Former Chairman, President & Chief Executive Officer, Union Pacific Corporation
Union Pacific CEO on earnings: Hiring picture ‘very difficult’ in 2022
#UnionPacific #employees #yahoofinance
Union Pacific CEO Lance Fritz joins Yahoo Finance Live anchor Rachelle Akuffo to discuss earnings, increasing productivity and gross margins, hiring in rural areas, and investment in the U.S. rail network.
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About Lance Fritz
Lance Fritz, former Chairman, President, and CEO of Union Pacific, has discussed the company's operational and financial performance in several media appearances. In October 2022, Fritz stated that the company made "sequential improvement" in network fluidity from the second to third quarter, and he anticipated a return to normal operations in the fourth quarter. He attributed volume pullbacks to cooling consumer demand, particularly in domestic intermodal and parcel shipments, while noting strong demand in coal, grain, and some industrial segments. Fritz also addressed labor negotiations, saying he was "less comfortable" after the BMWED Maintenance of Way employees failed to ratify a contract, but he anticipated closing agreements by the end of the year. In 2023, Fritz described the hiring picture as "very difficult" in 2022, particularly in rural areas, and noted that Union Pacific was using hiring bonuses and a referral program to attract workers. He discussed the company's implementation of Precision Scheduled Railroading (PSR) to lower costs and improve the operating ratio. Regarding the regulatory environment, Fritz said the Surface Transportation Board (STB) had done "a very good job" of balancing its decisions with the health of the freight rail network. Earlier, in 2022, Fritz addressed supply chain disruptions, citing high import demand, a shortage of truck drivers and warehouse labor, and the impact of COVID-19. He also described organized train theft in the Los Angeles area as a "real problem," stating that the company was working with law enforcement and investing in security measures.
Transcript (11 segments)
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Rochelle0:00
Union Pacific also out but with a miss on estimates in its latest quarter, with higher expenses associated with inflation and network recovery weighing on revenue growth. The guidance for 2023 providing some light at the end of the tunnel, with full-year operating ratio expecting to improve and carloads to exceed industrial production. We'll hear what further insights Union Pacific CEO Lance Fritz has. Lance, good to have you on the show. So I first want to ask you about this because we were looking at the revenue growth, but then we saw what it's been offset by some of these challenges including operational inefficiencies, elevated operating expenses. What is the plan here to really turn that around and cut some of these costs?
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Lance Fritz0:41
Yeah, Rochelle. Well, first, thank you for hosting me and also thank you for recognizing that we did grow last year. We beat our markets, if you will, both in the fourth quarter and in the full year, and it generated positive revenue, record revenue. But to your point, what are we going to do to recover the productivity and generate improved margins going into next year? First and foremost, it's about making sure that we have crew availability where we need it. Our hiring pipeline is fully charged, and we're graduating about 150 to 200 conductors a month right now. That's the high pace that we exited the year last year, so that gives us confidence we're going to get the resources right. The current network is fluid. We exited last year and are currently performing at a car velocity and a trip plan compliance for our customers that indicates we're a pretty fluid railroad. Now, we're an outdoor network, so we're going to be impacted by things like winter storm Elliott at the tail end of December and other things that will occur throughout the year. But with our capital investment, with getting the resources right, and with a very agile and better operating performance, we're confident we're going to get margin improvement here.
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Rochelle1:55
And obviously there are a lot of macroeconomic issues weighing on all companies, but as you mentioned, things like winter weather are more specific to your industry, but also some tightness in the labor market. Tell us about the hiring picture and how that's impacting business.
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Lance Fritz2:08
Yeah, the hiring picture was very difficult through last year, and specifically in areas where we operate in a rural environment where the workforce is small and the unemployment rates are very low. That's areas like in the middle of Iowa, in the middle and western Nebraska, out into Wyoming, and even up into Minnesota. Those areas we've largely been able to hire recently and fill our classes, but through last year we were having a heck of a time. Now we're doing things like paying a $25,000 hiring bonus in certain spots. We're adjusting other aspects of the job. We've made sure our training produces a conductor that's fully capable and ready to work. And we've got a wonderful referral program where we ask our employees to refer people they know because great people know great people. And out of about 12,000 plus referrals last year, we generated over 12,200 job offers. So that's a heck of a way for us to fill our classes as well.
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Rochelle3:14
And certainly helps in a very tight labor market. I do want to look at another bright note in your earnings data there, the operating ratio, which is a measure of efficiency, hitting 61%. Now, obviously, this is above the 60 threshold that a lot of railroad companies were trying to get to since the pandemic. What do you attribute that to? And I know that that's something that you also plan to see improvement in this year, in the rest of this year. How do you plan to get there?
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Lance Fritz3:38
Yeah, so Rochelle, if you go back a handful of years, we implemented an operating system that's code word PSR, Precision Scheduled Railroading, in the industry. What it fundamentally means is we redesigned our network to take work out of the network that didn't need to happen. We were switching cars in areas they didn't need to be, and we were running trains at relatively small train lengths and more of them than we needed on the network. By doing that, we've fundamentally lowered our cost structure, which improved our operating ratio. At this point, a big step like that really isn't available. At this point, it's blocking and tackling: using locomotives more efficiently, being fluid, making sure crew availability is high so we can use our crews efficiently, and continuing to look for opportunities to keep adding cars to existing train networks, which is a very productive way to grow.
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Rochelle4:38
And Lance, I know you've been pushing for more innovation, and we know that you joined forces with RailPulse Coalition. What does that mean for how you grow the business from here, what the industry means, and even in terms of perhaps crew size?
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Lance Fritz4:50
Yeah, so Rochelle, RailPulse is a good example of some of the technology investments that we're making. That's a consortium of other car owners; they can be railroads, they can be customers. And in that consortium, we've committed to GPS up the rail cars. Rail cars are interesting in that they are on a fixed asset, the rail network, so largely you know where they are. But when you start interchanging them or sending them into short lines, that visibility gets reduced pretty dramatically. And by putting technology on the rail car, we'll increase that visibility. There's other investments we're making, like modeling systems to know how to build a train plan that's more robust, making customer experience better, whether it's drayage drivers on one of our intermodal ramps or customers getting an improved estimated time of arrival. And even the fundamental technology that runs the network, something we call NetControl and the computer-aided dispatch, all of those are seeing investments and improvements, and they help us run a more fluid and more consistent, reliable network.
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Rochelle6:02
Now, on something that a lot of analysts are also honing in on is the regulatory environment with the Surface Transportation Board, which is the economic regulator for your business. Some potential changes ahead might make it easier for customers to bring cases. What do you say to investors who are perhaps worried about how this might potentially change the operating environment?
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Lance Fritz6:22
So the STB is our primary commercial regulator, and they are active. We've been spending a lot of time with STB members and their staffs, helping them see the rail economy from our perspective and in the light of the kind of regulations that they're thinking about. Generally speaking, the STB wants to get it right. They appreciate that their job is to ensure that the U.S. freight rail network supports growth, supports customers, and is able to reinvest in itself. So bottom line, they have a vested interest in making sure their decisions are done well, and we just help them see, you know, from our perspective, how that impacts the design of some of the regulations that they're contemplating. So far, so good. They've done a very good job of balancing what they think needs to happen with doing it in a way that maintains the health of the freight rail network.
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Rochelle7:24
Well, I do appreciate you joining me this morning, Union Pacific CEO Lance Fritz. Thank you so much.