Q1 2023 Union Pacific Corp Earnings Call
Greetings and welcome to the Union Pacific first quarter 2023 conference call.
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A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website.
It is now my pleasure to introduce your host Mr. Lance Fritz Chairman, President and CEO for Union Pacific. Thank you Mr. Fritz you may begin.
Thank you, Rob and good morning, everyone and welcome to Union Pacific's first quarter earnings Conference call with me today in Omaha, Kenny Rocker Executive Vice President of marketing and sales, Eric Gehringer Executive Vice President of operations and Jennifer Hayman, Our Chief Financial Officer. The story of the past quarter for Union Pacific is one of resiliency.
Battling heavy snow Arctic temperatures flooding and tornadoes the team maintained service levels and exited the quarter on a positive trajectory persevering through those harsh conditions, our employees delivered for our customers, which demonstrates again that our people are the foundation for the great things that lie ahead, turning to the first quarter results.
This morning Union Pacific is reporting 2023 first quarter net income of $1 $6 billion or $2.67 per share. This compares to first quarter 2022 results of $1 $6 billion or $2 57 per share our first quarter operating ratio of 62.
1% deteriorated 270 basis points versus 'twenty, 'twenty, two driven by excess costs inflation and lower volumes a series of weather events throughout the quarter had a real impact on our ability to capture demand, especially within our coal business as well as added cost to the network through those.
Events, our service product showed greater and greater resiliency quickly rebounding each time as we were better positioned with crew resources to support our customers and with April month to date freight car velocity is about 200 miles per day, we are operating a network that is positioned for consistent and reliable service.
While a more difficult start to the year than expected it doesn't reduce our expectations for 2023 as you'll hear from the team all of our goals are still in front of US Let me turn it over to Kenny for an update on the business environment.
Thank you Lance and good morning.
Freight revenue for the first quarter increased 4% driven by higher fuel surcharges and solid pricing gains, partially offset by a 1% decline in volume.
Bulk volumes were muted in the quarter as weather and service related challenges impacted shipments. Additionally, weaker market conditions for premium also drove lower volume for the first quarter. However, our strong focus on business development and new business wins, partially offset by some of that decline.
Let's take a closer look at each of these business groups, starting with ball revenue for the quarter was up 4% compare to last year driven by a 7% increase in average revenue per car, reflecting higher fuel surcharges and solid core pricing gains vol.
Volume was down 3% year over year grain.
Grain and grain products volume was down 1% driven by weaker export grain shipments.
World demand for U S grain has softened.
With drought impacts affecting supply and U P or region.
Fertilizer carloads were flat in the quarter.
Strong export potash was offset by decline in phosphate volume from weather conditions the land shipment.
Food and refrigerated volume was down 6% due to reduce beer import and weather conditions negatively impacting both fresh and canned shipment.
Lastly, coal and renewable volume was.
It was down 4% compare to last year, driven by weather interruptions and associated service challenges that impacted our locomotive and crew resources.
Moving on to industrial.
Industrial revenue was up 5% for the quarter driven by a 5% improvement in average revenue per car due to higher fuel surcharges and core pricing gains volume for the quarter was flat.
Industrial chemicals, and plastics volume was down 2% year over year, driven by lower industrial chemicals shipment due to challenged industrial production and reduce housing demand.
Metals and minerals volumes continued to deliver year over year growth volume was up 3% compare to last year, primarily driven by growth in construction materials and increased frac sand shipments along with new business development wins.
Forest products volume declined 19% year over year, driven by soft housing start and the war corrugated box demand for nondurable goods shipments.
Energy and specialized shipments were up 6% versus last year, driven by strength and demand for LPG and petroleum products.
These gains were partially offset by fewer soda ash shipments due to weather related challenges.
Turning to premium revenue for the quarter was up 3% on a 1% decrease in volume compare it to last year.
Average revenue per car inquiries about 5%, reflecting higher fuel surcharge revenue and core pricing gains.
Automotive volumes were positively driven by strengthening OEM production and dealer inventory replenishment for finished vehicles.
Domestic intermodal business wins were offset by a weak freight and parcel market driven by high inventory increased truck capacity and inflationary pressures on the international side. Despite weekend import more containership inland versus the first quarter of last year, resulting in year over year.
Our growth.
So now moving on the fly seven here's our outlook for the rest of 2020 three as we see it today.
Starting with our bulk commodities, we expect grain to be challenge near term as export demand softens and supply tightened throughout this crop year. However, as we look ahead toward the next crop season in late fall, we're encouraged by the initial forecast.
For coal low natural gas prices and a milder winter allow utilities to build more inventory, we are experiencing normal softening through the shoulder months.
Looking further out in the year demand will largely be dependent on natural gas prices and summer weather.
Lastly, we expect biofuels shipment of renewable diesel and their associated feedstocks to grow due to solid market demand new production coming online and business development wins.
Moving onto industrial the forecast for industrial production is to shrink in 2023, and the demand is getting weaker and forest products. However, we expect to see continued strength in construction and metal with new business wins.
And finally for premium we expect near term challenges and the intermodal market from high inventory levels inflationary pressures and weak consumer spending as people shift back that's been more towards services than good.
We will be closely watching for potential market uptake in the latter part of the year.
In addition, we expect automotive growth to continue driven by strong OEM production and dealer inventory replenishment.
To wrap up we are facing economic uncertainty and a tough price environment and a few of our markets, but we expect to see shrimp and some other commodity areas. Our diverse portfolio allows us to maintain our pricing got it.
To capture more demand, we are working closely with Eric and his team to be agile and have resources available in locations, where we need them.
I am confident that the team's relentless focus on business development will drive volume to exceed industrial production this year.
With that I'll turn it over to Eric to review our operational performance.
Thank you Kenny and good morning, starting on slide nine we continue to make great strides on safety as evidenced by our 10% improvement in derailment performance for the first quarter.
While encouraging progress on safety, our goal remains a future with zero incidents zero injuries.
We've made progress on derailments by implementing state of the art technology like precision train builder and our geometry inspection fleet. This is on top of our network of more than 7000, wayside detection devices and our 24 by seven operating practices Command Center.
