Former Chairman, President & Chief Executive Officer, Union Pacific Corporation
Union Pacific CEO talks Q4 earnings and why he is optimistic about the phase 1 trade deal and 2020
Union Pacific is out with its fourth-quarter earnings report. Lance Fritz, Union Pacific President and CEO, joins Yahoo Finance's On The Move to discuss that and more.
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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 (12 segments)
✨ AI-enhanced transcript with speaker attribution
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Adam Shapiro0:04
Well, all of this discussion plays a role in what happens over at Union Pacific. The U.S. railroad operator reported results for the fourth quarter, which showed a lower than expected quarterly profit as freight volumes of agriculture and energy shipments fell. With us to discuss this is Lance Fritz, Union Pacific's president and CEO and chairman. It's good to see you again, Lance. And there's a lot to dive into with these numbers, but let me give that kind of the headline because in the earnings call you talked about the trade one phase, that the phase one trade deal we signed with China, you said it removes it as a headwind, it is now a tailwind. And if it comes true, you said it'll be a really nice tailwind for the next three years. What makes you confident that the Chinese will follow through on their promise to buy soybean, corn, and that fuel shipments will also go up, maybe even coal for instance?
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Lance Fritz1:01
Adam, that phase one Chinese trade deal, that's the 'if' part, which is follow-through and enforcement. The good news in that deal, if you look at some of the detail, there is an effective, well, a relatively strong enforcement mechanism that if utilized, hopefully can be effective. So that gives us a little bit more confidence in implementation and follow-through. But the details in that deal, it increases the commitment by China to purchase from the United States almost double, or more than double, what they've been purchasing historically at the run rate in 2017. And it's good for agricultural products and a number of other segments that would be positive news stories for us. So we're not building a plan on the numbers that are in that phase one trade deal, but it does give us optimism that, as you noted, something that had been a headwind in terms of international trade and specifically our dispute with China is in the process of turning into a tailwind.
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Adam Shapiro2:03
So Lance, good to see you. Get a little more granular for us if you are able to. Freight traffic last quarter down 11%. How much of that do you attribute to the trade war, and how to other factors? What are those other factors? So that gives us an idea then potentially of how much you could see a rebound if the trade-affected items come back online.
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Lance Fritz2:26
Really, the moving parts of us being down 11% in the fourth quarter: coal was a part of that. Coal was down pretty dramatically on very low natural gas pricing. Predominantly, frac sand was down dramatically. That's on local sand being a replacement for the sand that we provide, as well as a little less activity in the exploration of petroleum in the basins that we serve. And then there was just generally a little malaise across a few other commodities that trade is informing. Specifically, trade has an acute impact on agricultural products, and more specifically grain, soybeans, and to a lesser extent corn and wheat. Off the west coast, we were able to find a few outlets for our grain to alternatives off the Gulf Coast, and it just wasn't enough to overcome what China being out of the market represented.
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Adam Shapiro3:24
Right, so that gives you a little bit more granularity on those items. Let's jump into these numbers because Wall Street is certainly applauding what you've done for the last three years. Unified Plan 2020, it's fair to say it is working. Your operating ratios are below, at least in the last quarter, 60%. So that is to be applauded. But one of the ways you got there is the workforce has been reduced, I think it was, for the last year about 17 percent, with more reduction going forward. Have you kind of peaked on those kinds of efficiencies when you're looking at workforce at Unified Plan 2020?
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Lance Fritz4:01
Yeah, Adam. So the Unified Plan 2020 is a two-part story. Most critically, from my perspective, is the story about the service product, how much better it is, and the sustainable and reliable nature of that service product that generates demand or an opportunity to capture demand more efficiently. The efficiency story, as you point out, part of that is about doing less work and hence having fewer employees. There's more of that to come. I think the largest steps maybe have already occurred, but it's hard to say. What we told our owners on the call this morning was we anticipate incremental productivity off of 2019. So part of lower headcount in 2020 is a run rate that we're coming out of the fourth quarter, and part of it is we're going to extend that as we implement additional productivity savings or productivity enhancements.
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Adam Shapiro5:01
And one of the things that's going to potentially allow you to do that is positive train control, the safety measure, will be installed completely right by the end of this year. But I know the labor unions are worried about maybe shifting from two in a locomotive to one conductor. Where do you stand on that?
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Lance Fritz5:17
Actually, positive train control is fully implemented right now on Union Pacific. It was fully implemented in December last year, and it does set a foundation, technology foundation, that with incremental investment we can safely and confidently take the conductor in the cab of the locomotive and have that person be on the ground doing the work that still will remain, about setting out and picking up cars, setting out, picking up power, and investigating a train if it goes by a detector on the side of the railroad that indicates the train needs to stop. Where we stand on that is we've indicated to our unions that that is a path we want to go down in the national round that just started up in 2020. And there's actually a lawsuit that is filed right now that is attempting to get our union who represent the conductors in the cab of the locomotive to the table, to get them to the table to negotiate on that item.
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Adam Shapiro6:25
Well, and we have been covering the World Economic Forum in Davos, and I'm sure you've been monitoring it as well. One of the big topics of discussion, not just there but more broadly, has been climate change, how to address that. A lot of companies talking more about how to address it. Obviously, fuel is a big part of what you guys have to pay attention to. How do you address climate change and perhaps how to make yourselves more efficient or less reliant when the main thing that you're moving around the country has to have some kind of fuel?
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Lance Fritz6:58
That's a great question, and I was paying attention to your commentary earlier this morning. So we are a solution for companies that are trying to find a way to reduce their carbon footprint. When we represent more of those companies' supply chains, we help them reduce their carbon footprint. We're four or five times more fuel efficient than the alternative trucks. And one of the ways that we try to take advantage of fuel efficiency ourselves is by driving the fuel efficiency of our own network. We did a good job of that in 2019. We improved our fuel efficiency by about two percent during the year, and that's about having our locomotives work more efficiently. Some part of it is technology added to the locomotive, some part of it is technology and training for our team or our engineer who runs the trains so that they can use their locomotives more efficiently, and some part of it is building longer and more productive trains so that the fuel that we are consuming is consumed doing more work. We also experiment all the time with technologies like hybrid locomotives, fuel cell locomotives. So it's not clear to us when or if a big shift in fuel of the locomotive occurs, but we're going to keep working on that, and I anticipate that will occur in the coming decade or decades.
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Adam Shapiro8:33
All right, Lance Fritz, the president and CEO from Union Pacific, thank you for being here on the move.
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Lance Fritz8:38
Thank you.