L.A. train thefts a product of ‘orchestrated’ crime, Union Pacific CEO says

Union Pacific CEO Lance Fritz joins Yahoo Finance Live to discuss the rail company's earnings, its intermodal partnership with Schneider National, and the spate of recent cargo rail thefts in Los Angeles County.

Video Transcript

BRAD SMITH: Shares of Union Pacific moving higher after the freight railroad company closed the books on its most profitable year ever, but not without some challenges. An alarming increase of freight train looting in Los Angeles has further impacted the supply chain, for anybody out there missing an Amazon package. Union Pacific Chairman, President, and CEO Lance Fritz joins us now, and Yahoo Finance's own Adam Shapiro hanging with us for the conversation as well.

Lance, let's get right into it. Full year 2021, you said that this was the most profitable year ever for Union Pacific despite lower volume. So looking forward, walk us through the demand outlook for 2022.

LANCE FRITZ: Yeah, Brad, thank you very much for mentioning the record year we just closed up on. What a testament to the team, because it was anything but an easy year. As we move into 2022, the profitability of our business is built on three pillars-- volume growth, making sure we have good, solid productivity, and pricing power.

And in terms of volume growth, you know, the fundamentals of our markets look like they're still solidly in place, notwithstanding inflation. Consumers are still in very good shape. Their balance sheets are in good shape. And they've got plenty of cash to spend. And the industrial economy looks like it's pretty healthy.

Industrial production is estimated to be recovering to the tune of, you know, 4.5% to 5% as we go into 2022. Those two things are pillars for the goods economy. And so the goods economy looks like it's pretty healthy.

ADAM SHAPIRO: Hey, Lance, good to have you here. Usually, I would jump in and talk about operating ratio and volume growth as it relates to revenue. I want to talk about the future, because the deal with Schneider Intermodal-- for those of us who are not in the shipping business or the logistics of getting all of these things moved, this is pretty big. I want to read from their press release about the deal.

Union Pacific Rail creates more opportunities for Schneider and our customers because they plan-- this is 25,000 containers right now-- they're going to be the biggest intermodal partner you have, but they're going to double the size of their intermodal fleet by 2030. For investors, what does that mean? And for your business, what does that mean?

LANCE FRITZ: Yeah, Adam, let me just make one correction, because I've got a great existing partner in the Hub Group, who's been with us for, I don't know, a dozen years. And I think they're probably still going to remain our largest intermodal partner. And having said that, the addition of Schneider and Knight Swift, who we onboarded at the beginning of this year, that forms a formidable number of customers out in the marketplace competing in the domestic intermodal space.

What really gets me excited is how much potential we have to take more trucks off the highway and get more containers onto Union Pacific. These are very, very competent, very capable operators. And I am really excited to have them part of the UP team.

ADAM SHAPIRO: Yeah, in the press release, you said-- and this is a quote, I want to share it with everybody-- "when we pair a Union Pacific's transcontinental rail solutions with our company-owned assets and professional drivers, we will be unstoppable force in the intermodal marketplace." When we talk about, though, what happened in Q4 and where we're headed, there was one statistic and it had to do with volumes.

It was the business volumes as measured by total revenue carloads down 4%. It was an improvement, actually, over what we saw in the third quarter. But help us understand what that's signaling to you.

LANCE FRITZ: Yeah, there were two big headwinds during the fourth quarter. Fourth quarter volumes in our bulk segment and our industrial product segment, they looked good. They were growing healthy. We felt good about that.

There was some opportunity that we left on the table in the bulk world mostly about crew availability. Where we really faced headwinds was in our premium segment. And there were two big issues there. One was the chip shortage in finished vehicles. So our finished vehicle shipments were down and our auto parts into finished vehicle factories were down. And then international intermodal shipments were down.

And we've talked about that, Adam. That's a phenomena where Pacific Ocean carriers who own the international boxes were trying to get those boxes made empty in the LA basin instead of letting them go inland so that they could turn them back around and get another shipment in Asia. That's because the trans-Pacific rates for shipments were so high compared to history, they had a huge incentive to basically go port to port and not let their boxes go inland.

That's going to remedy over time. There's more that goes inland normally. We talked to all of our customers. I think they're moving in that direction. But that really impacted our fourth quarter volumes.

BRAD SMITH: Also, Lance, want to talk about one of the targets that you've set for yourself as a company within the sustainability and environmental kind of protectionism that many companies are charting their own targets forward. And going forward from here, you talked about in this release how you fell kind of short of some of those targets. Where do you intend and where do you look to-- and seek to get back on track with regard to the targets that you've set forth there?

