Union Pacific Corporation (UNP) Presents at Barclays 2023 Industrial Select Conference (Transcript)

Union Pacific Corporation (NYSE:UNP) Barclays 2023 Industrial Select Conference February 22, 2023 8:35 AM ET

Company Participants

Jennifer Hamann - CFO

Kenny Rocker - Chief Marketing Officer

Conference Call Participants

Brandon Oglenski - Barclays

Brandon Oglenski

Again, I’m Brandon Oglenski, airline and transport analyst. Welcome to Barclays Industrial Select Conference. Very happy on the second, back here to have Union Pacific joined by Jennifer Hamann, CFO; and all of you might remember, Jennifer when she was Head of IR. So I've been through the organization and Kenny Rocker, Chief Marketing Officer, very happy to have Kenny at our conference for the first time.

So I know we're going to ask a lot about railroading here, but if we can queue up the audience [Operator Instructions] So do you currently own UNP? Yes, overweight; two, market weight; three, underweight; for no. And then question number 2, what's your general bias towards Union Pacific right now, positive, negative and neutral? And the more that participate here, the better the data gets we'll share it with you. Unfortunately, we don't have a quicker for you guys.

Jennifer Hamann

That's all right.

Brandon Oglenski

And then question number 3, in your opinion, through cycle EPS growth for UNP will be above peers, in line with peers or below peers? All right. It looks like we got some folks who went over in the room. So Jennifer, I know you want to talk a little bit here about UNP and what's going on recently so -- thank you.

Jennifer Hamann

Well, first of all, thank you for having us here. Sunny California is a step above the Cold Nebraska right now. But I have to remind everyone that we will be making some forward-looking statements today. Of course, those statements are subject to risks and uncertainties. So please refer to our UP website and our SEC filings for more detail about those risk factors. So I know we'll get into some Q&A probably about current volumes, operations. So I just want to kind of touch on 2 things. And the first thing is looking back, which is probably what's generated some of the skeptics. We had challenges in 2022 relative to our service performance that impacted our volumes and it impacted our overall performance. And so for our management team, jobs, call it 1, 2 and 3 in 2022 and continuing 2023 is to restore that service product safely, reliably so that it can facilitate what we believe is the long-term story and the exciting part of the UP story that's going to drive long-term shareholder value. And that's our growth story.

And so if you think about our strategy, which is serve, grow, win together. Obviously, the base on that is service. So we know that service product is job 1, and we have to achieve that, but beyond that, our long-term target is to grow in excess of industrial production. If you look at the track record of Union Pacific, it hasn't been a growth track record. Although in 2021 and in 2022, we did grow volumes, but not in excess of industrial production. Now a couple of reasons there, Part of that was our operational performance, but there were also as you're all well aware, a number of global supply chain challenges. As those supply chain challenges are worked through and as our service product is improving, that's what gives us confidence that, that long-term ability to have that industrial production plus growth is there.

And we also have the great UP franchise. And I think we can't overlook that great franchise that we have to serve diverse markets that are growing. You think about the grain, you think about coal, soda ash across the top tier of our network, think about our significant length of haul from West Coast to the Mississippi, North and South, Canada and New Mexico. We are the only railroad with access to all 6 major border crossings into and out of Mexico. Right now, we move roughly 2/3 of the business that moves north of the border. You've got auto franchise, serve 5 auto plants, 40 distribution centers, I could go on, but I'll let me get into that a bit more.

And of course, in the great business development efforts that he and his team have put forth over the last few years, particularly in intermodal space with the marquee wins with Knight-Swift at Schneider. We're investing for that growth, $3.6 billion is what we're going to invest in 2023. And part of that investment is going certainly to have a safe and secure infrastructure. But part of it is for growth -- a good part of it is for growth in that intermodal space, where we're converting what had been some manifest charge into intermodal facilities that can take on some of that growth. And that's cracking kind of what I'll call long term not of moving business from the highway onto our railroad.

We know there's a huge opportunity there. It's always been there, as our service product improves, we can take advantage of that. And then layer on the ESG or the sustainability part of that, where a shipper can move 1 truckload into 1 container or on carload on the rail, and they immediately save 75% in terms of their greenhouse gas emissions. And we're not standing still. We're working to improve our ESG, our sustainability profile as well through locomotive modernizations, through -- we've got a climate action plan where we go through a lot of detail about what we're doing and then biofuel blends. so we increased our biofuel blends by almost -- point last year to 4.5%, and that's a key part of getting to our long-term sustainability targets.

