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. 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 Vena, Chief Executive Officer for Union Pacific. Thank you, Mr. Vena, you may now begin.

Rob, thank you very much, and good morning, 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 Hamann; our Executive Vice President of Marketing and Sales, Kenny Rocker; and our Executive Vice President of Operations, Eric Gehringer. It's been a busy couple of months since we joined Union Pacific. I'm very excited to be back to work with over 40 years of railroading experience, including two years here at UP. I know this railroad, I understand the opportunity. To win, you need a strong management team, the right culture, and a great franchise. Since I started, I've spoken with employees, customers, regulators, community officials, and investors. My message has been consistent. It starts with safety. Our goal is to be the safest railroad in North America. We also expect to be the best in service and operational excellence. A key early initiative of mine is to drive decision-making lower in the organization, which means reducing layers and simplifying how we work. We recognize that our business volumes fluctuate and weather presents 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, generating industry-leading returns for you, our owners. 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, compared to 2022's 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 were lower year-over-year, driven by fuel expense and last year's one-time labor agreement charge. However, there is 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. It was a tough quarter, but I'm pleased with the positive productivity gains we're quickly achieving. Our service performance is also strengthening as we're positioning ourselves to meet customer demand while at the same stores 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. Freight revenue totaled $5.5 billion, down 9% versus 2022. Total fuel surcharge revenue of $637 million declined $515 million from last year, impacted by lower year-over-year fuel prices and the lag in our surcharge programs. The combination of price and mix increased freight revenue by 150 basis points as solid core pricing gains were partially offset by an unfavorable business mix. Other revenue decreased 13% versus last year, driven by a $70 million year-over-year reduction in accessorials. Switching to expenses, operating expense of $3.8 billion declined 4%, driven by lower fuel prices, last year's one-time labor agreement charge, and volume-related costs. Compensation and benefits expense decreased $77 million versus 2022, including last year's $114 million one-time labor charge. Third-quarter workforce levels increased 3%, with our active TE&Y workforce up 2% due to graduating new train crew personnel. We now expect full-year cost per employee to be up closer to 3%. Fuel expense in the quarter decreased 25% on a 21% decrease in fuel prices. 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 resulting in a deferred tax expense reduction. Net income of $1.5 billion declined 19% versus 2022. Third quarter operating ratio increased 3.5 points to 63.4%. Core results include the impact of inflation, lower volumes, and cost inefficiencies accounting 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. Year-to-date, we've returned just over 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 rated A by our three credit agencies. Wrapping up on slide seven, our 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, but we still expect to generate pricing dollars in excess of inflation dollars. 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. We expect similar levels for fourth-quarter paid sick leave expense as in the third quarter, and the impact of the BLET work rest agreements will primarily be seen through elevated force levels. Our capital plan is coming in a little higher at $3.7 billion. The important takeaway from today's results is that we strive to build on the current momentum as we end 2023 and enter 2024 on a path to further financial improvement.

Thank you, Jennifer, and good morning. You just heard from Jennifer that freight revenue declined 9% with a 3% decrease in volume for the third quarter. Let's jump right into the market drivers. Starting with Bulk, revenue for the quarter was down 10%, driven by a 6% decrease in average revenue per car due to lower fuel surcharges and a 4% decline in volume. Grain exports were softer due to tight supply. Coal volume was down due to competitive pressures from lower natural gas prices. Industrial revenue was down, driven by a 6% decrease in average revenue per car. But our relentless focus on business development is driving growth in our Rock network that supports construction of new LNG facilities and growth in petroleum products. Premium revenue for the quarter was down 12% due to volume decreases and lower average revenue per car from fuel surcharges. However, a robust business development pipeline like winning wagon shipments from Texas Gulf enabled us to outperform the market in the quarter. Turning to slide 10, our outlook for the fourth quarter anticipates continued challenges in coal as natural gas futures remain volatile. We expect to capture more demand as US soybean exports improve. Our forecast for renewable biofuel feedstock remains strong. The economic forecast for industrial production looks depressed in the fourth quarter, but we expect petroleum and construction markets to remain favorable due to our focus on business development. For premium, we are working closely with our intermodal customers in this challenging demand environment. We've seen a seasonal uptick at the beginning of the quarter and believe our improved service positions us well for future demand. In summary, we have a diverse portfolio that allows us to see positive momentum in some commodities. We have a strong pipeline of opportunities that we're actively pursuing.

