Union Pacific

Union Pacific reported record revenues thanks to higher prices and surcharges

Union Pacific reporter operating income growth of 13% thanks to fuel surcharges and “strong core pricing gains.”“LANCE M. FRITZ, CEO, CHAIRMAN, AND PRESIDENT, UNION PACIFIC CORPORATION: Our adjusted third quarter operating ratio of 58.2% is 190 basis points higher than 2021. Costs related to higher inflation and ongoing network inefficiencies were offset by fuel surcharge revenue, volume growth and strong core pricing gains to produce adjusted operating income growth of 13%. We made real progress during the quarter to increase network fluidity and better meet customer demand. And as you’ll hear from the team, we’re continuing to take steps in the fourth quarter to better meet that demand and drive costs from the network. While the year hasn’t played out as originally planned, our volumes have outpaced our peers, demonstrating the growth mindset that we’re instilling within our organization.” (Q3 2022 Union Pacific Corp Earnings Call, 10/20/2022)

Union Pacific reported that revenue was up for most of its business thanks to “strong pricing gains” and fuel surcharges. “KENYATTA G. ROCKER, EVP OF MARKETING & SALES – UNION PACIFIC RAILROAD COMPANY, UNION PACIFIC CORPORATION: Thank you, Lance, and good morning. Third quarter volume was up 3% compared to a year ago as carloads increased across all 3 of our business segments. Although overall volume was up, we undoubtedly had less demand on the table as we continue to improve service across the network. Freight revenue was up 18% driven by higher fuel surcharges and strong pricing gains. Let’s take a closer look at each of these business groups. Starting with bulk, revenue for the quarter was up 16% compared to last year, driven by a 14% increase in average revenue per car, reflecting higher fuel surcharges and solid core pricing gains. Volume was up 2% year-over-year. Coal and renewable carloads grew 5% year-over-year driven by continued favorable natural gas prices and 2 contract wins that started on January 1. Grain and grain products volume was up 3% with strong domestic feed grain and increased biofuel shipments for renewable diesel. ” (Q3 2022 Union Pacific Corp Earnings Call, 10/20/2022)

Union Pacific told analysts that “Operating revenue, operating income, net income and earnings per share were all quarterly records.”JENNIFER L. HAMANN, EVP AND CFO, UNION PACIFIC CORPORATION: Third quarter adjusted operating income totaled $2.7 billion, a 13% increase versus 2021. Other income increased $86 million driven by higher real estate income, including a $35 million gain on sale and pension benefit. Income tax expense increased 13% as a result of higher pretax income, partially offset by corporate income tax rate reductions in 3 of our operating states. As a result of those changes, we now expect our full year tax rate to be around 23%. Adjusted net income of $2 billion increased 18% versus 2021 and adjusted earnings per share was up 24% to $3.19. Operating revenue, operating income, net income and earnings per share were all quarterly records. (Q3 2022 Union Pacific Corp Earnings Call, 10/20/2022)

Union Pacific Executive: “we’re going to cover inflation with price.” “KENYATTA G. ROCKER: Yes. I mean, we’ve said it, as a management team, we’re going to cover inflation with price. But just to get a little granular here, our commercial leaders have done a really good job sitting now with customers, making adjustments to the rates real time, again, real-time discussions to reflect the inflationary environment that we’re seeing to date. And so we’re articulating the why behind the need for those adjustments with rates, especially in light of the capital that we’re expending and then also the fact that sequentially our service is improving.” (Q3 2022 Union Pacific Corp Earnings Call, 10/20/2022)

Union Pacific used that revenue to funnel billions back to investors, while additional labor costs only grew $114 million

Union Pacific funneled $7.9 billion to its shareholders through stock buy backs and dividends so far in 2022.“JENNIFER L. HAMANN, EVP AND CFO, UNION PACIFIC CORPORATION: Year-to-date, shareholders have received $7.9 billion through dividends and share repurchases. This level of cash returns demonstrates our firm commitment to rewarding shareholders with strong returns. Related to share repurchases, we now expect to buy back roughly $6.5 billion in 2022. Although we repurchased shares at a strong pace in the third quarter and expect that to continue for the remainder of the year, we have been impacted by higher-than-anticipated inflationary pressures and service costs.” (Q3 2022 Union Pacific Corp Earnings Call, 10/20/2022)

