Q4 2023 Union Pacific Corp Earnings Call
Greetings and welcome to the Union Pacific fourth quarter earnings call.
At this time, all participants are in listen only mode a.
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. Jim Vena, Chief Executive Officer for Union Pacific Mr.
Mr. <unk>: Mr. <unk> you may now begin.
Jim Vena: Thanks, Rob Good morning, and thank you for joining us today to discuss Union Pacific's fourth quarter and full year results.
Jim Vena: I'm joined in Omaha by our Chief Financial Officer, Jennifer Hayman, our executive Vice President of marketing and sales Kenny Rocker Executive Vice President of operations, Eric Gehringer.
Jim Vena: The Union Pacific team is executing our multiyear strategy to lead the industry in safety service and operational excellence, our fourth quarter shows a lot of what's possible and demonstrate that we're on the right path to achieving those goals.
We exited 2023 with strong momentum.
Jim Vena: Which gives me great confidence that we have a winning strategy there's work to do but we're building the foundation for future success.
Kenny Rocker: Now, let's turn to slide three.
Kenny Rocker: This morning Union Pacific reported 2023 fourth quarter net income of $1 $7 billion or $2.71 per share. This compares to 2022 fourth quarter net income of $1 $6 billion or $2 $62 67 per share.
Jim Vena: Fourth quarter operating revenue was flat as increased volumes in core pricing gains were offset by lower fuel surcharge revenue and business mix expenses year over year were also flat as lower fuel expenses and productivity gains were offset by inflation and volume related costs and higher casualty expenses.
Jim Vena: Our fourth quarter operating ratio of 69.
Jim Vena: Percent improved 10 basis points versus last year and more importantly, we demonstrated strong sequential or improvement of 250 basis points from the third quarter, where.
Kenny Rocker: We are taking the right actions to increase the efficiency of our railroad while also improving service for our customers.
Kenny Rocker: Key to our strategy is accelerating and what we control.
Jennifer Hamann: We made great progress in those areas. This quarter that provides further proof that we're on the right path for future success. So with that let me hand, it over to Jennifer to provide more details on the fourth quarter and full year financials. Thanks, Jim and good morning, let's begin by walking through our fourth quarter income statement on slide five starting with the topline operating.
Jennifer Hamann: Revenue of $6 $2 billion was flat versus 2022 on a 3% volume increase breaking it down further freight revenue totaled $5 $8 billion up 1%.
It gets driver of freight revenue in the quarter once feel lower year over year fuel prices reduced fuel surcharge revenue and impacted freight revenue was 375 basis points as fuel surcharges declined $180 million versus 'twenty, 'twenty $2 million to $795 million.
Jennifer Hamann: Volume growth in the quarter contributed positively, adding 350 basis points to freight revenue and the combination of price and mix also with positive increasing freight revenues 75 basis points as solid core pricing gains were mostly offset by an unfavorable business mix intermodal shipments up 5% contributed heavily.
Jennifer Hamann: Due to the mix dynamic.
Jennifer Hamann: Wrapping up the top line other revenue decreased 13% driven by lower accessorial and subsidiary revenue.
Jennifer Hamann: Switching to expenses, we provided expense details for both fourth quarter and full year in our appendix slides, but let me hit some of the highlights against our 3% volume growth operating expense of $3 $8 million with what.
Jennifer Hamann: Digging deeper into a few of the expense lines compensation and benefits expense was flat compared to 2022 fourth quarter workforce levels decreased 2%, while our active T. N Y workforce was flat against the 3% volume growth. This solid level of workforce productivity, mostly offset wage inflation as cost per employee only increased.
Jennifer Hamann: 1% in the fourth quarter if.
Fuel expense in the quarter decreased 11% on a 15% decrease in fuel prices from $3.70 per gallon to $3.16, our fuel consumption rate deteriorated, 3% as we move the less fuel efficient business next with increased intermodal shipments and pure cold moves.
Jennifer Hamann: Finally, other expense grew 20% as a result of higher casualty costs and the comparison to 2022, which included insurance recoveries.
Coming out of Covid, we had a sizable case backlog that we largely worked through the last couple of years importantly, we do not see these elevated expenses as a reflection of a long term trend, particularly with our intense focus on improving safety.
Jennifer Hamann: Fourth quarter operating income was flat at $2 $4 billion.
Jennifer Hamann: Although the line other income increased $16 million due to higher real estate gains fourth quarter net income of $1 $7 billion and earnings per share of $2 71 sense, both improved 1% versus 2022.
Jennifer Hamann: Alright, and ratio of 60.9% improved 10 basis points year over year, and 250 basis points sequentially.
Jennifer Hamann: Moving to slide six with a quick recap of full year 2023 results revenue of $24 $1 billion declined 3% driven by reduced fuel surcharges business mix and lower volumes, partially offset by core pricing gains.
Jim Vena: Operating income totaled $9 $1 billion and our full year operating ratio of 62, 3% deteriorated 220 basis points.
Jim Vena: Earnings per share of $10 45 census decreased 7% versus 2022, and then reflecting the impact of our overall financial results return on invested capital declined to 180 basis points to 15, 5%.
Jim Vena: Turning to shareholder returns in the balance sheet on slide seven full year 2023 cash from operations totaled $8 $4 billion down roughly 1 billion from 'twenty to 'twenty two.
Jim Vena: A combination of lower net income and nearly $450 million of labor agreement payments were the main drivers free cash flow and our cash flow conversion rate also reflected those impacts we returned $3 $9 billion to shareholders in 2023 through dividends and share repurchases. Our adjusted debt to EBITDA ratio finished the year at three times as we can.
Jim Vena: To prioritize a strong balance sheet and be a rated by all three credit agencies.
Kenny Rocker: Well 2023 was a difficult year I'm pleased with the progress we've made over the last several months to improve our service and productivity. We believe this performance marks an inflection point as efforts to improve the efficiency of our railroad through safety service and operational excellence is starting to be reflected in our financials with that I'm going to turn it over to Kenny to provide.
Some comments on 2023 and kick off our commentary on 'twenty 'twenty four you Jennifer and good morning, you just heard from Jennifer that freight revenue was up 1% in the quarter as our volume gains of 3% were partially offset by lower fuel surcharges.
Kenny Rocker: So, let's jump right into the business things to recap the market drivers on the revenue side.
Starting with ball revenue for the quarter was flat compared to 2022, driven by our three Brooklyn and increase in volume offset by a 2% decrease in average revenue per car Corp.
Kenny Rocker: Core pricing gains were more than offset by lower fuel surcharges and the unfavorable impact of low natural gas prices on our index based coal contract.
Jennifer: Fertilizer shipments grew compared to 2020 two as demand for Bureau application was strong due to lower nitrogen prices.
Jennifer: Grain product shipments were up for the quarter as our team secured new feedstock opportunities for renewable diesel production in Louisiana and California.
Jennifer: Additionally, ethanol shipments of inquiries with our improved service.
Jennifer: Lastly, coal continued to be challenged in the fourth quarter due to mild weather and decreased coal competitiveness from low natural gas prices.
Jennifer: Industrial revenue was up 4% in the quarter driven by a 3% increase in volume.
Jennifer: Pricing gains in the quarter were mostly offset by lower fuel surcharges and a negative mix and volume.
Jennifer: Business development in our petroleum and LPG commodities segment contributed to the growth demand improve our plastics business in both export and domestic market. However, sand volumes were negatively impacted by softer natural gas prices that reduced drilling in the Eagle Ford Basin.
Jennifer: And increased utilization of in basin sand in the D J basin.
Jennifer: Premium revenue for the quarter was down 3% on a 4% increase in volume.
