Greetings. Welcome to the Union Pacific Fourth Quarter Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Jim Vena, Chief Executive Officer for Union Pacific. Mr. Vena, you may now begin.

Thanks, Rob. Good morning, and thank you for joining us today to discuss Union Pacific's fourth quarter and full year results. I'm joined in Omaha by our Chief Financial Officer, Jennifer Hamann, our Executive Vice President of Marketing and Sales, Kenny Rocker, and our Executive Vice President of Operations, Eric Gehringer. The Union Pacific team is executing our multi-year strategy to lead the industry in safety, service, and operational excellence. Our fourth quarter shows a lot of what's possible and demonstrates that we're on the right path to achieving those goals. We exited 2023 with strong momentum, which gives me great confidence that we have a winning strategy. There's work to do, but we're building the foundation for future success. Now let's turn to Slide 3. This morning, Union Pacific reported 2023 fourth quarter net income of $1.7 billion or $2.71 per share. This compares to 2022 fourth quarter net income of $1.6 billion or $2.67 per share. Fourth quarter operating revenue was flat as increased volumes and core pricing gains were offset by lower fuel surcharge revenue and business mix. Expenses year-over-year were also flat as lower fuel expenses and productivity gains were offset by inflation, volume-related costs, and higher casualty expenses. Our fourth quarter operating ratio of 60.9% improved 10 basis points versus last year. More importantly, we demonstrated strong sequential OR improvement of 250 basis points from the third quarter. We are taking the right actions to increase the efficiency of our railroad while also improving service for our customers. Key to our strategy is excelling in what we can control. We made great progress in those areas this quarter. That provides further proof that we're on the right path for future success. So with that, let me hand it over to Jennifer to provide more details on the fourth quarter and full year financials.

Thanks, Jim, and good morning. Let's begin by walking through our fourth quarter income statement on Slide 5. Starting with the top line. Operating revenue of $6.2 billion was flat versus 2022 on a 3% volume increase. Breaking it down further, freight revenue totaled $5.8 billion, up 1%. The biggest driver of freight revenue in the quarter was fuel. Lower year-over-year fuel prices reduced fuel surcharge revenue and impacted freight revenue 375 basis points as fuel surcharges declined $180 million versus 2022 to $795 million. Volume growth in the quarter contributed positively, adding 350 basis points to freight revenue, and the combination of price and mix also was positive, increasing freight revenue by 75 basis points as solid core pricing gains were mostly offset by an unfavorable business mix. Intermodal shipments up 5% contributed heavily to the mix dynamic. Wrapping up the top line, other revenue decreased 13%, driven by lower accessorial and subsidiary revenue. Switching to expenses, we provided expense details for both fourth quarter and full year in our appendix slides. But let me hit some of the highlights. Against our 3% volume growth, operating expense of $3.8 million was flat. Digging deeper into a few of the expense lines, compensation and benefits expense was flat compared to 2022. Fourth quarter workforce levels decreased 2%, while our active TE&Y workforce was flat against the 3% volume growth. This solid level of workforce productivity mostly offset wage inflation as cost per employee only increased 1% in the fourth quarter. Fuel expense in the quarter decreased 11% on a 15% decrease in fuel prices from $3.70 per gallon to $3.16. Our fuel consumption rate deteriorated 3% as we moved a less fuel-efficient business mix with increased intermodal shipments and fewer coal moves. Finally, other expense grew 20% as a result of higher casualty costs and the comparison to 2022, which included insurance recoveries. Coming out of COVID, we had a sizable case backlog that we largely worked through the last couple of years. Importantly, we do not see these elevated expenses as a reflection of a long-term trend, particularly with our intense focus on improving safety. Fourth quarter operating income was flat at $2.4 billion. Below the line, other income increased by $16 million due to higher real estate gains. Fourth quarter net income of $1.7 billion and earnings per share of $2.71, both improved by 1% versus 2022. Our operating ratio of 60.9% improved 10 basis points year-over-year and 250 basis points sequentially. Moving to Slide 6 with a quick recap of full year 2023 results. Revenue of $24.1 billion declined 3% driven by reduced fuel surcharges, business mix, and lower volumes, partially offset by core pricing gains. Operating income totaled $9.1 billion, and our full year operating ratio of 62.3% deteriorated 220 basis points. Earnings per share of $10.45 decreased 7% versus 2022 and then reflecting the impact of our overall financial results, return on invested capital declined 180 basis points to 15.5%. Turning to shareholder returns and the balance sheet on Slide 7. Full year 2023 cash from operations totaled $8.4 billion, down roughly $1 billion from 2022. The combination of lower net income and nearly $450 million of labor agreement payments were the main drivers. Free cash flow and our cash flow conversion rate also reflected those impacts. We returned $3.9 billion to shareholders in 2023 through dividends and share repurchases. Our adjusted debt-to-EBITDA ratio finished the year at three times as we continue to prioritize a strong balance sheet and remain A-rated by our three credit agencies. While 2023 was a difficult year, I'm pleased with the progress we've made over the last several months to improve our service and productivity. We believe this performance marks an inflection point as efforts to improve the efficiency of our railroad through safety, service, and operational excellence are starting to be reflected in our financials. With that, I'm going to turn it over to Kenny to provide some comments on 2023 and kick off our commentary on 2024.

