Union Pacific reports profit rise of 23% in Q3, cuts volume goal

Lance Fritz, Union Pacific Chairman, CEO & President, discusses the company's latest earnings report and revised volume goal amid supply chain challenges.

Video transcript

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AKIKO FUJITA: Shares of Union Pacific getting a slight pop in the session after the company posted earnings of $2.75 a share on revenue of $5.6 billion. That marked a 13% jump year on year. Higher fuel costs and some extreme weather events, though, also weighing on the company's operations. Let's bring in the CEO and president of Union Pacific and chairman, by the way, Lance Fritz. We've also got Yahoo Finance's Adam Shapiro joining in on the conversation.

Lance, certainly a very strong quarter for you, but I want to start with what's happening today, because I know Union Pacific recently shifted over to that 24-hour operation to try and accommodate for the congestion we're seeing at that port-- at the ports. What's that meant for you from an overall operational standpoint, trying to move the pieces here to make sure you get the supplies going?

LANCE FRITZ: Yeah, thanks, Akiko. Well, let's start. There's a lot to like about our quarter. We did a great job in a pretty challenging environment in the third quarter. We generated record operating income, record net income for the third quarter, record operating ratio for the third quarter. So I'm really proud of the team.

Now you're asking a question specifically about the global supply chain. Our role in it, we tend to be the middle miles in the United States for the goods economy. And so what we've done recently in trying to support the West Coast ports and getting product from them into the inside of the country is to increase our hours. We were essentially 24/7. We had about 20 hours during the weekend that we weren't open at one of our ramps in the LA basin. We opened that up to make sure that the ports have full support for moving boxes.

At this point, the boxes on port that are trying to go inland on rail, they're dwelling at about a normal number, about three or four days all in. And so we're looking forward to the amount of boxes pointed our way growing because we're ready to take it. Now the last thing that needs to happen inland in a place like Chicago, we have to see more truck capacity and more warehouse capacity so they can handle the inbound volume. Once that's in place, we're in great shape. We're looking forward to growth.

ADAM SHAPIRO: Lance, it's always good to see you. And usually, we would be talking about your operating ratio, but I think it's good to point out that the entire team there, that quarterly workforce productivity increased by 5%, which is a testament, given what you've talked about with the headwinds. The climate issues with the fires on the west, the bridge that was out, that all led to things like the freight car velocity being down.

Where I get nervous-- because you know I consider your earnings report as the bellwether as to where the economy is going-- the supply chain issues. Help me understand, help all of us understand. When you look at intermodal, in the quarter, it was down year over year. It's hard to compare with 2020. But if you compare quarter to quarter, intermodal revenue was about $809 million in this quarter, but in the second quarter, it was almost $1.1 billion. Is that just a confirmation of the supply chain issue, or is that indicative of what's coming down the pike?

LANCE FRITZ: No, Adam, it's very clearly our intermodal business definitely reflects what's happening in supply chain. There is a lot of demand for goods in the United States. Retailers are trying to restock their shelves. The inventory to sales ratio is at relatively historic lows. And there's no sign that consumers' appetite for stuff is abating. So that tells me that when we see our intermodal business take a step backwards, it's because of parts of the supply chain. Mostly, dray or truck capacity and warehouse capacity aren't able to keep up.

And as a result, you see more shift over to truck. Well, the truck world is tight already. So I think you're just seeing a lot of retailers-- and we talk to them every day-- who are very frustrated because they just can't find yet a good way to get product from their origin to their store shelves. We stand ready to help. We're doing everything we can to try to help them crack that code, and it will be cracked.

ADAM SHAPIRO: Do you see in the fourth quarter intermodal gaining, or is this drop between second quarter and third quarter, is that normal in normal times? And in the second part of this question, are you going to have to raise prices? We hear this across different industries. Fuel prices going up. I mean, in the airline industry, jet fuel is up 60% year to date. Are you going to have to raise shipping prices?

LANCE FRITZ: Yes, so, Adam, when we think about pricing, it's not so much cost plus. We price to the value that we represent. And we price against competitive option. Right now, truck is really tight, so that creates a really good pricing environment for us. And in terms of kind of resolving some of those supply chain issues, that's going to be about labor.

So, from our perspective, as the economy continues to heal and as potential employees start seeing the need to get back into the workforce to get a job, to get that income stream back up and active, that's what's going to fill the seats in trucks and fill the jobs in warehouses. I'm optimistic about that. You know, there's always macroeconomic dislocations that happen in our economy. And the supply and demand free market always tends to get those settled. And I think they're going to get settled. Whether it happens in the fourth quarter or not, that's a big question.

