Union Pacific Corp. 2026 Q3 Earnings Call

Thanks, Rob. Sorry, I'm rather fast this morning. I'm ready to go. I overstepped you, so hopefully I don't do that to everybody today. No, I hope I am. We're ready to go here. So why don't we take a step back and think about where we are as a company and what we're doing. This morning, my wife, for whatever reason, got me up a little early. So I had a little more time to look at the railroad real close, and the first thing I look at is what's happening to the railroad weather-wise. Bottom line is, this is my favorite time of the year to railroad. Eric will tell you the same thing. Engineering programs are in a different place. The railroad is well set up. You don't have the extremes, too much of an extreme of weather.

It is a beautiful morning here in Omaha. Absolutely gorgeous. I'll tell you, it's a great place to live and a wonderful spot. The railroad's good. The range of temperature we have is from the low 30s to the high 80s, but that's who we are, and we have thousands of employees out there right now. Yesterday, we had 2.31 billion GTMs of product that we moved in this railroad, and all the people out there, and I got to congratulate them on the quarter that we had. Very excited to share with all of you who we are, what we're doing, and one thing we're not changing is the key pillars that we have. Safety for us is the foundation, and Eric will take you through some of the detail.

But where we are this year on an injury rate improvement from last year, where we are in the derailment rate, significant improvement from last year that continues all the work we've done, is very exciting as a foundation of everything that we do. And listen, safety for us is more than just a number. It's about people going home exactly the same way as they showed up when they came to work, and it's the movement of the goods that we have for America. We are moving products across the Western states and pretty soon across the entire country. That just helps the economy and helps businesses move ahead. So I love where we are safety, and I know Eric's got some more detail on that as we move ahead. And service, absolutely, I love where our service is.

We're delivering what we sold the customer and what we agreed to. And operational excellence, I see numbers in detail that I had a chance this morning to spend probably a half an hour, usually it's 5 minutes on, that show me that the number of cars that missed their plan, that we call 32-hour cars, is like 15% lower with business up. The number of locomotives we have out there running and operating don't match the amount of business increase, meaning we have way less locomotives operating, so much more efficient with them. The way the cars are turning, the car velocity is exactly the same as it was last year at this time with increase in business to show the resiliency of our buffer and how we handle traffic.

So I guess if I don't stop there, I might as well just tell everybody to keep quiet, and we'll just go to question and answers. But let me, real quick, tell you who's here with me. Our Chief Financial Officer, of course, Jennifer's with me every quarter. Love having her here. She's next to me. Kenny Rocker, Executive VP of Marketing and Sales, always in the right spot, right there to my right, and across the table, Eric Gehringer, our Executive Vice President of Operations, and I can't be prouder of what the team has done. If we can turn to slide 4 and quickly review. So this morning, Union Pacific reported record financial results as net income total, $2.1 billion, and our adjusted earnings per share grew 15% to $3.53.

Union Pacific's third quarter results demonstrate our ability to safely deliver the service we sold our customers while efficiently handling 6% volume growth. Higher fuel prices were a big cost driver, but when we take out the impact of fuel price and merger costs, our core operating ratio improved 110 basis points from last year. Now I'll let the team walk you through the results in more detail, and then I'll come back to talk about the Q&A and maybe a quick wrap-up before we finish the call. And Jennifer, all yours with some of the details on the financials, please.

All right. Thank you, Jim, and good morning, everyone. I will begin with our third quarter income statement on slide 6, where operating revenue of $7.2 billion increased 15% versus last year. Digging into the components of our growth further, freight revenue totaled $6.8 billion, up 15% on 6% volume growth. In addition, higher year-over-year fuel prices and the related fuel surcharge added 900 basis points to freight revenue. Although our quarterly pricing gains continue to exceed our inflation dollars, that contribution from price was masked by business mix, as nearly 75% of our quarterly volume growth was from domestic and international intermodal traffic. Wrapping up the top line, other revenue increased 21% to $384 million, as higher intermodal volume contributed to increases in both accessorial and subsidiary revenue.

Turning to expense, our appendix slides will provide more detail as our total operating expense increased 15% to $4.3 billion, primarily from the higher diesel fuel prices. Compensation and benefits expense increased 4%, as cost per employee was up 5%, driven by higher wages, incentive compensation, and training costs. Offsetting some of that cost pressure was a 1% decrease in headcount against that 6% volume growth, enabling us to generate our ninth consecutive quarter of record workforce productivity. Fuel expense grew 69% on a 64% increase in average fuel price and 4% higher gross ton-miles. Year over year, our price per gallon increased from $2.56 to $4.21 and added 140 basis points to our operating ratio. Purchase services and material expense increased 9% as a result of inflation, intermodal-related costs for our Loup subsidiary and the railroad, as well as cost to add surge locomotives to the active fleet.

These increases were partially offset by lower year-over-year merger costs. Equipment and other rents declined 3% versus 2025, as we more than offset the impact of volume growth with lower car hire and operating lease expense. Putting it all together, we had a record quarter with reported earnings per share of $3.49. Adjusted for merger costs, earnings per share totaled $3.53, and our operating ratio was 58.8%. Turning to cash returns in the balance sheet on slide 7. Our record financial results translated into 18% growth in cash from operations to $8.3 billion. Free cash flow totaled $2.4 billion after we reinvested in our network and increased our third quarter dividend 3%, the 20th consecutive year providing our shareholders with an annual dividend raise. We finished the quarter holding $3.1 billion between cash and short-term investments, and with an adjusted debt-to-EBITDA ratio of 2.4 times.

We will continue growing our cash reserves in anticipation of closing the Norfolk Southern merger in the second half of 2027. Looking out to the remainder of 2026 on slide 8, we are affirming our outlook of reported EPS growth in the high single-digit range versus 2025's reported EPS of $11.98. As a quick reminder, that $11.98 included $0.30 from a fourth quarter land sale. We are also affirming our ability to continue improving our core operating ratio in 2026 and leading the industry. Our 2026 reported operating ratio remains challenged by higher fuel prices, as we are currently expecting prices to average around $4.85 per gallon in the fourth quarter. We are also updating our capital spend to $3.5 billion for 2026 as we invest for growth and pull ahead some of the capital work planned for 2027.

Overall, we are delivering strong financial results in 2026 as we consistently execute on the three key levers for our railroad success, volume, pricing, and productivity. I will now turn it over to Kenny to provide an update on the markets.

All right. Thank you, Jennifer, and good morning. We delivered a record revenue quarter with freight revenue increasing 15% to $6.8 billion.