7% decrease in average revenue per car from lower fuel surcharges and truck market pressure.
Automotive volumes were negatively impacted by the UAW strike, but those decreases were mostly offset by dealer inventory replenishment.
Jennifer: And business development wins that I mentioned on last quarter's call.
Intermodal volumes were positive in the quarter, driven by stronger West coast imports domestic business development wins and strengthen our Mexico volumes now, let's start talking about 'twenty 'twenty four.
Jennifer: There are some key economic indicators that we're watching this year on slide 10. These are S&P forecast from their January report.
And you'll notice that it showed a mixed picture for 'twenty 'twenty four industrial.
Jennifer: Production looks to be flat housing starts are expected to remain challenged but the mapper auto continues to be strong.
Jennifer: Turning to slide 11.
Jennifer: Here is our 'twenty 'twenty four outlook as we see it today for the key markets we serve.
Jennifer: Starting with vault, we anticipate continued challenges in coal.
Jennifer: Natural gas futures remain volatile and inventories are high.
Jennifer: Domestic rain is relatively stable, but we are keeping a watchful eye on export demand.
Jennifer: On a brighter note, we expect fertilizer to be strong as repair that canpotex Portland, but so facility are now complete and commodity prices remain competitive moving into the things either.
Jennifer: And growth within Biofuels continues to be driven by strong demand outlook combined with a heavy focus on capturing new business, including incremental volumes procure from Minnesota and Iowa origins.
Jennifer: Moving on to industrial the construction market will be challenged to exceed last years record volumes as we're seeing softness in parts of the market.
Jennifer: However, we foresee the petroleum and petrochemical market remaining favorable due to our focus on business development.
Jennifer: And finally for premium on the international intermodal side, we expect the market to improve year over year, but our contract. We lost earlier in 2023 will negatively impact our 'twenty 'twenty four volumes on the domestic side weird and close with our customers who have indicated that they'll see a soft start to the year.
Sure.
Nonetheless, our strong service product that talks about the handbag market demand.
Kenny Rocker: And for automotive, we will see strength in this market with improve OEM production and business development wins.
Jim Vena: In summary, the economic environment continues to look muted in 'twenty 'twenty four particularly in the first half we're off to a four start in January based on severe winter storm and market challenges, we're seeing in coal and intermodal.
Jim Vena: But I am encouraged that we expect to see growth in some markets with our strong focus on business development for the second half we are well prepared to handle demand yeah, the market and economy improve we continue to make significant capital investments on both the carload and <unk>.
Jim Vena: Modal Brian to capture more freight over the road.
Jim Vena: Those investments along with our unmatched service offerings and improved service product from Eric's team create a winning environment for our customers.
Jim Vena: I'm excited for the opportunities in front of us and our commercial team is ready to help our customers win in the marketplace.
Jim Vena: With that I'll turn it over to Eric to review our operational performance. Thank you Kenny and good morning, moving to slide 13 to start I want to express my appreciation to the team for their relentless focus on improving our service product and driving network efficiency. It is thanks to their efforts that our network showed tremendous fluidity and reliability during.
Eric: The fourth quarter.
Eric: Freight car velocity improved 14% to 217 miles per day compared to fourth quarter 2022.
Eric: Increased train velocity and a reduction in terminal dwell drove that performance.
Eric: Service was strong during the quarter as we saw a significant 12 point improvement in both intermodal and manifest and auto trip plan compliance in.
Eric: In addition to trip plan compliance we have hundreds of customer specific performance metrics that also showed great improvement throughout the quarter. Most importantly, we are delivering the service we sold our customers, which is critical to our long term growth strategy.
While winter is here and has certainly brought its challenges. The railroad overall is very healthy and I'm confident the team will continue its positive momentum.
Eric: Safety continues to be the foundation of everything we do during the quarter, we delivered improved derailment performance through our investments in technology and process. We remain focused on the critical actions that drive real change so everyone goes home safely each day.
Jim Vena: Now, let's review our key efficiency metrics for the quarter on slide 14.
Jim Vena: During the fourth quarter, we saw year over year improvement across all of our efficiency metrics locomotive productivity improved 14% versus fourth quarter, 2022, and 9% sequentially as we continue to identify and execute on opportunities to utilize the fleet more efficiently.
Jim Vena: Throughout the second half of 2023 we stored nearly 500 units from our operable fleet.
Jim Vena: Workforce productivity improved 4% compared to fourth quarter 2022, with a strong crew base. We are focused on effectively managing workforce levels to the demands of the business.
Jim Vena: However challenges do remain from scheduled work agreements that in the near term require additional employees.
Jim Vena: Train length improved 2% compared to fourth quarter 2022, as we continue to remove Kerr touch points from the system in.
Jim Vena: In total throughout 2023 we were successful in extending train length as improvements in the second half more than offset the declines in intermodal shipments we.
Jim Vena: We remain persistent in our focus on train length to drive productivity, while providing a better service product to our customers.
Jim Vena: As we move into 'twenty 'twenty four we will continue to transform our railroad through a variety of technology initiatives and targeted capital investments designed to further improve safety improve our service product enhance resource utilization and ultimately lower our cost structure.
Jim Vena: So to wrap up let's review our capital outlook for 'twenty 'twenty four on slide 15.
We are targeting capital spending of $3 $4 billion in 2024.
Jim Vena: Similar to 'twenty to 'twenty, three we will support safe and productive operations by investing in our infrastructure and renewing our older assets. This includes modernizing locomotives and acquiring freight cars to support replacement and growth opportunities. We are also investing in technology and terminal and mainline capacity projects to improve productivity.
Jim Vena: Specific to our technology investments, we recently cut over net control, replacing our 50 year old Transportation management system. This cutover positions us to use real time analytics to open new capabilities for Union Pacific and our customers great work led by our technology team.
Jennifer Hamann: On the growth front, we will continue to invest in projects that expand our intermodal footprint and support business development and targeted high growth areas, such as inland Empire, Kansas City, and Phoenix to name a few so with that I'll turn it back to Jennifer to lay out our initial financial thoughts for 2024.
Jennifer Hamann: Turning to slide 17, let me start by pointing out that we added a new appendix slide that contained several of the 'twenty 'twenty four modeling assumptions that should be helpful to everyone and framing our current expectations.
Jennifer Hamann: You heard from Kenny it's a difficult market to forecast economic indicators show, a muted and uncertain economy.
Jennifer Hamann: A couple of other variables such as what the fed might or might not do with interest rates and a presidential election, and we've got an interesting year ahead.
Jennifer Hamann: On top of the macro pressures lower coal demand and some loss of international intermodal business are expected to negatively impact our volume.
Jim Vena: And as you've seen in the weekly carload data January is off to a slow start as cold temperatures across our system impacted operations and volume with first quarter volume down 9% year to date I am confident however that our strong and improving service product will allow us to capture available demand. We clearly demonstrated that in the fourth quarter as we took advantage of.
The unexpected but short term surge in intermodal.
Certainly the economy is our expectation to generate pricing dollars in excess of inflation dollars, even with ongoing headwinds from certain intermodal contracts with those pressures, we do not expect price to be accretive to margins in this year.
Jim Vena: Key for U P. In 'twenty 'twenty four is our ability to control the controllable by driving a strong safety culture, making ongoing service games and improving network efficiency, we're confident that regardless of the demand environment, we will take the necessary actions to run a more efficient network.
Jim Vena: Finally with capital allocation there is no change to our long term strategy. We are investing $3 4 billion back into the railroad it Eric detail next to prioritize our industry, leading dividend payout and then excess cash will be returned to shareholders through share repurchases. However.