Thank you, Jennifer, and good morning. You just heard from Jennifer that freight revenue was up 1% in the quarter as our volume gains of 3% were partially offset by lower fuel surcharges. So let's jump right into the business teams to recap the market drivers on the revenue slide. Starting with bulk, revenue for the quarter was flat compared to 2022, driven by a 3% increase in volume, offset by a 2% decrease in average revenue per car. Core pricing gains were more than offset by lower fuel surcharges and the unfavorable impact of low natural gas prices on our index-based coal contracts. Fertilizer shipments grew compared to 2022, as demand for fuel applications was strong due to lower nitrogen prices. Grain product shipments were up for the quarter as our team secured new feedstock opportunities for renewable diesel production in Louisiana and California. Additionally, ethanol shipments increased with our improved service. Lastly, coal continued to be challenged in the fourth quarter due to mild weather and decreased coal competitiveness from low natural gas prices. Industrial revenue was up 4% in the quarter, driven by a 3% increase in volume. Core pricing gains in the quarter were mostly offset by lower fuel surcharges and a negative mix in volume. Business development in our petroleum and LPG commodity segments contributed to the growth. Demand improved for our plastics business in both export and domestic markets. However, sand volumes were negatively impacted by softer natural gas prices that reduced drilling in the Eagle Ford Basin and increased utilization of in-basin sand in the DJ Basin. Premium revenue for the quarter was down 3% on a 4% increase in volume and a 7% decrease in average revenue per car from lower fuel surcharges and truck market pressures. Automotive volumes were negatively impacted by the UAW strike, but those decreases were mostly offset by dealer inventory replenishment and business development wins that I mentioned on the last quarter's call. Intermodal volumes were positive in the quarter, driven by stronger West Coast imports, domestic business development wins, and strengthening our Mexico volumes. Now let's start talking about 2024. Here are some key economic indicators that we're watching this year on Slide 10. These are S&P's forecast from their January report, and you'll notice that it shows a mixed picture for 2024. Industrial production looks to be flat. Housing starts are expected to remain challenged, but demand for auto continues to be strong. Turning to Slide 11. Here is our 2024 outlook as we see it today for the key markets we serve. Starting with bulk, we anticipate continued challenges in coal as natural gas futures remain volatile and inventories are high. Domestic grain is relatively stable, but we are keeping a watchful eye on export demand. On a brighter note, we expect fertilizer to be strong as repairs at the Canpotex Portland facility are now complete and commodity prices remain competitive moving into the spring season. Growth within biofuels continues to be driven by strong demand outlook, combined with a heavy focus on capturing new business, including incremental volume secured from Minnesota and Iowa origins. Moving on to Industrial. The construction market will be challenged to exceed last year's record volumes as we're seeing softness in parts of the market. However, we foresee the petroleum and petrochem market remaining favorable due to our focus on business development. And finally, for premium on the international intermodal side, we expect the market to improve year-over-year, but a contract we lost earlier in 2023 will negatively impact our 2024 volumes. On the domestic side, we are staying close with our customers who have indicated that they'll see a soft start to the year. Nonetheless, our strong service product sets us up to handle market demand. For automotive, we will see strength in this market with improved OEM production and business development wins. In summary, the economic environment continues to look muted in 2024, particularly in the first half. We're off to a slower start in January based on severe winter storms and market challenges we're seeing in coal and intermodal. But I am encouraged that we expect to see growth in some markets with our strong focus on business development. For the second half, we are well prepared to handle the demand if the market and economy improve. We continue to make significant capital investments on both the carload and intermodal front to capture more freight over the road. Those investments, along with our unmatched service offerings and improved service products from Eric's team, create a winning environment for our customers. I'm excited for the opportunities in front of us, and our commercial team is ready to help our customers win in the marketplace. 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. To start, I want to express my appreciation to the team for their relentless focus on improving our service product and driving network efficiency. It's thanks to their efforts that our network showed tremendous fluidity and reliability during the fourth quarter. Freight car velocity improved 14% to 217 miles per day compared to the fourth quarter of 2022. Increased train velocity and a reduction in terminal dwell drove that performance. Service was strong during the quarter as we saw a significant 12-point improvement in both intermodal and manifest and auto trip plan compliance. In addition to trip plan compliance, we have hundreds of customer-specific performance metrics that also showed great improvement throughout the quarter. Most importantly, we are delivering the service we sold to our customers, which is critical to our long-term growth strategy. While winter is here and has certainly brought its challenges, the railroad overall is very healthy, and I'm confident the team will continue its positive momentum. Safety continues to be the foundation of everything we do. During the quarter, we delivered improved derailment performance through our investments in technology and process. We remain focused on the critical actions that drive real change so everyone goes home safely each day. Now let's review our key efficiency metrics for the quarter on Slide 14. During the fourth quarter, we saw year-over-year improvement across all of our efficiency metrics. Locomotive productivity improved 14% versus the fourth quarter of 2022 and 9% sequentially as we continue to identify and execute opportunities to utilize the fleet more efficiently. Throughout the second half of 2023, we stored nearly 500 units from our operable fleet. Workforce productivity improved 4% compared to the fourth quarter of 2022. With a strong crew base, we are focused on effectively managing workforce levels to the demands of the business. However, challenges do remain from scheduled work agreements that, in the near term, require additional employees. Train length improved 2% compared to the fourth quarter of 2022 as we continue to remove car touch points from the system. In total, throughout 2023, we were successful in extending train length as improvements in the second half more than offset the declines in intermodal shipments. We remain persistent in our focus on train length to drive productivity while providing a better service product to our customers. As we move into 2024, we will continue to transform our railroad through a variety of technology initiatives and targeted capital investments designed to further improve safety, improve our service product, enhance resource utilization, and ultimately lower our cost structure. So to wrap up, let's review our capital outlook for 2024 on Slide 15. We are targeting capital spending of $3.4 billion in 2024. Similar to 2023, we will support safe and productive operations by investing in our infrastructure and renewing our older assets. This includes modernizing locomotives and acquiring freight cars to support replacement and growth opportunities. We are also investing in technology, terminal, and mainline capacity projects to improve productivity. Specific to our technology investments, we recently cut over NetControl, replacing our 50-year-old transportation management system. This cutover positions us to use real-time analytics to open new capabilities for Union Pacific and our customers. Great work led by our technology team. On the growth front, we will continue to invest in projects that expand our intermodal footprint and support business development in targeted high-growth areas such as Inland Empire, Kansas City, and Phoenix to name a few. So with that, I'll turn it back to Jennifer to lay out our initial financial thoughts for 2024.

