Union Pacific Corporation

Greetings. Welcome to the Union Pacific Fourth Quarter 2025 Earnings Conference Call. At this time, we'll dispense our listening mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's website. At this time, it is now my pleasure to introduce your host, Mr. Jim Venner, Chief Executive Officer for Union Pacific. Thank you, Mr. Gunner. You may begin.

Thank you, Rob. Appreciate. Let's keep going this morning. But maybe let's just take a second before we get into the prepared remarks. And then I'm really looking forward to the questions and answers. I'm sure there won't be anything on mergers. It'll be all about how good Eric and the team are running the railroad. But thanks for joining us this morning. But I do need to call out the entire Union Pacific team. We've had a significant weather event that impacted a vast majority of the United States of America from one end to the other. And we felt it in the southern region that has these storms come through, but I'm telling you, it used to take us weeks to recover. And Eric and the team have done a spectacular job. I wouldn't say that we're at 100% this morning recovered, but Eric's promised me by the time I look at the metrics on Thursday morning, we'll be back to normal. Eric, listen, you and the team, you want to just give a quick update on some of the big impacts, what's left to do here in the next, so the customers that might be listed and can understand exactly where we are.

Yeah, to your point, Jim, the team has done a heck of a job and it really is in that Texas and really in the Louisiana, Arkansas area and really where we are pretty much 70% recovered. And that includes partnering with a lot of our customers who, when this weather happens, they have to make adjustments to their, to their operations as well. We welcome that. We work with Kenny's team to be able to do that. And like you said, we wake up Thursday morning, we should be back.

Perfect. So, you know, listen, we're at Union Pacific and me specifically and the rest of the team with me. We like to deal with facts, not how people feel. You know, one of my favorite sayings when somebody tells me I think this, I tell them, tell me what the facts are. And the facts are The northern part of the railroad, which usually gets impacted with real cold weather, it did, has recovered really well. The western part of the railroad, you know, in LA, I'll have to admit, there wasn't very much of an impact. It was pretty clean, and they're operating like they should. And in that central east and south part, they've done a spectacular job of recovering, where it would have taken us weeks to get us back to where we are. Nice to see that the short time after, a few days, And that speaks to the facts of who we are and what we do with buffer of resources, making sure we had locomotives in the right place that would help, and all the assets and the people that we need. And I've got to give the employees credit for coming out in weather that was pretty tough. Now, I always try to tell people I've done it before. But yeah, that was a long time ago. Right now, the toughest thing I have to do is drive out of my garage and drive into another garage. So it's pretty easy. But I appreciate all the hard work by everybody. So why don't we get going? So I already said good morning, and thanks for joining us on the Union Pacific's fourth quarter and full year 2025 results. I'm joined in Omaha by Chief Financial Officer Jennifer Heyman, Executive Vice President Mark Candy Rocker, and of course, Eric, who has already spoken. So nice to have the team with me here this morning. Let's dig into 2025. Throughout the year, we continued to build on what's possible. Quarter to quarter, we challenged ourselves and each other The result, the Union Pacific team delivered our best-ever full year across safety, service, and operating excellence. As we close out the year, it's clear the team is consistently delivering at the highest levels, and I am confident that's what we'll continue to do. Now, let's discuss the highlights further, starting on slide four. This morning, Union Pacific reported 2025 full-year reported net income of $7.1 billion, up 6%, and earnings per share of $1,198, up 8%. 2025 freight revenue excluding the impact of fuel surcharge grew 3% versus 2024 and set a best ever full year record. Strong core pricing gains combined with an additional 113,000 real cars more than offset business mix. Our annual operating expenses after adjusting for merger costs and other one timers were roughly flat year over year, a excellent result against business growth as well as inflationary pressures. We remain disciplined, setting the best-ever full-year record for workforce productivity as we utilize 3% fewer employees to move 1% more volume. And we further manage our costs by operating a very efficient network, removing car touches and reducing dwell. We set best-ever records in many areas, freight car velocity, locomotive productivity, terminal dwell, train length, fuel consumption. I'm going to stop there. Eric would like me to have another 10, but that's it. That's enough to name a few. Importantly, we achieved these records while maintaining a buffer of resources as we safely delivered for our customers. Our 2025 full-year adjusted operating ratio improved 60 basis points to 59.3% versus 2024's result. Reported net income was another best-ever full-year record in 2025, driven by increased other income and higher operating income from revenue growth and productivity. Other income grew in part from industrial parkland sales, demonstrating that we will take advantage of opportunities to monetize assets and maximize value to our shareholders. Jennifer, how about you dig into the fourth quarter financials, and then Kenny and Eric will quickly walk you through the marketing and operating details. Then I'll come back for a quick wrap-up before we go to Q&A.

Jennifer? Thank you, Jim, and good morning. Let's begin with our fourth quarter income statement on slide six. We're operating revenue of $6.1 billion decreased 1% versus 2024 as freight revenue of 5.8 billion declined only 1% on 4% lower volume. Breaking down the drivers of freight revenue, the lower quarterly volume reduced freight revenue 400 basis points. Fuel surcharge revenue of 603 million increased 15 million as higher year over year fuel prices added 75 basis points to freight revenue. Core pricing gains combined with business mix to drive 275 basis points of improvement to freight revenue. Although still strong, quarterly pricing and mix were impacted by the competitive and global market environment, particularly in agricultural. While we remain focused on selling our valuable service product at the right margins, we have to compete. Fortunately, our strong operating efficiency and continuous drive to improve allow us to compete and still generate strong cash returns. Fourth quarter mixed dynamic was slightly positive, although not as favorable as expected, due to lower volumes in some of our higher average revenue per car or arc businesses, such as forest products, food and refrigerated, and energy and specialized markets, and higher volume in some of our lower arc businesses, such as coal and rock. Wrapping up the top line, other revenue declined 2% to $326 million, driven by lower revenue from the transfer of metro operations. Switching to expenses, our appendix slides provide some more detail, but let me discuss the key drivers as total operating expense increased 2% to 3.7 billion. Reported compensation and benefits decreased 3%, driven by the favorable comparison to the $40 million crew staffing agreement we had in the fourth quarter 2024. Our continued focus on operational excellence enabled record fourth quarter workforce productivity with workforce levels 5% lower than 2024. Fourth quarter compensation per employee increased 5% as a result of wage inflation and higher guarantee. For 2026, we expect our all-in compensation per employee to be up around 4% to 5% as we continue to identify opportunities to offset increasing wage and benefit inflation with process improvements, technology, and investments. Reported purchase services and materials increased 8%, driven by merger-related costs higher inflation, and increased maintenance and repair costs. Fuel expense grew 2%, driven by a 3% increase in fuel prices from $2.41 to $2.49 per gallon, partially offset by improved fuel consumption. Equipment and other rents declined 8%, driven by lower operating equipment leases and improved cycle times that reflect our strong network fluidity. Finally, other expense increased 22% to $344 million, on higher casualty costs and rising property taxes, as well as the comparison to 2024's bad debt adjustment. Against our record fourth quarter 2024, operating income declined 5% to $2.4 billion. Below the line, other income was a best-ever quarter and increased $264 million, driven primarily by industrial park land sales, which Jim mentioned earlier. Reported net income totaled $1.8 billion and was a fourth quarter record with earnings per share of $3.11. Our adjusted earnings per share totaled $2.86 and adjusted operating ratio came in at 60%. Turning to shareholder returns and the balance sheet on slide seven, full year 2025 cash from operations totaled $9.3 billion, roughly flat to 2024, while our cash conversion declined 10 points as a result of higher cash capital and our significant gain on land sales at year end. Cash return to shareholders grew 25% versus 2024 as we rewarded our shareholders by returning $5.9 billion in 2025 through both dividends and share repurchases. Our adjusted debt to EBITDA ratio finished the year at 2.7 times as we maintain a strong balance sheet and continue to be A-rated by our three credit agencies. Return on invested capital improved 50 basis points to 16.3%. As we've discussed, our goal is to have industry-leading operating ratio and ROIC. And I'm confident that when the dust settles after earnings season, we will remain the leader in 2025. In 2026, we expect our cash balances to steadily grow as we first prioritize paying off the $1.5 billion of long-term debt that comes due in the first half of the year and then conserve cash in anticipation of the merger closing. Now, I'll turn it over to Kenny, and I'll come back in a little bit to discuss our outlook. Kenny?