Further supporting our efforts in March the industry announced a set of key safety actions. These include the installation of additional wayside detectors and enhanced standards for how we proactively using share critical data. In addition, the industry is expanding efforts in first responder training and deploying technology to provide <unk>.
Real time railcar condition monitoring that.
The railroad industry remains one of the safest transportation modes in the nation and through our capital renewal program Union Pacific invest almost $2 billion annually back into its network to further improve safety.
Now moving to slide 10 for a look at our current operational performance.
As Lance mentioned mother nature made her presence felt across the Union Pacific network. This season.
Bringing extreme weather in many forms U P crews in California battled flash flooding persistent mudslides and heavy snow.
The Central Sierras for example, recorded over 700 inches of snow. This season, that's 222% above historical averages employees across our central corridor and upper Midwest portions of our system also worked through prolonged blizzards ice and Arctic temperatures. These.
These events challenged our ability to maintain a fluid operating state on specific portions of the system. However, thanks to the dedication and proactive efforts of our employees. The network quickly recovered after each event.
And as the chart on slide 10 demonstrates we're exiting the quarter on a positive trajectory versus the congested state. We were entering this time last year.
Our April month to date metrics show, a network and a healthier state with freight car velocity at 200 miles per day intermodal T. P C and the high Seventy's and manifest T. P C on the rise as well.
That result, also reflects our hiring efforts as we focus on back filling nutrition and targeting locations where crew challenges persist.
We currently have around 1000 employees in training, which is an increase of approximately 500 versus last year.
In addition, we have utilized borrowed out employees to address hard to hire locations and get crews where needed.
Now, let's review our key performance metrics for the quarter starting on slide 11.
Sequentially, we held our ground through the obstacles of the quarter.
Freight car velocity and manifest and auto trip plan compliance made slight improvements from last quarter's results intermodal trip plan compliance remained effectively flat as we battled resorts and balances driven by weather interruptions.
With our current traffic mix freight car velocity consistently running around 200 to 205 miles per day will strengthen our entire service product, including bulk manifest and intermodal performance.
Turning to slide 12 to review our network efficiency metrics locomotive productivity dropped 5% versus first quarter 2022.
However, it remained flat sequentially from last quarter's results as we continue to operate a larger locomotive fleet in an effort to support the recovery of the network in the second quarter. The team is focused on moving more freight and right sizing the fleet to that point, we are in the process of storing over 100 units to add the ready status.
First quarter workforce productivity declined 6% to 991 daily miles per FTE, driven by an increased number of trainees and lower volumes.
Our strong training pipeline supports our ability to capture available demand and future growth, while managing attrition and reducing borrowed out employees as employees graduated from training, we expect productivity to improve.
Train length is effectively flat compared to last quarter's results lower intermodal traffic, coupled with extreme cold temperatures across the northern tier of our network presented a headwind to our train length initiatives for the quarter.
The team remains committed to strengthening the network, while recovering lost productivity.
Wrapping up on slide 13 the.
The success drivers for 2023 remain unchanged and the entire team is dedicated to building on the momentum gained as we exited the quarter.
We remain committed to addressing the employees quality of life feedback and are pleased with the recent agreements regarding paid sick leave and.
We will continue to work diligently in finding win win solutions that enable a strong service product and provide our employees with more consistent work schedules. In addition, as you heard from Kenny we continue to aggressively look for opportunities to strength in volumes with the service product demonstrating resiliency, we have added back train sets in.
Targeted freight cars to the network to capture available demand.
I am confident that the foundation, where lane will provide a safer more consistent and reliable service product to meet the growth needs of our customers with that I will turn it over to Jennifer to review our financial performance.
Thanks, Eric and good morning will start on slide 15, with a look at our first quarter income statement.
Operating revenue totaled $6 $1 billion up 3% versus 2022, despite a 1% year over year volume decline other revenue decreased 5% driven by $30 million of increase subsidiary revenue, which was more than offset by a 50 million dollar reduction and asked the soils lower intermodal volume and <unk>.
Supply chain fluidity drove that's the soil decline.
Operating expense increased 8% to $3 $8 billion, resulting in first quarter operating income of $2 $3 billion down 3% versus last year below the line other income increased $137 million year over year, largely driven by a $107 million one time real estate transaction.
They contributed 14 cents to earnings per share interest expense increased 9%, reflecting higher debt levels.
Net income of $1 $6 billion was flat versus 2022 but when combined with share repurchases resulted in a 4% increase in earnings per share to $2 67, our first quarter operating ratio increased 2.7 points to 62, 1%.
Falling fuel prices during the quarter and a lag on our fuel surcharge programs positively impacted our operating ratio by 190 basis points.
Our results offset the fuel benefit and we're a 460 basis point drag to operating ratio included in that is the impact of weather, which is difficult to quantify but between both lost revenue and additional expense, we estimate to be in excess of $50 million now.
Now looking more closely at first quarter revenue Slide 16 provides a breakdown of our freight revenue, which totaled $5 $7 billion up 4% versus last year lower year over year volume reduced revenue 150 basis points total fuel surcharge revenue of $883 million added 475 basis points.
The freight revenue, reflecting the lag in our programs the combination of price and mix increased freight revenue 75 basis points as ongoing pricing actions were mostly offset by our business mix fewer lumber shipments and more short haul rock shipments were the primary drivers of the negative mix.
Turning now to slide 17, and a summary of our first quarter operating expenses, which totaled $3 $8 billion.
Compensation and benefits expense increased 7% versus 2022.
First quarter workforce levels increased 4% with transportation employees up 5%. The result of our dedicated hiring efforts over the last 12 to 15 months.
Cost per employee only increased 3% in the quarter as wage inflation was partially offset by a larger training pipeline.
During the first quarter, we signed agreements with the majority of our labor unions to provide paid sick leave to our employees. These agreements became effective April one and represent just under half of our craft professionals.
Assuming we are able to reach agreements across the board, we would expect cost per employee to be up mid single digits for the year consistent with what we discussed in January .
Fuel expense grew 7% on a 9% increase in fuel prices as we moved less freight our fuel consumption rate deteriorated, 1% as the impact of our fuel conservation efforts was more than offset by reduced network fluidity.