The cost of new labor agreements for Union Pacific was only $114 million. “JEFFREY ASHER KAUFFMAN, PRINCIPAL, VERTICAL RESEARCH PARTNERS, LLC: Jen, just a quick question. That $114 million, does that represent an accrual on all outstanding labor contracts, including the ones not yet ratified? Or is that only for the agreements that have been ratified to this point? JENNIFER L. HAMANN: Yes. Thanks for that clarification. It is for all of the agreements, both ratified and tentative at this point because those are the deals that are literally on the table and that are waiting ratification. So that’s what we know to be able to take the accrual for.” (Q3 2022 Union Pacific Corp Earnings Call, 10/20/2022)

Union Pacific admitted a huge portion of their employees were forced to work away from home for a week at a time

A Union Pacific executive admitted 40% of their BMWE unionized employees work away from home for 7 days at a time before getting to return.“LANCE M. FRITZ: A couple of things to note. We’ve got an agreed-upon status quo or maintained of status quo with BMWED while we’re negotiating out what they take back to their membership, and one of the reasons, maybe we think the predominant reason for that original vote not to be ratified is that the PEB recommended both wages. And they also, for the BMWE, recommended a change in their compensation for travel to the work site because about 40%, sometimes more of that work team goes to away-from-home work sites, works for 7 days and then comes back. So a change in that travel allowance and a change in the per diem while they’re away from home. That negotiation on UP property just finished up last week. And so as the members were ratifying the vote, there was a section of it that they really didn’t have clarity to. We think that clarity makes that vote more straightforward. And so that’s part of the negotiation that’s happening. It is exactly what’s going to be embedded in the agreement when it goes back out for ratification. Ultimately, I remain confident that we’re going to get our temporary agreements ratified and be able to avoid a strike. That’s still a possibility, but I don’t think it’s a probability.” (Q3 2022 Union Pacific Corp Earnings Call, 10/20/2022)

Union Pacific reported billions in revenue and billions in buybacks and dividends

Union Pacific reported Q2 operating revenue of $6.3 billion, 14% higher than 2021, despite lower volume. “JENNIFER L. HAMANN, EVP AND CFO, UNION PACIFIC CORPORATION: Looking now at our second quarter income statement on Slide 15, operating revenue totaled $6.3 billion, up 14% versus 2021 on a 1% year-over-year volume decline. Operating expense increased 25% to $3.8 billion. Excluding the impact of higher fuel prices, expenses were up 11% in the quarter. Second quarter operating income was $2.5 billion, a 1% increase versus last year. Interest expense increased 12% compared to 2021, reflecting higher debt levels. Income tax decreased 2% due to the Nebraska corporate tax rate reduction I just mentioned and contributing to lower second quarter effective tax rate.”(Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific’s net income increased by 2% to $1.8 billion for the second quarter. “JENNIFER L. HAMANN, EVP AND CFO, UNION PACIFIC CORPORATION: Net income of $1.8 billion increased 2% versus 2021, which, when combined with the share repurchases, resulted in earnings per share, up 8% to $2.93. Looking more closely at second quarter revenue, Slide 16 provides a breakdown of our freight revenue, which totaled $5.8 billion, up 14% versus 2021. Lower year-over-year volume reduced revenue 150 basis points. Fuel surcharge revenue increased freight revenue, 11.25% points, reflecting the rising diesel prices. Total fuel surcharge revenue was $976 million in the quarter. Strong pricing gains combined with the positive business mix drove 425 basis points of freight revenue growth.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific reported funneling $5 billion to shareholders in the first half of 2022 through dividends and buybacks. “JENNIFER L. HAMANN, EVP AND CFO, UNION PACIFIC CORPORATION: Capital spending year-to-date is up 38% versus 2021, which reflects both a more normalized spend trajectory and an increased capital budget for 2022. Year-to-date, we returned $5 billion to shareholders through dividends and share repurchases. This includes a 10% dividend payout increase announced in May, the third such increase in a little over a year’s time. And we finished the second quarter with an adjusted debt-to-EBITDA ratio of 2.8x as we continue to maintain a strong investment-grade credit rating.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific’s CFO described the second quarter as worse than they expected but “ we remain committed to leading the industry with our long-term dividend payout ratio and share repurchases on par with 2021.” “JENNIFER L. HAMANN, EVP AND CFO, UNION PACIFIC CORPORATION: As it relates to our operating ratio, the first half performance makes achievement of year-over-year improvement unlikely. However, we do expect year-over-year improvement in the second half of 2022 and a full year operating ratio around 58%. While our 2022 results won’t match our view coming into the year, we remain committed to our goal of ultimately achieving a 55% operating ratio. We’re also revising our guidance for incremental margins, which we now expect to be around 50% for the back half of the year. Beyond 2022, we still expect to achieve our longer-term guidance of mid- to upper 60% incremental margins. Our capital allocation plans remain unchanged. Capital spending at $3.3 billion for the year, well within our long-term guidance of below 15% of revenue and we remain committed to leading the industry with our long-term dividend payout ratio and share repurchases on par with 2021.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific reportedly cut staff by a third in recent years and told analysts it would be ready to cut again in a downturn