Thank you, Jennifer, and good morning. Before I dive into the fourth quarter results, I want to acknowledge the team's hustle and drive, which helped deliver a best-ever four-year record for freight revenue excluding fuel. Now, turning to the fourth quarter on slide nine. Spray revenue was down slightly on a 4% decline in volume. Our strong service product allowed the team to offset that pressure with pricing. With fuel surcharges and business mix, we delivered a 4% increase in average revenue per car. Let's talk about the key drivers for each of these business groups. Starting with our bulk segment, revenue for the quarter was up 3% compared to last year on a 3% increase in volume. while business mix held average revenue per car flat. Strength in coal was driven by sustained demand and favorable natural gas pricing. We're seeing smaller winds build momentum and provide incremental volume in a mature market. In grain, lower domestic demand and reduced soybean exports to China were partially offset by business development winds in Mexico. And, as Jennifer mentioned, The competitive and global environment also impacted quarterly pricing and mix. Grain products growth in renewable fuels and associated feedstocks was tempered by uncertainty around the Renewables Fuel Tax Credit. Food and beverage volumes remained pressured with softness in Mexico beer shipments. Fertilizer and sulfur finished the quarter strong, driven by increased phosphate shipments and higher sulfur demand from the mining industry. Turn into industrial. Revenue was up 1% for the quarter on a 1% increase in volume. Average revenue per car was flat, as strong core pricing gains were offset by business mix. Demand and business winds increased in petrochemicals and construction shipments, partially offset by decreased volume in our forest and petroleum markets. Premium revenue for the quarter declined 6%, on a 10% increase in volume and a 5% increase in average revenue per car, reflecting business mix and higher fuel surcharges. Intermodal volumes were challenged by lower West Coast imports and customer shifts. Despite that, 2025 was the best ever year for domestic intermodal, which also delivered another record-breaking quarter driven by exceptional service and business wins. Automotive volumes declined due to reduced OEM production driven by softer consumer demand and ongoing quality holds. Now, let's focus on 2026 and the macro indicators we're watching on slide 10, based on S&P Global's January outlook. At the start of the year, the indicators point to a softer environment. That said, it's still early in the year and these forecasts can move as conditions evolve. We'll watch the data closely, but we'll stay focused on what we can control, delivering strong service, hustling the wind, and new business, and partnering with our customers to grow. Looking ahead on slide 11. While we've been seeing volatility, we remain optimistic about coal's potential, with natural gas prices expected to remain favorable in the near term. Grain exports, mostly to Mexico, and some to China coupled with ongoing business development should support growth. In grain products, we expect continued strength supported by aggressive business development and expanding markets for renewable fuels and feedstocks. And as the policy for renewable fuels becomes clearer, we expect that to further support growth. Moving to industrial, we're planning for a challenging backdrop. Industrial production is forecasted to be flat, and housing starts are expected to decline by more than 2%. Our team is laser focused on business development and leveraging our strong service product to close gaps. We expect our petrochemicals markets to remain strong, driven by investments we've made in our Gulf Coast franchise and winning with new and existing customers. Wrapping up with premium, we expect continued softness in international intermodal volumes in the near term as imports stay below last year's levels. Later in the year, comparisons ease, but the import environment remains fluid. On the domestic side, we see continued opportunity and growth from over-the-road conversions enabled by our strong service product and multiple channels to win. Softening vehicle sales will pressure automotive volumes. That said, the team continues to hustle and recent business development wins will help offset some of that softness. Looking ahead, we're confident in our ability to compete. With a strong business development pipeline and a service product that continues to differentiate Union Pacific, we're focused on converting opportunities through strong customer relationships, commercial intensity, and consistent execution. And with that, I'll turn it over to Eric to review our operational performance.

Thank you Kenny and good morning moving to slide 13 or in the fourth quarter we extended our safety performance delivering meaningful improvement in both personal injury and derailment rates compared to our three year rolling average. Importantly, for the full year 2025 we achieved best ever results in both areas and we expect to lead the industry and employee safety. These outcomes reinforce our commitment to safety and demonstrate the effectiveness of our training programs and technology investments. Freight car velocity of 239 miles per day beat last year's record fourth quarter by 9% and set a best ever quarterly record. This result was driven by record quarterly terminal dwell of 19.8 hours, increased train speed, and continued process and technology improvements to remove daily car touches. Truly exceptional work as we build further momentum to operate a safer railroad and drive capacity for future growth. Our service product tracked ahead of what we sold our customers as fourth quarter intermodal and manifest service performance both improved to finish at 100%. As a reminder, service performance index will be rebased to our best monthly performance as we continue to raise the bar for success. We will remain agile and maintain our buffer of resources, positioning us to respond quickly to demand. Now let's review our key efficiency metrics on slide 14. Fourth quarter locomotive productivity improved 4% versus 2024. Additionally, our 2025 full year results set a record demonstrating the team's focus on further reducing locomotive dwell to maximize asset efficiency. Workforce productivity improved 3% and set a quarterly record for the sixth consecutive quarter. We continue to enhance and automate our operations while improving the safety of how we work. Train length in the quarter improved 3% versus 2024 a strong result against the mixed headwinds associated with softer international and motor shipments, which were down roughly 30% year over year. All in, 2025 was a best-ever year for train length, averaging almost 9,700 feet, as we adapted our transportation plan for the business and leveraged targeted investments to generate mainline capacity. With that, let's review our capital outlook for 2026 on slide 15. Our capital plan is developed through a disciplined multi-year strategy to strengthen our infrastructure and generate strong returns. In 2026, we are targeting a capital spending of roughly $3.3 billion. As we've said before, our first capital dollars will support safe, reliable, and productive operations. We are prioritizing our core infrastructure, modernizing our locomotive fleet, and acquiring freight cars to support both replacement needs and future growth. We're also investing in targeted capacity projects that align with our growth initiatives. These investments position us to capture additional volume opportunities and drive meaningful productivity improvements across the network. A few examples include the continuation of our siding construction and extension projects in the Pacific Northwest and along the sunset route in the Southwest. We're also making terminal investments for our manifest network in and around Houston in the Gulf Coast region. On the intermodal front, We're planning additional investments at Inland Empire and Phoenix to increase capacity and support growth in those markets. Our focus is on aligning the right resources in the right places at the right times so we can grow with our customers and continue driving efficiencies across the network. Before I pass it over to Jennifer, I want to express my gratitude to the UP team and their unwavering focus on safety and service. By staying disciplined on the fundamentals of railroading, We expect our team to continue this momentum in 2026 and beyond. So with that, I'll turn it back over to Jennifer to review our initial financial outlook for the year.

Thank you, Eric. Turning to slide 17, before I give our thoughts on 2026, let me just summarize what we achieved in 2025. The strong results we've reported today are on target with what we laid out last January. The path to achieving the results, however, was actually quite different. My point in highlighting that is pretty simple. we are executing our strategy of safety, service, and operational excellence leading to growth at a very high level. That level of execution makes us more nimble as a company and enables us to both win in the competitive freight transportation market as well as to take advantage of spot market opportunities. Whether that be higher than expected coal demand, domestic intermodal moves, or opportunistic real estate sales, the entire Union Pacific team is collectively driving for excellence. and that's producing best-in-class industry returns. As we apply that mindset to 2026, our current plans do not anticipate a significant economic upswing. We are, however, confident in our operational capabilities as our network is running better than ever. Our service product creates value for customers and we are committed to outperforming the markets through our business development efforts. It's also important to note that since we laid out our three-year targets in September of 2024, several things have changed. Notably, S&P Global's 2026 economic estimates in key areas such as industrial production, housing starts, and auto sales have deteriorated. In addition, rail inflation is ticking up again. We expect slightly over 4% inflation in 2026. Our commitment to yielding price dollars that exceed inflation dollars has not changed, but price may not be a driver of our improving margins in 2026. And of course, in September 2024, we did not anticipate the impact of merger costs and pausing our share repurchases. Despite this different backdrop, we remain committed to attaining our three-year CAGR of high single to low double digit EPS growth through 2027. Specific to 2026, our earnings outlook is in the mid single digit range as we continue to face volume and cost headwinds. As 2025 demonstrated, The year ahead will likely present some ups and downs, but I am confident that we can adapt and drive financial gains. We are planning $3.3 billion for 2026 capital improvements, and we will continue to deliver value to our shareholders with consistent annual dividend increases. Importantly, we fully expect to improve our operating ratio versus 2025 and remain the industry leader in operating ratio and return on invested capital. The team's accomplishments in 2025 demonstrate the capabilities of our great franchise, and we look forward to making further improvements in 2026 as a standalone company and in 2027 when we merge with the Norfolk Southern. It is truly a great time to be at Union Pacific. And with that, I'll turn it back to Jim to wrap things up.

