Union Pacific Corporation — 2024 Q1

You bet. David, thanks for the question. And I'll just summarize real quick what we're doing. And then, Kenny, maybe you want to get into a little bit more of the specifics, okay? So if we look at what we're doing on the railroad side, and that's very important in how we're going to be able to grow and grow with our customers is our customers -- some customers we have expect speed and resiliency in the model. And others, it is -- speed is less of a concern. It is consistency in the model. So if you take a look at what we're doing, we are building the fundamental blocks that we are able to provide a service like no one else. We can go from and we're out there selling it. So in the high-speed market to market, we have a service that operates very high speed, 2,000 miles in less than 2 days, that makes us competitive against other modes of transportation.

All right. So look, David, you hit it on the head. What are we doing differently? And I just want to talk to you about some of the product development that Eric and I and our teams are doing together. You look at the Phoenix ramp. We're excited about it. We're seeing that volume come in there and grow sequentially. It just gives our customers and BCOs more optionality.

David, real quick, I've spent a lot of time, I think I've made like 8 or 9 trips down to Mexico already in the 8 months I've been here, working very closely with FXE with our ownership position in them. We know where the points of concern are. FXE has done a good job of identifying what they have to do, and I think they run a good service product. They're going to continue with the same goal as we have to strive, and we're working together on it. In fact, in a couple of weeks, I'm going to ride a train, head end of a freight train, down on the FXE to take a look at their railroad even more.

Thanks, Justin. We are not providing OR guidance, but -- so I'm not going to comment on your number. But I think the way that you're describing it in terms of what we expect from ourselves is to continue to make improvement. You heard Jim talk about the fact that we made good gains, but there's more to do. And that's really our focus, is to continue to do that quarter-over-quarter to make gains. Obviously, we're doing that in an environment that we can't totally control.

Good. I'll start with it, Amit. Thank you very much for that question. Now I want to be really clear right off the bat. We have the capacity to be able to handle more than 155,000 carloads. What brings us tremendous confidence is when you think about the 5 critical resources that we have. We clearly have enough terminal capacity. We clearly have enough mainline capacity. More specifically, we've talked about in the past and continue to maintain a buffer in our crew base. We have a couple of hundred extra crews based across the system that are available. As to your point, when that volume comes on, we have the crews.

So, Amit, the only thing I would add is, and you know, I've never given guidance on operating ratio because it's a result of how you operate the railroad, and that's really important. But ex-fuel, a 60.1% last quarter with where the volumes were, what we did with price and what we did with efficiency on the railroad, that's a pretty good number. It's okay in the way I look at the world. Some people would say it's excellent. I go, it's pretty good.

Well, let's start with the end of the question. I love volume, and I love revenue. So at the end of the day, that's really important to us to be able to drive it forward. And what we've done is we worked hard. It looks easy sometimes to operate a railroad and especially as complicated as the Union Pacific network is because it is complicated. It's not a linear railroad. It's very, very spread out in the way it operates. But I think we're focusing the people at the right level. We're doing the right things when it comes on the expense side and headcount and everything that's involved in it, making sure that we don't impact service. And I think we did a great job of it, and I can see us improve in every one of those.

Yes. Listen, great question. And I'm going to give Eric to talk about how he sees and what's moving forward and Kenny, but let me just summarize the way I like to look at things is you always try to optimize the network operationally and look for ways to be able to drive efficiencies in the network. But the base plan always is what did we sell to customers, what did we tell the customers we're going to deliver and make sure that that's the base plan. And from that, you build it up.

I'll start building up with that. So, Ken, to Jim's point, when you look at our quarterly performance from a dwell perspective, and we had a 5% improvement in our car dwell during the quarter, that's a full half of 1 hour off of every car on the Union Pacific. That's how we are able to move the cars faster. Now when you think about that going beyond that, to Jim's point about being agile, we took out 4,000 touchpoints just in the first quarter as we looked for more and more ways to be able to modify the transportation plan to move the cars faster.

Ken, anything to add?

I mean we talked about the efficiency. It shows up in the product development that we talked about. It shows up in all these small discrete things like adding more cars right at the customer's plant and asking for more business by customer, by plant.

