Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

Got it. And on peak itself, we've heard from a few trucking companies so far that they're looking forward to a very, very robust peak. Do you guys have a sense of what that's looking like just yet? Or is it a little too so.

I don't know. We think that volume is not going to go up a whole bunch in those segments that are usually driven by peak, but I'm hoping that everybody else is right and not our experts.

They're pretty decent levels right now. I mean yes, that's the nice point.

Yes, it's not negative, but I don't see another substantial double-digit increase.

Got it. I think a big message from you guys for the last kind of 2, 3 years during the downturn has been, hey, we have the capacity for when the volumes do come back. You have seen a pretty nice improvement in volumes already kind of off the bottom here in the last couple of years. So where are you now on excess capacity on the service level that you can maintain? At what point do you think you'll have to bring some resources back...

Ravi, it's pretty simple. Okay. What we did was starting in 2019 is as we looked at the railroad in a completely different manner of what was possible. We invested hundreds of millions of dollars in making our railroad to be able to be -- handle trains of different [indiscernible] in different corridors. And as we publicly have said lots is we operate with more business than we did in 2019 with 24% less trains. Some people think that's a number you can just slap on the wall and it was easy. That wasn't easy. But that's capacity that we have excess. So if we're going to run 7 new lanes in the merger, my God, we don't get back to where we were even in 2019. So level on the business that we have now. So we're very comfortable with that piece. And the other 2 areas that you always have to be careful with is locomotives. The reason is, you just can't get them if you need them in a short period of time. Otherwise, we wouldn't -- the buffer would be 0. We just go down to the corner place and buy a locomotive, but nobody has them just sitting there for us and people. So I'm very comfortable with capacity wise, a few little pinch point areas that we'll continue to invest in. On the intermodal side, Jennifer, we spent, I think, something like $1.2 billion in the last 8 or 9 years to increase our capacity, the number of lifts we put in there on purpose to be able to handle these changes that we think that we can draw to our railroad as we move ahead. So that's what we've done is try to touch every piece of our business to give us ourselves the capacity to not run up against it. And you'll see that if you run up against that, you just slow down the railroad slows down, which is not good.

Got it. Just a follow-up on that topic, very close to you have already mentioned it several times earlier today, which is service levels. How comfortable are you with kind of where you are with service, what technology investments do you have to make to kind of push that to a new level? And kind of are you confident that will sustain even when these volumes come back?

Listen, let's just page this. We've invested in technology from gate technology. So truckers can come in seamlessly. They don't even have to stop. They slow down to come in and out of our terminals. We have the way we switch boxcars at the terminals. We've invested in technology that allows them to do more. So we're handling switch number of cars per hour, probably 20% better than we were before. we continue to invest. We have taken all our main systems and replace them with the latest in the last 3 or 4 years, whether it's the dispatch system, whether it's our fundamental net control. The best part about net control was, it was a little scary thing. And I hope that Lance had done it when he was the CEO, but he sort of left that for me and kept at building and they came to see me and said, we're going to shut down our main system that runs everything off of it, payroll cars, everything. And I said to them, well, what's our backup. If that doesn't work or we have a glitch, what do we do? Says you can't do anything because you can't meld the 2. We're talking about hundreds of thousands of railcar movements and everything else, and we did it over a weekend. And I give Rahul and his entire team accolade. So we're ready to do what we have to do moving forward. So I'm very comfortable where we are. Jennifer, anything to add or did I cover it?

We covered a lot of it. I mean -- but we are continuing to develop both within our terminal systems our terminal command center that's going to help prompt decisions originally to some of the managers in terms of how do they want to bring the trains into the yard, how do they want to set up the switch plans to make sure that the cars are making the next connection. But ultimately, you look forward instead of just prompting the terminal managers is going to go ahead and make those decisions and send those instructions to accrue automatically. So there's a lot ahead of us there that we can do to continue to get more productive and safer.

The most exciting thing that we are working on and we're pretty close is a dynamic operating plan. It takes us a long time to change the operating plan against what happens with the business because you have so many things you have to worry about, assets, people, commitments, service plans, everything else. But I'm telling you, we are very close. I'd like it so that the day after tomorrow, we can have a new plan that fulfills what we have to do, but able to be able to run assets better and cheaper size of trains and everything else, and we're getting there. I'm not happy with Rahul on this one and hope he's listening in. Like I expect them to give it to me 6 months ago and he thinks it's difficult. I don't know. -- it's pretty simple from where I sit. He just needs to get going on it.

[indiscernible] for a run early in the morning.

He's too fast. He's a marathon. He would like -- I would have to trip them to be for sure. He has fast real fast.