Thank you, Jennifer. Turning now to slide 19. Before we get to your questions, I'd like to summarize what you've heard. First, Jennifer reviewed the fourth quarter financials. Ricardo has declined 4% in the quarter driven by tough year-over-year international intermodal comparisons. We had strong core pricing gains and continue to drive productivity throughout our network. Kenny gave an overview of fourth quarter volumes and laid out initial thoughts for 2026. We are focused on pricing to the value we provide and competing in the marketplace. It's clear our service execution over the last two years plus is helping us win with our customers. We see opportunities in several areas, including chemicals and domestic intermodal, to name a few, to leverage our diverse franchise to further grow our business. Eric reviewed our record safety, service, and operational results. From a safety perspective, we made strong improvements and expect that we will end the year as the industry leader in employee safety. On the service front, we have shown our customers what consistent, reliable service looks like and how it drives value through the supply chain. On operational excellence, we more than met the challenges we set several quarterly and full-year fluidity, dwell, and productivity records, and the team is ready to drive further improvements in 2026. Lastly, Jennifer discussed our outlook for the upcoming year. Similar to 2025, we are focused on building on our safety performance, winning new business, and controlling our costs, all to generate improved financials. Our diverse franchise brings us challenges and opportunities every day, and our job is to maximize what's possible. As we continue to successfully execute on our strategy, we will remain the industry leader that keeps raising the bar as we drive value for our shareholders. Before we open it up for questions, I'd like to make just a couple of comments on the merger. Job one for our team in 2026 is continue to improve and run a great railroad. I like where we are, I like what we have planned, and I love the way we've been able to increase productivity and we've been able to adjust depending on where the business is and also what the impact of input costs are. Job two is working through the regulatory process to merge with the Norfolk Southern. I'll be honest, myself and we are disappointed that the STB determined we needed to provide more information after providing close to 7,000 pages and working with them and listening to them if they needed more information. But at this procedural step that we've seen in previous acquisitions, which were ultimately approved, Let's be clear. This does not reflect the value of our combined railroad will provide America and our customers. We are confident that we demonstrate our merger enhances competition is in the best interest of the public. Our combined railroad will move goods faster while removing millions of trucks off to congested highways in several large cities and customers will benefit from faster, more reliable service that unlocks new markets. The STB's request is focused on three areas requiring clarification. Our response will take a few weeks to prepare and then we will refile our application as soon as possible. We view this as a short-term blip and do not expect a significant change to the timeline as we are still targeting closing in the first half of 2027. We are following the process and doing our part to move forward with transparency and speed. We are delivering at the highest levels. So fundamentally, I like where we are and aligned on what it takes to win, driving safety service and operational improvements to support growth as we work toward combining with Norfolk Southern. So with that, Rob, we're ready to take questions if there's any.

Thank you, Mr. Venna. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star 1 on your telephone keypad and a confirmation tone to indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Due to the number of analysts joining us on the call today, we'll be limiting everyone to one question to accommodate as many participants as possible. Thank you, and our first question comes from the line of Jonathan Chappell with Evercore ISI. Please receive your question.

Good morning, Jonathan.

Good morning, Jim. I'm going to give you a break and go to Jennifer first today. Jennifer, I know there's a lot of moving parts and you end up in 25 in a different manner than you expected 12 months ago, but just help us understand a little bit. You said price may not be a driver of improving margins in 26 given the accelerated inflation. You talked about 4% on the count per employee. You're not expecting a macro recovery. So how do you get to OR improvement in 26? Is this a function of headcount, productivity? And if there's any way to frame the magnitude based on what you see today or Kenny laid out from a macro standpoint, that'd be helpful.

Yeah, thanks for that question, Jonathan. So you heard that right in terms of from what we're expecting today, at least as we sit here from a price standpoint, that while we absolutely believe that we will and have a plan to improve our operating ratio in 2026, we don't think that we're going to get any help from price. Of course, that's an early look. And really, it's a function of a couple things. You know, we definitely benefited in 2025 from natural grass prices and strong coal pricing. While that may hold, we're just not going to have that as a tailwind for us in 2026. And then you still have a pretty weak domestic intermodal market. And those two things really are what's reflected in that pricing commentary. In terms of productivity, Eric and his team did a fantastic job in 2025, driving productivity, driving efficiency. And we have more ahead of us. in 2026. And so that definitely will be a continued tailwind for us as we move into 2026. And that's going to be supportive of improving our margins. And then the last thing I'll mention is the business mix. You know, it should be a more favorable business mix for us in 2026 than in 2025. Now, we were a little off in 2025. I thought it was going to be a better mix in 2025 than it ended up being. But you still saw us make margin improvements. That's where I think just the way that we're running and executing today is a huge benefit for us. We are moving every available carload there is, and I anticipate we'll continue to do that in 2026. So that's really how we're looking at it.

Thank you.

Our next question comes from the line of Jordan Alger with Goldman Sachs. Please proceed with your questions.

Hey, good morning. It's Andre on for Jordan. Thanks for taking our question. Morning, Jim. I was just curious if you could dig a little more in on the $2 billion of targeted net revenue gains from the expected merger. I think about $4.2 billion of the increased traffic gains are being offset by $2.2 billion of costs associated with handling that traffic. The question is how variable can that $4 billion gross traffic number be based on your planning assumptions? And then Could you just discuss a little more related to how you project the associated costs of taking on that new traffic, which altogether I think it implies a pretty healthy EBITDA margin for the potential new traffic coming on board? Thanks for the question.

So if I have your question right, you're asking us when we put the merger application in, we talked about growth and the carload growth. And you want to know... if that's conservative or not, or where the market is. And you also want to understand how we're going to handle that business. So let's split that up in two pieces. You know, we had experts. We looked at it before, of course, before we decided to cross the bridge and merge with Norfolk Southern. We did our own analysis of the traffic that's available both long-haul intermodal that today we have a lower percentage than the mid-length intermodal business just because of the handoff that what happens when you have to hand off from one railroad to the other, and it just does not open the market and penetrate it as well. So we're very comfortable that that $2 million that we put into the application is there. And in fact, we are and always have been, just like when we talked about price before, we're conservative. If anybody thinks we're going to let Kenny get away with being conservative internally, then dream on and you don't know who I am. Okay? So the same thing with this. We're very comfortable. And then we had experts look at the market and they wrote in their best guesstimate or estimate at this point on what we're going to do. Anytime you increase business, You get the added on the trains that you have and what you need to do. So it's always much more efficient than running traffic that is in a decreasing position where you have to try to figure out how to adjust your network. So bottom line is I'm very comfortable that the business is out there. Now, there has been some talk about this business. It's 2 million and my God, how much is that? Well, You know, if you do the math, it's around 38,000 car loads. You have to remember the way all of us count intermodal, so you can just about cut some of that in half because there's two containers at least on a rail car. And for us, we load up our trains. Also, we don't run 10,000-foot trains. We run our intermodal package because we have built the system to be able to do that. somewhere between 14 and 18,000 feet. And we do that every day and we've been doing it for now the last few years. So the total number of additional movements that we're going to have on the railroad that impact what capital we need to require is not as large as people think. And we know that it's not that large. Let me take one more step down if you take a look at the way we operate. The way we operate is, This morning, when I looked, okay, like I do every morning, we have over 2,000 movements, foreign railroad, locals, trains running on our network. So if we add, you know, 10 more trains a day or 15 or 14 more trains a day, it's a pretty small rounding error on the impact to the network. So I'm very comfortable that when the merger gets finalized, which it will just because of the enhanced product that we're offering our customers. And just an end-to-end railroad from one end of the country to the other is enhanced all by itself. We're going to be able to provide seamless, faster service to our customers, let alone in the watershed. So, Eric, do you have anything more to talk about how the network's going to handle this little bit of business that we're going to bring on that hopefully is more than $2 million?