So -- we're probably not going to give you a number, Ravi, which isn't going to surprise you, but I'll let Kenny talk to the markets. But just from a mix perspective, with intermodal probably staying weak through most of the year, that probably is going to give us the ability to have some positive mix within our business as we think about that for the rest of the year. Kenny?

Yes. I've been very encouraged and proud of the commercial team and the conversations that they're having with customers on price, articulating the inflationary pressures that are there and working with those customers to price to the market, taking a little bit more risk to price that business. And at the end of the day, our service product has improved, as you can see in the results, and we're talking to our customers about that and aligning that with the capital investments we're making. So it is not a coincidence or by luck, we are having very deliberate conversations with our customers.

Those are 2 different ones, Ravi.

Yes, I'll start off. Thanks for the question. I said that back in January, it's not like we woke up January 1 and started deciding that we needed to have these deliberate conversations with customers. These started well early last year. And we've shared this. We can touch close to half of our price annually. The other half is in multiyear deals. I touched on it a little bit, about the deliberate conversations that we're having, the risk that's out there. And then I'll talk about a couple of markets.

And Brian, to your question about crews and the coal lines, so every single week, we review every board across the system. And we're looking, just as you pointed out, for changes in the market that shows up an increased or reduced demand. We've made adjustments. We'll continue to make adjustments.

Yes. Jordan, thanks for that question. So I think you're right. You're hearing a lot of positivity by the team because we know that there are more opportunities. And first, it's building the momentum, it's sustaining the momentum and then keeping the cost out. And so if you think about equipment rents, that really is all about continuing to drive the car velocity, continue to drive the cycle time and the dwell that Eric referenced. So those are directly impacting that line.

This is actually Eric Morgan on for Brandon. I just wanted to ask another one about mix. I appreciate the detail on the impact to yields, but I was just curious if you could speak to any effects on margins just because with coal being down, big drag on volumes right now in international intermodal as well. Should we be thinking these sort of mix swings helped to drive the strong OR in the quarter? Or is it really just an RPU impact?

Yes. Thanks for that question. So mix does help on the RPU. And when we think about mix, there is some different mix in terms of the cost profile that's behind that. Our opportunity and our job is to improve the profitability of every line of business that we have. And so we are very proud of our manifest franchise. That's really our sweet spot for sure. But as Eric talked, intermodal, grain, coal, those are very profitable businesses for us as well to the extent that we can drive greater train length, So -- I'm not going to say we're totally agnostic, but we want to grow, and we want to grow across all lines of business. And so I think if you see us do that, you're going to like the margins that come from them.

You bet. And just to sort of -- why don't I summarize the way I look at the quarter and what we see moving forward? First of all, if you look -- if you take a look at our results, our industrial, and that's what I love about Union Pacific is our industrial originations, the Mexico product that is non-intermodal, which gives us a different level of return and price capability, is strong. And that's what we want to see. And that was -- that's what helped us in the first quarter, and I can't see that changing, except I just don't know where the macro items are going to be in the short term in the U.S.

Yes. Thanks for the question. On the near-shoring piece, it's real. You've seen the amount of investments that's there. We've got a strong commercial presence that's there, and you look at the overall rail, I'm talking the rail industry market share into and out of Mexico, is still relatively low if you put it in the mid-teens or so.

You bet, Tom. So let me start with the purchased services. So I think I did say that the one-time item there accounted for about half of the year-over-year decrease. So you should set that aside when you're thinking about rolling that forward. But again, as you heard me talk on another question, we still obviously think we have opportunities there.

Yes. I mean, obviously, if there's a significant change up or down from a volume perspective, that can have an impact, but I think we feel like we're in a pretty good place right now.

It's a great way to look at it, Tom, in the short term, you'll see in the next few quarters. But the challenge, and one that we know that we have to tackle, is we have wage inflation. You deal with that absolutely, and you have a great service product and you price properly. I think we're doing the right things there so that we don't impact our customers to the point where they can't win in the marketplace.

Bascome, it's a great question. And did I like to hear that? Absolutely. But because I think we're in an industry where we provide for the price that we charge very competitive and we beat most modes of transportation. So I think you need to be smart on how you price, and I think you need to make sure that we provide the service for that price that we sold.