Jim Vena: However, given first quarter debt maturities of 1.3 billion, we will not be repurchasing shares in the first quarter.
Jim Vena: It's always difficult in late January to make predictions for the year ahead and this year is no different there clearly ongoing challenges from a macro and inflationary perspective, what is very encouraging though as we start out 2024 is our momentum, which you've heard US mentioned several times today, we demonstrated with our fourth quarter performance, what's possible and we look forward.
Jim Vena: Further improvement in the year ahead with that let me turn it back to Jim. Thank.
Jim: Thank you Jennifer.
Jim Vena: Let's turn to slide 19.
Jim Vena: Before we get to your questions I'd like to quickly summarize what you've heard from our team Kenny.
Kenny Rocker: Kenny outlined our view on the upcoming year, our volume outlook today reflects headwinds from lost business coal demand and relatively soft economic book as much of that is out of our control. We are mitigating these impacts to business development and value creation by providing great service to our customers.
Eric: Eric describe the progress we've made to return our service levels to industry best well, there's work to do the team made consistent improvement through the quarter to exit in a very fluid state.
Obviously winters here, but that's part of railroading I judge our success by how we minimize the impact on our customers and how quickly we recover the network. So far we've grown we've shown great resiliency finally, as Jennifer laid out our productivity and pricing gains will be key to overcoming the ongoing inflationary pressures in 2024 as well as the Sop.
Jim Vena: The economy, well many unknowns remain I'm confident we will succeed in the areas we control.
Eric: We've got plenty of opportunities this year to improve safety service and operational excellence.
Jim Vena: As you heard me say in October I came back to Union Pacific to win my.
My vision and the opportunity I see for this company has not changed we have the right team and strategy in place to grow this railroad long term and I'm very confident we'll see a better union Pacific in the future.
Jim Vena: Now ready to take your questions Rob.
Rob: Thank you Mr event or.
Rob: Well now be conducting a question and answer session.
Rob: If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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Rob: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Due to the number of analysts joining us on the call today.
Rob: Having everyone to one question to accommodate as many as possible.
Rob: Thank you and our first question today is from the line of Chris Wetherbee with Citigroup. Please proceed with your question.
Rob: Hey, Thanks, good morning.
Chris Wetherbee: If I could ask just sort of the outlook for 2024 as you sit here it sounds like a muted macro environment is just keeping you cautious, but I guess when you think about the opportunities that you have can volume being up this year I know some of the macro indicators that you highlighted are muted, but they are still positive. So curious about volume growth and I guess in that context with pricing, maybe not necessarily being a.
Chris Wetherbee: Creative to margin is there enough of that volume in some of the cost efficiencies that you guys are working on to get margin expansion.
Chris Wetherbee: So Chris maybe let me start and then Ken I can give you some more color I mean, we're just not going to give you a number in terms of what we think can happen with volume because of what you yourself said, there's just a lot of uncertainty and we just don't think it's prudent sitting here at the end of January to give you some sort of a forecast based on hopes for a second half recovery do we.
Chris Wetherbee: Hope that that will happen and are we going to work diligently to move every piece of business that theyre, absolutely and I think you really saw what the network can do with our fourth quarter performance, but we just need to see a little more certainty and hopefully that plays out through the year and we can provide that but sitting here today, we just don't see that they can't even be talking about and I talked about it in my opening.
Ken: So it's a mixed bag of opportunities that are in front of us we feel really good about our the biofuel market not marketed go on demand is growing we're capturing business in those markets on the industrial side. We've had some you know record year on the construction site there will be a strong year, but as we are coming out of the gate with weather.
Ken: That's gonna be.
Ken: Little bit challenge for a.
We feel really good about our petrochemical business and wins that we've had.
Ken: From a business development perspective on the petroleum and LPG side. Those are all positive for US you know on our premium business.
Ken: Again, those are really economic driven and so we'll be looking to see what happens with demand overall I talked about the international intermodal side and the lock there we feel really encouraged by our ability to win on the auto side and you heard us talk about the Volkswagen women last quarter.
Ken: There are a lot of demand there and our forecast for growth there, we really feel good about that market.
Ken: Anything on the margins.
Ken: I'm sorry.
Ken: Oh, I'm, sorry, again I'm not.
Ken: You know this might become a broken record I hope not but I mean, we are not going to give specific guidance I mean, we're going to do everything we can as much as we can and again you saw what we did in the fourth quarter, but every kind of other guidance I would give is gonna be predicated on what I think is going to happen with volume.
Ken: And we just don't have that clarity and I don't think it's prudent to do that sitting here today.
Chris Wetherbee: Got it thanks for the time appreciate it Chris.
Chris: Chris Let me just maybe just.
Chris: Try to put this all into a box.
Chris: We were thinking is.
Chris: It was very difficult for us to look forward and say this is exactly the way the year is going to go more important to me and the team is.
Chris: What we've done operationally what are what do we do to provide.
Chris: Candy and the entire team the capability to go out there and maximize what's available for us and what we can bring on to this railroad and for me. That's the single most important thing I think what we've shown is has the capability to flex up we have the assets to be able to flex up we have the capacity to be able to flex up and then.
Chris: We continue to drive the efficiency of the railroad, which I expect we will then what we do is as we win in the marketplace and whatever is out there we're going to compete against everybody else crux at other railroads and we think we are we winning model. So that's the challenge we have and it would be truly there would be a mistake for us.
Chris: And say because I can't tell what's going to happen like Jennifer pointed out with the with the inputs and the effects from interest.
Jim Vena: Interest rates and everything else that's happening in the economy, but I'm very comfortable that we're going to maximize what's available for union Pacific and win.
Jim Vena: Okay. That's helpful. Thanks, Ed I appreciate it.
Jim Vena: Our next question is from the line of Walter <unk> with RBC capital markets. Please proceed with your question.
Jim Vena: Yeah. Thank you very much our operator good morning, everyone.
Jim Vena: On the intermodal side I know there was a business loss, there and but looking at some of the statistics that L. A long beach, there seems to be a really good uptick in volumes into those that those regions for that region.
Jim Vena: Richie impact, perhaps east coast is down.
Can you are you seem that there is new business coming back that way and could that be Ah Ah Ah Ah Ah.
Jim Vena: A nice offset to any business loss or could it create an opportunity for our business or more business with there's more volume shifts to L. A long beach and perhaps you know the fluidity of L. A long beach is that keeping pace with the new volume that kind of gets way.
Jim Vena: Yeah. So thank you Walter we've spent a lot of time looking at the global supply chains in the us.
Jim Vena: The canal and so forth I'll tell you right now in the near term, we haven't seen any significant shift we've been talking to our the VESCO carrier owners, we know they put in terror our customers upon in tariffs to go over the Panama Canal for example, and so we've been working with them to me.
Jim Vena: Move as much as we can with the network that we have with the match back opportunities that we have with the reload opportunities that we have with the new products that we have on the with the Houston.
Jim Vena: Language that Eric has given us to give our customers every reason to go to the West coast. So what we have seen is we are seeing more go on IPR, we have a very efficient service network to accomplish that we're happy about the customers that we have that have been able to grow in that market and then finally.
Jim Vena: We have a great network, where the service, we're able to capture that and get all of that business that's out there.
Jim Vena: And then as we think.
Jim Vena: Because to your point you can't predict the future with entire clarity. It's another reminder, Walter of the fact that when we talk about having a buffer and you look at what we did in the fourth quarter, we generated the ability to make sure we have that buffer that buffer and locomotives that buffer in railcars positioned in L. A so in the event the volume is there we support.
Jim Vena: Kenny.
Jim Vena: Our team to be able to actually capture it.