Yeah, let's build on that, where you started. Really, we're talking about a 6% increase in our operating inventory at the combined entity. And I want everybody to make sure you hear that, 6%. So you have three things you do. Number one, you rely on the buffer of capacity we already have. We talk all the time, internally and externally, about the fact that we keep a buffer of resources for locomotives and cars. But we also do that for terminal capacity and mainline capacity. We don't run terminals up to 100% capacity. heck, when we get to about 80%, we're already making investments. Second thing, when you look at the application, the base year is 2023. So we've made capacity investments. And independently, NS has made capacity investments as well in 23, 24, and 25. And those are all tailwinds for us to utilize. And then Jim hit the last one. And I got to be honest, I totally agree with Jim when I, I don't remember what railroad said it, but something about 10,000 feet, and I had a hard time computing that because we don't run trains at 10,000 feet. Here at Union Pacific, we've invested in our people and the technology that allows us to safely and reliably operate those trains to the length Jim mentioned. So I'm very comfortable with it. We're working through the integration process, and it will be the most thoroughly planned and executed integration of two railroads.

Listen, sorry for the long answer. We'll try to be shorter so this thing doesn't go too long, but great question. Thank you very much. Appreciate it, Nicholas. Thank you.

The next question is from the line of Ken Hexter with Bank of America. Please proceed with your question.

Good morning, Ken. Hey, good morning, Jim and team. Great job on the ops. I guess just a quick one just to clarify that the base rate for your mid-single-digit growth, is that the 1198 reported or is it the normalized? I'm just getting a lot of questions on that. And then pre-merger, you're now building to low-single-digit, mid-single-digit into 2027. Maybe you could just kind of, are we really ramping that up for the 27 outlook and kind of what should expectations, I know it's two years ahead, but just because you've reiterated that target, just want to understand your thoughts there. In the face of 3.8 down to 3.3 billion capex, so why the reduction and what's getting pulled out? Thanks.

Well, for one question, Ken, you managed to hit a lot of points there. Let me see if I can hit them all. So our guide of mid-single digits is off of the 1198, our reported EPS, which was up 8% year-over-year in 2025. You also asked, in terms of the CapEx piece at the end there, we are sizing our CapEx relative to what the network needs. And Jim's talked about this before. CapEx isn't just a snapshot in time. It's not a single year. These are multi-year investments. Eric mentioned some of the investments that we're making in and around Houston. That's over $300 million in total, but that's going to be over many years. So we're looking ahead. We're looking at what we have ahead of us in terms of what we need, and we feel very comfortable with that. What was your middle question? I missed that one.

Just then, sorry, the middle part of it was the ramp into the low-mid single digits into 2027.

Oh, the ramp points up.

Yeah.

You're a conservative positioner.

I mean, you're right. Mathematically, that does put a lot of pressure on 2027. Again, we're sitting here on January the 27th. It's tough to know exactly what's going to happen. The economic indicators don't look great, but if that's different, we're positioned, we have the resources, and we're going to capitalize on that, absolutely. The market's not telling us that's available today, but the market's often wrong. And, you know, seeing ahead to 2027, again, continue to run well, and we feel very comfortable with the guide, even though that does mean if we're right in the mid-single digits for 2026, that puts a big lift on 2027 for us.

And we stopped the share buyback of $45 billion, right, or $4.5 billion this year. So just because we're making sure that we have the cash, as Jennifer spoke about. And, Ken, you should know me by now, and you should know this team. We'd rather be a little conservative in how we look at it and make sure that we overdeliver on what we have, and that's our challenge all the time. So, Ken, good question. Thank you very much.

Appreciate the time. Thanks, Jim. Thanks, Jim.

The next question is from the line of David Vernon with Bernstein. Pleased to see you with your questions.

Good morning, David. Good morning, Jim. So a bigger picture question for you around some of the access issues. Obviously, the regulator came out with the decision to maybe change some of the rules around switching. I'm not going to call it reciprocal because it's only reciprocal if two parties are involved. But if you think about the switching sort of regulation moving away from maybe the mid-tech paper precedent, how does that change your perspective on the business or what kind of impact do you expect that to have As we think about, you know, a future either with or without the merger, if we're going to maybe make it a little bit easier for shippers to petition for a switch, how does that change the UP business? We've been getting a lot of questions on that from investors, and I'd love to get your thoughts on it. Thank you.

Yeah, listen, I think it's a timely question, David. I appreciate it. Anybody who's heard me for the last son of a gun, okay? I was at CN 10 years ago, so I was on calls regularly. 12, 13 years ago. I've been very consistent, and I haven't changed. I'm all about competition, and that's what I love about this merger. It's going to make everybody more competitive, and it's going to drive better results for our customers. But on that issue, I am not afraid to compete, and I think customers should have optionality. In general, the devil's in the details with what they've put out, and we have to work through. But I am very supportive of If you can't deliver for your customers, then customers should have optionality, and I have no issue with that. Now, it needs to be across the whole industry, not just, okay, Union Pacific. It has to be for everybody. I would love to compete with some customers that are not getting the service level we're providing in the western U.S., and when we have the merger, in the eastern U.S., or with the Canadian railroads that are running north-south. okay, through and into Iowa. We'd love to compete against them and we have no issue opening some of our customers up or all of them up as long as everybody does. So that's where I'm at with it. The devil's in the details. And let's make sure that whatever happens actually improves the customer experience. The worst thing you can do is have a system in place that is complicated. No one understands how the customer can win. If you increase touch points, and you make it complicated, then the customer actually sees a deterioration. They're going to have to carry more inventory and more assets to try to move through it. So as long as, you know, we protect the investments that we've made, okay, to provide service to our customers, you know, just in Inglewood, hundreds of millions of dollars to have the buffer in there to be able to recover as fast as we have. So I'm all for it. I like it. Let's get through the details. And I've told everybody, the regulators that wanted to listen to me, long before anybody put anything out in this last one, that I would be supportive. Now, I don't think everybody's on the same page, but if they are, it should be an easy fix to go ahead and get it done. I'm ready, and Union Pacific's ready to challenge ourselves. And the cream rises to the top when you have more competition. So... David, hopefully I helped you with that answer and you're clear about where we are on it.

You absolutely did. And maybe just as a quick follow-up, do you have a date for when the application is going to be resubmitted? I'm not sure if that filing has been in yet, but I think the STB had asked you guys to let them know when the resubmit was going on.

Okay. You know, I've been having an exciting morning watching the railroad recover. Then you ask me a question like that. I'm telling you, we've got experts working on stuff and trying to get all these experts to give me all the detail. We're working on sort of a sliding scale right now. I don't like it. I wish it was in tomorrow, but they're working hard, and this is weeks. And this was why we started with trying to get the application in way before the full six months, because I was absolutely sure, even though we thought we had done a good job, that the STB was going to find something that they wanted us to look at it again. And I understand why. This is a big combination. This needs to be done right. And I give the STB credit that they're going to look at it. I think the three members, plus all the people at the STB, they have a responsibility to make sure that what we're doing is positive. They're going to come to the same conclusion as I have and the entire team here and Norfolk Southern has, that it is positive. It is positive for customers, for our employees, for America, you know, taking trucks off the road. But at the end of the day, it's a process, frustrating as it is, okay? Once in a while I go home and I have a nice Irish whiskey to calm myself down before I go to bed just to say, okay, I'm good with this. But stay tuned. As soon as we know exactly the date, I'll be the first one to announce it. I think we'll put a press release out that says that in March on whatever date it's going to come out. So sorry I can't give you a definitive one this morning, but you know I'm pushing them hard to get this thing done. All right, thank you. You're welcome.

