Union Pacific Corporation

Greetings. Welcome to the Union Pacific fourth quarter 2022 conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President, and CEO for Union Pacific. Mr. Fritz, you may now begin.

Thank you, Rob, and good morning, and welcome to Union Pacific's fourth quarter earnings conference call. With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales, Eric Geringer, Executive Vice President of Operations, and Jennifer Heyman, our Chief Financial Officer. The fourth quarter and 2022 overall were challenging for Union Pacific and our employees. The lengthy labor negotiations tested our workforce, while customers felt the impact of our service issues. Two things are critically important as we turn the page to 2023. First is the trend line of improving freight car velocity since late summer, although acknowledging there were bumps along the way. And second is how we move forward, establishing consistent service for our customers day in and day out and demonstrating to all stakeholders our commitment to excellence. Now turning to our fourth quarter results. This morning, Union Pacific is reporting 2022 fourth quarter net income of $1.6 billion, or $2.67 per share. This compares to fourth quarter 2021 results of $1.7 billion, or $2.66 per share. Our fourth quarter operating ratio of 61% deteriorated 360 basis points versus 2021, driven by continued service challenges and the impact from winter weather. For the full year, reported operating ratio finished at 60.1%, deteriorating 290 basis points driven by operational inefficiency, inflation, and higher fuel prices. The entire Union Pacific team recognizes that 2022 did not beat expectations. Crew constraints in critical locations impacted by shifting demand had a real impact on our performance. As you'll hear from Eric, We are building resiliency into the network through hiring efforts, shifting critical resources, and better operations to address that shortfall. And you're seeing those benefits manifested in how the network has responded since Thanksgiving through the ups and downs of extreme winter weather. These challenges aside, we achieved volume growth for the year. We demonstrated our commitment to meet customer needs with business development wins that are critical to long-term financial success. The recent onboarding of Schneider is a great proof statement of delivering on that commitment. We also made significant progress towards our climate goals. In 2022, we increased our biofuel blend to over 4.5%, on pace to achieve our 2030 target of 20%. This is a key initiative in achieving our 2030 greenhouse gas emission reduction targets. In addition, for a fourth consecutive year, we improved our fuel consumption rate on a year-over-year basis. lowering at 1% to an all-time record. This helped our customers avoid 23.4 million metric tons of greenhouse gas emissions by using rail versus truck. Union Pacific will continue to be a rail leader in sustainability. Now, let's start with Kenny for an update on the business environment.

Thank you, Lance, and good morning. Fourth quarter volume was up 1% compared to 2021. Gains in our premium business group were partially offset by a decline in our bulk area. However, freight revenue was up 9%, driven by higher fuel surcharges and strong price. Let's take a closer look at each of these business groups. Starting with bulk, revenue for the quarter was up 7% compared to 2021, driven by a 10% increase in average revenue per car, reflecting higher fuel surcharges and solid core pricing gains. Volume was down 3% year-over-year. Grain-to-grain products volume was down 2% driven by a decrease in export grain shipments. Despite strong market demand, we faced service and weather challenges that slowed shuttle cycle times as well as having a tough 2021 comparable. Fertilizer car loads were down 15% year-over-year driven by reduced shipments of potash due to market softness along with another tough comp, the 2021 fourth quarter. Food and refrigerator volume was down 8% due to reduced shipments of finished beverage products and their associated raw materials. And lastly, coal and renewable car loads remained flat in the quarter as our ability to capture demand from favorable natural gas prices was impacted by weather and service challenges, particularly in late December. Moving on to industrial. Industrial revenue was up 5% for the quarter, driven by a 5% improvement in average revenue per car due to higher fuel surcharges and core pricing gains, somewhat offset by a negative business mix. Volume for the quarter was flat. Industrial chemicals and plastic shipments were down 4% year-over-year, driven by lower industrial chemicals demands. Metals and minerals volumes continued to deliver robust year-over-year growth, driven in part by our business development efforts. Volume was up 8% compared to 2021, primarily driven by an increase in frac sand shipments and growth in construction materials. Forest products volume declined 17% year-over-year, driven by weak corrugated box demand and softness in the housing market. Energy and specialized shipments were up 2% compared to 2021 driven by an increased waste and soda ash demand partially offset by fuel petroleum shipments from regulatory changes in Mexico markets. Turning to premium, revenue for the quarter was up 15% on a 3% increase in volume. Average revenue per car increased 12% due primarily to higher fuel surcharge revenue and core pricing gains. Automotive volume was up 9% driven by strengthening production and inventory replenishment for finished vehicles. Intermodal volume was up 2% driven by increased international shipments, mainly due to an easier comp in 2021. Although domestic volumes decreased due to soft market demand, declining truck rates, and increased over-the-road capacity, the aforementioned negative impacts was partially offset with the Schneider conversion in December. Now, as we look ahead to 2023, you can see the macro indicators that we are watching along with inflation and interest rates. And you'll notice that we have some challenges with industrial production, imports, and housing starts. However, we remain optimistic that we will beat industrial production with our strong focus on business development. Now, moving on to slide eight, here's our market outlook for 2023 as we sit here today. Starting with our bulk commodities, we expect a challenging year with grain based on drought conditions, which will affect crop availability and UPSERV origins. However, we expect to see growth in coal. Even though natural gas prices have come off their highs, low inventories will support continued demand. We are keeping a close eye on natural gas prices given the price impact of our index-based contracts. In addition, we expect biofuel shipments for renewable diesel to continue to grow due to solid market demand, new production facilities coming online, and business development wins. Moving on to industrial, the forecast for industrial production is to shrink slightly in 2023, and the demand is softening in forest products. However, we expect to see continued strength in metals with new business wins. And lastly, for premium, we expect the entire intermodal market to be challenged, both international and domestic, by high inventory levels, lower truck rates, and tempered consumer spending. We expect to outperform that market, however, through our new business with Schneider, as well as opportunities to grow with other private asset owners and our strong IMC partners. We expect automotive growth to be another bright spot in this segment, driven by production strength and inventory replenishment. As I wrap up my comments, I want to take a moment to express my gratitude to our customers and the operating team. Over the past month, extreme weather events impacted large portions of our network, and I want to thank our employees who safely worked around the clock in harsh conditions to keep the railroad running for our customers. And with that, I'll turn it over to Eric to review our operational performance. Thanks, Kenny, and good morning.