Jim Vena: And and the fluidity of the terminals right now is that how would you assess that.
Jim Vena: Very very fluid as you saw in the fourth quarter, a 14% improvement in car velocity doesn't come unless you've got married fluid operations now to Jim's point on their opportunities and of course there are in fact I'll talk about those as we go through this but overall right now yes very fluid.
Jim Vena: I appreciate it thank you.
Jim Vena: Our next question is from the line of Scott Group with Wolfe Research. Please proceed with your question.
Jim Vena: Hey, Thanks, Good morning, guys. So it seems like you're framing in there says there's things we can control and things we can't control it.
Jim Vena: It strikes me that over time.
Scott H. Group: The industry's been able to have some control over price and now you're talking about inflation upsize and you know right now yield ex fuel is only up one right. So it just seems we need more price.
Scott H. Group: Can we get more price I dunno, how do we how do we think about that and then could you just clarify like this this international intermodal contract when did we lose that because it sounds like it happened in sometime in 'twenty three but we just we're seeing really good intermodal growth. So I'm a little confused with why we're flagging this as such a big issue right now.
Scott H. Group: Thank you Scott I I got I got both of those thank you. So first of all you're exactly right.
Scott H. Group: Prices are controllable and let me make this clear it's not like we are jumped up here and waited till January one to look at price we've been going down. This path here for a few months, you've heard Jennifer and I say that we have a set amount call. It almost half that we can touch.
Scott H. Group: From a pricing standpoint, our commercial team has really been very effective sit in our customers talking to them about the improved service product talking to them about our increased inflationary pressures that we saw from the labor side and how Eric is leveraging that to improve in our service product.
Scott H. Group: Give them, they're seeing the same input there you know the same increases I've been meeting with customers and so they know that so yes, we control a portion of that and so we've been very focused on articulating that story.
Scott H. Group: I think you had a question on the international side and Yeah, you're correct. We lost some of that earlier in the year last year, the bulk of that will still be up.
Jim Vena: Working through in 2024.
Chris Wetherbee: But just to your question.
Speaker Change: And he's talking about with that loss that kind of goes to our discipline when it comes to price and making sure that the business. That's on our railroad is running at acceptable margins, sometimes that doesn't happen and we might lose a piece of business. Yeah, I mean with the service product when they're investments that you heard Eric talk about this morning the margins.
Speaker Change: To be acceptable to be on the network.
Speaker Change: Well I hate to always we kept piece and I won't but let me recap the Scott for you. So.
Speaker Change: Inflation when I was first call that I had in October I was pretty clear that we are going to deal with the inflationary pressures that are that is presented.
Speaker Change: For us that we have to tackle and we're doing it two ways. We are dealing with it on a on a price from the price side and we're also dealing with dealing with it on the efficiency side and I think we have a clear view. This is not a short term three months you can fix it on the on the price side and even on the efficiency side, we've seen improvements in it.
Speaker Change: Fishing season, you can see that from the number and I think there's more available for us on the efficiency side.
Jim Vena: From how we operate our trains the fluidity in the terminals, how we use our people and we did a really good job. The team did a fantastic job in the fourth quarter and I expect it to get better as we go through the year. So those two things we're tackling head on we're not being shy about it we're being straight I've met with a lot of customers in groups and small and.
Jim Vena: I've been clear about what the pressures are and what we're gonna do about them moving forward, but at the end we want our customers to win in the marketplace, we want them to win.
Jim Vena: So we're being smart about how we price and what level and it's different for different marketplaces, and that's how we're handling it but I'm excited I think we overcome this this year by the end of the year.
Jim Vena: See ourselves in a different position.
Jim Vena: Thank you.
Jim Vena: Our next question is from the line of Tom why do it with UBS. Please proceed with your question.
Jim Vena: Yeah. Good morning so.
Jim Vena: Jim you you've seen you realized at a very fast and in positive response in terms of the rail network operation since you've been at your peak.
Where do you think you're at in terms of kind of further improvement. So I don't know if you want to look at like you know locomotives you know what the active fleet is and where it can go to maybe if you could comment a little bit on head count I think that the head count was down.
Down pretty meaningfully sequentially. So I guess I'm, just trying to get a sense of kind of you know are we at the stable level now after that really quick improvement or you know our head count an active locomotive fleet going to have further steps down as we go into 'twenty four.
Jim Vena: Well listen thanks for the question so the way I see it as this I think there's more on the railroad to become more efficient and the concentration is a little different.
Jim Vena: And the last time I was here and a little different than what we just were able to do it in the fourth quarter I think there's opportunity in and speed and car velocity that'll help us be able to move the railcars faster use a few less locomotives and be able to keep the network more fluid, but the real.
Jim Vena: A big piece for us and what we're going to concentrate on and we think there is a capability that would be much better is how fast we operate are our terminals and the fluidity through the terminals to be able to have the products now it's just not in the transportation piece, we are looking at ways and on the engineering side.
Jim Vena: How we do maintenance, how we do capital work on the mechanical side, how we what it cost us to perform overhauls every piece of the network is still there. So I think there's still more left on that on that piece to be able to do.
Jim Vena: Okay can you offer a thought on how that translates to head count do you think head count goes down further or is it kind of stable at current level.
Jim Vena: But you know the challenge we have with head count as we signed some collective agreements and you live with what was given to you and some of those collective agreements put pressure on the on head count they put pressure on.
Jim Vena: From both the the time off.
Jim Vena: The benefit of time off that we provided.
Jim Vena: We had some weekends when the football game, where on that are we have.
Jim Vena: An extra 15, 20% people all got sick at the same time, so we need to be able to figure out how to deal with that and we'll do that as we move ahead. It must have been a real bad weekend right. At the same time was one of the playoff games was on but at the end of the day.
Jim Vena: Those are those are stumbling those are blocks that we have to get over this year and what we showed in the fourth quarter is with all of that all the pluses and all the headwinds we had on the head count we were able to keep the head count and reduce it overall in the company and there is no reason for us not to continue to do that.
Jim Vena: We will look for every opportunity.
Jim Vena: Sorry, I can't give you a specific number because this is a moving target as we move ahead. We're implementing you agreements through this year, so well it'll be noisy it won't be a straight tangent are down the slope wont be perfect there'll be a little up and down but I'm very comfortable that we have the.
Jim Vena: Programs the processes in place to be able to correct that and had the way which is less people handling the same amount of business.
Jim Vena: Great. Thank you.
Jim Vena: Thank you.
Jim Vena: Our next question is from the line of Jon Chapell with Evercore ISI. Please proceed with your question.
Jim Vena: Thank you and good morning, I was going to ask this anyway I guess, it's a perfect follow up and maybe it's just reading between the lines, but when Eric mentioned.
Some of the challenges remaining from the work agreements that required additional employees I mean, it was noticeable to me that your stress near term. So is this just is there a time, where this anniversaries, where you could be a lot more flexible based on the volume environment or was the stress on near term kind of related to what you were just mentioning Jim you're putting programs in place you're trying to address it.
Jim Vena: And that you hope at some point you can kind of reverse that trend.
Jim Vena: Yeah in the in the in 2024, we have a date.
Jim Vena: Implementation for the agreements that we have not implemented completely unusual pressures.
Jim Vena: On the number of people that we would need to operate so that'll be through 2024, and that's why I've always talked about this as a I see this as a two year.
Jim Vena: Adjustments to the railroad to be able to get there, but we do have programs in place as we implement we run into things if we operate as efficiently as I think we can we will mitigate that and you've mitigated by running less trains having more cars on the on the same trains we grow we put more cars on the same things instead of starting more we use the people and.