Union Pacific’s CEO said the company had cut one-third of rail staff since PSR reforms in 2018, and now “ we’ve got to do some other unique and creative things with our labor unions in order to make our crews more available and more productive without them working harder.” “LANCE M. FRITZ, Union Pacific Corporation – CEO, Chairman, and President: Yes, Scott, let me start first by saying emphatically that PSR is not the cause of our problems in the second quarter. When you look at our pre-transformation to today, the — all of that headcount change is because we took work out of the network. We run 1/3 fewer trains, which require 1/3 fewer locomotives and also 1/3 fewer people running the trains and maintaining the locomotives. So we took work out of the network that didn’t need to be there because we were touching cars more than we needed to, and we had too many special commodity unit trains running around the network. So we transformed the network, took that out, and we were in fine shape. We’re the same railroad that we were in 2021 or 2020, I mean — but here’s where we got into trouble. We ran the network tight, and we did not recognize the stack up of risks that were in front of us with COVID continuing to impact crew availability, growth coming on and normal weather events, when you run tight, you just don’t have a lot of opportunity to recover quickly. We got into trouble and inventory grew on us, and we had to take some pretty significant measures to fix that, and we did in the second quarter. When you look at what we need to do different going forward, it’s not thousands-of-employees different. It’s hundreds and in different ways. We got to get our odd sports back. We’ve got to run our boards less tight than we were running them for a while. And we’ve got to do some other unique and creative things with our labor unions in order to make our crews more available and more productive without them working harder. And that can be done. We see a clear path for all of that.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

When asked about the possibility of an economic downturn and labor cuts, Union Pacific’s CEO said “we’d adjust very quickly to it.” “JAIRAM NATHAN, RESEARCH ANALYST, DAIWA SECURITIES CO. LTD., RESEARCH DIVISION: I just wanted to follow up on a few questions that you already answered regarding recessionary and plans there. So I think in the past, your interest figure has been pretty nimble in cutting costs in the event of a volume decline. But do you foresee any changes to how you can adjust your labor given the difficulties that you had this year? To get crew availability up, do you see a different approach in the event of a recession or a volume downturn?LANCE M. FRITZ, Union Pacific Corporation – CEO, Chairman, and President: Yes. Jairam, fundamentally, the answer is no. We still — if there were a catastrophic downturn in the industrial economy, the goods economy, we’d adjust very quickly to it. Now having said that, on the margin, like we talked about very early in the call, we would be much more thoughtful about where and how much and how we would make those employees available to us when volume returned. So you’d probably see marginally some different behavior but fundamentally, we have the ability, and it’s proven to adjust our business to whatever the environment is.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific admitted staff had not seen raises in years while praising Biden’s Emergency Board