Thanks, Eric. Turning to Slide 17. Let me start by pointing out that we added a new appendix slide that contains several of the 2024 modeling assumptions that should be helpful to everyone in framing our current expectations. As you heard from Kenny, it's a difficult market to forecast, as economic indicators show a muted and uncertain economy. Adding a couple of other variables such as what the Fed might or might not do with interest rates and a presidential election, and we've got an interesting year ahead. On top of the macro pressures, lower coal demand and some lost international intermodal business are expected to negatively impact our volume. As you've seen in the weekly carload data, January is off to a slow start as cold temperatures across our system impacted operations and volume with first quarter volume down 9% year-to-date. I am confident, however, that our strong and improving service product will allow us to capture available demand. We clearly demonstrated that in the fourth quarter as we took advantage of the unexpected but short-term surge in intermodal. More certain than the economy is our expectation to generate pricing dollars in excess of inflation dollars, even with ongoing headwinds from certain intermodal contracts. With those pressures, we do not expect price to be accretive to margins this year. Key for UP in 2024 is our ability to control the controllables by driving a strong safety culture, making ongoing service gains, and improving network efficiency. We're confident that regardless of the demand environment, we will take the necessary actions to run a more efficient network. Finally, with capital allocation, there is no change to our long-term strategy. We are investing $3.4 billion back into the railroad as Eric detailed. Next, we prioritize our industry-leading dividend payout, and then excess cash will be returned to shareholders through share repurchases. However, given first quarter debt maturities of $1.3 billion, we will not be repurchasing shares in the first quarter. It's always difficult in late January to make predictions for the year ahead, and this year is no different. There are clearly ongoing challenges from a macro and inflationary perspective. What is very encouraging, though, as we start out 2024, is our momentum, which you've heard us mention several times today. We demonstrated with our fourth quarter performance what's possible, and we look forward to further improvement in the year ahead. With that, let me turn it back to Jim.