Purchased services and materials expense increased 16% driven by maintenance of a 3% larger active locomotive fleet and inflation.
Equipment and other rents was up 9% as a result of increased car hire expense related to elevated cycle time and the other expense line grew 6% related primarily to higher environmental remediation costs.
Turning to slide 18, and our cash flows cash from operations in the first quarter decreased to $1 $8 billion from $2 2 billion in 2022. The primary driver was presidential emergency Board back pay settlements paid in January which totaled $383 million that payment also impacted our quarterly cash flow conversion.
Virgin rate and free cash flow with both roughly in line with last year's performance when you exclude that payment.
In the quarter, we returned $1 $4 billion to shareholders through dividends and share repurchases and we finished the first quarter with an adjusted debt to EBITDA ratio of two nine times as we continue to be a rated by all three credit agencies.
Wrapping up on slide 19, we are maintaining our 2023 full year guidance to achieve volumes above industrial production price gains in excess of inflation and operating ratio improvement.
Our plans for capital allocation also are unchanged.
As with every year, there are puts and takes to how the year plays out well 2023 started a bit slower than expected I need to remind everyone. It is only April 20th we have eight and a half months in front of us and many opportunities with volume service and productivity.
Before I turn it back to Lance I would like to express my thanks to the E P team.
We are skilled and running the outdoor factory that is our railroad, but mother nature seem very focused on testing those skills. This year, given the extremes, we face and yet the team forged ahead, keeping the network fluid and our customer served fantastic work by everyone with that I'll turn it back to Lance and thank you Jennifer as Eric discussed we continued to me.
Great strides on safety derailments have been in the spotlight recently.
The entire industry understands the critical role we play in support of the communities we serve in fact.
Since 2000 Union Pacific's mainline derailments are down almost 30%.
Helping make this past decade, the safest for the rail industry working collaboratively and proactively the industry can further improve on that safety record looking forward as you heard from Kenny consumer facing markets or in rough shape right. Now importantly, though there remain opportunities to capture additional demand in a number of markets.
Entire team is executing a plan to capture those additional carloads supported by an improved service product.
Finally with birthday approaching I'd like to highlight the actions Union Pacific is taking to protect our planet at the end of 'twenty 'twenty. Two we released our second annual climate action plan highlighting updates to achieve our greenhouse gas emission reduction targets. This includes our goal of net zero emissions by 2050 over.
The past year, we've turbocharged our locomotive modernization program, we've committed to both battery and hybrid electric locomotive and we've increased our biodiesel blend to over 5% and we're being recognized for that work. This past year Union Pacific was selected as a member of the Dow Jones sustainability index for the.
The first time and we were the highest ranked railroad and the transportation category. Unfortunately, most admired companies' Union Pacific is committed to being a sustainability leader driving long term value for all of our stakeholders.
Before turning to Q&A as it relates to the CEO search process. The board is fully engaged and executing its duty to identify the next leader and I can say from personal experience what a wonderful job. It is to be at the helm of the company like Union Pacific I'll continue to lead the team until the new CEO is identify.
<unk> and I'm energized by what we can accomplish in the coming months as well as the great potential. This company has for years into the future with that let's open up the line for your questions.
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Thank you and our first question today comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks, good morning.
Lance and any timing on C O surge and any thoughts on what you and the board or are looking for and then Jennifer margins down 270 basis points, obviously, we need some nice improvement the rest of the year to get to a full year improvement can you help us bridge us to that full year improvement and any thoughts on second quarter.
It's an easier comp do you think margins inflect positive in Q2, just any thoughts. Thank you guys.
Yeah. Thank you Scott So I'll just circle back to the press release that the board sent when they announced earlier.
Earlier in the year that we were in the process of identifying a new CEO . They were clear on what they were looking for then write our track record and experience in safety and customer service are business development, a clearer vision on our culture and a good operating experience.
So they are crystal clear on what they're searching for and and the only update I have for you as well.
We're using our excellent third party external consultants and other being very thorough in their search.
Which is underway.
So then Scott to your T. R. O R question, I mean, you're exactly right, we we need to make sequential improvement through the year, and then that needs to become year over year improvement at some point for us to be able to meet that guidance. The factors that are going to help drive that certainly feel is something that is looking different to us this year than it did last year.
You know, particularly right now you saw the 1.9, a point that it benefited our ore in the first quarter. You know that will comparison will get a little tougher in the back half. So it may look different than than 'twenty. Two did but certainly feel I think is something but then its the main levers that you know that we have available.
To us its volume price and productivity and of course volume you know it depends a little bit what that is but you know we also have peer cost control. So if if volumes are something that are not our friend in and we're not able to get that leverage. We also have the ability to control costs them through to being very careful and diligent in our management.
Jennifer one last thing what gives us a ton of confidence as we look into the end of the year is how the network's operating right now it's in a place where.
We can get the volume and we can squeeze out the excess class.
Thank you.
Next question comes from the line of Tom what are its with UBS. Please proceed with your question.
Hi, yes, good morning.
Wanted to ask you about the head count level I think you'd do you know that.
Training pipeline for her for TD looks a it looks like you know, it's larger but I think that the level of people that you've had that are trained it on the system seems like its been static for a while and so I'm just wondering where what do you think about in terms of where you need to get for a you know T T and why that or.
Our trained on the system and I guess in terms of attrition has attrition Ben you know an ongoing problem has that stabilized just thinking about you know that that head count dynamic and then I guess, how that fits into how you would expect a you know network performance to a to go from where we are thank you.
Yeah, So Tom.
We entered the year, saying total head count hires in addition to the T. N Y would look kind of like what it did in 2022 predicated on our on our plan for for volume our volume is looking a little cloudy right now to US certainly in the first quarter in the back half and.
So of course that our hiring plan is being looked at and adjusted net.
Net net in the second quarter Youre going to see us add to the active T N Y head count coming out of the training pipeline. The question really is what's the training pipeline look like for the rest of the year, having over a thousand and the pipeline is a very strong pipeline for us.
In terms of attrition you know, we we tend to have about a 10% turnover in our in our tea and why workforce.
