Union Pacific Corporation

Greetings. Welcome to Union Pacific's third quarter earnings call. At this time, all participants will be in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone 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 will be available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Jim Venna, Chief Executive Officer for Union Pacific. Thank you, Mr. Venner, you may now begin.

Rob, thank you very much and good morning. And good morning to everyone that's joined us. And thank you for joining us today to discuss Union Pacific's third quarter results. I'm joined in Omaha by our Chief Financial Officer, Jennifer Heyman, our Executive Vice President of Marketing and Sales, Kenny Rocker, and our Executive Vice President of Operations, Eric Gerringer. It's been a busy couple of months since we joined in Union Pacific. I'm very excited to be back. I come back to work with over 40 years of railroading experience, including two years here at UP. I know this railroad, and I understand the opportunity. To win, you need a strong management team, the right culture, and a great franchise. And that's the goal, win and be the best in the industry. Since I started, I've spoken with employees, customers, regulators, community officials, and investors and my message has been consistent. It starts with safety. Our goal is to be the safest railroad in North America. That's the standard we should set for ourselves. We also expect to be the best in service and operational excellence. Service is delivering what we sold to our customers. Operational excellence is using our resources and assets as efficiently as possible. It's being mindful of our costs and developing our people. A key early initiative of mine is to drive decision-making lowering the organization. This means reducing layers and simplifying how we work. We need to deliver value with speed. This is a cultural change to empower our people. We recognize that our business volumes fluctuate and weather presents its challenges, so we will always keep a buffer of resources to manage those situations. This commitment to safety, service, and operational excellence will lead to growth. And for you, our owners, that generates industry-leading returns. There's work to be done, but the entire team understands our strategy for success. Now let's discuss third quarter results starting on slide three. This morning, Union Pacific reported 2023 third quarter net income of $1.5 billion or $2.51 per share. This compares the 2022 third quarter net income of $1.9 billion or $3.05 per share. Our third quarter operating revenue declined 10%, reflecting lower fuel surcharge revenue, reduced volumes, and decreased other revenue. Expenses also were lower year over year, driven by fuel expense and last year's one-time charge for labor agreements. But there's an ongoing mismatch in our cost structure, resulting in an operating ratio of 63.4, as we continue to be challenged by inflation, including pressure from new labor agreements and higher casualty costs. Additionally, the lag on our fuel surcharge program negatively impacted results as fuel prices rose during the quarter. No doubt about it, it was a tough quarter, but I'm pleased with the positive productivity we're quickly gaining. Our service performance also is strengthening as we're positioning ourselves to meet customer demand while at the same time storing assets. I'll let Eric and Kenny discuss both in more detail. Ultimately, we're taking the right actions to build from here. So with that, let me hand it to Jennifer to provide more details on the third quarter financials.

Thanks, Jim, and good morning. I'm going to discuss our third quarter results by walking through the income statement on slide five, starting with operating revenue of $5.9 billion, down 10% versus last year on a 3% year-over-year volume decline. Breaking it down further, as illustrated in the appendix slides, freight revenue totaled $5.5 billion, down 9% versus 2022. Total fuel surcharge revenue of $637 million declined $515 million from last year. The impact of lower year-over-year fuel prices as well as the lag in our surcharge programs reduced freight revenue 8%. The combination of price and mix increased freight revenue 150 basis points as solid core pricing gains were partially offset by an unfavorable business mix. Increased short-haul rock moves and fewer lumber carloads outweighed the impact of moving fewer low-average revenue per car intermodal shipments. In addition, our pricing gains continue to include the impact of certain coal and intermodal contracts that are more reflective of current market conditions. Wrapping up the top line, other revenue decreased 13% versus last year, driven by a $70 million year-over-year reduction in accessorials. Switching to expenses, where, again, more detailed information can be found in the appendix, operating expense of $3.8 billion declined 4%, driven by lower fuel prices, last year's one-time charge for labor agreements, and volume-related costs. Digging deeper into a few of the expense lines, compensation and benefits expense decreased $77 million versus 2022, which does include last year's $114 million one-time labor charge. Third quarter workforce levels increased 3%, and our active T, E, and Y workforce is up 2% as we graduated new train crew personnel during the quarter. At this point, with our train crews more appropriately staffed, our training pipeline is shrinking. Today we have just over 500 employees in training, down more than 50% from last quarter's pipeline of roughly 1,200. Excluding the impact of last year's labor charge, cost per employee was essentially flat in the third quarter as we are starting to generate better overall productivity. As a result, we now expect full-year costs per employee to be up closer to 3%. Both third quarter and full-year costs per employee reflect elevated workforce levels and better crew efficiency, partially offset by wage inflation, which includes $20 million in the third quarter from paid sick leave. Fuel expense in the quarter decreased 25% on a 21% decrease in fuel prices from $3.96 a gallon to $3.12. Our fuel consumption rate was flat, but showed positive momentum through the quarter as we stored locomotives and improved freight car velocity. Finally, other expense grew 18%, primarily related to continued pressure and casualty costs. It also reflects the impact of one-time write-offs, as highlighted in the financial walk-down slide on 22 in the appendix. The resulting outcome is third quarter operating income of $2.2 billion, down 17% versus last year. Below the line, other income decreased $18 million, driven by last year's $35 million gain from a real estate transaction. Interest expense increased 6%, reflecting higher average debt levels. Income taxes are lower in the quarter on reduced income and lower tax rates that resulted in a $41 million deferred tax expense reduction. Similar to last year's $40 million tax reduction, we again had three states cut corporate income tax rates in the third quarter. Net income of $1.5 billion declined 19% versus 2022, which when combined with a lower average share count resulted in an 18% decrease in earnings per share to $2.51. Third quarter operating ratio increased 3.5 points to 63.4%. Core results, which include the impact of inflation, lower volumes, and cost inefficiencies, accounted for the majority of the year-over-year change. Turning now to slide six and cash flows. Year to date, cash from operations totaled $6 billion, a decrease of roughly $1 billion from 2022. The combination of lower net income and nearly $450 million of labor payments were the main drivers. Free cash flow and our cash flow conversion rate also were impacted. Year to date, we've returned a little more than half of the cash generated or $3.1 billion to shareholders through dividends and share repurchases. And we finished the third quarter with an adjusted debt to EBITDA ratio up slightly from 2022 levels at three times, as we continue to be A-rated by our three credit agencies. Wrapping up now on slide seven, the overall financial story and outlook for the remainder of 2023 is largely unchanged. We're facing a demand environment where we don't expect full-year volumes to exceed industrial production. We do, however, still expect to generate pricing dollars in excessive inflation dollars. Although, as we've discussed through the year, not to the level that offsets the negative impact of elevated costs on our operating ratio. Fuel also remains a headwind on earnings per share, although moderating from the $0.34 negative EPS impact in the third quarter to approximately $0.10 of negative year-over-year impact in the fourth quarter. And that assumes fuel prices in the fourth quarter are around $3.30 a gallon. And significant inflation headwinds remain. primarily in the form of the new labor agreements. We expect similar levels for fourth quarter paid sick leave expense to third quarter, and the impact of the BLET work rest agreements will primarily be seen through elevated force levels. Finally, our capital plan is coming in a little bit higher at $3.7 billion. All that said, the important takeaway from today's results and our view of tomorrow is that we're making gains. From maximizing growth opportunities and repricing our business, to improving service and generating productivity, we're striving to build on the current momentum as we end 2023 and enter 2024 on a path to further financial improvement. With that, I'll turn it over to Kenny to give us a view of the business environment.