Yes. I'll let Kenny talk -- take that coal question. But you're hearing it right. We're putting a lot of pressure on Kenny and the team to go out there and deliver the price, and they're very much stepping up to that and are taking on that challenge and being aggressive in the marketplace. Obviously, we improved our margins in the quarter. So the combination of our volume, which was down a little bit, but price and productivity is what's driving the margin improvement. I can't say that we're accretive yet from just a pure price inflation standpoint, but that absolutely is the goal. We are though exceeding, just the dollars are exceeding the inflation dollars. We're still very confident of that. Kenny?

Yes. I just want to reiterate what Jennifer said, we'll exceed our inflationary dollars. On this coal question that you have, we're looking at the same things. You're looking at in terms of the natural gas futures, and we're talking to our customers, similar to my comments around domestic intermodal. Yes, I think we're at the trough levels, when they will come up is yet to be seen. They're still depressed. We'll see if we get some seasonal lift here going into the spring and the summer. I want a hot, muggy summer so we can move more business. But if that doesn't happen, we'll see what Eric and the team to do for us to efficiently move the coal business. Thank you for the question.

I'm telling you, and I have to jump in on this one here, Kenny and team and everybody, coal is what it is, and I said it in my prepared comments on purpose. We have other markets that are going to take care of that coal business. It's tough to replace the number of the trains that we originate, but we used to originate a heck of a lot more than we do today, and we need to be able to grow it. So we can hope, and I'm not into hope. I'm into, let's go out there, deliver, have the right processes, have the right things possible, and we go deliver and we win.

It's a great question. I think it's -- when I came back to work, a lot of people thought that the only thing I'd concentrate is on operations, and I have been spending some time there. But I have spent a lot of time speaking to customers. I did it the first week I was on the job. I've followed up with them. I've gone to meetings when we bring them in, our Industrial, our Bulk, our Premium business.

Yes. If you look at it, so far this year, our face-to-face meetings, the strong customer engagement strategies. We have a lot more, significantly more contacts with customers, and we're touching them in different ways. One of the unique strategies that we have as I'm looking at Eric, 1/3 of our meetings have an operating leader or a local operating person is there. And we're doing that to see how we can grow more business specifically. So strong customer engagement strategy at all levels, and we're going to keep at it. Thanks for the question.

Elliot, thanks for the question. So a few things here. Let's set aside the contract loss you referenced. It's been strong. International intermodal has been strong for us, a little bit of a pleasant surprise for us that we've been able to capitalize on it. We're seeing more IPI business or business that's going into our network increase by a few points. We are aware that there has been a small impact on the positive side because of some of the challenges with the Panama Canal. We'll see what happens if some of the BCOs are a little bit more concerned with any labor issues on the East Coast.

Walter, I appreciate the question. You have to think about it that 40% of the traffic that we either originate or receive starts somewhere else. So when you put that number in perspective, we can't be choosy and say that we'd rather partner with one Eastern railroad or one Canadian. I guess, I can't call CP or CN Canadian railroads anymore. I apologize to both of them, but international railroads. And what we need to do -- and all the short lines that we touch. The way I look at it is what is the best and the fastest and the quickest. So if we're all efficient, we all have good service, we all are smart in running a very fluid railroad that has buffer to be able to handle the ups and downs that naturally occur, Walter, we all win. So I don't have a preference.

Yes. Thanks for the question. You heard my comments around our petroleum markets and business development wins there. And it's a type of oil that we're moving that we're excited about, and it's moving right now domestically. We've seen some strength. Eric's team has been able to help us grow a little bit of that business and get as much of it as we can. So we don't see that kind of traditional crude by rail that we saw 10 years ago, but we're seeing another emerging commodity in the market that we're excited to be moving, and it's going great for us.

Rob, just let me -- if that was the last question, let me just summarize real quick because I think there's a few key points that I want to make sure that we highlight. One is, I think, the last 2 quarters have shown what's possible for this railroad. And that's really important to us is what's possible. We will have headwinds. We have a wage increase coming July 1. That's a headwind.