ZACK GUZMAN: Yeah, Lance, you mentioned labor. And I guess, to Adam's point, you guys could be a bellwether for something else we've been talking about when it comes to vaccine mandates and dueling lawsuits there between Union Pacific and the union around vaccine mandates. And I suppose, you know, it's probably on the margin. I don't know what kind of numbers you have in terms of where the issues are for unionized employees kind of raising these issues.

But I mean, it does seem like it could weigh maybe on labor issues there if more people don't want to get vaccinated, don't want to come back into work, if that's the mandate. So how are you looking at that as maybe working with the union to solve it? Or how big of an issue could it be for Union Pacific?

LANCE FRITZ: Yeah, Zack, that's a great question. Let's start from the standpoint that Union Pacific's 85% unionized. All of our craft professionals in the field that are executing the service product, whether it's train crews or the people maintaining the railroad, the individuals that are maintaining the equipment, all of them are part of a union. And you're right, we are following through on the federal mandate for federal contractors because it applies to us. And so, our employees are going to need to be vaccinated. There's no option there.

Some of our employees really take exception to having the federal government tell them to do that. We're working with them actively, trying to make it as easy as possible. We've got an incentive in place for those that get fully vaccinated. For the non-agreement population, it's half day of vacation. For our craft professionals as part of a union, it's a dollar figure. We're also working with union leadership to help them understand what our obligations are, what we're trying to do.

The lawsuits that you see are really kind of technical. They're about making sure that if and when there are disputes about how we're implementing the mandate, that they're handled in an appropriate way, given our labor law, which is the Railway Labor Act. I would set those lawsuits aside.

I would say they are indicative of the fact that some of our employees really do not-- they just don't take kindly to being told what to do. They're independent thinkers. And so, we're helping them understand the nature of the mandate, the nature that it is going to be required of us. And ultimately, I don't think that we have a significant impact on our labor force. But we're keeping an eye on it, and we're helping our labor force follow through on the obligation.

AKIKO FUJITA: Lance, you've been very vocal about the impact these extreme weather events have had on your operations. You've talked about bridges that were burned down in the fires, you know, flooding that has happened. You put that cost at more than $100 million for this year. How do you look at that number? Is that a one-off in a year where we've seen real extreme weather events? Or do you see that cost baked in, potentially getting exponentially higher, as these weather events become more frequent?

LANCE FRITZ: Yeah, Akiko, the cost for what we'll call casualty events that you've just outlined, those are tending to be pretty stable in the close years here, call it '19, '20, '21. But to your point, we are seeing over a longer period of time more violent weather visiting on our railroad. And it does impact what we do to overcome it.

We have to maintain the railroad in a different way. We put different amounts of culverts and bridges and how we put ditches around the railroad to handle water. We're also having to be smarter about how we handle wind speeds and how we handle our traffic during wind events.

And in terms of fires, absolutely we're having to think differently about how we both combat fire, partner up with institutes like the US Forest Service or Cal Fire, and also harden our infrastructure to be able to handle wildfires more effectively. So all of the above is in play. And I think it clearly is part of climate change. And it's clearly something we have to continue to keep our eye on.

ADAM SHAPIRO: Lance, as we wrap up with you, I am just curious, because we're almost two years into the COVID-19 pandemic. We're talking about climate change and the pandemic. Can you breathe a sigh of relief? Do you feel that, at least, the COVID-19 issues are behind the railroad? Or is it still both plates full and no rest for the weary?

LANCE FRITZ: Adam, I'm like every other human. I am fed up and tired of dealing with the COVID pandemic. Ultimately, what we've told our employees and what we've told the communities that we serve is the best way for us to get beyond this is vaccination and making sure that we're treating each other with respect and dignity and practicing a little patience and grace. So we talk about that all the time inside the company, that there is extra pressure on all of us. There's a lot of different things visiting on us that make life a little harder.

And one thing that we can actively do is treat each other with a little bit more patience and a little bit more grace, and we will get through this. As Americans, we're resilient. We are single-minded when it comes to defeating things like the COVID pandemic. So I'm confident and I'm optimistic, but I'm tired.

AKIKO FUJITA: I think we all feel that way, Lance. You're speaking on behalf of all of us, but always good to get you on the show here. Lance Fritz, Union Pacific chairman, CEO, and president. And our thanks to Adam Shapiro as well for joining in on the conversation.