So I put all those things together, and I think it's very much a winning formula at Union Pacific when you consider growth above industrial production plus a safe, reliable service product is going to allow us to deliver industry-leading operating ratio and industry-leading financials. Kenny?

Kenny Rocker

Yes. Thanks, Brandon. Appreciate being here, warm here as Jennifer mentioned. First, I'll just talk about the market, and then I'll talk about some things we're doing commercially. First of all, when you look at the market, and we are today, Jennifer talked about it, a little bit slower than we expected because of weather and also a little bit of service challenges coming into the year. But I'll tell you, the demand is there, and this what I call undisputed demand. You look at our bulk business, our coal business, for example, even with the natural gas prices where they are today -- we're talking to all of our customers. There's quite a bit of demand there. The inventory levels are low. They need to replenish, that's an area for us that we can really capitalize on both domestically and export coal business that's out there.

Other parts of our bulk work like renewables and biofuels are also very strong. The demand is there. We're seeing more facilities come online. we've got a strong pipeline of customers that want to come on our network in that area. When I look at our industrial area, quite a bit of rock demand that's out there. In the Southeast portion of our network, we see that as strong demand. We're putting more resources up against that to capture all of that demand that's out there. And then on our metal side, our metals business has also been strong for us. And so we're excited about that. On the forest product side and paper side, that's a different story. We are seeing the softness in terms of how to start. We'll be watching that closely from a timing perspective as Springfield is really upon us and we'll get a good gauge on how that's going.

Then on our premium side of the business, we've got a number of things going on. On the auto side, it's an optimistic story for us. The demand is there. We're seeing that demand both on the finished vehicle side and the auto parts side, that demand has held up. And so that's a bright spot for us. International is interesting for us. I'd tell you, international is doing what we thought I'd be doing. If not as strong as it should be right now, so we're monitoring that. We're talking to our customers. They believe that, that could turn around as we look at the back half of the year, call it, the summertime.

And then we are seeing a little bit of overall general softness on the domestic side before, we excited about the fact that we've integrated and onboarding Schneider. So those are the markets. And that's how we look at the market and really excited about our management team and our commercial team coming together to really drive a lot of the business that's coming off. So the markets all with the market on, we'll take advantage of it. But if you walk it down, I talked about our bulk unit that renewable diesel, the biofuels, we feel really good about our franchise and our ability to deliver into some of the end markets, our ability potentially get a couple of moves out of it. So moving it in at an intermediate and then moving in the final mile into some of the Western areas.

And then on our industrial side, we've got some wins on the metals side with -- metals business that's helping us as we talk about outpacing industrial production. And again, on the premium side, Jennifer mentioned it, we're really excited about where we're going with our premium business. If you look at domestic intermodal, for example, we feel really encouraged by the stable customers that we have, including our AMP UMAX. We've invested more in chassis. We've invested on GPS in that fleet -- if you look at from last year to same for next year ,we've added $1.5 million less increased our rent capacity by 20%. So just a really bullish outlook from us and we're excited about it.

Question-and-Answer Session

Q - Brandon Oglenski

Kenny and Jennifer, thank you so much of that. But unfortunately, I'm sure everyone who looks at the news feed sees pictures of derailment that obviously, we don't want those to happen, but it is a piece of the business. So do you guys see anything coming from all the attention from a regulatory or political or policy standpoint, given all the current events.

Jennifer Hamann

Yes. So first, let me say the derailment in Ohio was extremely unfortunate and the impact that it's had to that community is something that's obviously getting a lot of attention, and I'm sure that the NS is going to do the right thing by the community. I mean that's something that we take very seriously as railroads. One of our key stakeholders that you've heard us talk about for a long time is the community. And that's because we run through them, our employees live in them, and it's a vital part of our infrastructure. I think the first thing to say with regards to it is I think we need to find out what caused the accident first.

I know the accident investigation is still underway. And then from that, make reason judgments about how do you best prevent something like that from happening again. I think you're well aware, we spend millions every year in terms of -- billions in terms of investing in our infrastructure for safety. And then over and above that, when you think about the inspections that we do, the maintenance that we do on the track on our freight cars, on the freight cars of our customers. We take it very seriously in the time that we spend training with our employees and emphasize that not just with our employees, but again, with the community because we do recognize that even though transporting on rails is the safest way to transport some of these very hazardous commodities, accidents can unfortunately still happen.

Brandon Oglenski

Well, I appreciate that. And I guess, with the view this year volume above industrial production, I think that -- I'd love to hear how this has changed because I think for years, a fair criticism of the UP, which was you got a very good margin improvement, good pricing outcomes, good mix, but not a lot of growth. So what is driving this change and shift in the outlook for volume?