Jim Vena: The facilities that we have more efficiently so, but it's a 2024 headwind for us that we're going to overcome just like we did on the fourth quarter.
Speaker Change: John We only have the word quest agreement in place with the BLA T. We're still negotiating with smart T D correct.
Speaker Change: Hmm.
Jennifer Hamann: Thank you Jennifer and thanks, Jim.
Youre welcome.: Youre welcome.
Youre welcome.: Our next question is from the line of Amit Malhotra with Deutsche Bank. Please proceed with your question.
Jennifer Hamann: Good morning, Thanks, Hey, guys. Good morning, Congrats on the good results she Jennifer I want to come back to the 5% inflation. So you've got a $15 billion cost structure that basically translates to like 750 million bucks of higher cost.
Jennifer Hamann: In 'twenty four I assume that's a gross number because you've done that you guys have done a phenomenal job actually lowering the cost structure as you move from three two to four view. So is there any help you can give us in terms of how you think about that grows 5% translates to kind of like a net cost number in the context of the revenue outlook.
Jennifer Hamann: Yeah, No I mean, you've got that exactly right in that 5% is the gross number so that's our challenge and opportunity is to offset that with productivity and so you know that's where you know you heard Jim talk you heard Eric mentioned, we have those opportunities in.
Eric: Virtually every cost category, you know put depreciation side, that's kind of fixed for the year, but we absolutely have opportunities to offset that in terms of how we run the railroad and I think you know just think about wage inflation and think about fourth quarter. So you know we had wage inflation.
Jim Vena: First half of this year are our wages are going to be up 4% for our union personnel, it's going to go to four 5% in the second half, but our cost per employee was only up 1% in the fourth quarter. So that's productivity, that's enabling us to offset some of that and so that's the task of this management team and that those controllable that we talked about in.
Jim Vena: That's what we're very much focused.
Chris Wetherbee: But is there any any help like I mean can you offset after baking upset 40% of it like because that's obviously critical to understanding the EBIT and margin outlook, which I know is a highly uncertain, but at least give us some sense of how much you can offset that gross number by in your opinion.
Chris Wetherbee: Also note that the volumes play play a role in that in terms of how we're able to leverage and build longer trains in and have more.
Jim Vena: Work to put up against some of those inflationary costs. So that's our challenge, but I'm really not going to be able to give you any more than that.
Jim Vena: Okay, I thought I'd try anyways. Thank you guys appreciate it.
Jim Vena: Good question.
Jim Vena: Okay.
Jim Vena: Our next question is from the line of Allison <unk> with Wells Fargo, because you see with your question.
Jim Vena: Hi, good morning.
Jim Vena: So obviously services improving here just in terms of customer engagement.
Jim Vena: Any color on the strength of the type of antibody opportunities turning to take salary.
Allison M. Landry: <unk> opportunities and I guess, along with that are you seeing any improvement in some of the conversion of some opportunities out there just any thoughts thanks.
Kenny Rocker: Allison Let me, let me start and then Kenny.
Kenny Rocker: Please jump in so if we look at the this railroad that we are blessed with that we operate and I think you've seen some of the steps we've taken.
Jim Vena: So you have to provide a level of service that we sold our customers and that's our goal and we work real hard every day to do that we operate the railroad very efficiently Where's the opportunity we have a mix of traffic that's available to us that the originate on our railroad. So when I go around the entire railroad I'm very.
Kenny Rocker: Comparable that we offset and we have the capability to offset and we are tackling whether it's industrial complex all the way from New Orleans to Brownsville, Texas, whether its the green whether it's the soda ash, whether it's the intermodal on the west coast and our speed, we are able to provide speed or customer.
Kenny Rocker: Or is that require a speed and not all of them do we can go from L. A to a Texas you know close to 2000 mile journey, and we do that in a in 48 hours. So that's truck like so and our service. So we've put on from Mexico going into Eastern Canada, partnering with C N and.
Jim Vena: And ourselves into the east plus into Chicago is unparalleled we can do it as fast as anybody so there's lots of opportunity out there for us and what we have to do is with good service the customers will see what's possible and they will want to partner with Union Pacific and grow their business with us versus.
Kenny: Anybody else I'm Kenny.
Kenny: So first of all we have a robust business development pipeline.
Kenny: The healthy wanted us to incur.
Kenny Rocker: Encouraging one we're excited about the pipeline in front of us So a lot of opportunities. There. The main thing I want to start with is our service product is in a strong position and so as we talk about the services that we sold to customers you look at some of the markets yet.
Kenny Rocker: Get a little bit more detail here look at coming out of Mexico. That's the service product that Eric has given us a daily that's undisputed and an unmatched coming out of Mexico.
Kenny Rocker: It's the fastest product. It's also a product that is on time you look at the West Coast and someone asked me a question earlier, we're blessed with a network, where we can pitch them. We can catch we can pitch carbon out of the west coast as we onboard and on dock, we've got a strong ipi, we can catch in the inland Empire and we built that.
Kenny Rocker: We put it in the bathroom is there and we've shared with you that we've got plans that really are growing in that area and with the network and the service product. We have we're expecting to grow if you look at the carload side, you've heard us talk about some of the wins in the auto side I talked about the Petro Chem side.
Kenny Rocker: Great and that work down in the grass Golf Service Park is improving our commercial later if the commercial team are sitting out there and talking to customers about taken a little bit more truck off the road. So we're bullish on getting out there and growing as the service product is there and we're investing in our network.
Kenny Rocker: Great. Thank you.
Kenny Rocker: Our next question is from the line of friend in the country with Barclays. Please proceed with your question.
Kenny Rocker: Hey, good morning, Thanks for taking my question, Eric I wanted to come back to you because I think in response to an earlier question. You spoke about you know there's still more to come on.
Kenny Rocker: Things like velocity and train.
Eric: Train length, and then I think Jim even alluded to some local service plan changes. So do you want to elaborate a little bit more.
Eric: Where you see productivity gains this year.
Eric: Absolutely. So you mentioned car velocity, so let's start there and how is your thinking about 'twenty 'twenty four and what's in front of US you saw what we did in the fourth quarter of 2014% improvement 217 miles per day that'd becomes a floor a floor that is we work every single day as was mentioned before we are working to improve that now if you peel that back in.
Kenny Rocker: You say, okay within that where do you see the biggest opportunities you mentioned train length. So we can start there train length isn't opportunity always has been and candidly always will be because the railroad a dynamic trailing comes in two forms. The first one can you just gave a great example of inland Empire, where we're bringing more volume onto the railroad I already have an existing.
Kenny Rocker: Train and we can just tacking on to the back of that the other way that it comes in our actual transportation plan changes that we make an example of that is the one that can be brought up with Mexico. When you think about that being two trains before and now were consolidating that traffic into one it allows us to drive productivity that way after that fluidity drives our locomotives.
Jim Vena: There's other factors, but at the very core of it is about fluidity. We took out 500 units out of the system in the second half of last year, a little bit because of volume, but the vast vast majority of it because of fluidity continuing that work allows us to continue to right size. The fleet and you know we don't talk a lot.
Jennifer Hamann: Purchased services are on these calls, but purchased services a big opportunity for us whether you're thinking about how many vehicles do we have on this railroad to operate it where do we think about how much fuel that we're using we also have opportunities on the casualty side as Jennifer has mentioned many times before it's an opportunity all the way from the safety side, that's probably where.
Jim Vena: So focused on safety as well as even as we think about our service product and we have teams that are dedicated to making sure that the freight that we haul is has successfully hauled from origin to destination without being damaged and how do we drive down any claims that we have so it is a target rich environment and we are doing everything.
Jim Vena: Every day to capitalize on that.