Thank you, Jennifer. Let's turn to Slide 19. Before we get to your questions, I'd like to quickly summarize what you've heard from our team. Kenny outlined our view on the upcoming year. Our volume outlook today reflects headwinds from lost business, coal demand, and a relatively soft economic forecast. Much of that is out of our control. We are mitigating these impacts through business development and value creation by providing great service to our customers. Eric described the progress we've made to return our service levels to industry best; while there's still work to do, the team made consistent improvements through the quarter to exit in a very fluid state. Obviously, winter is here, but that's part of railroading. I judge our success by how we minimize the impact on our customers and how quickly we recover the network. So far, we've shown great resiliency. Finally, as Jennifer laid out, our productivity and pricing gains will be key to overcoming ongoing inflationary pressures in 2024 as well as the soft economy. While many unknowns remain, I'm confident we'll succeed in the areas we control. We've got plenty of opportunities this year to improve safety, service, and operational excellence. As you heard me say in October, I came back to Union Pacific to win. My vision and the opportunity I see for this company has not changed. We have the right team and strategy in place to grow this railroad long term, and I'm very confident we'll see a better Union Pacific in the future. We're now ready to take your questions.

Thank you, Mr. Vena. We'll now be conducting a question-and-answer session. Our first question today is from Chris Wetherbee with Citigroup. Please proceed with your question.

Thanks. Good morning. Maybe if I could ask just sort of the outlook for 2024. As you sit here, it sounds like a muted macro environment is keeping you cautious. But I guess when you think about the opportunities that you have, can volume be up this year? I know some of the macro indicators that you highlighted are muted, but they are still positive. So curious about volume growth. And I guess, in that context, with pricing not necessarily being accretive to margin, is there enough in that volume and some of the cost efficiencies that you guys are working on to get margin expansion?

So Chris, maybe let me start and then Kenny can give you some more color. I mean we're just not going to give you a number in terms of what we think can happen with volumes because of what you yourself said. There's just a lot of uncertainty, and we just don't think it's prudent sitting here at the end of January to give you some sort of a forecast based on hopes for a second half recovery. Do we hope that that will happen? And are we going to work diligently to move every piece of business that's there? Absolutely. And I think you really saw what the network can do with our fourth quarter performance, but we just need to see a little more certainty. And hopefully, that plays out through the year, and we can provide that. But sitting here today, we just don't see that. But Kenny, maybe talk about your margin...

I talked about it in my opening comments; there's a mixed bag of opportunities that are in front of us. We feel really good about the biofuels market. That market is growing. Demand is growing. We're capturing business in those markets. On the industrial side, we've had some record years in the construction side, still a strong year. But as we are coming out of the gate with weather, that's going to be a little bit challenged for us. We feel really good about our petrochem business and wins from a business development perspective. On the petroleum and LPG side, those are all positive for us. On our premium business, again, those are driven by economic factors. We'll be looking to see what happens with overall demand. I talked about the international intermodal side and the loss there. We feel really encouraged by our ability to win on the auto side. You heard us talk about our recent wins, and so as there's a lot of demand there and the forecast for growth, we really feel good about that market.

Anything on the margins?

Let me just try to put this all into a box of the way we're thinking. It's very difficult for us to look forward and say this is exactly how the year is going to go. More important to me and the team is what have we done operationally? And what are we doing to provide Kenny and the entire team with the capability to go out there and maximize what's available for us and what we can bring on to this railroad? That's the single most important thing. I think what we've shown is the capability to flex up. We have the assets to be able to flex up. We have the capacity to be able to flex up. If we continue to drive efficiency of the railroad, which I expect we will, then what we do is we win in the marketplace. Whatever's out there, we're going to compete against everybody else, trucks and other railroads, and we think we have a winning model, so that's the challenge we have. It would be a mistake for us to come out and say that we can predict what's going to happen, like Jennifer pointed out with the inputs and effects from interest rates and everything happening in the economy. But I'm very comfortable that we are going to maximize what's available for Union Pacific and win.