The next question is from the line of Chris Weatherby with Wells Fargo. Please, here's your question.

Hey, thanks. Good morning, guys. I guess maybe as it relates to the merger and the competitive landscape, obviously there's a lot of customer relationships that need to be addressed as you go through this process. I know it's relatively early, but with the application in, people have had a chance to look at it, get a sense of how you're thinking about it. You'll have obviously more comments to come, as you just noted, Jim. I guess maybe specifically on the intermodal side, can you talk to us about how that sort of discussion is developing? There's obviously some big partners, you know, that are not on your railroad in the west, but maybe would be on the combined railroad in the east. Just kind of get a sense of maybe how that discussion sort of looks right now and maybe how we should think about those relationships evolving in 2026. What's embedded in your outlook on volume?

Let me pass it over to Kenny here in one minute, but let me just say this. We've had discussions with customers from bulk customers, from customers that are single-car movers, customers that are chemical, customers that are moving industrial products that need to move. And every one of the customers that I've spoken with, they understand it. They see the benefit. Are they concerned? What they're always concerned about is, will Union Pacific, and they should be, okay? That should be a question they ask, and they've asked me that question, is, are you going to be able to keep the service level up with a combined railroad, and are you going to impact me? Because they remember Canadian Pacific's schmuzzle with their IT system, and I tell them, Listen, with net control, what we did was it's the fundamental base of everything that feeds into the railroad. We did it and it was a non-event. I've also been railroading for 47 years. At the end of the day, it's real important and for me it's real important. Whether it was when I was in Vancouver and we were getting rid of those four-hour quits that people were having, we did it in a way so that customers don't see the impact. That's real important to me. With that, I think the feedback is, if you can provide me good service, they see the benefit and they see the pressure this is going to put on the other railroads to compete. And Chris, it's pretty simple. If you can't compete on service, if you can't win and be faster across the country and across You know, when we extend by 200 to 300 miles, customers on the east side of the Mississippi and customers on the west side of the Mississippi that can get further into the Ohio Valley or people from the east can get into Texas easier or into California easier, they're going to have to compete on price. So I think the pressure is not going to be on customers. They're going to see much more competition as we move ahead. But, Kenny, you've had lots of discussions with people, Why don't you give Chris a little bit of more background and color?

Yeah, Chris, I think Jim hit it across the board. You know, all of our customers, not just Intermodal, but let's talk about Intermodal, and we're pretty excited about it. As you know, Hub has come out, Swift has come out, O&E has come out, and what those Intermodal customers see are the investments that Eric and this management team have made. We've talked about them with Inland Empire, Phoenix, Twin Cities. The service is strong. I talked about it in my results today. Wow, we're coming from a place of strength, being able to have our best ever domestic intermodal business, and we talked about it in all 2025. Over the road wins with Uber. Over the road wins in Phoenix. Over the road wins in the Kansas City. So we're coming from a position of strength, and we're excited about it. Got it. The appreciation model is a pretty good one, Jim.

Thank you.

I don't know how the hell you spell that. I'll leave it to you, Chris.

Thank you. Our next question is from the line of Walter Spracklin with ABC Capital Markets. Please proceed with your question.

Yeah, thanks very much. Good morning, Walter. Good morning. How are you doing? So if I start on operating ratio, if I look at your Operating metrics, Jim, they look really good. I mean, lengths like, you know, Eric highlighted are at record levels, velocity record levels. You know, when I see that kind of operating performance, my inclination is to kind of improve your operating ratio fairly, you know, not by a little bit, maybe 100 basis points or more. But I'm curious as to, you know, Jennifer made some comments about pricing and, or sorry, inflation and how pricing won't be a contributor. Do you need pricing, do you need volume to get north of 100 basis points or can you do that through those metrics that you're hitting right now without help from macro or price?

Walter, you're a smart guy. You've been around for a long time and you understand this. You use a whole bunch of levers when we look at operating ratio and that's a result of everything that we do. will continue to look at how we can operate better and how we can operate more efficiently and you could see the work that was done by eric and the entire operating team on productivity some things are given to us you know whether i liked it or not when i showed up this time came back to work we signed a collective agreement that increased wages substantially for our employees and then this time One of the parties went out fast and signed a pattern agreement that we've had to live with. Now we have agreements with everybody, but that includes a 4% wage increase first year. So at the end of the day, that's the pressure we have. Now, Kenny needs to deliver on price. We're talking about price and saying where it is right now. But it's unacceptable if Kenny and the marketing team think that their job is for the value we give customers to understand the marketplace and price it properly. So, Walter, I'm very comfortable that we're going to be able to improve our OR this year. Jennifer's always much more conservative than me, and that's okay. That's where she should be, okay? She's the person that puts it all on paper and gives us the numbers. If I gave you my number, it would be scary, but I'm not going to give it to you. But I think I'm very comfortable where we are, Walter. And, Walter, I've got to say it, like, thank God I'm not in Winnipeg. When I saw minus 38, I was thinking, son of a, I felt bad for those people at Canadian National. Like, let me tell you, they are tough. But hopefully I answered your question.

Yep, appreciate the time, Jim.

Thank you.

The next question is from the line of Jason Seidel with TD County. Please choose your question.

Elliot Alperin for Jason Seidel. Wanted to ask about the 2026 outlook. Can you speak to the volume and pricing assumptions within your guidance? I know you're pricing in excess of that 4% inflation number, but can you speak to maybe how customers are absorbing new contracts given the muted customer demand you're seeing and kind of the expectations for the year?

Well, I can't give you the color, but let me just remind you what I said exactly. And we're not giving specific numbers as to volumes other than we do plan to outperform the markets. On the price side, we said that our price dollars in an absolute basis will exceed our inflation dollars. So that's an important nuance. We're not talking about it in percentages. It's absolute dollars. So Kenny, take it away.

Yeah. So last year around this time, we laid out macroeconomic indicators. And we said at that time they were mixed. And then in 2025, we put up a record year in freight revenue. So I just want to say that. So we know we can win in a difficult environment. And we know we have some commodities that we'll have to really go after, like forests and lumber. We'll see how that plays out. Automotive, we'll see how that plays out. But you look across the board, in construction, as the weather was good, we had a banner, remarkable year. Plastics. banner, remarkable year. Industrial chemicals, banner, remarkable year. Grain products, banner, remarkable year. So in all three phases, we've been able to grow in a difficult environment. We're committed to that. We've got a strong service product. And so with that, we're going to gather the demand that's out there, maximize the price based on the service that we have, and we'll see where that lands us. Thank you very much.

Our next question is from the line of Scott Group with Wolf Research. Please just use your question.

Morning, Scott. Hey, thanks, guys, and Jim. So, Jim, we've got the SDB decision on the application. They sort of had a comment, hey, if you want to improve the overall application, go for it. We've got lots of other comments from other rails, some other stakeholders. I guess, has your degree of confidence and approval here changed in any way and ultimately What is giving you so much confidence and approval here?