That really hasnt changed over the course of the last five years, we don't necessarily see it changing right now so one of the adjustment factors is if we find ourselves getting out over our skis, a little too far attrition can help us adjust pretty quickly.
Okay.
So it sounds like the I guess trained level goes up but overall head count kind of static as the training pipeline comes down as maybe the best way to look at it.
I think it really does depend on the volumes to a degree Scott and so certainly as Lance said second quarter. I think you certainly see our total head count is going up it's going to be probably different than last year. You know first half we've got the training pipeline loaded in the first half and I think the question is gonna be what does the second half look like.
Yeah, Okay. Thank you.
My next question is from the line of Kenny texture with Bank of America. Please proceed with your question.
Okay, great. Good morning, So just it looked like the operating service levels, where we're flat.
You mentioned that a couple of times I guess, Eric did but velocity was really came down in the past few weeks I guess during the quarter and then more recently showed a pretty solid rebound I guess, maybe the last week or two is there anything changing with the operating plan was this I don't know if Eric or Lance you want to throw in some thoughts or was this just kind of the end of some of the weather stretches that you were talking about.
They just talk about how operations are doing now and what's changing thanks.
Yeah, Ken Thanks for the question, Yeah, you're somebody's exactly accurate it was towards the tail end of winter is really where we were about three weeks ago, having come out of that and with all the work that we've done on the hiring side as amongst other actions you're seeing the output of having two to three weeks without whether it being that headwind.
With weather largely if not entirely behind us for winter you should expect us as our customers expect to maintain where we are we've reinforced that 200 to 205 miles per day is what drives our TPC metrics to the level of our customers expect.
Great. Thanks, Jeff.
The next question is from the line of Chris Wetherbee with Citigroup. Please proceed with your question.
Yeah. Thanks, Good morning, guys, maybe one quick follow up on the head Count point, I guess I'm just curious.
Given you know what you guys have been able to do with some degree of service recovery would.
What do you think about pausing sort of the hiring as you sort of reassessed volumes, depending on sort of how that plays out in.
In the second half of the year curious about that and then maybe on that point for Kenny just in terms of like what you're seeing in the month of April It seems like we've seen in March and April would be a little bit softer across the board of transports not necessarily union Pacific specifically, a little bit softness there kind of curious what you're hearing from the customers has there been a bit of a spring lull here or maybe that picks up.
In the near term just kind of some thoughts there would be helpful.
Hey, Good morning, Chris This is Lance I'll start and then turn it over to Kenny on your second question. So lets unpack that the head count question a little bit.
We were in much better shape. This time this year versus same time last year, the hiring pipelines pool, but more importantly, we've been filling our classes everywhere. We've been looking for people across the railroad for about the last three or four months that is very different than our experience last year.
Where we found it very difficult in about six crew hubs all in the northern region to be able to find candidly the workforce to be able to hire. So we've we've been much more aggressive in the back half of last year amping up things like hiring bonuses, finding creative unique ways to create a work or work for.
It's a pool to hire from and that's paying dividends right now.
So you're exactly right in terms of as we look into the year right now we're starting to evaluate.
Our original plan for hiring versus what volumes are doing and what the back half of the year balance is going to look like or our longer term guidance remains in place and that is we fully expect to be volume variable and have ultimately our head count grow at less than our volume.
<unk> are growing but clearly coming out of last year, we had to fix the ship and get our crew boards healthy at a little excess not excess at a little factor of safety to the CRU Board. So that we could take you know events and recover quickly so that our service product was consistent and we're in that place right now where we're essentially there.
We're solving some of the problem with borrow out so hiring is going to have to replace them because theyre expensive and it's a it's a burden on our employees to be borrowed out, but but we are in much better shape looking into the rest of the year. Okay. Yeah, Hey, Chris So, let's just start off you know you look at our coal we're expecting it to.
We have a seasonal lull this time with shoulder mines that I mentioned you know if you look at it last year in natural gas prices were much higher.
It was more of a normal look for them.
Our domestic intermodal will keep an eye on it it's a very.
Loose market right now there is quite a bit of truck capacity. That's out there. So we'll be watching that and then also are you know last year. If you look at it our green business was pretty strong this time of year and now we're seeing more a global Green go into places, where we export it last year now haven't said.
All of that looking forward to the rest of the year, Hey, we're still bullish about some of these markets that I mentioned are whether it's finished vehicles the metal.
Rock that's in our construction area as one in a biofuel.
Okay. That's helpful color I appreciate the time guys.
Yep.
The next question is from the line of Ben Nolan from Stifel. Please proceed with your question.
Yeah.
Yeah. Thank you I appreciate it I, maybe Kenny if I could just follow up with a with that we've been hearing a whole lot of noise about near shoring reassuring specifically around Mexico I was curious if you can maybe put.
Put a little color around it if that's something you're seeing if there's any.
Notable business wins or anything specific to them.
The moving of manufacturing back to North America that that you're hearing from your customers.
Yeah, we we are seeing a little bit of that we we've seen our production related to.
The autos OEM there was one pretty large highly.
Highly public announcement that came out and with that you got to remember there is a lot of other inputs that move by rail whether it's soda ash gorilla glass the metals that comes in for the car that's great for US also and our bulk commodities on the AG side, we're expecting.
Some some new production and receivers down there so yeah.
It is looking pretty encouraging and this is.
The first time that we're seeing tangible things that we can point towards so that's a positive for I won't go on and all we enjoy a fabulous network there I'll leave it at that.
Okay and.
Just to clarify that how should we think about the timing of an impact on that I mean is this something that could happen near term or is this a big picture long term longer term kind of a dynamic. This is a big picture longer term I mean, you've got a.
A good time for these locations to actually build out the physical infrastructure there in the plant.
Okay, and not but Ben it's wonderful to have new production facilities spot in the North American market.
We will get our fair share we have a wonderful franchise to and from Mexico, and anytime industry shows up and in the North American continent, it's good for us good for railroads.
Alright I appreciate it thank you.
The next question is from the line of Justin Long with Stephens. Please proceed with your question.
Thanks, and good morning, I wanted to circle back to the full year guidance. Obviously the start of the year has been more challenging than you anticipated. So in order to hit your outlook do we need to see a meaningful positive inflection in the freight market and if so when does that need to occur.