Union Pacific’s CEO said he hoped a labor agreement “takes off the table all the anxiety and conflict of a labor force that hasn’t seen a raise in 2.5 or 3 years.” “SCOTT H. GROUP, Analyst: Okay. Very helpful. And just, Lance, your comments were helpful. Do you think getting a labor deal done in the next couple of months is going to be a help here? LANCE M. FRITZ, Union Pacific Corporation – CEO, Chairman, and President: Yes. What’s going to be a help about that, Scott, is it takes off the table all the anxiety and conflict of a labor force that hasn’t seen a raise in 2.5 or 3 years. And you put that to bed and then we can get busy on deals that we care about on property, which are really, really important to us.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific’s CEO told analysts he thought the PEB “appear to be knowledgeable and skilled as arbitrators” and hoped they would agree with the company’s proposal on wages. “LANCE M. FRITZ, Union Pacific Corporation – CEO, Chairman, and President: Jennifer, let me start by talking about wage increases and what we could see and then you can kind of talk about how we’ve accrued, et cetera. So, Bascome, the PEB is going to listen to both sides and then come up with what they think is a reasonable approach to wages. Recall that our package is going to include ’20, ’21, ’22, ’23 and ’24. And in ’20 and ’21, the markets were tough for wages, right? In 2020, wage growth was probably near 0. 2021, it accelerated. It’s accelerating in ’22. And I’d expect it’s probably going to be relatively strong in ’23 before dropping back down. So we’ve got a good beat on that. We’ve got a proposal that we’ll be talking to the PEB that reflects that. And I think if the PEB is reasonable, and they appear to be knowledgeable and skilled as arbitrators, we’ll get to a place that we’re comfortable with.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific’s CEO said conductor-less trains would be “better for the conductors’ quality of life”

Union Pacific’s CEO said he hoped Congress would not get involved in crew size negotiations and that he felt “redeploying the conductor from the cab to the ground” was “better for the conductors’ quality of life.” “RAVI SHANKER, analyst: Very helpful. And just kind of one quick follow-up, Lance. I think there’s some chatter about Congress trying to mandate 1-person crews for the railroads. Kind of any comment on that? LANCE M. FRITZ, Union Pacific Corporation – CEO, Chairman, and President: Yes. So I don’t know if Congress’ getting involved. They frequently get asked to get involved in the crew-size discussion. Our role right now inside of national negotiation is to make sure that either the PEB addresses the question or they address the question by allowing the railroads and labor to continue to negotiate, which we are right now with our unions that are affected on redeploying the conductor from the cab to the ground. We think it’s better for the conductors’ quality of life. There’ll be great jobs. And of course, there is an efficiency opportunity there. And so we’re going to keep pursuing that. So yes, stay tuned. I think the next big thing that will happen is the STB is pending a rule that they’ve been working on regarding how many people have to be in the cab of locomotive. And we’ve got our antenna up on that.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific admitted poor scheduling and deployment were leading to employee friction

Union Pacific said it was asking employees “to see if they actually want to go work in other locations than they may have otherwise been hired on.” “ERIC J. GEHRINGER, Union Pacific Railroad Company Inc. – EVP of Operations: Yes, Brian, I’ll start. Thanks for that question. As you know, our goal this year in total is to bring on 1,400 transportation employees. And as I said in my prepared comments, we’re well on our way to do that. Specific to your comment around, are you seeing increased retention issues or washouts, we’re really not. Both of our rates would be in line with our historical performance. Now, we’ve done a number of different things around the hiring that’s helped to ensure that that’s the case. When we went back and you look at the beginning of the year with some of the changes we made to our training program that in some cases, extended parts of it, that was to ensure that the quality of the training program was exactly what our employees needed. At the same time, even just in the last 2 weeks, we’ve offered up a new program where for our new hires, we’re actually engaging them to see if they actually want to go work in other locations than they may have otherwise been hired on. And that’s providing flexibility that historically we may not have. So we continue to challenge ourselves between the operating team and our workforce Resources Group to incentivize our new hires to stay with us. We want them to be the 30-year plus employees that we’ve got across the entire system.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific’s EVP admitted, “if you can take them from a relatively unscheduled process or unscheduled nonstandard schedule and move them to a more standard schedule year one, going to improve the retention of the employees you have now.” “ERIC J. GEHRINGER, Union Pacific Railroad Company Inc. – EVP of Operations: Now here’s what’s left, right? What’s left, Lance hit on part of it, certain jobs today, if you can take them from a relatively unscheduled process or unscheduled nonstandard schedule and move them to a more standard schedule year one, going to improve the retention of the employees you have now. And two, you’re going to offer up jobs that have been different than in the past and in doing so, you’re going to attract different groups of people that you may have been able to attract in the past. So that’s the work we have in front of us. Even just 2 weeks ago, we launched a new survey to all of our transportation employees to help them further help us understand quality of life on the job. So you’ll continue to see us focus on it. We are not struggling as much as maybe some other roads as you characterized it, but it’s still an opportunity we have to keep at the forefront of us.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