I have a few more questions on financials and some thematic topics I'll come to that in the end. Maybe let's talk about the merger now. First of all, congratulations, the STB obviously has removed the proceedings from bans resumed consideration of the merger on [indiscernible] applications. How do you view this latest milestone? How should investors think of it? And Give us a sense of what do you think the time line of the next debt are from here?

Well, listen, we are very, very happy to cross that threshold because once the STB on May 28 accepted the merger application, then the clock starts. So the next piece is the merits and the parties that have an issue with what we're doing to get the put in, but they have to put in their detail. They have to tell the STB and make it public. What it is that they can't just speak. It's like some railroads are out there saying that we end up with 50% of the business. That's just a lie. It just is a live, [ Burnison Northern Santofe ] owned by Berkshire, a big company, they have more gross ton miles than us. So we're #2 on gross time miles. Yes, our revenue is more -- you'll have to ask them why -- it's up to them not up to me, okay? And our operating metrics are better, everything else. But bottom line, that's where we are. And CSX and Norfolk Southern are about the same. So if you put #2 and 3 or 2 and 4 together, you don't get the 50%. And somebody forgot that there's 2 Canadian railroads that actually operate in the U.S. So you add them in their Canadian National and Canadian Pacific, and we end up with 40. So the reason I'm telling you this story is they can't go about telling the STB that we get the 50 without proving their math. And I don't know what math people are taking, but it's just wrong. I even heard it yesterday when -- at an like -- so the good part about it is I love where we are without being too snarky, I apologize if I woke up a little [indiscernible] this morning. But bottom line is I like where we are in the process. It's taken us way too long to get here. But if anybody has worked with government regulators, it takes them a while to get through the right place you want them. But I'm going to look at it from their side. I think they're being very, very cautious in making sure that they do the right thing as they go through the process. I think the chair and both the members -- all 3 members, sorry, are smart, and they'll make the right decision because they see the benefit for America and the benefit for the shippers and benefit for America to win against world night competition. So I love it where we are. And we have a time line now called May 28 next year. And then they get 30 days to give us a decision. Now again, this is Jim Benne. I'm hoping they make the decision in 2 days. So on the first of June, we have an answer, but I bet any money they don't take 2 days probably, we shall see. Jennifer, anything you want to add on that?

No. I think you covered off.

But Jim, you guys have not been sitting still waiting for them. At the same time, you've offered a number of concessions already, and we obviously had an agreement with Canadian National -- can you just talk about the thought process there, kind of why you did that? And kind of what benefits do you think it will give you through the process?

Well listen, you can go study history, all you want all the way back on mergers and anything else. And you need to deal with concentration of railroad against customers. And that's what we had when the merger gets consummated, we would end up with 3 rail tracks between our 2 that we have today, plus we would take over the Norfolk Southern one. So we needed to do something with that. You can't have that. So either we make a deal with somebody -- and I give Canadian National and Tracy and the whole team there, a lot of credit. They could see the value of what they do. They're going to be able to move intermodal from Canada into there. If they want the Kansas City, and I think it's wonderful. It's competition. And they might take a little business away from us. Now they better be good or we're going to try to keep it, right? But at the end of the day, I love that. And with that, we started talking about the terminal issues, whether it's the TRRA and the STB came back twice and ask us on the TRRA, even though we said, listen, we don't want to control it. And what people miss there's terminal railroads and cooperation agreements within terminals across the U.S. And they are all run with one thing when the railroads own them. It's a nonprofit. It's not there to make money it's there to switch a railcar for the cheapest price going. And that's how we manage it all of us. But we fixed TRRA with this, and we fixed the Kansas City. So it's good for CN. It expands their reach -- so we have to fix that. If you look at our network now, it's a bolt-on -- so would I make a deal with another railroad? Absolutely. But it would have to be a win-win for Union Pacific and for them and that they could see what the befit is. The idea to give up tracks of your railroad for no reason at all, just goes against the fundamental principle of how our business should work. But on top of that, this is what it would do. If you allow -- if we allowed x railroad to run on our railroad for 800 miles, we would charge them a per car mile charge that actually would make it more expensive for them to get to that destination. I've thought about just bought a green because, guess what, we would just reset the price higher for us. okay? That doesn't make a particle of sense of business. In businesses should be who can get the best in what the market allows you to do. So that's why I'm going to have a hard time making a deal with anybody else. But if it's there, One piece of the deal that's really interesting, Robbie, is we gave Canadian National access from Canada to Mexico through Memphis. Yes. Man, I can hardly wait. We win by them growing Canadian business to Mexico. Got to love the competition. We just added to Canada against the Canadian Pacific love it. I didn't get a phone call thanking me about that was a great deal for you, Jim. And bad for CN.