And then Kenny maybe just a clarification on intermodal I think you said international volumes were up but I was wondering if you could share the percent change you saw in both international and domestic intermodal. Thanks.
So I'll take the first part of that question you know again, our guidance relative to volume exceeding industrial production. We came into the year industrial production was forecast to be down about a half a percent, it's actually gotten a tad bit worse. Its now down about seven times. So you know that that's not a huge bulk guests to to exceed them.
Yes, we started a little weak or down a point and a half here in in the first quarter, but you just heard Kenny talk about kind of the different markets that are available to us and the fact that as our service product is improving we're putting more assets into play to move more carloads, and that's giving us greater flexibility to move those assets around to hit them.
Markets that are available to us and so you know we feel quite confident that we will be able to to reach that goal is as it relates to volumes and the rest of our full year guidance, obviously, which we reiterated.
I don't think I'm going to break out our domestic and international here, but.
What we saw and I mentioned that just because you do have a more fluid.
Our intermodal network on the international side, we don't have a lot of them are back boxes on either in more of those ocean carriers are moving inland and we're seeing that we put in products up against that that's helping that with our green facility down there on the Dallas side with a K T and there.
They hit their largest volume record in the first quarter, they just announced they're going to expand and so we feel good about that that we can move more of that inland.
Okay. Thanks.
Okay.
Our next question is from the line of Jordan Alger with Goldman Sachs. Please proceed with your question.
Yeah, Hi morning, just sort of curious I think other than volume talked about other.
Productivity or cost yeah other than fuel expense Navy going down what are some of the other cost levers.
That you could use to help drive or to improve over the course of the year, obviously volume dependent and it would be things like purchase transport you know just trying to get a sense. Thanks.
Yeah, It's a great question Jordan.
So as you think about that and the progress we're seeing right now it's impacting nearly every one of our cost lines in a positive way the big ones that we talk about is certainly starting with fleet size and our prepared comments I mentioned, the fact that we're taking 100 locomotives in them putting them in storage, but theyre in a storage state in which they can still be there quickly to gain volume.
Our next after that it's all about crew utilization right, which stretches everything from re crew rates to dead had held the ways to how do we think about over time and making sure that we're being judicious with the use of overtime.
From there, we certainly do even though you mentioned that we do focal focus on our fuel consumption and I'm really encouraged actually by the first quarter. Because if you look at January we came out very strong February was kind of okay. In March was certainly weak, which means with weather behind us. There's no reason that we shouldn't snap right back to that great progress there.
We saw in January so, it's those others, but I've listed the biggest ones.
Thank you.
Yeah.
Our next question is from the line of Jason Seidl with TD Count. Please proceed with your question.
Thanks, operator, good morning, everybody appreciate you taking time.
Two quick things Kenny I think you said there were some pricing pressures in a few of your industries I understand intermodal would love to hear what else is being pressure out there and also in terms of the the west coast Port Labor situation, how much freight do you think god diverted and if we get a resolution here hopefully in the near term do you.
It would come back quickly or would take some time.
Yeah. So you know, but before I talk about domestic intermodal, which I think is your question I just want to reiterate that we've got a broad diverse set of customers and markets that we get the price and we've said that publicly that call. It approximately roughly half of that business, we get the touch every year.
Outside of just one particular market now there is a lag impact to that but the.
Feels like it was the commercial teams have done a really fabulous job, one articulating hey, we're spending quite a bit on capex.
We're putting quite a few resources out there are they understand what's taking place in the industry, but our business on the labor side and the labor negotiation and candidly. They are experiencing the same inflationary pressures. So you've got that piece now talking about domestic intermodal yeah domestic intermodal.
And then a pretty loose market quite a bit of truck capacity.
There.
We're seeing it in our bids in the RFP, we've got mechanisms that are employees for.
Our suite of intermodal customers to go out there and compete and win business based on their own strengths and capabilities, which give us confidence and the other part of that is the fact that you know as the market tightens up we can quickly capture that upside.
And Kenny Jason's last question, but the West coast ports Niall W. Yeah.
You know we've been in close contact with the West coast ports and they believe that there.
There should be an agreement here in near term I would tell you it's hard to quantify what's been diverted away because of some of these labor challenges I'll tell you when we look at the order book going out.
To I'll call it the west coast ports, it looks like the negative delta that we saw year over year is.
Becoming less and less.
Well, that's good and and you think that there wasn't agreement again knock on wood because everyone wants that that you would receive it back quickly or would pick up over time.
I think that's that's just I can't be that precise Jason we could be positive about it but to be precise probably just wouldn't be a good idea.
That sounds good I appreciate the time as always guys.
Thanks, Jason.
Our next question is from the line of Brian <unk> with Jpmorgan. Please proceed with your questions.
Hey, good morning, Thanks for taking the question can you just to follow up on the.
The pricing reset is that kind of going.
Is as expected do you still have a little bit more of a lag impact because volumes and maybe a little bit weaker than you thought so I guess, there's that can accelerate here and same sort of question with price mix is that probably the worst you'd expect in that.
The near term here as you look at the different end markets is there is there are developing.
Yeah.
Certainly the way, we calculate price volume.
Increasing and improving helps our philosophy that also because it is April and not December we have a time to get more of that volume in the play as we move throughout the year I would not say that there are some markets that are harder to.
Capture.
Pricing other than those areas, where we have mechanisms in place.
With domestic intermodal.
We're being very disciplined in our approach to take price and in some cases, we've also taken some.
Some risk there to make sure that we're pricing towards the market.
Kenny are the same as what you said about domestic intermodal to a lesser degree is true in coal where you've got a natural gas can be a driver of some pricing absolutely we'll be watching natural gas pretty closely.
The next part of your question, Brian you know coming into the year. Our view is it makes it would likely be negative throughout the year, primarily around the fact that we were expecting to see more growth on the intermodal side. Obviously, that's that's changed a bit and so looking to the second quarter at least we're probably expecting a bit of a positive mix beyond that I think.
Too soon to say, but I do think that's something that is different as we sit here today than when we came and talked to you in January .