An analyst told Union Pacific “When I talk to the rail industry, people that are hiring, they say, this is Gen Z. They don’t want to work 5 days a week. They don’t want to be on call before going out in the field. ““JEFFREY ASHER KAUFFMAN, PRINCIPAL, VERTICAL RESEARCH PARTNERS, LLC: I appreciate you squeezing me in. It’s been a long call, so I’ll be quick. You noted that you had jumped on hiring and raising your T&E employee training a little sooner, I think, than some other rails. CSX was griping last night about how they’re having attrition issues after training. Norfolk just put a release this morning saying they’re raising pay to $25 an hour and adding incentives. When I talk to rail industry, people that are hiring, they say, this is Gen Z. They don’t want to work 5 days a week. They don’t want to be on call before going out in the field. Can you talk a little bit about how the job is changing? Or what you’ve done to be maybe a little more successful in hiring and retaining your employees than some of the stories we’re hearing?” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific repeatedly singled out Father’s Day and July 4th as impacting crew availability, suggesting employees wanting to spend time with families

Union Pacific’s EVP singled out Father’s Day and July 4th as holidays leading to service impacts due to “reduced crew availability.” “ERIC J. GEHRINGER, EVP OF OPERATIONS, UNION PACIFIC RAILROAD COMPANY INC.: Thanks, Kenny, and good morning. Beginning on Slide 9. As we discussed in April, we began the quarter with our service product in need of significant improvement. To recover the network and better serve our customers, we implemented decisive measures to reduce inventory levels and restore fluidity. The chart on Slide 9 shows the current state of operations. We hit a trough in April and have since made steady progress. While the improvement has not been a straight line because of continued crude challenges and isolated incidents, the team has stayed the course to build momentum and generate positive results. We experienced reduced crew availability from the Father’s Day and 4th of July holidays as we expected and planned for. We have, however, recovered from those holiday impacts and returned to our prior improvement trajectory. We continue to see the benefits of our hiring initiatives and feel confident in our ability to hire and train approximately 1,400 new transportation employees this year.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)

Union Pacific’s EVP emphasized “Father’s Day and 4th of July” as their “third and fourth most impactful holiday of the year” for crew availability. “ERIC J. GEHRINGER, Union Pacific Railroad Company Inc. – EVP of Operations: Yes. That’s exactly right. I mean when you think about car velocity and you think about service, they’re tied together. And so when we think about our biggest opportunity sitting right in front of us, it’s really about crew availability. And we’ve got some growing tailwinds. We’ve gotten through the third and fourth most impactful holiday of the year. Now that Father’s Day and 4th of July is behind us, we saw a sequential improvement month after month during the entire quarter in our recrew rate that generates additional crews for our use. And then, of course, we’ve got the hiring that I covered in my prepared comments that bring me a tremendous amount of confidence, especially because 400 of the 500 that are training will be available to us by the end of the third quarter. So all growing tailwinds to be able to increase velocity and deliver the service product that our customers expect.” (Q2 2022 Union Pacific Corp Earnings Call, 7/21/2022, via Nexis)