3rd Quarter 2026 Earnings Release - UNION PACIFIC CORP

Financial Performance:

• Reported net income reached a record $2.1 billion, with adjusted earnings per share (EPS) growing 15% to $3.53.
• Operating revenue increased 15% year-over-year to $7.2 billion, driven by 6% volume growth and higher fuel surcharges (900 basis points impact).
• Core operating ratio improved by 110 basis points to 58.8% (excluding fuel and merger costs), despite fuel price inflation adding 140 basis points.
• Cash from operations grew 18% to $8.3 billion, generating $2.4 billion in free cash flow.
• Total operating expenses rose 15% to $4.3 billion, primarily due to a 69% increase in fuel expenses and 4% growth in compensation costs.
• Balance sheet remains strong with $3.1 billion in cash/short-term investments and a debt-to-EBITDA ratio of 2.4x.

Guidance and Future Outlook:

• Management affirmed full-year 2026 reported EPS growth in the high single-digit range.
• Fourth-quarter average fuel prices are expected to rise to approximately $4.85 per gallon (vs. $4.21 in Q3), likely creating a continued drag on margins.
• Capital expenditures for 2026 have been increased by $200 million to $3.5 billion to accelerate network improvements and locomotive modernization.
• Intermodal volume is projected to grow double digits in Q4, and domestic intermodal is on track for its third consecutive record volume year.
• Expectation remains to continue improving the core operating ratio despite external fuel cost pressures.

Business Segments and Product Lines:

• Bulk: Revenue up 10% on flat volumes; grain exports and renewable fuels drove growth, offset by lower coal and wheat shipments due to market conditions.
• Industrial: Revenue up 14% on 6% volume growth; strong performance in metals/minerals (construction projects) and petrochemicals (refinery utilization).
• Premium/Intermodal: Revenue surged 21% on 9% volume growth; domestic intermodal recorded its fifth consecutive record quarter.
• Automotive: International volumes improved 8% driven by West Coast imports; business wins offset general market softness.
• Operational improvements included record workforce productivity (9th consecutive quarter) and fuel consumption rates dropping 2%.

Market and Competitive Landscape:

• Union Pacific is outperforming macroeconomic indicators, growing volume faster than industrial production and housing starts.
• Management notes that rising diesel prices have historically shifted cargo from truck to rail due to rail's superior fuel efficiency.
• The proposed merger with Norfolk Southern is positioned to lower supply chain costs by eliminating handoffs, creating a single-line service option.
• Competitive pressure is intensifying, with other railroads improving efficiency in response to the merger proposal.

Risks and Challenges:

• High and volatile fuel prices remain a primary cost headwind, negatively impacting the operating ratio.
• Regulatory hurdles regarding the Norfolk Southern merger, including objections from certain union groups (e.g., BLET) and competitor coalitions.
• Potential seasonal volume declines in Q4 due to holiday seasonality.
• Inflationary pressures on wages, labor, and purchased services continue to increase operating expenses.

Management Commentary and Tone:

• CEO Jim Venna expressed high confidence (99.999%) in the merger approval, dismissing demands for concessions as unrealistic ("no Santa Claus").
• Management highlighted operational resilience, noting the ability to handle 6% volume growth without sacrificing service metrics or safety standards.
• A significant portion of the call was dedicated to congratuting CFO Jennifer Venna on her upcoming retirement after 3+ years leading the financials and 6+ years at the company.
• Tone was assertive regarding the merger's public benefit and defensive against competitor objections, while remaining optimistic about long-term growth.

Analyst Questions and Answers:

• Merger Strategy: Management stated they will not grant specific concessions to competitors or unions to force approval, citing that the merger's inherent benefits (efficiency, single-line service) are sufficient. They await the November 18th comment deadline from the Surface Transportation Board (STB).
• Growth Drivers: Volume growth is attributed to a mix of strong service execution, network investments (e.g., Twin Cities, Phoenix), and truck-to-rail conversions, rather than just macroeconomic factors.
• Productivity: Confirmed that workforce productivity gains are sustainable due to technology adoption and fundamental operational discipline, not temporary measures.
• Fuel Impact: Analysts noted fuel price volatility; management clarified that while Q4 will see higher fuel costs, the company's long-term fuel conservation strategies remain effective.
• Technology Synergies: Identified potential for integrating Norfolk Southern's advanced wayside rolling stock inspection technology into the Union Pacific fleet.

Other Key Points:

• The Canadian Pacific Kansas City (CPKC) deal is described as "almost done," reinforcing the pattern of no-strings-attached merger approvals for non-overlapping routes.
• Management emphasized that the merger will not result in selling off significant railroad assets or shortlines, as the company prefers to maintain internal control for efficiency.
• The company reported 289 excess locomotives as a buffer, ensuring capacity to handle potential further volume surges.
• Over 500 customer letters of support for the merger have been received, including from major chemical industry shippers.