LANCE FRITZ: Yeah, actually, we feel pretty good about our progress, Brad. One thing that happened in the year is that we, for the third year in a row, improved our fuel consumption rate. That's a fundamental driver of reducing our overall greenhouse gas emissions. We've committed that by 2030, we're going to reduce overall absolute emissions by 26% on scope one and scope two, and we've also now committed to being net zero by 2050.

We're the only US railroad that's made that commitment. And I'm really pretty darn excited about the progress that we are making. A lot of that scope one and scope two is going to be about the fuels that we use and converting our locomotives to alternative fuel. Early on, it's going to be about using more renewable diesel and biodiesel.

And we've got a good, clear path to trying to make that happen over the course of the next 10 years. And then inside of that, we've got to continue to do a ton of work on converting to alternative fuel. And we're in the process of making a very big commitment about that. So keep your eyes open. I think in the next week or so, we should have an announcement about some very exciting news on that front.

AKIKO FUJITA: Yeah, we'll certainly be waiting for that announcement. Lance, it's Akiko here. You know, we have all seen those images out of LA County with the looting that's happened. And you've highlighted the impact to the company-- $5 million in claims, losses, damages, and gone as far as to say if things don't clean up here, potentially, you'd look at rerouting things. And I wonder what the realistic option is here. Can you really avoid LA County altogether if, in fact, the situation doesn't get better?

LANCE FRITZ: Akiko, clearly, we don't want to do that. That's a nuclear option, and we would be very, very hesitant to pull that trigger. I will tell you, we've got our arms around this, we think, at this point. We've amped up our use of technology like drones to be a deterrent and to help collect evidence.

We've amped up the number of our own special agents, our police force that are present in those areas. We're partnering with LAPD. They've amped up their presence with us.

We're encouraging the district attorney locally to prosecute more of these cases. The criminals there have turned from two or three years ago, a theft event every now and then, it was one-off, wasn't well-orchestrated. It was an opportunity crime. Now, it's an orchestrated organized crime that happens.

We've largely cleaned up the areas from the video that you've seen and that you've shown. We've got good cooperation with the governor's office. They're going to be on the ground there with us today, this afternoon. So I think we've got our arms around it, but there's a lot of work that has to be done here. We need more prosecutions.

And oh, by the way, we're also going to be making capital investment in physical barriers, in more physical security-- whether it's metal security fence, razor wire, or concrete barriers. You know, it's sad to say that we're going to have to do those kinds of investments, but we've got to keep our employees safe and our customers' [INAUDIBLE] safe.

AKIKO FUJITA: You mentioned the cooperation from the LAPD as well as the governor's office. Are you getting the same cooperation from the district attorney? I mean, it sounded like when this story initially broke, there seemed to be a bit of tension between-- or more frustration, maybe, with the way that you saw the county handling these cases.

LANCE FRITZ: Yeah, our frustration is about making sure that prosecution occurs. There was a fair amount of criminals that we apprehended and booked with LAPD, only to see them back out, you know, 24 hours later. And then they would brag to our police officers about how a misdemeanor is nothing and they're just not worried about it. We need the theft to be prosecuted like what it is. It's organized, it's grand theft, and we need a strong deterrence to stop that behavior.

ADAM SHAPIRO: You emphasize, too, the thing that many of us sometimes don't realize is the threat that this organized crime effort might pose to the safety of your employees. It's with that in mind, because I've heard you stress that these barriers want to put up are-- the goal is to protect your employees. Got to ask you about Omicron.

What kind of impact has the wave had on staffing? Hopefully people who did get breakthrough cases were able to recover. But what's that doing with your ability to transport goods?

LANCE FRITZ: Adam, thank you so much for that question. We addressed this also on our call today. And I'm crystal clear about this-- in our planning for the second half of the year, we missed that Omicron would behave-- that COVID would behave like it did-- that we'd see a third and fourth wave. We expected kind of status quo, getting a little better over time.

And so I think we miss that as a risk. As a result, crew availability was an issue and it impacted our operation. One great thing about the fact that we implemented the federal contractor mandate in October is that over 3/4 of our population heading into November and December were vaccinated. I think that had an impact on both their exposure and the severity of symptoms for those that got breakthrough cases.

We can see that. You know, we track every day how many of our employees are quarantined for either presumed positive or exposure, and that did uptick in the fourth quarter. But it was nothing like the uptick in cases we saw in the communities that we serve. And where our employees reside. So I feel very good that we're doing what we need to do to protect our employees. They're protecting themselves. And like in this LA situation, we've just got to continue to look out for their safety and their health. And we're committed to do that.

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