So, Scott, if this was a bad deal, if this truly was not better for our customers, better for our employees, then you know what? You'd be speaking, but no one would listen and no one would see the facts. This combination is compelling. It changes the dynamic and the competition And remember, fundamentally railroads, the other railroads can say what they have to say and they're very vocal about it, but they're complaining because they're worried about competing against us. Because no business would ever, ever complain if somebody in their marketplace was doing something stupid. You know, if you were offering really bad coffee across the street, you'd go over there and try it out. You'd check out all their business processes. You'd check and see how their app is. You'd check and see how their payment is. And you'd check and see how theirs is. And if they were really bad, I don't know, maybe the rest of them wouldn't do that in our industry, but I would tell the owner of that coffee shop across the street from my coffee shop, I'm telling you, your coffee's the best, okay? I wouldn't complain. I'd only complain, and I'd go back worried, if the product that they had was better than mine, and I have to do what I have to do. So bottom line is, that's why I'm very confident. And it's not just Jim Venna that's confident. It's speaking to the people in Norfolk Southern They see the benefit. They understand it. And that's good to have because we're going to be merging these two companies together. So I'm very confident that at the end of the day, going through this process, and is it painful? If this was the Jim Benna's STB, I would get that decision done by my birthday, okay, this summer. But this is not Jim Benna's STB. We need to go through the process. We knew it was going to be long and thorough And so be it. Okay. I wish it was thorough and shorter, but you know what? It is what it is. So we'll deal with that as we go. So Scott, very comfortable with it. And we're going in to answer the questions that they asked us when they gave us the response. You know, one of the things they asked us to do is give our red line of where we're going to, where we have, and any big deal has that optionality to say to the buyer, the company that's going to spend $85 billion in stock and cash, at what point you could actually walk away. And we never thought that was material in looking at the merits of the business and whether it made sense to put the railroads together, and we didn't provide it. The STB wants it, we'll give it. I have no idea what the other railroads are going to do with it. Maybe they'll scurry home and take a look at it and see what they can do to figure out how they can get close to that number where our walk-away is. But I don't understand it against the merits. So we'll answer the key questions. We'll make sure we do it right. And if we have more information and we can add something in the merger as we put in the refreshed merger application, we'll do that. But that's where we are with it, Scott.

Thank you, Jim.

You're welcome.

Our next question is from the line of Tom Wadovitz with UBS. This is his question.

Morning, Tom.

Yeah, good morning, Jim. So I wanted to ask you about your thought process while we're in this approval process phase. You talked about maybe first half of 27. It might be like maybe implied more even for what happens with Norfolk, but I would guess you have maybe some thoughts on kind of combined strategy. So how do you approach volume? I think Norfolk had seen some volume shift over to CSX on J.B. Hunt. I don't know if there's any risk to your volume, but do you think volume as you're in this kind of broader approval phase before you can run the railroad combined is Do you say, hey, we've got to be aggressive on volume and, you know, kind of win volume back or get as much volume as we can? Or is this like, hey, you know, we don't need to be too aggressive because when we've got the combined railroad, then we're going to really go out there and win?

Listen, I can't tell Norfolk Southern what to do, okay? And I'm not going to say it publicly because I just can't. You know, it would be illegal for me to tell them what to do. But I'll tell you what we're doing at Union Pacific. We are looking to grow our business, and that's what we're going to do in 2026. We're looking for every opportunity. You know, when you serve a customer that gives you 30 rail cars and they're served also by another railroad in Texas, we want, if our service level is high and our pricing is good, then we would expect them to give us 32 cars and 33 cars. So we're going out to grow our business. And if you take a look at the way we handled the Canadian Pacific merger with Kansas City, I think we've done an excellent job of growing our business in and out of Mexico, even though they have a seamless railroad going in. The true numbers are we've done a spectacular job with FXC and with Canadian Pacific. We still ship with Canadian Pacific into Mexico, and we ship with the FXC into Mexico. both northbound and southbound. So that's the way I look at it, Tom, is this year the merger is one thing, but the fundamental of what we need to do to operate the railroad and grow our business and increase price for the value we're giving and looking at the markets and what we have to do and what's possible. And sometimes we've got the drop price, and we've done that this year with some of our commodities that are single-served because of the marketplace and what they were competing on. And I've mentioned it publicly. You know, we've had to do that with the soda ash because of what's happening with their competitors that are from China with synthetic soda ash. So at the end of the day, that's where we are. I expect Kenny to grow the frickin' business. Otherwise, why do I need a marketing department? I expect Eric to deliver improvements in productivity. Otherwise, why do I need a frickin' operating department headed up by Eric? And he's doing a good job. Gentlemen, you guys are doing good. Don't get me wrong. This is not me putting you on the hot seat. And Jennifer, you better freaking deliver too, okay? So at the end of it, that's where we are, okay? So hopefully I gave you a clear view of the way I look at it.

Very clear. Thank you, Jim. Thank you.

Our next question is from the line of Brandon Nikolinski with Barclays. Please refuse your question.

Morning, Brandon. Hey, good morning, Jim and team. Thanks for taking the question. Jim, I guess can you put in context the proposed rulemaking change the STB made on reciprocal switching and dropping the requirement to prove anti-competitive behavior, and especially in the context of your open access gateway proposal and the merger as well. Appreciate it.

Okay. Well, listen, I need to get these guys into it also a little bit. And Kenny, why don't you tell people what our position is on reciprocal switching or some open access, okay?

Yeah, I think you hit it up early in the question. I think... I think Jonathan Chappelle asked it, but when you look at our service product being the way it is, we're not afraid to compete. I said that in our words, we've been able to grow again. We want to expand the pie. We're not looking at just, you know, rail-to-rail competition. We're trying to go after over-the-road. We've been emphasizing that. I've shared earlier, best serve on domestic and remote, growth on the international side, on the over-the-road, from some of the ports going back east. We're looking at expanding the pie, and we're doing that through the investments. We've invested in Twin Cities. We've invested in Kansas City. We've invested in the Gulf Coast also on the carload business. You've seen us show optionality, Jim, and also Brandon, and where we normally might have gone to the West Coast or PNW on the grain business, we pivoted down to Mexico. We're looking to go out there and compete regardless. There was another part of the question in terms of the gateways and keeping those open. Our customers demand optionality. We want our customers to have optionality. There's no case where we go out and we would not want to provide optionality for our customers.

Eric, are you afraid of competing if we had reciprocal switching or some sort of access as long as it's fair, as long as the details work to make the customer better. If we don't deliver, somebody else should. So how's your feeling on it?

No fear at all, but I'm going to focus on the back half of what you said. And Brandon, we talked about this to Kenny's point a little bit earlier. When you start thinking about reciprocal switching, what you have to be really cognizant of is what is the experience the customer is going to have. And you can horribilize it, and I'm not going to horribilize it. But even in your average scenario, if it's not designed properly, that car or that collection of cars that the second carrier is now handling, they're going to be in a terminal at least for a day or two. And so now you've added somewhere between, say, 20 and 50 hours of dwell to that car. That's not what customers want. At least that's not what our customers want. Our customers want us to seamlessly pick up the car, take it to our terminal, process through it quickly, like our record dwell in the fourth quarter of 19.8 hours, and get it an outbound train. So how we design this, in fact, specifically how the STB designed this, we need to make sure that we're really cognizant of is it achieving the ultimate goal of our customers, which is to be able to deliver the transit time that they promised their customers.

And if I could add one thing, and we've done it. So we've worked with customers to build in. And in fact, we have two places that we're going through the process to get three places. Jennifer, that's right, you're right. Three places that we are in the process of going through the regulatory environment to be able to build in, where customers are single-served and we're willing to spend our money. And that's the way it should be. Business should not be you get a freebie from somebody else. Like, I don't know, I'd have a hard time if I had a coffee shop, and I love coffee, and I'm short of coffee this morning, I need a double espresso. But at the end of the day, If I had a coffee shop and somebody wants to set up in my coffee shop to sell their coffee, if you want to have a freaking coffee shop, build one across the street, build it next door to me, do whatever. So at the end of the day, I'm not afraid to compete. In fact, I think it would be an advantage for Union Pacific and the merged Norfolk Southern Union Pacific to have open access. We even put more pressure on our competitors, okay, to be able to win in the marketplace if we can have a real high level of service, which we have. But on top of that, if we need to spend money, son of a gun, some of the railroads, our competitors have huge amount of money put aside. They could build into just about anywhere if they wanted to. So that's the way I look at it. It's about competition. This is not your... grandmother's railroad that's afraid and protective somebody wants to go through new orleans because that's the quickest way to get to the southeast and into florida we want to go there if you don't what you end up doing is you lose the business eventually somebody comes from overseas to take that market away from you and we've seen that in places where people get protectionist we're not protectionist but i'm telling you We didn't like the last time the STB came up with a way to do service and access. It was so freaking complicated. All we were going to do was hire lawyers to try to figure out how to do that. And I've got this love-hate relationship with lawyers, okay? I love them sometimes, and sometimes they bother the heck out of me. But at the end of the day, we're here to compete, and I have no problem if we have something that provides service, higher service for our customers, and we'll win. And they'll pay us for that service, if we provide the service that makes them better and they can win in the marketplace. We need to partner with more and more of them as we go. So, listen, gentlemen, thank you very much. Sorry again for the long answer, but you got me going on this issue. So, thank you.