Kenny Rocker

Well, for one, I'll hit on a number of things. Our mind that is different in the standpoint of investing for that growth and put enough dollars to support it, which is essentially what you need, depending -- results of what markets you're talking about. We're doing that across the board if you look at that on our bulk business, for example, the grain reload, the Ag reload that we have supports our bulk business but it also supports our intermodal business on the international side investment side Dallas to Dock that supports our industrial business on the plastic side, but also supports our international intermodal business.

We've changed the way we incentivize our commercial teams, so they're driven to go out there and win the business. A part of that session plan also built around price and so they need to make sure that they -- we've got market pricing in there. So cultural and a mindset change is really there, and that's been in place now for a couple few years. We're excited about our franchise. We feel like there are some emerging markets as we're staying close to our customers that have growth out of catapults.

If you look at the petrochem business, in our plastic business, we've got just a fabulous footprint there, and we feel great about the wins that we have there. Another emerging market with renewable diesel in the biofuels. We feel great about that franchise and the investments that we're making and the wins that we have there. And again, if you look at just kind of across the board, the intermodal space. I talked about what we're doing on the international intermodal side. And then in my opening comments, I talked about the domestic piece and what we're doing there. We've got the wins and the investments there, to be stickier with the customer. So very deliberate, very pointed, very focused and I feel good about where we're headed.

Jennifer Hamann

And I would say what really supports that is the fact that we have a very efficient cost structure. And we took a little bit of a step back last year, but it's that basis of a very efficient cost structure that puts Kenny and his team in the place to be able to go out there and compete in markets. And in some cases in markets that we weren't previously competitive because we've made a structural change in our cost structure, we're able to go out and meet our profitability targets and win new business.

Brandon Oglenski

Okay. Appreciate that. And can we focus on intermodal for a second because I think your volumes are roughly flat even with those new business wins. So a couple of things I want to touch on. First, international, I think, has been very soft. So imports have been lower into the U.S. Do you see inventory destocking happening with your customer base? And is there a view that, that could actually improve throughout the year? And then I'll ask about the onboarding the new business?

Kenny Rocker

Sure. Yes. We do see that as a situation that will improve as we move throughout the year. Clearly, we know that there is quite a few of inventory that's still out there. And in some cases, we are hearing that it's coming down, but it may not be the right product, right? So you may have a lot of this product and a little bit of that. We think that, that will smooth out, talking to our customers the time and it's really, I call it just a back half of the year. That's encouraging to us. And it's no matter who we're talking to, whether it's the end consumers or some of the international carriers that we speak to directly. That theme is pretty consistent. So that's a positive for us.

Brandon Oglenski

And then can you talk about the Knight-Swift business that you brought on last year and the Schneider business that's coming on board this year. How is that process going?

Kenny Rocker

Yes. So we've integrated both of those new carriers onto our network and candidly really supported business for all of our domestic base has made it all there. And when I say that, we -- tech investments up against the lands. So we're going to make it were a driver experience is something that all benefit from. You literally get that truck in there. They don't have to punch in any kiosks or flash a bag, they just drive to. That's going to help our entire network. For those 2 carriers, I think they're enjoying it. We'd like the fact that it provides our customers optionality in the marketplace. And talked about UP and EMP -- UMAX and EMP. But the same thing is true here, Brandon, a lot of optionality for our customers with those other 3 carriers.

But integration has gone well. I think they would tell you the same thing and we're excited to have them on the network okay? And I think you brought up something else. And yes, it's been flat. But if I look at it, probably in a worse scenario if we didn't have those two from a volume perspective.

Brandon Oglenski

Right. And Jennifer, I think you did mention -- and Kenny as well that there's been some service challenges that have lingered into 2023. Can you talk about what those challenges are and how you're addressing them?

Jennifer Hamann

Yes. So I think you're aware that the kind of the genesis of our challenges last year were in the crew base. And so we were very aggressive in our hiring last year, onboarding, I think, over 1,400 new employees. Right now, we've got about 600 employees that are still in the training pipeline. And we've onboarded, I think, another 100 or so here in 2023. And you've heard us talk about the fact that certainly, those new hires have put us in a much, much better place in terms of stability within our network. And I think you're seeing that in our metrics, where we have still had some challenges is across the northern tier of our network where it's just been very difficult to hire. Now we have been able to, over the course of 2022 and here in the first part of 2023, be able to put more what we call borrow outs into those territories.