Thank you just a quick follow up for Lance on the regulatory and legislative side, a lot of noise coming out of D. C. Some of the.
Safety things you mentioned earlier in the some of the stats on your piece specifically, but what are you most focused on when it comes to the different topics that are being discussed down there we tend to focus on on train lengths to service an FRE safety advisory recently, but I just wanted to hear you know what was important in what you thought we should focus on when it comes to the various topics being discussed.
You know after the safety issues that we've seen in the industry over the last few months. Thank you.
Brian That's a great question so in engaging the legislators in D. C. We help them understand what would actually move the ball in terms of safety, where regulatory effort would make a difference in where it wouldn't to your point train length wouldn't you know statistically.
<unk> on U P. Since 2019 train length is up something like 20% in our mainline inciting derailments are down 26%. So there's zero corollary between train length, and and and derailments, but there are other things that they can help with we're taking action right now on <unk>.
Decide detection, that's a place where the F. R E can step in.
Hum.
Things that we'd we'd emphasize that really don't have a corollary impact another one is.
Crew size, and whether conductors or redeployed to the ground that has no impact on safety around the world empirically.
So we just broadly try to help them understand that and stay deeply engage Brian .
This is this is a a deep engagement all the time right now.
Thank you very much for the color I appreciate it.
The next question is from the line of Allison <unk> with Wells Fargo. Please proceed with your question.
Hi, good morning.
Wanted to ask on the new business and I guess first is there any way I know, there's a lot of moving parts with Valeant.
Maybe get quantify or help us understand the contribution of the new business wins and volume and then second as part of that just in terms of the new business pipeline any notable trends in sort of that conversion that you're seeing in terms of bringing on new business onto the rail. Thanks.
Yeah, Hey, Allison, it's pretty broad because obviously in all three of our business teams.
If you look at it Biofuels renewable diesel for us is an emerging market.
<unk> been very encouraged by our ability to land new customers, a new production site to move out of the Midwest going into the west and those are attractive margin to us on the industrial side. The same thing is true as we look at our metals business and some of them.
The minerals business tied to that famous.
Famous went wrong those are.
Areas that are positive and they have structural increases related to population.
<unk> down in Texas, Louisiana, and the Gulf and so those are great and then you all are aware you're aware Alison if some of the new recent wins.
Our intermodal sector and again, we feel really blessed that we've got a suite of highly capable customers that can go out and grow business over the road and it complements very nicely. Our U N. P are you maxing E. M. P products that we have in the marketplace.
Thanks, and just any color on the conversion trends with any business opportunities out there.
We see the pipeline is still there well the thing that we're keeping an eye on is are they actually you know moving.
Catheter amount that they initially told us so.
No concerns with the pipeline just a little bit of concern with making sure the volume that they committed to and feel there.
Understood. Thank you.
Our next question is from the line of Amit Malhotra with Deutsche Bank. Please proceed with your question.
Thanks, Operator, hi, everyone. Jennifer are are earnings going to be up as you move from <unk> to <unk>, because there's a big fuel benefit in the in the EPS line in <unk> and we calculate it's like 25 cents or something like that and a lot of that's going away because of the lag on fuel.
And so you're starting kind of from a hold to to build back on as you move from <unk> to <unk> I know I know, there's weather, but I'm just trying to understand the cadence of earnings growth from once you can actually grow in <unk> because of that operating income impact from fuel and then just related to that because volume seems to be the fulcrum for all of this.
You know the average weekly volume in the quarter was 152007.
Seven day, Carloadings, and and I think last week, you did under that the weather was a lot better and so I guess the question really is is that like when are we going to see if weather was a big problem in the quarter you exited lower than your average for the quarter. When are we actually going to see some of the volume show up in the weekly carloads. Thank you.
Well, so let's start off on the field piece and we agree with your math on the 25 cents for the first quarter and that's that's exactly right you have to think about hill in two pieces of it you have to think about the fuel surcharge piece and then the expense piece and while in the first quarter of the field surcharge piece was was a positive as well.
And at what our current prices are for fill right now call. It $3 a gallon when we paid $4 a gallon a year ago, that's going to flip on us and so that is going to have a different dynamic, but our field expense is going to be less as well and so you really have to think about it in those two parts and separate that out I would say in the analysis. The other thing I want.
To remind everybody about two Q of last year was we did have an 18th cent benefit from a landfill, Illinois Tollway and that was within our results and then we also had $35 million extra and some casualty expenses. So that goes away. So you've got some puts and takes there but I just wanted to make sure everybody's thinking of.
As you're you're putting that together you know our goal is going to be to continue to to drive as much volume as we can across the network and I'd do it as efficiently as we can and improve the service product and the output of that will be you know the output of that I'm not going to give you specific earnings guidance on that and then to your other.
Question about volumes I think you need to factor in the Easter holiday that does have an impact on our volumes and so well, yes, whether it was clearing we did have a holiday impact there and I think you know again, we're putting assets into place and we're gonna be moving the volumes that are available to us.
Uncomfortable.
Talking about and reported numbers this weekend beyond shut them.
Okay. That's great and then just just related to that Kenny I don't know if you have a view on intermodal yields I know fuel there's a lot of noise in intermodal yields and fuel but are are we holding line on intermodal yields ex fuel is that the expectation kind of over the next few quarters.
Yeah.
I've said this a minute you know we feel really good about the mechanisms we have in place for our customer to go out there and compete.
And when and retain business.
Based on their capabilities and their strength.
And I also feel good about again.
As you know the market move that we'll be able to move more real time with it and so that's a positive for us.
Got it okay. Thank you very much appreciate it.
Our next question is from the line of Jon Chapell with Evercore ISI. Please proceed with your question.
Thank you and good morning.
Eric I want to go back to the productivity, which I seem to go back to every quarter, but just as it relates to getting to these full year targets. One of your peers has kind of laid out what a fluid network could mean from a cost perspective. So is there any way for you to quantify what you think the productivity improvements can contribute in the final three quarters of 'twenty three.
And also any way for us to kind of understand the timing you're still digging out of the weather, mostly you know they're still taking people out of training is this like 90% of second half productivity improvement type story or can you start to get some significant improvement in two tier.