Thanks, Jim. Sorry if it was a duplicate question.

Oh, don't worry about it. I love it because, you know, you need to reinforce things 10 times. So, that was not a shot against you about the question. I loved it. We probably weren't clear the first time. So, don't worry about that at all. Okay? Thank you.

Our next question is in the line of Stephanie Moore with Jefferies. Please proceed with your question.

Good morning, Stephanie.

Hi, good morning. Thank you. Well, being based in Nashville here, we're pretty iced in. So if UNP is back up and running by Thursday, then I hope we can say the same for my household. So that's pretty impressive. But I did want to return... Yeah, no, it's pretty impressive. I did want to maybe return to the pricing conversation. You know, look, considering how strong the network is performing and the value you are providing for customers, can you talk a little bit about the pricing opportunity going forward for you guys? I mean, is there something that needs to happen from an industry standpoint to bolster pricing? You know, is this just a function of an improving rate backdrop? And then, you know, how is UNP specifically positioned post-merger as well? Thanks.

I'm glad you asked the question. So we've got two structural things that are going on, and Jennifer talked to both of them. On the cold side, we've got some mechanisms in the contract that helped us out a little bit in 2025, and we'll see what happens with that going forward. And then the same thing, we've talked about this now, we're talking three years in terms of domestic intermodal and where the rates are from that level, and we haven't seen the price and uplift there. I get to make this pretty crystal clear. We have the mindset with this service product that we are pricing to those levels. We have the mindset that we haven't backed away or changed anything on how we're looking at the pricing. We have those two structural things that we talked about. Outside of those, the teams are doing a very good job sitting down with customers, sharing the service product that they have, and talking about opening up new markets for growth and or on the renewal. So there is no change whatsoever. I need to make sure we're all on the same page on that. It's service drives price. Service drives price. And I said that we're consistent with that.

So hurry up. Yeah. And rail is still more price competitive than truck.

And rail is more price competitive than truck. Yeah. Thank you very much. Thanks for the question.

The next question is in the line of Ari Rosa with Citigroup. Please receive your question.

Ari, good morning. Hey, Jim, good morning. Thanks for taking the question. So I know a number of people have asked about reciprocal switching, but I actually wanted to broaden the question out a little bit more. If we could talk about the relationship between the class ones and the STB. I don't know if you would agree with this. I know you've been railroading a long time. It seems to me that over the last 20, 25 years or so, The STB has been relatively hands-off with the rails as long as service has been pretty good. But now as we think about kind of transcontinental mergers, just the scale of the rails post-UPNS, assuming it goes through, is there anything that concerns you where the STB might say, just given the size of the railroads in that scenario, that the STB says, we need to be more proactive, we need to be more aggressive, in our regulatory approach and how we think about protecting customer interests. And I guess, is there anything, I know you said obviously competition doesn't concern you, but is there anything that would concern you where you would say, okay, that's a step too far or that's something that the STD could do that would kind of impede our ability to hit our synergy targets or that would erode margins kind of structurally over the long term?

The answer is no. But let me give you a little bit more feedback. So Ari, and I know you set me up to help me with this question. And I think it's a wonderful question. People think about the railroad and the regulatory environment. And they're thinking back to the 1890s, 1900, when there was no highway system. Vehicles were just starting to be manufactured. There wasn't trucks. So the competition was railroad against railroad was the key way and boats using water to be able to move products. If you actually move to today, we have, if you look only in the railroad, you could say that we have X amount of business. But if you actually look at all the business, everything that's moved, railroads have a pretty small percentage of the total business that's out there that's being moved. So our competitor is trucks and vessels and international vessels coming in with competition. It is Brazil moving products into the largest soybean crushing facility, which is in Ragazza, okay, which is in Mexico. And that's our competition. So at the end of the day, we have to stop thinking about the railroads, And if we end up with 38 or 40% of the total market, and we hope to grow it, but if that's where we end up, it's a small piece. The other thing is, and this is real philosophically real important, listen, the other railroads, we're going back and forth lots. They're smart people that operate those other railroads, okay? I know a lot of people in the other railroads, and they're smart people. And we should be proud as a nation that with all the regulations and everything that we do from safety and everything else, I would put the railroads in the United States of America up against and in North America up against anybody. No one has a railroad that can move a product at the price we move it and how safe we move it as an industry. We can go back and forth. That's just normal business. I don't know why. It's part of the railroad business. I know why they're doing it now because they're afraid to compete against us. We're going to have a stronger competitor. But at the end of the day, I think the regulators know they can't wreck this industry. If they wreck this industry by making it overcomplicated, trucks are getting more efficient. They have no ifs, ands, or buts. And I use Waymo as an example. But there's trucks out there running right now to see how they can automate and have less people with more products in a truck, okay, or multiple trucks. That's our true competition, and that's where we have to win. So STB are bright people, okay? You know, I've got to know Patrick a little bit. I can't talk to him very much anymore just because they're going through this merger, plus the other two, okay? Michelle and Karen, but at the end of the day, they're smart. They know they don't want to wreck the industry, but we also have to look forward and quit looking backwards to 1890 or a merger that happened in 1995, okay? I had black curly hair, big mustache. I looked cool back then, okay? Not so cool anymore. But at the end of the day, technology's moved ahead, how we operate, information flow, how fast we can get information, okay? Use an AI and it tells us exactly... I knew what was happening on the railroad five minutes after I got up. I didn't have to phone anybody, okay? So I sent Eric a little note thanking him and the team on how well they're doing on recovering real fast. But at the end of the day, that's where we are. So the answer to get back to the first simplified, non-AI generated answer, the answer is no, I'm not worried.

Okay, very helpful, Jim.

Thanks. You're welcome.

Our next question is from the line of Rika Humane with Deutsche Bank. Please receive your question.

Good morning.

Good morning. This is Megan on for Richa. Thanks for taking my question. My question is for Jennifer. Oh, no problem. Thanks. You laid out the full year expectation for compensation per employee to be up 4% to 5% year-over-year and mentioned opportunities to offset the increasing wage and benefit inflation through a few things like process improvements and technology. Could you just clarify if that 4% to 5% increase includes your offsetting efforts or if those represent potential upside in proven costs? In any color that you're willing to share on opportunities that you've already identified would be really helpful. Thanks.

Sure. So, yeah, the 4% to 5% that we say is what I'll call that the net compensation per employee. So that already takes into consideration what we're planning to do. And when you think about the drivers of that inflation this year, It's really three things. It's the new agreements that we've signed and the wage inflation. It's increases to health and welfare, so higher benefit costs, as well as higher payroll taxes as they raise the limits every year in terms of what's taxable on a Tier 1 and Tier 2 basis. So those are the three main drivers. In terms of what we're doing to offset that, it's really across the board, and Eric's team is certainly a big part of that. doing more with RCL, taking more car touches out so that you need fewer people working in the yards, doing more in terms of automating our switch operations. Eric, you want to go into a little bit more of that?

Yeah, you hit three of the really important ones. The other one that really stresses how we operate the railroad. You know, when I look at other railroads, I see them take on initiatives where they've got some spend, say, $70 million on something, and they set a goal to reduce it by 2%. That's not how we do it here. Here at Union Pacific, we look at the fundamental. What is the thing that we have to do or the collection of things that ultimately result in the railroad running even better? And then we like to say the cost falls out. And so when you see our record number on car velocity, 9% above a record quarter last fourth quarter, when you see our locomotive productivity, that's what I would encourage you to focus on. Watch as we continue. And it's tough work. And when you put up as many gains as we put up, Right. Getting the next percent is tough. But as I tell my team all the time, we're in the business of doing hard. And my team's, our team, excuse me, has delivered on that. And we'll continue to deliver that in 26. Yeah.

