating. The slope is better. So good safety. In fact, great safety. Not that we are happy with exactly where we are. You always look for ways to improve it. Good fundamentals in the company, financially good, great service, best -- I would rate it as the best service in the industry. You can see it from our car velocity and everything else that we talk about. And operationally, I think we do a good job of being very efficient on how we use our assets and money. Anything else you want to add?

No. You...

Perfect.

Operating metrics. You guys have got some great operating metrics. I think you've also shown yourselves to be really adaptive. I mean you've worked through tariff policy, tremendous amount of West Coast imports, been able to manage that really well. Coal volumes up, down. I don't know that I've ever seen Union Pacific more adaptive, which probably puts you in a pretty good position to merge. That being said, can we just maybe step back and talk a little bit about the rationale for the merger, the opportunity at 30,000 feet that you think it delivers, the network, customers, really the full value proposition that it offers.

Okay. So fundamentally, everything that I just talked about in the answer to the first question had to be there. If you weren't a safe operating railroad, if you weren't efficient operationally, if you didn't have the right service level, it would be a nonstarter. You would never get it through the different regulatory groups, the FRA and the STB and politically be able to do that. So we needed to have that, and I think we've done a good job. And we've done that by saying, you need to have a buffer and a buffer means on assets and on what the railroad capacity is to be able to handle the swings up and down. And we've done that, and we're good where we are. So if you take a look at it and frame where we are as a railroad industry, there's no ifs, ands or buts that trucks are getting and going to be more efficient as they get more autonomous.

Right.

And they are testing them. This is not a dream that you have pie in the sky and you think it might happen. It's happening. And in the next few years, we're going to see that competition. And the employee that drives the truck is a large piece of the cost that's tied to trucking. I'm not saying that the railroads will replace everything a truck can do. But in the markets that we're pretty good at right now and the markets that we think we can grow, we need to be able to be better. And that's why it's good for America. So that's one. Two is -- and we get -- listen, I find it humorous. I really do, that we get the railroads that operate across their country from one end to the other and have 90% of the railroad business for 2 railroads would have a problem if the United States of America would have the same thing, seamless coast-to-coast movement. I truly find it -- I find it disconcerning. It bothers me that some people would be that vocal against this, okay? But at the end of the day, people can say whatever they want. That's a benefit. Think about it. I don't know how many of you flew into Chicago and what the Midway or O'Hare. But if you had to come -- go to L.A. and you have to get off at the airport here, change airport, go from Midway to O'Hare to go to L.A. as you came from the East somewhere, how many of you would love to do that? And how many of you would have thought twice about do I really want to go listen to these people? And think about the time and effort. I don't even want to ask you how many of you actually checked luggage because you were absolutely sure that, that connection would have worked, okay? So at the end of the day, it's good for America. It's -- we are able to compete better with the world. A lot of the products that we have that we move are not just competitive within the U.S. We're competing against others that have end-to-end network systems that want to move. And we compete every day with ports in Canada. Last time I looked, there's hundreds and hundreds of containers that come to the Canadian ports and some of them from Halifax, all the way into the U.S. and are able to be then handed off and trucked to final destination because there's an advantage in Canada from going end to end and whether it's up from Vancouver. So we -- what we're going to be able to do is place our business, our ports, our employees in a much more competitive to be able to compete against others. So that's why we want to do that. Financially, absolutely. If we were going to -- if we went through all of this and all we ended up with was that we were going to be at high single-digit growth, then why do it? And we wouldn't do it. Makes no sense to go through this kind of transaction to end up with a railroad that's going to return to our shareholders exactly what the noncombined railroad is going to do. So we see the benefit of this in long-haul moves and also moves from both sides of the Mississippi to open up markets for us to move. So that's why we're doing this. And I could keep on going for the other 17 minutes. But one other point. So it's good for America. Is it good for our customers? Absolutely. The more we dig into the details, it's truly amazing how many customers we remove touch points where we have to hand it off to somebody else and they add 24 to 48 hours to it. And we can move not just intermodal, but the box car and the tank car business and the merchandise business quicker. And employees -- if you guys can -- on the side, tell me about a railroad that guarantee the job for every unionized employee when they're going through something like this, please come up and tell me. Don't tell me about the one where the STB forced them to. Tell me about the ones that came out. And I wasn't born naive. The reason we're doing this is we see the growth and we see how we move ahead and grow the business and we need the employees. And we'll use natural attrition if we have sort of to fix some of the bumps as we get more efficient. So good for customers, good for our employees, good -- great for the country.

Right?

It is -- when I talk to very senior people in the administration and they tell them the story about what we're doing, they get it. They understand it. All politics aside, they see. They cannot believe, Dan. They go, you mean you don't operate from one end of the country to the other? No. We go to Chicago. We go to Memphis. We go to New Orleans. You mean if we want to move something -- if we want to move copper from Arizona to the east, you have to hand it off to somebody else? Yes. Really, there's 1,000 trucks today that are going to move in Chicago from one railroad to the other by truck. And when you tell them the facts and get away from the noise, right? People get it across the entire spectrum, even our customers. So it's sort of fun. It's a great story. I can't believe we didn't do this 10 years ago. What do you think, Dan? We should have done it. You think it's a good idea, right? I guess I don't get to ask you questions. Do I?

