Union Pacific CEO on Stimulus: When U.S. economy is humming, railroads will hum

Lance Fritz, Union Pacific CEO, joins Yahoo Finance to discuss his company's quarterly earnings and his outlook on the U.S. economy.

Video Transcript

JULIE HYMAN: Union Pacific, the railroad company-- that company coming out with their net income. That did fall year over year. But the company also achieved better operating costs in the form of its operating ratio, specifically 58.7%-- so back below a 60 target that the company set.

Lance Fritz is joining us now. He is the CEO of Union Pacific. And it's always good to see you on the show, Lance. Thanks for being here.

I do want to ask you big picture, first of all, about the revenue per carload number. It was down by 7%. And so if you could, just give us sort of a snapshot of what you are seeing in terms of demand right now, and where the demand is stronger and weaker.

LANCE FRITZ: Yeah. Thank you, Julie. And it's a pleasure to be with you this morning. So yeah, let's talk a little bit about the quarter.

From my perspective, it was a strong performance in a difficult environment. And to your point, that 7%-- when you unpack that, about half of it is mix partially offset by pricing, a yield. And about half of that is fuel surcharge. When we look down a little deeper into the markets, you know, that's where I really start building some confidence into the fourth quarter and next year.

Our premium product, the domestic intermodal, specifically parcel driven by e-commerce-- that was strong. Grain and grain products. Some parts of foods. Specifically, beer was strong. We saw fertilizer pretty strong.

And we saw almost every commodity and market get better from the bottom in May. Although, some areas, like the industrial economy, are not back to where they were prior to the COVID pandemic. But they but they certainly showed sequential improvement. And we're anticipating that's going to continue.

ADAM SHAPIRO: Hey, Lance. It's great to see you. So some of the things that you scored big on here, as Julie pointed out, the ratio, the operating ratio-- but also, you ended the quarter with $2.6 billion cash on hand. You've maintained the dividend. And you've resumed share repurchases. And I'm trying to understand why Wall Street right now, at least investors, are punishing you, because the stock is off, as we're talking about, 5%.

And I can only guess it's either a fear of another COVID perhaps surge that would hit your business. Or it's what you just talked about with industrials, because energy was down 20%. Forest products were flat, despite the housing boom we're seeing. Industrial chemical plastics were down 9%. That's kind of the economy right there, isn't it? What am I missing?

LANCE FRITZ: Yeah, Adam. I think you've largely got it right. And I think as our investors unpack the quarter, they'll see the kind of confidence that I've grown. And that is, in a very difficult environment, we definitely did a great job of controlling the things that we can influence directly.

So we were more than volume variable when it came to cost.

And to your point, we're largely reflecting what is happening in the economy. When it comes to market share, we actually have upticked our market share as we competed against other competitive modes. And that's about our service product.

So I think as the quarter gets unpacked, there will be a reflection and a recognition that the service product is strong and maintaining. We continue to have great cash generation, and it's only going to improve as the economy continues to improve.

JULIE HYMAN: Let's talk about that operating ratio for a moment in more detail, Lance. So what was responsible for, I believe it was a quarterly record, in terms of the efficiency of that operating ratio? And I know you've been undergoing a three-years' long effort to get that number down. So I'm sure some of that was involved in this. Is it also a question of fuel prices, for example, or did you see other input costs fall?

LANCE FRITZ: Yeah, so fuel price did help us a little bit on the operating ratio, the impact of fuel and timing. What really helped most was pure productivity and efficiency, the women and men of Union Pacific doing wonderful work, just terrific work under the leadership of Jim Vena and the operating team to find ways to run the network more efficiently.

And our core KPIs that we shared on our call today, they improved in locomotive efficiency, in train length, in workforce efficiency. Our service product showed improvement. So we're really hitting on a lot of cylinders right now, and it's reflective of the entire team.

ADAM SHAPIRO: Well, one of the things you talked about on the earnings call was guidance for 2021. I heard actually that that ratio is going to be-- it's going to have a 5 in front of it. So investors are going to pay attention to that.

You just mentioned train speed being up. You also have the dwell time was down 3%, and train length was up. How much more can you push that, though? Have you peaked out there?

LANCE FRITZ: We have not picked out there, Adam. So when we look forward into next year and future years, there's still plenty of opportunity to run a more reliable, consistent network that's more efficient and that's safer. We're already in the middle of working on making our Chicago intermodal product better through consolidation of our intermodal ramps there. We're doing the same thing in Houston.

We're in the middle of some capital projects that allow us to run more efficient train sizes on some of our critical routes. And we continue to invest in technology that enables our customers to have a better visibility into their service product, and also a greater opportunity to make decisions based on what's going on in the network. So it's a full-court press that's nowhere near finished.

JULIE HYMAN: And Lance, before I let you go, I have to ask you about the stimulus question as well. As you heard our prior guest talking about, this is something that has been a big topic of discussion. Railroads are economic bellwethers. You talked about industrial demand being the sort of lagging piece here. How much does your business need stimulus, and what kind of difference could it make if there is another stimulus bill passed?

LANCE FRITZ: Yeah, that's a great question, Julie. Let me start from the top. You know, what turns a railroad is trade and robust healthy trade, consumers buying things, and the industrial economy. Stimulus would certainly help two of those three, right? Directly in the industrial economy and also in the consumer economy.

That is, stimulus probably creates jobs. It certainly removes inefficiencies in our economy. It enables business to begin growing, thriving, and expanding. And the only question is the nature of the stimulus, right?

I mean, if it's got direct payment support of those in the United States that have been kind of dropped out of the economy because of the COVID pandemic effect, that'll be fantastic. That replaces income that normally would have been there. If it supports rural broadband, where you start, you know, unleashing the productive capability of a large part of our geography, if it includes shoring up some of the critical infrastructure-- all of that is helpful to the US economy. And when the US economy is humming, typically the railroad's gonna hum.

JULIE HYMAN: Indeed. Lance, it's always great to see you. Lance Fritz is the Union Pacific CEO. Thank you again for being here.

LANCE FRITZ: Thank you, Julie and Adam.