And that's where you see the continued gains on the workforce productivity, right? Exactly.

So less people, even though the cost per employee might be up. Yeah. Right. The total cost. for the company is in a different place just because of the productivity gains that we will continue to see. And you can see that from where our headcount direction has been over the last few years.

Yeah, up 2% volume in 2025 in total with down 3.5% on the workforce. Exactly.

And let's not miss that because that's how you take care of the inflationary cost per employee is you need less employees to do the same amount of work. Okay. Good question. Thank you very much.

The next question is in the line of Brian Austin back with J.P. Morgan. Please proceed with your question.

Morning, Brian.

Hey, good morning. Thanks for taking the question. Don't want to keep you too much longer from that double espresso.

Brian, don't worry about me. I got nothing else to do today, okay? This is the most important thing I need to do today is make sure that people understand what we're doing. So I appreciate you hanging on.

All right. Well, thank you for your time. So just two kind of follow-up ones, really. Eric, you just mentioned you're in the business of doing hard. It's hard to miss all the records you've been setting, but you're still expected to reset the bar and push higher. You gave a few comments about how you do that, but I just wanted to hear maybe a little bit more, especially, I think you have zero furloughs. So also maybe you can address sort of the resource buffer from a labor side if we do get some positive upside, or at least there'll be some uncertainty we're not thinking of right now. And then Jim, just to wrap up maybe the M&A stuff, it doesn't sound like you're really Thinking about addressing some other comments from the rails, just focused on the three main from the STB and also doesn't seem like you're too concerned about the whole red line and having to provide that publicly. So maybe you can give some Co on that to wrap up. Appreciate it.

Yep. I'll start. So you brought up a head count. I'll translate that into hiring. Now, as we think about our hiring plan for 2026, remember a couple of things. First thing we look at is attrition, right? To maintain our buffer of resources. One of which is our crews. We've got to make sure that we cover attrition. And then to the person's question a few questions ago, we then do the puts and takes. So if we sign an agreement with a union that may add heads, we don't expect that in 2026. But then we go through all of our technology initiatives. We go through the fundamentals that I was talking about, and we make adjustments to that. Now, a lot of people start on the labor side, and they should. But we also are just as focused on the non-labor side. So when you think about the work that we've done over the last three years on fuel, whether it's modernizing locomotives, the expansion of our energy management system, our program for where do we partial fill, full fill, that saved us tens of millions of dollars, and that trend will continue. Even when we think about modernizations alone, that's a 5% fuel savings per unit that we modernize. I'm telling you, we can go through the whole portfolio because that's how we manage it here. We come into the year with specific initiatives. There are dozens and dozens and dozens of them, and we work tirelessly to execute. And you saw the results in 25, and I expect that we'll be just as successful in 26.

Brian, if I can just add one thing on that is what you don't see is we are carrying extra people, but we don't have them furloughed. We actually have guarantee payments just the way the collective agreements are that we And they're actually, that buffer is built that way that we have some guaranteed payments. We try to structure the number of employees in the right place. And Eric and team do a fantastic job of driving that to be at the right place so that we don't get behind. But we also are paying some guarantees that nobody would see outside of us internally. So that's where the excess, that buffer is situated. On the merger, Listen, we always have different opinions. And it's interesting to hear the other railroads talk about some of the things they've talked about, like we're going to shut down 300 lanes. We don't have 300 lanes in intermodal to shut down. We have more than 300 customer to customer points, but trains going into terminals. So we're going to keep them all open. And in fact, we want to expand that, not be less. You know, we've put on new trains that run now from L.A. to the west side of Chicago, G2, because we see a market there that we didn't operate. So that's a lane we've added, and we want to continue to have the lanes that open up access for our customers east and west across the country. And, you know, one railroad put out that I was – they sent it out to the customers that I was a leader on the EJ&E line. in 2008. Well, I wasn't in the U.S. in 2008. I was battling the western part of the CN network, but I still got credit for whatever happened on the EJ&E. So that's why I like to talk about fact, not fiction. So bottom line is, as we move ahead, we're going to have to give some things, and we know that, like this red line. I don't like it. I don't see what the benefit, but it's not about Jim Venna. It's about what the STB thinks. And they also need to be reasonable and understand that we're doing the right things because we're not holding anything back. We told them black and white day one when I called into the STB to tell them that we were going to merge. I said, tell us what you want and we will provide it. There's no big secret. I think we're pretty open about fundamentally who we are, what we do, what we're trying to do, move forward. And there isn't any big secret because it's such a compelling case. So I don't like it because I don't think it adds to the merits. But guess what? I wish Jim Benna had a totalitarian system that I could get every decision that I want, but I don't even get it at home with my wife and kids, for God's sakes, let alone with a regulator. And I'm good with that. That's just part of the process, and we knew that's what it was going to look like. In fact, sometimes I don't even get it here in the company. Eric tries to tell me what to do. Jennifer, for sure, okay, tells me what to do. And Kenny, he's a really good salesman, okay? I always keep my hands on my wallet when he's around and make sure he doesn't take $10 out of my pocket. But at the end of the day, that's just the way life works, and we'll work through this because it's a compelling piece of business and compelling for our customers of the country. Okay, and our employees, and I'm looking forward to when we have this railroad put together.

All right, thanks very much. Very helpful.

Oh, you're welcome.

Thank you. Our final question is from the line of Ravi Shankar with Morgan Stanley. Please refuse your question.

Ravi, good morning.

Hi, it's actually Madison on for Ravi. Thanks for fitting us in.

Oh, no problem. How are you this morning?

I'm good. Thanks so much for all the color. I think I just have one kind of more of a cleanup question, not on M&A, so I'll give you a break on that. I know you had highlighted in the beginning of the call the fact that winter storm had been having on some operations. I was just wondering if you were able to quantify at all what you think the impact on the quarter could be from the recent weather, or if you just have any more color right there.

Jennifer? Yeah, I mean, it's going to add a little bit of cost to us, and that's really cleanup cost, a little, you know, crew delay, extra limos, lodging, those types of things, probably a little extra propene for switch heaters because we lost commercial power in several places. But, you know, the big thing that we'll see sometimes in winter storms is lost revenue. If you've got long customer shutdowns, prolonged periods where we're not able to serve our customers. We don't see that happening as we sit here today. Different than a couple years ago when there was some bad weather in that Houston area where you did have customers who were out for extended periods. That was much more impactful. Again, as we sit here, we don't see that. So we'll look to make up the lost car loadings. You'll certainly see that reflected in next week's loads when we report out to the AAR. But with a lot of the quarter in front of us, basically two months left, I think we'll make that up. and really just be left with a little bit of extra cost from the cleanup.

And, you know, it's a great question, and that's why it's real important for us to have the capability to recover fast. And the faster we can recover, and that's what I like about Thursday morning numbers looking pretty good, is that those impacts are not as significant, and we get back to the customers to say, ship us everything you got. We're ready to move, and let's move ahead. So, listen, thank you very much. Great question.

Got it.

Thanks. That was the last question, Rob?

Yes, Mr. Venner, that was.

Let me just tie it up here real quick, okay, because I've really enjoyed the call this morning. I think it's great to talk about what we're doing and how we move ahead, and I appreciate the questions. I think the questions were great. Looking forward to talking to you after the first quarter results, but we're going to operate this railroad in the best way we can with all the talent we have and people out in the field that do a spectacular job. And at the same time, we work through the process for the merger. So I'm excited. The whole team's excited. We get up every morning. You know, we could have just left it alone and not worried about a merger and just ruled it out for a couple of years, you know, ride the horse out in the range and have a little bit of fun, go out to the Super Bowl, go do whatever the heck we do when we're supposed to be working. But guess what? I'm not into that, and neither is this team. We are here to deliver for our customers and win in the marketplace and be the best railroad in North America. So we're challenged by our competitors. They're smart. They want to beat us. And at the end of the day, I love it. Let's go challenge, and we'll talk to you all later on. Thank you very much for taking the time to spend a little bit of time with us this morning. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.