Thank you, Kenny, and good morning. Starting on slide 12, safety is the foundation of everything we do, and our goal is to lead the industry. Union Pacific can be the best because we've been there before. While our progress has been encouraging, we must continue to improve technology and provide best practices to the industry. In August, our network faced intense weather events, yet through our team's efforts, we were able to quickly restore operations. Despite the weather headwinds, we improved year-over-year performance metrics. Freight car velocity improved 5% this quarter. We're continuing our work to deliver the service we sold to our customers. Now let's review our key efficiency metrics for the quarter on slide 13. We have taken actions to align resources with current volumes and run an efficient network, which incorporates Jim's strategy of empowering our people and removing layers. Locomotive productivity improved 4% versus last year. Workforce productivity was down 6% versus last year, reflecting the impact of volume declines. Train length improved 1% compared to third quarter 2022, and we are continuing to work to further improve this measure. While our service product demonstrated noticeable improvement, there are still opportunities to enhance efficiency across our network.

Thank you, Eric. Before we get to your questions, I'd like to quickly summarize what you've heard from our team. Jennifer walked you through the inflationary pressure we're facing, and Kenny outlined a challenging volume environment. Despite this, the team is leveraging our business development pipeline to bring new business to the railroad. From Eric, you heard that we're improving safety, service, and efficiency. We exited the quarter with great momentum and, while there's still room to improve, I believe we can deliver better service for our customers, driving growth by aligning with a strategy of safety, service, and operational excellence. We're now ready to take your questions.

Thank you. We'll now be conducting a question-and-answer session. Our first question will be from the line of Ken Hoexter with Bank of America. Please proceed with your question.

Good morning, and congratulations on your new role, Jim. To start off with operations, what changes are necessary? Is there something wrong with the plan or is there an excess of equipment? Could you discuss the metrics you’ll focus on as you begin, particularly regarding productivity? You mentioned an excess of locomotives, so please share some numbers, targets, and your thoughts on how to achieve those. Thank you.

And nice to be back and nice to hear your voice again, and I'll let Eric jump in, but because he's the operating person, he's responsible. What metrics do I look at? I haven't changed much. A successful railroad is always fluid, operating in a manner that doesn't impact the network due to decisions you made on service that you sold and how you use your assets and people. So when I look at Union Pacific, I look at do we have the capacity to handle traffic and the ups and downs that occur? We need to ensure we have a buffer of people and assets ready for business fluctuations. Also, I look at revenue first, including volume, because if it's not good, the next call is to Kenny. Then I look at car velocity, an end-to-end measure of performance. 210 is a good number but nowhere near what's possible. We need to push more. We need to focus on crew changes and intermodal terminal efficiency. There are several metrics we consider that demonstrate our operational effectiveness, including resource management. We have over 500 locomotives parked that are ready to go; they can be activated quickly to maintain our service levels. In short, we want to ensure efficiency without neglecting the fundamental demands of a functioning railroad.

When we think about recap in the quarter, we made great progress from a fluidity perspective. We were able to store approximately 300 locomotives during the quarter and reduce our recrew rate. While we still face challenges due to workforce productivity from certain agreements, we are actively working on productivity measures. We've seen improvements in train length, reducing borrow outs to the lowest level of the year. The focus on improving efficiency in our network continues.

Great. Thanks for the time.

Yeah, good morning, and welcome back, Jim. I have a quick question. I think we've heard this in the past many times from you: first, you have to fix the engine and ultimately energize the commercial momentum. So my question is about car velocity. Where do you think you are in that process and what’s the ultimate goal?

Fadi, I like the question because it frames the challenges I saw when I came back. Inflation on input and labor costs is a challenge. We are looking for efficiency gains. Car velocity should ideally return to 220 miles per day; I would be disappointed if it doesn't. We know we can't rely solely on efficiency for long-term gains, but we are pricing our services properly.

Thank you, Operator. Good morning, Jim, welcome back, Jennifer, Kenny, and Eric. Wanted to focus on the inflation and pricing dynamic currently going on. Are we just waiting until we can reprice contracts and see better fluidity in the railroad? Are we in for a few tough quarters in terms of comps?

No, we're not waiting. We're repricing these contracts now. Our commercial team is effectively articulating the labor cost pressures and how we are addressing these challenges. Our customers face similar pressures in their markets. We're investing significantly and sharing that value with customers to illustrate the benefits.

While we can't access all contracts immediately for price adjustments, our team is focused on every opportunity to win with higher prices. About half of our book is multi-year contracts, with 25% tariff and 25% year or less contracts.

Thanks very much. Hi Jim, Jennifer, everyone. Can you talk about OR expectations moving from 3Q to 4Q? It seems like the fuel headwind gets better sequentially. You're moving more carloads per week, seeing decent sequential volume growth. Can you discuss that and whether that increase in car velocity allows you to move more waiting volume?

