Union Pacific Corporation

Greetings, and welcome to the Union Pacific Fourth Quarter Earnings Call. At this time, all participants are 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 slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Jim Venna, Chief Executive Officer for Union Pacific. Mr. Venna, you may now begin.

Thanks, Rob. Good morning, and thank you for joining us today to discuss Union Pacific's fourth quarter and full-year 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. The Union Pacific team is executing our multi-year strategy to lead the industry in safety, service, and operational excellence. Our fourth quarter shows a lot of what's possible and demonstrate that we're on the right path to achieving those goals. We exited 2023 with strong momentum, which gives me great confidence that we have a winning strategy. There's work to do, but we're building the foundation for future success. Now let's turn to slide three. This morning, Union Pacific reported 2023 fourth quarter net income of $1.7 billion, or $2.71 per share. This compares to the 2022 fourth quarter net income of $1.6 billion, or $2.67 per share. Fourth quarter operating revenue was flat as increased volumes and core pricing gains were offset by lower fuel surcharge revenue and business mix. Expenses year over year were also flat as lower fuel expenses and productivity gains were offset by inflation, volume-related costs, and higher casualty expenses. Our fourth quarter operating ratio of 60.9% improved 10 basis points versus last year. And more importantly, we demonstrated strong sequential OR improvement of 250 basis points from the third quarter. We are taking the right actions to increase the efficiency of our railroad while also improving service for our customers. Key to our strategy is excelling in what we control. We made great progress in those areas this quarter. That provides further proof that we're on the right path to future success. So with that, let me hand it over to Jennifer to provide more details on the fourth quarter and full-year financials.

Thanks, Jim, and good morning. Let's begin by walking through our fourth quarter income statement on slide five, starting with the top line, operating revenue of $6.2 billion with flat versus 2022 on a 3% volume increase. Breaking it down further, freight revenue totaled $5.8 billion, up 1%. The biggest driver of freight revenue in the quarter was fuel. Lower year-over-year fuel prices reduced fuel surcharge revenue and impacted freight revenue 375 basis points as fuel surcharges declined $180 million versus 2022 to $795 million. Volume growth in the quarter contributed positively, adding 350 basis points to freight revenue. And the combination of price and mix also was positive, increasing freight revenue 75 basis points as solid core pricing gains were mostly offset by an unfavorable business mix. Intermodal shipments of 5% contributed heavily to the mixed dynamic. Wrapping up the top line, other revenue decreased 13%, driven by lower accessorial and subsidiary revenue. Switching to expenses, we provided expense details for both fourth quarter and full year in our appendix slides. But let me hit some of the highlights. against our 3% volume growth operating expense of $3.8 billion was flat. Digging deeper into a few of the expense lines, compensation and benefits expense was flat compared to 2022. Fourth quarter workforce levels decreased 2% while our active T and Y workforce was flat against the 3% volume growth. This solid level of workforce productivity mostly offset wage inflation as cost per employee only increased 1% in the fourth quarter. Fuel expense in the quarter decreased 11% on a 15% decrease in fuel prices, from $3.70 per gallon to $3.16. Our fuel consumption rate deteriorated 3% as we moved a less fuel-efficient business mix with increased intermodal shipments and fewer coal moves. Finally, other expense grew 20% as a result of higher casualty costs and the comparison to 2022, which included insurance recoveries. Coming out of COVID, we had a sizable case backlog that we largely worked through the last couple of years. Importantly, we do not see these elevated expenses as a reflection of a long-term trend, particularly with our intense focus on improving safety. Fourth quarter operating income was flat at $2.4 billion. Below the line, other income increased $16 million due to higher real estate gains. Fourth quarter net income of $1.7 billion and earnings per share of $2.71 both improved 1% versus 2022. Our operating ratio of 60.9% improved 10 basis points year over year and 250 basis points sequentially. Moving to slide six with a quick recap of full year 2023 results, revenue of $24.1 billion declined 3%, driven by reduced fuel surcharges, business mix, and lower volumes, partially offset by core pricing gains. Operating income totaled $9.1 billion, and our full year operating ratio of 62.3% deteriorated 220 basis points. Earnings per share of $10.45 decreased 7% versus 2022. And then reflecting the impact of our overall financial results, return on invested capital declined 180 basis points to 15.5%. Turning to shareholder returns and the balance sheet on slide seven, full year 2023 cash from operations totaled $8.4 billion, down roughly $1 billion from 2022. The combination of lower net income and nearly $450 million of labor agreement payments were the main drivers. Free cash flow and our cash flow conversion rate also reflected those impacts. We returned $3.9 billion to shareholders in 2023 through dividends and share repurchases. Our adjusted debt to EBITDA ratio finished the year at three times as we continue to prioritize a strong balance sheet and be A-rated by our three credit agencies. While 2023 was a difficult year, I'm pleased with the progress we've made over the last several months to improve our service and productivity. We believe this performance marks an inflection point as efforts to improve the efficiency of our railroad through safety, service, and operational excellence is starting to be reflected in our financials. With that, I'm going to turn it over to Kenny to provide some comments on 2023 and kick off our commentary on 2024.