So think of taking a crew from Houston and putting them into North Platte for a period of time. We've got, I think, right now, close to 280 -- almost 300 borrow outs up in that northern tier. And that really is to support the service product and move more volumes because that's that critical bulk core that Kenny talked about where we know there's demand that we're missing there. So you've seen some setbacks with weather. Unfortunately, this is the time of year on our network and everyone's network where you're subject to some more variability from other nature, and we've certainly seen that.

Sometimes in the case of heavy snowfalls. The more impactful has been very cold temperatures because everything moves slower in the cold, whether you're a human locomotive. It just is a more difficult operating environment. But I think we've got -- I think the groundhog saw his shadow, so I think we've got more weeks of winter, but we're a couple where with that and we get into March, you should see some of those things clear up. And I think most telling is how quickly you've seen us rebound from some of those impactful of that.

Brandon Oglenski

And I guess, longer term, too, because it feels like current industry for almost 2 decades that when volumes go up inevitably, there's always service challenges, not necessarily specific to the UP. But I think it's a fair critique of the industry. What can we do going forward to maybe improve and get more consistent on outcomes?

Jennifer Hamann

Yes. I think it's a variety of things. I think it's our transportation plan and taking variability out of that. I think when you think about running a scheduled railroad and reducing car handlings, being very deliberate with the transportation plan, that's something that can help remove those variability events or at least reduce them. You think about making sure that you've got healthy crew boards and that you're appropriately staffed you've got locomotive resources at the reading, which we do, and then the capital investment in the infrastructure.

We know where on our network. Historically, we've had flooding issues. So we have a very deliberate program that goes out there raises the tracker does something to change the grade so that we don't have repeat events in those areas and kind of the list goes on from there. So there's a number of fronts that we try to attack that on because we know that, that variability is something that impacts our service. So it's 2 things, try to reduce the variability, but then make sure you appropriately resource so that you can recover from the variability as quickly as possible.

Brandon Oglenski

Okay. And speaking of cash investments, if we can queue up audience question #4. And again, the keypad here. In your opinion, what should Union Pacific do with excess cash? go ahead and poll the audience. It's 1, bolt-on M&A, larger M&A, share repurchases, dividends, debt pay down or internal investment?

And then question #5. In your opinion, on what multiple of 2023 earnings should Union Pacific trade? That's an encouraging range, I think. And then #6, what do you see as the most significant investment issue for Union Pacific, core growth, margin performance, capital deployment or execution? Thank you all for participating.

And then core growth, so interesting. And then #7 does ESG play an active role in your investment decision relating to Union Pacific. One is, yes, it's a positive factor; two, yes, a negative factor or no ESG does not play a role. Appreciate everyone doing this. And I guess speaking of core growth as the biggest issue here. Kenny, I think you brought it up and Jennifer talked about incremental investments. Is Union Pacific willing to take more risk now? Is that what I'm hearing maybe as opposed to the past?

Jennifer Hamann

I don't know if it's taking more risk, Brandon, I think it is recognizing again that we've made tremendous strides in our cost structure. And you know these 3 kind of pillars to our performance. It's volume, price and productivity. And where you have seen of our performance gains over the last many years come from has been the productivity and the price lever, less so on volume. And so as you get to a point, and certainly, we're not done yet. We know we have opportunities to further gain productivity. And Kenny and his team are very focused on making sure we're pricing into the market in yielding those price dollars that exceed inflation dollars, but volume can play a bigger role. And we have capacity on our network, and we have demand for the business.

Kenny Rocker

Yes. I mean you look at the opportunities that are out in front of us, and we're willing to invest -- you look at our transload facility down in Phoenix, that's just been a great acquisition for us. Another transload in Southern California, a great acquisition for us. Again, that transloads on the California for our carload business is right next to Inland Empire has for domestic intermodal business. So again, we're doubling down on those investments to really grow the business.

Brandon Oglenski

Okay. And Jennifer, this year, I think, provided maybe a little bit less guidance than in the past. And I know maybe operating ratio is not the central metric that everyone should be focused on, but a lot of investors have focused on the OR. Can you talk about opportunities to actually drive improvement this year and some of the headwinds that you've had recently?

Jennifer Hamann

Yes. I mean I think the reason you hear a lot of the railroads talk about operating ratio, it's an easy way to compare us across businesses. But it's an outcome of our performance. And so when I think about the different levers, it really goes back to the volumes that Kenny and his team are winning and that we're moving across our network, the price that's winning those volumes and that's attracting the business to us and then is how efficiently we handle it. Those are the key levers that are going to drive it. And we have work streams and activities against each of those to make sure that we're trying to get as much from those as fast as we can as to the greatest degree that we can. And so that's how we look at that. There have been headwinds certainly our service has been a headwind. Inflation has been a much bigger headwind than we imagined a few years ago.