We are aiming for sequential gains in OR as we build upon third quarter momentum, although it will require continued hard work from our team. With improved volume outlook, we are optimistic.

Regarding car velocity, it's an important measure that indicates how well we're performing. Increasing business can come from various areas, but we need to ensure our terminals can handle any increases efficiently. If we can deliver consistent service and recover quickly from service disruptions, we can capitalize on new business opportunities. I am confident in our ability to grow the business effectively.

Thanks. Intermodal is often viewed as a long-term growth engine for the industry. Are you in a position to start taking more share from trucks? What still needs to happen for Intermodal to grow?

We know customers' needs differ; service consistency is key. Our improved product and service reliability will help us capture market share. We've been effectively incorporating all shipment methods while maintaining service quality to our customers.

Thanks. Wanted to ask about visibility to labor cost inflation into '24, considering rising bonuses and work rest rules. Can you also share thoughts on the broader regulatory picture and how you perceive it as you start?

We are still finalizing our 2024 plan but are aware of pressures such as the scheduled wage increases and work rules. We aim to drive productivity to offset these costs as much as possible.

Our relationship with the FRA is strong as we align on safety goals. We are committed to responding and improving based on their feedback. With the STB, we seek to provide good service for our customers while navigating regulatory requirements. Our customers' success is our success as we aim for efficient service.

Hey, thanks. So you want more pricing and productivity while facing inflation. When do you think you can start improving margins? And Jennifer, can you speak to the share buyback situation?

This is not a change in our capital allocation philosophy. It’s a temporary pause while we manage cash flows. We aim to resume share repurchases once we generate more EBITDA.

There will be productivity gains ahead, but they will take longer than my previous experience. It won't be as quick, given that we don't have the same easy opportunities. Stay tuned to see how we can continuously improve.

Thanks very much, operator, and welcome back, Jim. I'm curious to hear about your multiyear efficiency objectives. Do you see any potential opportunities to streamline some of your hump yards or other infrastructure?

There’s nothing inherently wrong with hump yards, but we need to optimize how we use them. I want to ensure efficiency by focusing on reducing touchpoints and dwell times at our terminals. We have a goal of improving our operational efficiency, and we're looking at everything while also considering the organization and the levels of management to promote quicker decision-making. I'm excited about focusing our operational efficiency going forward.

Good morning. So when we think about the operating income growth in the next couple of years, how do you see the opportunity trending relative to productivity and volume?

We see good signs in multiple markets driving volume growth, especially where we've established robust processes. Our industrial markets show some strength as well. We haven't fully tapped into the share of road business that has potential for growth—this is where we’ll double down our efforts.

On productivity, we'll look for every opportunity to use less and save costs in this high-inflation environment while relying on attrition to manage workforce size effectively. We’re looking at every area of our operation to increase productivity and reach better efficiency.

Hey, good morning. Can you talk about the earnings leverage from intermodal agreements? And how do you see the competitive dynamic changing post CP/KC acquisition?

As we're building a better service product, we're also leveraging our intermodal capabilities to capture market share from the trucking sector. We do believe aggressive pricing strategies will be key as we navigate competitive landscapes.

We have a comprehensive network that allows us to compete effectively with any railroad. CP/KC is strong, but we have a vast network encompassing 23 states, fast access, diversity, and strong partnerships. I believe that with our superior service, we will win in the marketplace.

Good morning. Can you expand on the over-the-road opportunity? Is it something you are seeing more of today? And how should we think about its progression over the next few years?

We see a significant opportunity to penetrate over-the-road markets due to our improved services. Customers desire consistent service, which we're delivering. This is an area where we plan to build stronger business connections.

Thanks. Headcount was down sequentially for the first time in a while. Should we expect headcount to stay relatively flat or come down further? How much volume do you think you can manage with the current headcount?

We are focusing on a more productive workforce, and while headcount will be managed, we will capitalize on attrition as part of the strategy ahead. The collective agreements are a factor we must address, but we ultimately want to leverage our workforce without bringing on additional hires.

Thanks. Can you clarify how you expect comp per employee to trend sequentially into the fourth quarter? Do you think productivity can fully offset cost inflation headwinds?

Comp per employee has been adjusted for one-time events, and as we move into Q4, we'll face some challenges as we transition train personnel. Our goal is to drive efficiency to offset inflation pressures, and it's a significant focus area for all departments.

Our goals are clear. It's about safety, service, and operational excellence. That's how we win. We're focused on efficient service delivery for each type of customer. We're leveraging our railroad and its strengths to achieve the growth we believe is possible.

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