Jim Vena: Thank you.
Jim Vena: Our next question is from the line of basketball majors with Susquehanna. Please proceed with your question.
Jim Vena: Following up on the locomotive piece earlier, you talked about storing 500 units in and having a 9% sequential increase in productivity.
Jim Vena: Jim as you look forward a bit further can you just talk about how you think about you piece fleet renewal strategy for locomotives over the next call it three to five years, and and and and how at this point is some of the regulations that California is proposing are impacting the way that you think strategically about that cigna.
Jim Vena: An investment for the railroad. Thank you.
Jim Vena: That's good and I think it's a great question. If you if you looked at the bottom line.
Jim Vena: We have enough locomotives that we would not have to look into the planning period of three years out that we would have to purchase any locomotives, but we always look at the the.
Jim Vena: The greenhouse gas emissions of our locomotives, what we need to do to be able to invest to make them more efficient both on the fuel spend and greenhouse gas emissions. So I think we will target.
Jim Vena: Capital expenditures, that's not in the plan this year and we'll look at it again to see where we are we're testing new innovative ways to have propulsion. So we will continue to do that and invest in locomotives that are can be hybrid.
Jim Vena: To work out there for us.
Jim Vena: And in certain situations, we can be implemented but I don't see the requirement is that we do not have to spend money, but bottom line is we know that we will invest in our fleet and we don't want to have the oldest fleet in the network. So we will continue to invest in when you are in the fleet as we move ahead, but it will not happen in 2024.
Jim Vena: Thank you.
Jim Vena: You're welcome.
Jim Vena: The next question is from the line of Ken extra with Bank of America proceed with your question.
Jim Vena: Hey, good morning, and congrats on solid and rapid results here just wanted to check I guess, you're not changing that you don't need volume gains to get margin improvement is that right am I hearing that right and then your thoughts on the outpacing normal sequential shifts in.
Kenny Rocker: For the first quarter or should we still expect that like you did in the fourth quarter, given the weather or accelerating gains and then just aside when Kenny I just want understand.
Kenny Rocker: Can you talk about the scale of the intermodal loss in 'twenty four did we see it in the fourth quarter or does that all coming in can you talk scale I guess that was a surprise I think to everybody so far.
Okay. So three questions and that was very good I like so what are we start remembering what are we going to start what do we what do we start with the contract real simple.
Kenny Rocker: Contract was lost early in 2023 and.
Kenny Rocker: The business is actually lost starting January burst correct, Yeah, that's true.
Kenny Rocker: We'll still see a bulk of it is still showing up in 'twenty or 'twenty four so that's the that's the challenge is it's a 2024 issue.
Kenny Rocker: It was early in 2023 that we lost that business.
Kenny Rocker: And if I can in terms of your margin questions again, not going to give you any specifics there and you know we have three levers as you know that we use to attack and generate profitability and volume price and productivity and you've heard us talk about the fact in my prepared comments that priced well.
Positive and in excess of inflation dollars is not going to be accretive to margins here in 2024.
Kenny Rocker: We are unsure about the volume.
Kenny Rocker: Picture, there's a lot of puts and takes as you heard and we know we've got some headwinds from a contract loss in coal.
Kenny Rocker: And so are the lever that we are most confident about and have ultimate control over is the productivity side and so you're right. We have shown in periods of declining volumes in the past that we can through productivity and price to generate margin improvement, but we're not giving any guidance on what any kind of magnitude of volume changes. So I don't want to try to get into that game.
Kenny Rocker: Linking X amount of volume with X amount of productivity and margin. The thing that you will see from us and our results regardless of what happens as long as that we're performing better we're running better we're running more efficiently and driving productivity and whether that results in positive or negative in the financial picture is gonna be a function of some.
Kenny Rocker: That volume in and how that plays out through the quarter and through the year first quarter. In particular is gonna be a bit of a challenge for us and <unk>.
Kenny Rocker: Volume, yes in the weather you you've heard us talk about that but a couple other things just to remind everyone in terms of a year over year comparison last year, we had about $100 million little over $100 million.
Kenny Rocker: Real estate transaction that was in our earnings and we also had a very strong fuel benefit in the first quarter of last year and helped our margins, but I think almost two points in about 25 cents. So just want to remind everybody of those kind of year over year comparison pressures.
Kenny Rocker: I appreciate the multiple part answers to my one question. Thank you.
Kenny Rocker: [laughter]. Our next question comes from the line of Justin Long with Stephens. Please proceed with your question.
Jim Vena: Thanks, and maybe taking a shot at asking that question a little bit differently, Jim you've now been at the company for roughly a couple of quarters do you have any updated thoughts on the size of the total productivity opportunity going forward and roughly how much of that is dependent on volume growth.
Jim Vena: You know if we want to make our own assumption that volumes are flattish this year hypothetically.
Hypothetically is that a scenario, where you can still see meaningful margin expansion year over year.
Jim Vena: Yeah.
Jim Vena: Listen I think it was a well framed question I like it because it gets to the crux of who we are at Union Pacific and what the vision is and what our goals and objectives are I'm very clear on it I think.
Jim Vena: We are going to have quarters, just like the first quarter, but maybe we don't see as much of a sequential improvement as we would like because of the pressures of what we had in January so far with weather and I'm not sure what's going to happen I've been around for way too long to the forecast what's going to happen.
When winter was on and when we come through spring and everything that can happen in but fundamentally I see us as having the best operating ratio in the industry and that's what we're driving towards and we will get there and I see it in the future and the future is not so far that the that it's cloudy I see it clearly and what we have to do so.
Jim Vena: For me, that's real important and I don't care, whether we whether the business and the business in the marketplace gives us business or not but I'll tell you I'm pretty clear. Okay. We have a great railroad we operate very efficiently we should win with the customers and I expect Kenny and his team to deliver this is not you know people want to talk about we lost the busy.
Jim Vena: We need to go replace that and we need to bring it on and we need to do that in the short term not the long term without going after a.
Jim Vena: Making an adjustment on price to go get the business, we have that capability and we can deliver value to the customer that's how I think and I did not come back here, you know I could've sat at home in Scottsdale, or being somewhere doing some exciting hiking or mountaineering, but I decided to come back because I think we can win and we have the railroad in the network to do that.
Jim Vena: So the pressure is on this team.
Jim Vena: The pressures on Eric to make sure and his entire team to deliver recover fast like we did with this last winter.
Jim Vena: The impact that we had I expect Canada to deliver and I expect Jennifer and the entire team to look for every opportunity to see how we monetize what we have is a railroad and win so I love. The question perfect. So hopefully I answered it for you.
Jim: You did thanks, Jim Youre welcome.
Jim: The next question is from the line of Ben Nolan with Stifel. Please proceed with your question.
Ben Nolan: Yeah, Thanks, and good quarter and by the way Jennifer I do like the AR that last slides helpful. The my my question relates to Mexico. Obviously, that's an initiative that you guys really tried to accelerate last year and then around the end of the year, there where the border closures I'm just just thinking through how you how you.
Ben Nolan: That business to trend.
Ben Nolan: Moving forward in and if Youre seeing a lot of these reassuring things or or or some of these interruptions.
Ben Nolan: It, causing any any second guessing of that at all.
Jennifer Hamann: So can you talk about the business and how we see it and then if.
Speaker Change: You don't mind I'm going to answer the piece on the border. Okay sure Yeah, I mean you.
Speaker Change: You know Ben the near Shoring is real we've seen the billions that have gone in and.
Speaker Change: And all of 2023.
Speaker Change: These are a number of them are highly industrial and rail centric, which we find encouraging.
Speaker Change: I talked about the service product that we have.