We shall see how this plays out. Jim, can you give us the latest insight into the conversations you're having with various stakeholders here called you in support of the deal, folks have called you with concerns. Kind of what's the latest update on that?

So we have over 2,000 groups or individuals that are positive on the merger, letters of support. We have over 500 customers -- and just a couple of days ago, the governor from South Carolina, okay, sent a letter in. And we have letters continuing to come in. So the support is the -- and it's the most support that anybody has had on a merger. So we're very happy, and it's across state lines all over the place. And we have some detractors that have said that they put in. And -- and -- but at the end of the day, the positive is much stronger than the negative because they see the benefit of being able to operate through. So we're continuing -- I wrote a letter to the top 50 customers, CEOs, myself and said, listen, if there's anything that you want to talk to me, but you don't understand. This is my personal phone number. This is me give me a call and a couple of them have. And we've actually had great conversations, and we'll probably get a couple of letters of support from them. And some of the rest of them, I haven't heard from them and that means they must support me. I got it, and it's not quite. But at the end of the day, communicate with our customers because that's really important. It's hard to communicate against associations. They don't pay anything. So it's pretty hard to have a proper discussion. And plus, I can't tell them exactly what we're doing with some of our customers because they're an association. So I like it. stakeholder, stakeholders, [indiscernible], I'm telling you. If there's 1 thing I really screwed up on. I did not know I was going to have to make so many trips to different government offices somewhere in this country over this, but I've done lots of myself, Jennifer and the entire team to make sure the story is straight. And they get it. As soon as you tell them, how do you like an airline industry that never went across the country. And how do you like an interstate system where when 80 gets to the Mississippi River, you have to -- there's no bridge across. You have to barge it across the cars over to the other side, so you can get to the other part of the country. They get it as soon as you tell them that. So I love it. [indiscernible] communication.

Any questions in the room?

Okay. I love it.

Right up here.

There is a question. Okay. I thought I was going to get off the stage 2 minutes of 47 are...

[indiscernible].

Mine is actually on autonomous trucking. I was wondering what your view is it on it on it more broadly. Do you see it as a competitive risk or opportunity for railroads and as autonomous trucks increasingly become a reality -- and if it does come to pass, how can rails close the gap on the value offered to customers?

It's been a big topic of the [indiscernible].

Listen, this is something that we should always think about in the business that we're in, and I do think about it lots. If you stand still, someone else is going to beat you. You've got to look at what's coming up and you've got to look forward, okay? We're not into defragmenting, okay, or fragmenting our railroad network to have 48 railroads like we had back in the second world war Class Is. We want to move ahead because our competitors are moving ahead -- and that is one of the reasons we've looked at this merger, and we think it's so important for the country is the competition is going to get better, and we need to be able to get better and have a chance to win. I've actually written in an autonomous truck. And I'm telling you that technology is there on the road system. I do everything I can. I know for an old guy 68 years old, and people might say, by the time you get the 68-year-old grizzle then you only look at things in a certain way. If there's technology out there, I got my IT guy going to get me a flip phone from Apple because I want to see what that technology does plus I think it's cool. But at the end of the day, I write [ Waymo ] I write Teslas that are autonomous. I go trucks. I don't fool around Aurora. I've been in there a few years ago. And I'm telling you the technology is there, okay? They're driving right now with somebody in the seat, but hang on, okay? So we need to be able to be smart enough to move ahead. And if we stay the same, we just lose business because they are going to be competitively more efficient than us and they stretch that mileage of how far they can hold. People want more trucks on the road, then I guess, don't let us do the things that we need to do as a rail industry to move ahead. That's what's really important.

You referenced the transaction in relation to that, do you think that's going to be part of the debate kind of, hey, autonomous structure coming, it will help the rails compete better? Or how do you think that will relate to the transaction?

Well, listen, I know the 5 key areas that the STB needs to look at, but public interest is the very first thing, and it's pretty hard for them not to look at everything that's coming up. And do you want a railroad that seamlessly can operate between the East Coast and the West Coast without handing off and being even intermodal 8 to 24 hours faster and less application, less handling, safer because every time you touch something, it cost you something, something could happen. Do you want to have a railroad system that allows you to compete against that truck? Or do you want not to. Listen, that's why this merger is going to get approved. There's no question. It's good for the country. It is good for the customer. Single line railroad costs less -- rates are less on a single line railroad haul today than anybody that has a multiple railroad touch. So that means that we can offer better. Now I'm not here telling people expect the 5% rate cuts because my job is to represent by a company. But if we -- market-wise, everything else, we could do that, and still be able to do what we have to. So it is -- Ravi, it truly is a great deal for America.

Great. And that's a great spot to wrap it up. Jim, always fun, always insightful. Thank you so much for being here.

Ravi, thank you very much Thanks, everyone.