Yeah, John Thank you for the question, obviously, we won't guide you to the specifics on the timing of the productivity what I would reinforce is that based on the performance that we see on the railroad right now, it's bringing me and others greater and greater confidence that we'll see that productivity continue to grow throughout the rest of the year to.
To say as you look into the second quarter, the headwind of winter behind us.
And the forecast of being able to grow the volume of.
That's what's going to drive that beyond that I'm not going to guide to it. We're just all focused on making sure that we drive that productivity safely.
Any just broad range of numbers I mean, if we go back to the Investor day, and starting point, there any way to kind of parse that out.
Range.
No you know John I think that'd be unwise for us to do that you know we are not going to try to pace, our productivity improvement and so we wanted to do that as you know as fast as we can as safely as we can while providing a really good service product. So that we can ultimately drive greater volumes across the network that's the real.
The real leverage in that field productivity and quite frankly, yeah.
John This is lance so just putting a bow on that our expectation is in Q2 with a fluid network, we really squeeze out a bunch of the the excess cost created by kind of weather and variability from those events.
And then we started stretching our legs are beyond Q2 to continue to recover some of the productivity and ultimately all of the productivity that we forewent in 2022 and then start growing from there we've got a fair amount of inflation. That's in front of us that we got to offset this year and going into next year. So.
So we're gonna be fighting that battle through the whole year as well.
Got it thanks, that's agenda burner.
Thank you.
In the interest of time simply accommodate as many analysts as possible we'd ask everyone to please limit themselves to one question.
And the next question comes from Atlanta, Ravi Shankar with Morgan Stanley . Please proceed with your question.
Hi, Thanks, good morning, everyone.
Very quick follow ups here, one is I know mix was a headwind in the first quarter, but can you confirm that a.
Dollar price was above a dollar inflation in.
In the first quarter and kind of if not going up how does that trajectory change the rest of the year and so I can't kind of if youre going to have a pretty significant.
A significant inflection in volumes okay.
Card, you're running down during the half, we're saying year to date and.
And you could get to better than down one 7% for your full year guide.
It wasn't macro assumption does that involved for the second half of the or are you counting on a and improvement in macro conditions and a restocking to get you there. Thank you.
So I'll hit the first part of your question and yes, our pricing gains in the first quarter did exceed our inflation so Kenny.
In terms of macro assumptions.
We we we do not have planned in a recession right. So a recession would be a problem for us absent that.
What we need is markets to continue to just behave.
<unk> reasonably I E. We need consumers to continue to be healthy spend some they don't have to go crazy. They just you know need to not pulling their horns, and we need the industrial economy to continue to do what it's doing and we need inventory and this whole destocking to call them.
Now after the first quarter first half all of those I think are pretty reasonable expectations. The wildcard would be a recession.
Thank you.
Our next.
It's from the line of friends into claims he was Barclays. Please proceed with your question.
Hey, Good morning, My one question for Lance or Eric Your trip plan compliance on manifest.
It remains in like the low 60% level.
And I know, there's definitional issues, but there are carriers out there delivering much higher than that so I wonder if you know we've talked a lot about service products on this call today well, what's the right target for trip plan compliance and what are the steps to get there.
Yep, so they're focusing on the manifest in autos.
When that starts with the seven so right 70, 75% that's in a place where our customers are giving us feedback that says that we're meeting their expectations now as far as steps to get there.
You're going to always have manifest and auto lag the intermodal T. P C and it's simply because the cycle time of those cars is longer.
It's a conversation we were just having the last two weeks to make sure that we are doing those actions. So when you look at the velocity picking up that's a tailwind to it when you look at our uses counts, which means that we are making connections in the terminals to the right train that's up just those two things alone drive P. P. C. In the right direction, and we're driving that as fast as we possibly.
We can because we want to send the message to our customers that we understand first quarter was difficult, but we're in a better place now and it's for their benefit and ours.
Thank you.
The next question is from the line of Walter <unk> with RBC. Please proceed with your question.
Yeah. Thanks, very much I, just want to come back to service levels and the regulatory spotlight you know clearly the whole industry Union Pacific and included is under a bit of a spotlight from the regulator for their service issues and when I looked buckeye, but look back historically.
Whenever a railroad is needed to promptly address a service issue operating metrics almost always deteriorate rather than improve.
So I don't know if this is best for Jennifer but I want to come back to that question about or are you expecting an or improvement as early as Q2.
Just on what you're seeing now and I know you said you saw some pretty good exit trends in Q1, whether it's behind you Easter was more of a.
You know a it was more of a a numbers of Ventura a year over year numbers event as opposed to anything fundamental. So are you are you would you see yourself is on track to achieve Q2 improvement. Despite your efforts to to address service and that the Q2 improvement should continue through the rest of the year.
Yeah, well I'm going to resist the temptation to give you two Q guidance and stick with the full year guidance that you all can do the math I mean, we have to make improvement quickly and it's gotta be sequential and at some point, obviously that has to be year over year and that is our focus and that is our intent and we're very confident that we will do that.
Okay, and if and barring that you then perhaps your full years at risk. If you can't see that quickly as quick a quick turnaround that you're mentioning Jennifer is that a is that fair.
The longer you go into the year with that improvement it gets more difficult yeah, yeah, I would agree with that okay. Alright, okay. Thank you very much for at the time I appreciate it.
Walter.
Our next question is from the line of Bascom majors Susquehanna. Please proceed with your question.
Thanks for taking my questions can you talk a little bit about how your relationships and engagement with the STB has evolved over the last few months and any expectations of how they'll extend the service period, sorry, the service oversight period when it expires in a few weeks here and it may be walking that for next 12 to 18 months.
Where do you think there is will be most focused and how do you engage with them as the CPUC deal stop sucking up oxygen in that room. Thank you.
Thank you for the question Bascom. So we are deeply engaged at the S. T D. A.
No.
There is an executive level interaction with an S. T D either staff or a member virtually every day certainly several a week.
What what is helping in those conversations right now is demonstrably the service product is better.