Speaker Change: And we're not waiting around for the near shore and have happened, we've seen some wins without having the fastest product coming out of Mexico, especially in time sensitive.
Speaker Change: Products like auto part again daily service, we're reaching into the mid west reaching into different parts of Canada and so we're encouraged by that we're bullish about that we are talking to customers about that were put in as much as we can on the network and you also saw us create a service product.
Speaker Change: And so the south east, which we are getting some traction on so again coming out of Mexico. It's a great franchise for US we've got six borders that we can get in and out of Mexico. So.
Speaker Change: Great product and great friend, John you bet.
Speaker Change: And on the border.
John: I'm disappointed that the border was shut down and I do not think that's the way to move forward I think there is a problem. There was a human humanitarian issue I personally went down with some members of the.
John: The team to go visit and it's very difficult when you see people crossing.
John: River and the mother with a child coming and then falling into some laser wire that is not something that anybody should should see but at the end of the day for us I think it's more important that the border crossings are fluid and we are doing everything investing in systems to make sure we protect the railway cross.
John: But we do not have people crossing on the trades and we've done a really good job of that people are not crossing.
John: Coming across from Mexico into the U S or vice versa on the trains and that's why we will continue to do and we will work close with our customers and we have customers understand they have a problem and we've worked very closely with them and we will continue to have meetings and discussions. So that we will do everything we can to make sure that the real op.
John: For Asia is not impacted as we move forward.
John: Alright, thank you.
John: Yeah.
John: The next question's from the line of Ravi Shankar with Morgan Stanley. Please proceed with your question.
John: That's why everyone. You guys said that you are looking to push on unreal length, which is our train length is understandable.
John: So you're going to have how much room, you have to kind of.
Get more leverage there.
Ravi Shanker: Kind of given your efforts already going off and how much more like physical space is there also I think given some of the kind of regulatory scrutiny around train lengths.
Ravi Shanker: Is this something that you guys can do by yourself or do you need to get be kind of STB or Congress is going to sign off on it.
Ravi Shanker: Yeah. Thank you for that question so.
Jim Vena: Core to your question is how do we think about train length and how do we execute that so let's let's put volume to the side just for a second don't do our trains have capacity for more trailing absolutely 100%.
Jim Vena: The work that we have in front of us that we've been executing now for years and we'll continue to do is to make sure that all of our systems behind the scenes continue to first identify those opportunities and as we've always been to be exceptionally prudent about actually working through our physics engines and to understand exactly how to build our trains.
Jim Vena: That's the science and like all science evolves and every quarter every year, we see new opportunities to be able to keep capitalize on that so I'm not going to guide you to a specific number but I'm going to tell you we see some opportunity there you'll see us capitalize it in 'twenty four and I am excited and appreciative of what the team is doing to make that happen.
Ravi: Thank you Ravi.
Ravi: Our next question is from the line of Brian Us in bed with J P. Morgan. Please proceed with your question.
Brian P. Ossenbeck: Good morning, Brian Hey, good morning. Thanks.
Brian: Hey, good morning, Jim Thanks for taking the question.
Brian P. Ossenbeck: Just a quick follow up first on the more grist rules is there anything in your guidance.
Brian: Where are you assuming that smart T D actually does come on board or so far are you just assuming that it's too early.
Kenny Rocker: And then maybe for Kenny I Havent seen mix is probably harder to forecast than volume, but the two are related. So maybe you can just give us a sense in terms of some of these market pricing adjustments for coal and intermodal that have been.
Kenny Rocker: More of a headwind than not the last past couple of quarters is that something that we should anticipate are also being a potential headwind into next year.
Kenny Rocker: Just curious how much visibility you have on that knowing that it's you know probably trucking natural gas dependent but.
Kenny Rocker: I guess is that Directionally worse in 'twenty four then perhaps it wasn't in 'twenty three.
Why don't you handle that.
Kenny Rocker: In terms of the Warcraft piece, we do have an assumption that will come to an agreement probably sometime later in the year. So that's that's part of our overall thinking.
Kenny Rocker: Oh, yeah yeah.
Kenny Rocker: You asked a question about our intermodal domestic intermodal.
Kenny Rocker: First of all if you look at where the rates have been I'll differentiate the spot rates over the last four months sequentially.
Kenny Rocker: I'll I'll call it very slow gradual increase which is encouraging.
Kenny Rocker: Same is true on the contractual side.
Kenny Rocker: Very slow gradual improvement sequentially. The last four months, so I can't get into saying, whether I think over the next three months that's going to continue.
Kenny Rocker: We've got a lot of mixed feedback from customers, but.
Kenny Rocker: Encouraged by what we've seen in the past.
Kenny Rocker: I've said this before that we have mechanism.
Our contracts for our.
Kenny Rocker: Suite of customers to keep them competitive are real time and in times like this.
Kenny Rocker: And as the market improves I would just mentioned some of those and then let's see how.
Kenny Rocker: It will help us some of the mechanisms that we have to you know, but you were a little bit more price and better margin.
Jim Vena: Yeah, Brian I think you also asked a broader mix question in terms of next year, and obviously with a lot of unknowns about volume and it's hard to answer that but you know the big drivers. There really are an intermodal front and largely so goes intermodal. So goes the broader mix for U P. We obviously have mix within mix.
Jim Vena: I know you're also aware and so when you think about just the premium category with automotive being very bullish on that as well.
Jim Vena: Think about some of the contract wins and what's happening in that market that may help your overall premium mix, particularly if you've got you've got some down and then we'll see how the rest of the categories play out, but that's that's the big swing factor for us in 2024.
Brian: Thanks for the question guys I appreciate the thoughts.
Brian: Thank you.
Brian: The next question is from the line of Jordan Alger with Goldman Sachs. Please proceed with your question.
Brian: Yeah, a couple of just real quick follow ups or clarifications, one I don't know if I caught the order of magnitude impact of the international intermodal loss, whether it be revenue or.
Brian:
Volume and then secondly, what does it mean.
Brian: Price.
Brian: Not being accretive to margin does that mean overall yields would at best be flat.
Brian: Thanks.
Brian: Yeah for the second part of your question Jordan. It really just means mathematically when you look at how the price impact and has added to the revenue.
Brian: It does not help your overall operating ratio calculation, even though even though it's going to be higher than the inflation.
Brian: When you do the math, you know that math right.
Brian: Got it.
Brian: So again, we're not going to frame up the magnitude.
Brian: I can tell you we're focused on growing our international intermodal network.
Brian: We've been blessed with a new intermodal terminal there in Phoenix.
Brian: Gonna open up everywhere.
Brian: I talked about some of our.
Brian: Other products that we have all of them coming out of Houston, and we've talked about Mexico. So again, where we're bullish and we want to make sure that we're moving that product at the appropriate margin acceptable margins.
Brian: Thank you.
Brian: Thank you very much.
Brian: The next question is from the line of Jason Seidl with TD Cowen. Please proceed with your question.
Brian: Thanks, operator, good morning, everybody I'm talking onto Jordan's question. There if we were to look.
At pricing and exclude sort of intermodal and sort of the natural gas impact in some of the links are coal contracts.
Brian: Would pricing be accretive to margins and the remainder of the business and also.
Brian: As I look at it that near shoring commentary, how should we think about sort of post 'twenty four and near shoring Where's that going to show up for you guys and is there any extra capex that might be needed.
Brian: <unk>.
Brian: Yeah, Jason Thanks for the question you know, we're just not going to get into that final level of detail, but certainly those are substantial headwinds for them that have been impacting our yield through much of 2023 and in the intermodal piece for sure is going to linger into 2024, yeah. So.