You can ask me any question you want. You can ask me any question you want. It seems like it's well timed, right people, right place, right time. You've hit on a lot of what I'm about to ask, but maybe just taking it a step further, we've argued that if we saw one M&A transaction, we would almost certainly see a second. We haven't seen a second at this point. We've also argued that a transcontinental rail delivers a value proposition, potentially significantly lower landed cost over time, lower variable costs, capital efficiency, fixed cost. You also get to go to the market with a singular marketing strategy. It's hard to place a bet. I don't know what that means because we've never seen it before. But I'd love for you to talk to that. Technology is another thing, a seamless technology, the ability to have visibility over the entire network point-to-point. There's a lot here that we haven't touched on, the watershed markets, the growth opportunities that exist. Can we take it one step further and talk about some of these other areas that should inherently be benefits that stem from the combination?

Yes, you bet. So let's start with if you have a railroad that goes across the United States of America and touches the coast. Let's start with technology, okay? From the customer side, the customer point of view, what the customer is going to be able to do is have one relationship with one bill with one touch point and be able to see if that cross country gives them, which it will, a faster service that drops their asset costs and also is able to have them carry less inventory. That's there. We will take the best of Union Pacific and the best of what Norfolk Southern has and implement it. Our gate technology where people today can get into our facilities, like some of them don't even have to stop. UPGo app, all the information in, go to one of our terminals where we're not talking about 3 trucks coming in, okay? They're streaming in. They walk right in. They know where they're going, where do they you drop off and they know where they come to pick it up. So those are all things we implemented net control a year ago, January. And I joke around about it, and I did say to them, well, why didn't you guys do that before I came back to work? Because basically, they told me if they made a mistake, we were going to be in big trouble because you cannot turn the old system back on easily, okay? So we did that because of all the work that the team did, and we have the team that did -- and that is a big deal. That's the fundamental system that runs everything else off of it, collecting money, real important, freight paying bills, keeping track of the cars, making sure that the regulated commodities are in the right place on the train. You name it, that system did it, and we did it with no noise. So I'd rather laugh and I do. I find it humorous that some railroad who had a problem on their merger are sitting there talking about, oh, my God, what happens if Union Pacific. I think we're smart enough to be able to go through this. And then other people talk about 1995 and the SP. Any of you want to see the picture, I brought one with me because I've told people that I had big black hair, black curly hair and a mustache, okay? That is a lifetime ago. Today's Veterans Day, okay? Very important day for us to stop and think about everything that's happened in the 1900s. But son of a gun, do we still go back and think of what happened in 1914 or 1917. Yes, we should learn from it, and we should make sure we never make those mistakes again. But today, I think we understand at Union Pacific, how we move ahead to do the things that are right. And I find it humorous but frustrating. But I guess if you don't have a good story, that's what my mother always told me. If you don't have a good story, try to tell another story that's a bunch of bunk and see if somebody else if it will stick on the wall, okay? Jennifer, anything you want to add?

Maybe one thing. No, but kind of piggybacking on the thing about you're reducing friction points for the customers. And right now, unfortunately, a number of our customers employ third-party logistics companies to have them stitch together that view of the end-to-end transportation, to have them review the bills that they're putting together end-to-end. And we're eliminating that need. We're giving them the tools that they need, the one-stop shopping that they desire. And that's why many go to trucking for short-haul moves or even spot moves because it's much easier to just pick up that phone and call a broker and then have it handled end-to-end. We'll be able to do that now on an end-to-end basis that will give them the cost savings, the safety, the public benefits of rail that they're not able to access today as easily. So it's a big deal.

Watershed markets have been an area of focus. Could you just frame that one more time for us so we're clear on what the opportunity is for growth there?

Yes. So when we talk about the watershed, we're really talking about that center part of the country where either side of the Mississippi or the Missouri, pick a river whichever one you want. But where you're essentially being -- if you're a customer who's in close proximity to one of those areas, one of the railroads is going to end up, we'll call it, short hauling themselves. It might be a 200 move on UP side, but maybe it's a 500- or 600-mile move on the NS today. But you've got fixed costs on both railroads that need to be covered with that. And so it becomes very difficult economically for us to price that for that 200-mile move to cover our fixed costs. And when you think about the interchange that has to happen in between there and the time for that, that's something else that is money for our customers because that time that, that freight has to spend there, there's a cost to that. That's not free. So you eliminate that time piece, you eliminate having the 2 sets of fixed costs, and it becomes much more economical for us and for the shipper to do that. And that's a big market opportunity that we see opening up for us as part of this merger.

Right.