It's going to continue to be a headwind here in 2023. We said about 4%. And so -- and then you've got a little bit of economic questions, I guess, if you will, coming into 2023 in terms of what's the year going to be like? I know some people -- we've got the tail end of the C1, the recession word was mentioned. Certainly, when you look at our domestic intermodal volumes, absent some of our wins, that's pretty weak. And that's where you tend to see some of that. We're seeing greater truck capacity. So it's a little bit of a cloudy or crystal ball maybe coming into 2023 than other years, but we know the things and the objectives that are in front of us and that's where the team is focused.

Brandon Oglenski

What I think you guys did share in your conference call for the fourth quarter that the goal is always to drive improvement on the OR. Is that right?

Jennifer Hamann

Yes. And I mean, we don't see that we're at a place where we're content with our performance certainly and that we have those opportunities. And so our guide for the year was operating ratio improvement, and that was off of our 60.1 which is -- was our reported OR.

Brandon Oglenski

Yes. And by the way, sorry, I know he's only a few minutes, but there's any audience questions, just raise your hand, we'll get you a mic. And then -- sorry, do we have one here?

Unidentified Analyst

Yes. I think you talked about the macro a minute ago, but could you expand on the clouds kind of talk about how you see the real-time data coming out.

Jennifer Hamann

Do you want to talk to the economy, Kenny?

Kenny Rocker

Yes. I'd open it up a little bit. I'm actually in the camp of saying, hey, in the near term, -- it is -- we are seeing a little general softness here. Based on just talking to customers, I think the macroeconomic indicators should improve, call it sequentially, but definitely in the back half. When I say that, I'm referring to a lot of the consumer spending. So the spaces like the intermodal space, some of the areas like housing, which may take a little bit longer. So long term, those things are always going to improve. But what you also are hearing me say is that what's in our control as a management team and as a commercial team, we're just being very bullish out there with the wins. And we're winning across all those 3 business groups that we have that I mentioned to you, whether it's a renewable and the biofuels, a little bit of growth from our sees on the food and beverage and bulk.

On the industrial side, with the metals, petrochem business, housing [indiscernible], that will get a little bit better too. Rock is there, that's structural undisputed demand. And then on our premium side, I mean, we have just a pretty strong franchise as you look at auto parts network going north and south and then also our finished vehicles franchise. So I'm pretty bullish on everything that we can control. The macroeconomic and piece, we'll see how that plays out. And it's going to be a little bit of soft here in the next several months.

Brandon Oglenski

Well, we only have -- I want to hit on 2 topics. One being the opportunity and maybe the challenges of Mexico, especially with CPE and KCS potentially closing. And then more broadly, pricing because you did have a lot of labor inflation, but everyone is asking about deflation, supply chain was a source of a lot of challenges for broader economy. So how do you see those dynamics playing out here?

Kenny Rocker

P Yes. So humbly speaking here, we've got a better route structure. I mean we can get inside and traverse north and south better than a primary competitor that's coming on the line. The topography is better for us to traverse. We've got very strong relationships commercially with those customers that our existing and those customers that are growing. And we look to provide our customers with optionality, as we have several different gateways that we can access in the Mexico versus ship one. So we feel good about the opportunity to compete and keep growing that market space for us.

Jennifer Hamann

And our only as there is with the STB and this is consistent with our filings is that it's a level playing field in terms of that competition.

Brandon Oglenski

Got it. And then Kenny, as we close out here, just a comment on pricing.

Kenny Rocker

Yes. I mean, clearly, Jennifer and I and the management team, we're spending a lot of time assessing a lot of the inflationary pressures that are out there. We see it very clearly. We're talking to our customers about it. I think our commercial team is doing a great job articulating why market pricing is aligned with these inflationary pressures. -- and a lot of the capital that we're -- that we talked about into the growth to make sure that we can have market price products that are out there. So it's a very deliberate conversation that we're having with our customers as these contracts renew. Candidly, they see it in their own space to their experiencing the same thing that we are. And I'd say that there is not a lot of surprises there.

Brandon Oglenski

Well, we could go on and on, but I think the time is up. So Kenny and Jennifer, thank you so much for attending. Appreciate it.

Jennifer Hamann

Thank you, Brandon.