Jason H. Seidl: I'll post 'twenty 'twenty four as you look at it I mentioned a lot of industrial base.
They are markets that are going there.
Kenny Rocker: I think in terms of auto think in terms of metals and minerals.
Kenny Rocker: In terms of the petrochemical market.
Kenny Rocker: Perfect I appreciate the time as always everyone.
Kenny Rocker: Oh, thank you.
Kenny Rocker: Our next question is from the line of Jeff Kauffman with vertical Research partners. Please proceed with your question.
Kenny Rocker: Thank you very much. Thanks for squeezing me in just a follow up on the near shoring for Kenny.
Jeffrey Kaufman: A lot of the companies we talk to say really all that's been done at this point is concrete has been poured and the ground in some of these facilities have been announced and really youre not going to see a lot of this potential until kind of 'twenty five 'twenty six 'twenty seven looking at your industrial development plan and kind of what's out there do you think and I'm going to ask you to guess here.
Jeffrey Kaufman: It could just be 100 basis points in magnitude of volume on a basis over a three to five years could it be larger than that how should we think about scoping. This longer term industrial development opportunity for U N T.
Jeffrey Kaufman: So certainly not gonna have gone on but your basis points, Washington, Here's what I will say, though and I repeated this and I want to make sure I hit them pretty hard we've got a service product.
Kenny Rocker: <unk> come in and out of Mexico.
Kenny Rocker: That is unmatched that's a daily product is the fastest product.
Kenny Rocker: Getting in and out of the heart of Mexico. We also have six gateway.
Kenny Rocker: Which gives us optionality, which give our customers optionality, which gives us an opportunity to hit different parts of Mexico. So, yes, we feel very.
Kenny Rocker: Bullish about Mexico, and the growth and we've been working from an industrial development perspective, with all the stakeholders with all the customers to help bring that on.
The only thing I would add.
Kenny Rocker: The only thing I would add is this is.
Kenny Rocker: With the ownership position, we have on the FX I think that ties us even to be able to optimize what's available to us as near shore. It happens and as we work collaboratively.
Kenny Rocker: And make it the view as one railroad operationally it'll help us on the efficiency of being able to move the traffic and I think we were able to offer the customers. The best product and we think it gives us a chance to win a bigger majority of any business that's added to those lanes.
Thank you very much.
Kenny Rocker: Thank you.
Kenny Rocker: Our next question is from the line of fire them Nathan with Daiwa. Please proceed with your question.
Kenny Rocker: Hi, Thanks, Thanks for taking my question so just.
Kenny Rocker: On the casualty and I guess on the other expense in there on the last slide you have flat to down it looks like the casualty will be.
Kenny Rocker: We would be favorably. So can you talk about something that could kind of offset that.
Kenny Rocker: Yeah.
On the call I mentioned, the fact that we've had some higher casualty expense. It's certainly over the last couple of years and we've been playing some catch up and so that's really a large part of what's driven the increase in those lines or in that line in the other line and so.
Kenny Rocker: We don't expect that to continue because it is not indicative of our safety performance and in fact, you've heard us talk about being very focused on improving that overall performance. It really is some cleanup and some maybe outsized verdicts two just with some of what's going on in the courts and we think we have some of those big things behind us.
Kenny Rocker: So looking forward to you know a better footing in 2024.
Kenny Rocker: Okay and finally on just on the Capex question.
Jimmy: Jimmy talked about efficacy.
Jimmy: In terms of.
Jimmy: Capital additions.
That's actually being on the same basis, you guys in terms of investing in the business.
Jimmy: Yeah. They have the same capability they do a real good job.
Jennifer Hamann: I'm on the board and its always Jennifer and they have a great plan for 2024 and they invest in their railroad.
Jennifer Hamann: As we do bottom up build the plan up to see what you need so I'm very comfortable that they will invest that have the capability to invest.
Jennifer Hamann: What they need to move forward.
Jennifer Hamann: Okay. Thank you for that.
Jennifer Hamann: Thank you.
Jennifer Hamann: Final question is from the line of David Vernon with Bernstein. Please proceed with your question.
Jennifer Hamann: Hey, guys. Thanks.
Jennifer Hamann: Thanks, and good morning, and thanks for taking the questions I'm sorry.
Jennifer Hamann: They put you lap that David.
Jennifer Hamann: It's been happening since the second grade the last thing would be you should be you should feel familiar with that process and I, we're always called laughs I hear you.
Jim Vena: Exactly so a couple of questions for you first you know the Capex moderation, you know Kenny or you're a little bit worried about how that's going to impact you for growth and then second you know given your exposure to the to the situation down in Mexico, Jim I'd Love to hear your thoughts on you know what you think the introduction of a passenger rail might do down in Mexico and Turkey.
A freight flows coming cross border any any perspective or insight you can share in terms of the response to that efficacy.
Jim Vena: I think I had to give to the Mexican government in the last couple of weeks. Thanks.
Jim Vena: Okay. Let me let me ask the question.
Jim Vena: We plan our capital do we ever.
Jim Vena: Limit the capital or do you have a problem for growth not at all perfect. That's the way we look at it that simple never so let me clear up this whole David because it's a great question and you know the answer so you're asking me and you've heard it before and I'm very clear on this we build our capital plan from the bottom up to look at what we need.
Jim Vena: To reinvest in the railroad and every year is a little bit different pies rail.
Jim Vena: Equipment, we look at growth and what are what we've identified where we need to invest we're opening February 1st the new intermodal terminal in Phoenix. So we've invested in that we were quick turnaround, we don't pull around anymore that would've been like a six month, one year discussion we turned around and in November said, there's a market there.
Jim Vena: There and February 1st we're opening up a place. So we were able to invest quick and that's the way I look at it when we built it up we came up with $3 4 billion that is not a hard number if theres an opportunity for us to invest to grow this company or that we need to fund on the replacement and the.
What we do every day to operate the railroad will invest and we never ever skimp on safety maintenance of the railroad the capital cost we need and the growth. So we are there I have no issue and on the passenger service listen.
Jim Vena: I give our both the FX C and C. P. Casey, they're saying the right things and I agree with them. We there was an interaction when you have passenger service that affects you, but there's nothing that you are that I'm worried about because they can't figure out how to mitigate that and still operate our freight and passenger a railroad efficiently. So.
Jim Vena: Comfortable that that will not have a significant effect or really any effect as they move ahead and I'm sure that they'll just move ahead them they'll be operating some passenger service on on the railroad.
Jim Vena: So hopefully we answered your questions David.
Jim Vena: You did thanks very much.
Jim Vena: Thanks.
Jim Vena: Operator, Rob maybe if I can just see it as we're done with the questions I wouldn't mind, just recap and then and if Theres a few people on and that's great and if everybody else Who's got off and I'm talking to my team here and they love to hear the story. So bottom line is this is we have a great railroad.
Jim Vena: We have a franchise that allows us with the business mix to go up and down with because not one area ever.
Jim Vena: Wish one year that every segment that we had industrial premium okay and the bulk will all grow at one time, that's not the way the world is I've never seen it in my career, we need to be able to have the resiliency in our capability to react and what's happening we don't know what's going to happen this year, but I'm, telling you fundamentally.
Jim Vena: We are on the right track to deliver the team is engaged we're excited and we're looking forward to winning this year, we have goals to grow revenue.
Jim Vena: With our service and we also have goals to be the most efficient operationally.
Jim Vena: Railroad in the industry. So I'm looking forward to 2024 I'm excited the team is excited and I'm looking forward to talking to all of you in the three months and see how the first quarter went to see how we're growing on what we've done up to this point. So thank you very much.
Jim Vena: Thank you ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.