And customers are temperatures are down the other thing if you recall late last year. There was a hearing at the STB that focused on Union Pacific and our use of embargoes and we are to the STB into our customers more importantly made the commitment that we're going to both look at how we use embargoes.
And have an eye towards essentially you know getting back to a place where they are rare.
Year to date this year, 65% reduction in the use in the last two months, 75% reduction as the railroads getting better and I have all the confidence in the world that kind of progress is going to continue.
So what I expect at this point you know the S. T v's a bit of a wildcard I won't predict what they do in May as regards the service reporting period, but I know the the overall industry and certainly Union Pacific is in a place where our service product is not prompting a more scrutiny and a significant.
Temperature coming into the STB from customers and that's that's there that's their purview, that's what they're built for us to react to customer feedback.
And that's what they've done in 2022, so the fact that if we can get customers to a place where they're satisfied with the service product and are in good dialogue with us on it that that takes a lot of the pressure off the S. T D.
Thank you for that and you maybe the longer term part of that question over the next 12 to 18 months, where do you think they will focus most and how do you make sure that your shareholders and customers interests are protected there. Thank you.
Bascom, so what we keep an eye on our R is the fulsome docket that they've got in front of them things like.
Fine law for a rate review versus this alternative dispute resolution mechanism forced open access.
The use of revenue adequacy as our rate setting mechanism.
Those are things that we're working hard with the with the STB for them to understand what the ramifications of some of those decision points are what is and is not justifiable by data in fact, and then of course, we we engage you know pull suddenly with them to to help make sure the regulation coming out of the U S T.
Makes sense and and accomplishes what they're trying to accomplish which is very good service product and growth in the rail industry.
Thank you.
Our next question is from the line of Ari Rosa with Credit Suisse. Please proceed with your question.
Great. Thank you and good morning, So really quickly I was wondering what was the real estate transaction, maybe you could give a bit of color on that I don't think we saw it and then lance.
[noise] approach, perhaps the final months, perhaps quarters of of your time as CEO of U P. I was hoping you could just kind of take a bigger picture step back and reflect on what are the accomplishments you're most proud of and.
And how you think about where you'd like to see the future of the railroad go from here and in particular I was hoping you could touch on your thoughts on the ability of U P to grow volume and take share over the over the next five or 10 years. Thanks.
Yeah in terms of the real estate transaction all right it wasn't fiber optics deal.
And alright. Thank you very much for the question and the opportunity that to reflect just a moment if I look back over the last eight years now working on your nine the thing I'm things I'm. Most proud of is what we have a team has a comp have accomplished in terms of moving.
Our transportation plan to a P S. Our model.
Doing that over the course of the last four years and doing it in a way where our customers weren't damaged by the transition. They were benefited from it I think we've done stupendous work on sustainability as I mentioned in my opening comments, we've done terrific work on diversity equity and inclusion we're recognized for that right.
Now in the industry and and in our communities.
We've done really good work on setting ourselves up to be able to grow we've got a wonderful stable of partners I M sees that are world class in hub.
In Schneider and Knight Swift in X P O N and its.
Its current form.
So I'm I'm really really pleased with that the as I look into the future.
We are pleased to be able to grow we have to be consistent and reliable and our service product that means we have to get our five critical resources right. All the time, we got one of them wrong last year part of our issue in part the fact that the you know the world blew up to a degree.
But we have to be stable and consistent for our customers. They tell us they want that and they will grow with us as we deliver that so I know the growth potential is there their supply chains want to use rail more.
The concept is really simple and straightforward. It's it's in our strategy serve with consistent reliable service grow with service product and products that meet our customers' needs do that in a way where we are the provider.
Of choice as the partner of choice that allows us to win in the marketplace and do it together with all four of our stakeholders being benefited from it we think the strategy is sound and we're ready and executing on it.
Yeah.
Thank you and congratulations thanks.
Sorry.
The next question is from the line of David Vernon with Bernstein. Please proceed with your question.
Hey, good morning, Jennifer a couple of questions for you within the guidance that you're giving for a full year or improvement is that all just the mechanics of fuel or is there some improvement in the underlying business and then as you think about costs from 'twenty to 'twenty two to 2023 on a full year basis can you give us some sort of absolute numbers around inflation.
Asian, and what added cost is being put in there for E T O.
An additional enhancements to the sense of the competition package.
So in terms of our inflation guide, we said, 4% was our inflation guide for 2020 three and we said on on the employee side that come from Florida would be up mid single digits and those things still hold and that takes into account what we have negotiated for implant and negotiate for in terms of paid sick leave.
You know in in terms of of how we're going to get there and how we're going to improve it really is the basis for them you know the service product the pricing I feel will be a component I mean, it obviously is confronted in there, but we have the other levers and you know that's where we are.
Very much focused fields can be what it's going to be a we're going to go after those items that we have the greater control over its winning new business pricing it appropriately and move it inefficiently.
Alright, and then maybe Eric just as a quick follow up as you think about the FTE count for the full year.
Where are you sort of targeting the business to be at year end 2023.
You know I think Lance I already answered that question you are hiring levels for this year are roughly we came into the year, assuming that they were going to be roughly similar similar to last year attrition is roughly similar in terms of what happens in the back half, we're really watching that from a volume standpoint.
Okay. Thank you.
Thank you Jim.
Thank you.
Our final question today is from the line of high room Nation with Daiwa. Please proceed with your question.
Hi, Thanks for squeezing me in I just had.
I had a question on the on the EV penetration and as or do you need to does U P need to make investments.
Given the the fire risk of batteries with any reason.
I'll say that.
We have not seen that risk right now.
We have very close relationship with the EV leaders, we've enjoyed growth there our ramps are prepare to handle those E V. E V. And then we're looking at the.
The forecast and the size and what we need to do if anything from an investment perspective to make sure that we can efficiently move those off and on the ramp and do it safely.
I think fundamentally the answer is we have not seen a shift in risk.
Just on our shipments of Evs.
Okay, great. Thank you.
Thank you.
Thank you.
There are no further questions at this time I would like to turn the floor back over to Mr. Lance Fritz for closing comments.
And thank you Rob and thank you all for joining us today and for your questions. We're looking forward to talking with our owners again in May at our annual meeting until then take care.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.