Now part of your question was about one merger or maybe going to another. At the end of the day, every company needs to decide what's the best for them and how they want to spend some capital and whether it's a good return. We've done the homework and for Union Pacific, we're very comfortable. And I think what we'll find when the [indiscernible] this Friday and we announced it, I think our shareholders are going to be -- understand what it is that we're doing and understand at a real high level from the preliminary numbers that we're getting, okay, that we're in a good place. So at the end of it, do I think down the road, the competition -- what are we going to do to competition? We're going to be able to compete harder against Berkshire. We're going to be able to compete harder against CSX, against Canadian Pacific and against Canadian National. So if we can put -- and we know we can do that, faster service, real low incident rate, real safe railroad. And we're going to be able to show the value to our customers in that they -- any time they cross the Mississippi, they're going to have less assets they need and less inventory. So that saves them money. Even if we just increase the rates at the regular whatever number it is that the market sort of will allow us to do that, they're going to benefit from that, and they know that. We're going to open up markets for customers that today, it's tough for them, like Jennifer was saying, to go from one side to the other. If we do -- we are going to do that. There's no if. This is not an if discussion. This is absolutely that's there and possible. And if anybody thinks I make up these, yes, we're going to do that. Go listen to the first call in 2019 when I showed up in January, okay, on the 14th of January -- sorry, 7th of January, they announced me, and I was on the first call. And what I said was, this is what we're going to do. And if somebody listened and go check those off. So we are going to have the fastest service across the United States of America. We're going to have the least touch points where something can lose your luggage across the United States of America. We're going to allow customers to win in the marketplace and win against people like Brazil that are trying to sell more, okay, soybeans into Mexico or trying to get a foothill into the U.S., in the eastern parts of the U.S. We're going to compete harder and have our customers and the states and the people that work for Union Pacific win coming across, okay, moving products. So that's all there, up to Berkshire if they want to do something. They have the cash. I think last time I looked, my wife, I asked my wife this morning, how much cash are they carrying because she's been a long-time shareholder, and they're a great company. They made some great decisions. And they made a couple of bad ones. And I think on this one here, I'll leave that alone. I'll let somebody else decide that one. But bottom line is they got $330 billion of cash available. So if they wanted to buy something, they have it. So it's up to them. Now as hard as they've come out of the gate, telling things that are just completely like they put out a 2-pager and I've got it sitting in my bathroom wall, next to the sink with the toothpaste. But it's on the bathroom wall that says we're going to shut down 300 lanes, and I go, really, why would we shut off 300 lanes. We want to -- first of all, we don't have 300 lanes like in intermodal. There isn't that many lanes like one that goes north out of L.A., another one that goes to Chicago, another one that goes to Memphis, another one goes to Atlanta, like what the heck lanes do we -- I had to ask Kenny, are you hiding 290 lanes from me that I don't understand, but -- and they said we're going to shut down those many, and I laugh. So I can't -- I find it interesting the Berkshire is that coming after us that hard. And in fact, why do I call them Berkshire? I'll be honest, so anybody can hear it. We're actually Union Pacific Corp., and we own a railroad, and I'm the CEO of Union Pacific Corp. and the CEO of Union Pacific Railroad. And what's [ humorous ] about it is some people at -- according to Northern Santa Fe were taken aback that I would call them Berkshire. Last time I looked, that's the publicly traded company just like Union Pacific Corp. I got to have some fun too, okay?

I have another question I want to ask, but I'd also like to present the gallery with an opportunity to ask a question if anyone would care to ask one. Fair enough.

You know the way I think, Dan, and I've said this to the group, all of you heard me speak and have a little bit of fun because we do have a little fun at Union Pacific. But -- so if you don't have any questions for me, so you've agreed with everything I have to say. Okay? So I don't want to hear anybody write stuff that's against us go...

Real quick. We've got 2 minutes left. One of the consequences of the proposed merger has been a flurry of joint service announcements, collaborations in the East from some of your competitors. Said differently, it seems like competition in the East is enhanced. Competition in the East has increased. What does that mean for the domestic intermodal market? What are the consequences of some of these announcements? How is Union Pacific responding to those announcements? And that's all I got.

Well, listen, it's a great question. It's -- the timing is perfect for them. They've sat down and looked at it and they said, what happens when Union Pacific and Norfolk Southern get together? How do we compete against that railroad? And they're trying to do service agreements. They're good. Service agreements are good, but you can see what happened with the service agreement that Norfolk Southern had with Canadian Pacific over the Meridian Speedway. Kansas City forever used to allow an 11,000-foot train to operate. And all of a sudden, when Canadian Pacific took over and in the last few months, they decided to cut back the train size that was always handled before the merger and even since the merger. So at the end of the day, that's the problem with those -- Kansas City is saying to us, you're going to have to run 2 trains at Union Pacific. And we're going. Well, we have to -- we'll run 2 trains. That's the way it is. First question we asked them was why? What changed from 5 years of being able to run 11,000-foot train from L.A. all the way into that market and now you can't? So that's what you have to be careful with, with some of those deals as they break down and people look internally.

Fair enough. I want to thank you for being here.

Thanks for having us.

I appreciate the opportunity to ask questions. I hope the rest of the conference goes well for you and safe travels.

Listen, thank you very much.