3rd Quarter 2026 Earnings Release - UNION PACIFIC CORP

Explicit Guidance:

• FY2026 Reported EPS: Affirmed growth in the "high single-digit range" versus FY2025 reported EPS of $11.98 (noting FY2025 included $0.30 from a Q4 land sale).
• FY2026 Capital Expenditures: Updated guidance to $3.5 billion for the full year, representing a $200 million acceleration of capital work originally planned for FY2027 to invest for growth.
• FY2026 Operating Ratio: Expected to continue improving its core operating ratio, though reported OR remains challenged by fuel prices.
• FY2026 Fuel Prices: Forecasted to average approximately $4.85 per gallon in Q4 2026 (up from $4.21 in Q3 2026), adding an estimated 140 basis points of drag to the OR (similar to Q3 impact).
• Dividends: Announced a 3% increase in the Q3 dividend (20th consecutive annual raise).
• FY2026 Cash Flow: Generated $8.3 billion in operating cash flow (18% YoY growth) and $2.4 billion in free cash flow.

Business-Segment Outlook:

• Intermodal (Premium Domestic): On track to deliver a third consecutive record volume year, supported by over-the-road conversions and service strength; expected to drive double-digit volume growth in Q4 2026 for International Intermodal.
• Bulk (Grain & Ag): Positioned for further growth driven by strong export grain demand, renewable fuels (ethanol/feedstocks), and new facilities (Bunge/5B in Dalhart, TX; CHS facility in Evansville, WI).
• Industrial:
  • Metals: Expected continued strength from construction projects in Louisiana/Texas and sustained domestic steel production.
  • Energy/Petrochemicals: Excitement regarding the commissioning/startup of the Golden Triangle Polymers plant in Texas and strong export demand for plastics.
  • Coal: Anticipates continued headwinds from lower natural gas prices and elevated inventories, offset by pricing discipline.
• Automotive: Expects business wins to continue offsetting market softness; international automotive volume improved 8% YoY driven by West Coast imports and OEM/part supplier growth.
• Productivity: Commitment to maintaining workforce productivity gains and continuing to optimize network fluidity despite volume fluctuations.

Market and Competitive Outlook:

• Pricing Strategy: Intent to maintain pricing discipline, pricing "to the value of service" rather than purely on volume or market indices, expecting stronger pricing environments in late 2026/early 2027 as truck capacity inflection supports rate increases.
• Competitive Landscape: Believes the Norfolk Southern (NS) merger will force competitors to "up their game" to compete with the enhanced single-line service; confident the merger will lower supply chain costs and increase efficiency compared to competitors.
• Volume Trends: Observing broad-based strength in industrial markets and not seeing consumer slowdown indicators; expects to outperform macroeconomic indicators (e.g., industrial production, housing starts) due to service advantages.
• Market Drivers: Anticipates sustained momentum from truck-to-rail conversions as fuel price volatility makes rail more cost-competitive; expects volume to grow double digits in Q4 2026 for international intermodal.

Macro / Industry Outlook:

• Fuel Volatility: High diesel prices (Q4 avg $4.85/gal) viewed as a temporary drag but also a structural advantage for rail efficiency; plans to rely on long-term fuel surcharge programs and conservation efforts.
• Regulatory (STB): Expects the Surface Transportation Board (STB) to approve the UP-NS merger; anticipates the first merged earnings release approximately one year from now.
• Labor Market: Projects business growth through the merger will create "more employees" due to increased efficiency; confident in retaining the majority of unionized workforce given job security and wage levels ($160k avg total comp).
• Economic Context: Views the current environment as having "parts of the economy" facing inflationary pressure but a significant segment of consumers still spending; expects to outperform broader economic indicators.

Strategic Initiatives:

• Norfolk Southern Merger:
  • Timeline: First merged earnings expected in ~12 months; procedural schedule published by STB.
  • Regulatory Strategy: Filed ex parte communications for open discussion with STB regarding the 8,000+ page application; preparing for November 18th public comment deadline.
  • Vision: Aims to deliver a seamless, faster supply chain with reduced transportation costs; confident the deal is "fact-based" and beneficial for the country.
  • Negotiation Stance: Unwilling to offer "freebies" or concessions not factually required (e.g., guaranteed job for life); prepared to walk away from deals that do not benefit the company.
• Capital Allocation: Accelerating $200M in capital projects (locomotive modernization and infrastructure) from FY2027 to FY2026 to support current growth; maintaining significant surplus buffer (e.g., ~289 idle locomotives) to handle unexpected volume spikes.
• Technology Integration: Plans to integrate Norfolk Southern's wayside inspection technology (rolling stock defect detection) into Union Pacific operations while sharing UP's proprietary systems with NS.
• Service Enhancement: Commitment to maintaining a "surge buffer" of resources (locomotives, crew in training) to ensure service reliability during volume surges.

Risks and Headwinds to Outlook:

• Fuel Prices: The primary variable impacting margins; Q4 2026 faces higher fuel costs than Q3, creating a drag on the reported operating ratio.
• Regulatory Uncertainty: Potential comments from competitors, coalitions (including BLET and other railroads), or the STB regarding market concentration and vertical competition.
• Market Softness: Continued weakness in the global coal market and softness in the broader automotive market (though offset by business wins).
• Operational Constraints: Potential for weather-related or seasonal network challenges; reliance on maintaining surge buffers to handle volume beyond current expectations.
• Customer Concerns: Need to manage customer perceptions regarding downstream consolidation and potential price increases if competitors merge, though management asserts benefits outweigh these concerns.

Management Tone on the Future:

• Confidence: Highly confident ("99.999% sure") that the merger will be approved; expresses pride in operational execution and resilience.
• Sentiment: Optimistic about long-term industry health, viewing the merger as a catalyst for overall industry efficiency and a win for the U.S. supply chain.
• Hedges: Acknowledges fuel price volatility as the main near-term risk; emphasizes patience with the regulatory process while maintaining a firm stance against non-fact-based concessions.
• Culture: Emphasizes "perpetual dissatisfaction" with performance and a commitment to continuous improvement in safety, service, and productivity.

Miscellaneous:

• Personnel Transition: Chief Financial Officer Jennifer Venna is retiring; she will remain through early next year to ensure a smooth transition.
• Competitor Response: Management notes that the merger announcement has already driven competitors to improve their own efficiency and service offerings.
• Shortline Strategy: No plans to sell significant railroad assets to shortlines; intends to handle shortline traffic internally to maintain network efficiency.