Okay, that's helpful. Thanks. Appreciate it.

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

Yes. Thanks very much, operator. Good morning, everyone. On the intermodal side, I know there was a business loss there. But looking at some of the statistics in Los Angeles Long Beach, there seems to be a really good uptick in volumes into those regions or that region. Red Sea impact, perhaps East Coast is down. Kenny, are you seeing that there is new business coming that way? Could that be a nice offset to any business loss? Or could it create an opportunity for more business wins as more volume shifts to LA Long Beach, and perhaps the fluidity of LA Long Beach is that keeping pace with the new volume mix coming its way?

Yes. Thank you, Walter. We spent a lot of time looking at the global supply chains in the canals and so forth. I'll tell you right now in the near term, we haven't seen any significant shifts. We've been talking to the vessel carrier owners. We know they put in tariffs, our customers have put in tariffs to go over the Panama Canal, for example. And so we've been working with them to move as much as we can with the network that we have, with the match-back opportunities that we have, with the reload opportunities that we have, with the new products that we have on the Houston lanes that Eric has given us to give our customers every reason to go to the West Coast. So what we have seen is we are seeing more going IPI, and we have a very efficient service network to accomplish that. We're happy about the customers that we have that have been able to grow in that market. We have a great network where we can capture that and get all of that business that's out there.

That’s true, Kenny, as we think about that because to your point, you can't predict the future with entire clarity. It's another reminder, Walter, of the fact that when we talk about having a buffer and you look at what we did in the fourth quarter, we generated the ability to make sure we have that buffer. That buffer in locomotives, that buffer in railcars positioned in LA, so in the event the volume is there, we've supported Kenny's team to be able to actually capture it.

And the fluidity in the terminals right now? How would you assess that?

Very fluid. As you saw in the fourth quarter, we had a 14% improvement in car velocity, which doesn't come unless you've got very fluid operations. Now to Jim's point, are there opportunities? Of course, there are. In fact, I'll talk about those as we go through this. But overall, right now, yes, very fluid.

Our next question is from the line of Scott Group with Wolfe Research. Please proceed with your question.

Hey, thanks. Good morning, guys. So it seems like you're framing this as there's things we can control and things we can't control. It strikes me that over time, the industry has been able to have some control over price. You're talking about inflation at 5% and right now, yield x fuel is only up 1%, right? So it just seems we need more price. Can we get more price? How do we think about that? Also, can you clarify when we lost the international intermodal contract? It sounds like it happened sometime in '23, but we're just seeing really good intermodal growth. So I'm a little confused about why we're flagging this as such a big issue right now.

Thanks, Scott, I got both of those. Thank you. First, you're exactly right. Prices are controllable. Let me make this clear. It's not like we jumped up here and waited till January 1 to look at price. We've been going down this path for several months. You've heard Jennifer and I say that we have a set amount – call it, almost half that we can touch from a pricing standpoint. Our commercial team has really been very effective sitting down with customers, talking to them about the improved service products, and discussing with them our increased inflationary pressures that we saw from the labor side and how Eric is leveraging that to improve the service products that we provide to them. They're seeing the same input, and they know that. As for the international side, yes, you are correct; we lost some of that earlier in the year, last year. The bulk of that will still be working through in 2024.

But just to your question, Scott, I think what Kenny is talking about with that loss goes to our discipline when it comes to price and ensuring the business that's on our railroad is running at acceptable margins. Sometimes that doesn't happen, and we might lose a piece of business.

With the service product, the margins have to be acceptable to be on the network.

I don't want to recap this often, and I won't, but let me summarize, Scott, for you. So inflation – when I was clear on my first call in October, I indicated that we are going to deal with the inflationary pressure presented to us head-on. We're doing this through price and also through efficiency. I think we have a clear view. This is not a short-term problem; you can fix it through pricing or efficiency; however, we've seen improvements in efficiency, as you can see from the numbers. I think there's more available on the efficiency side from how we operate trains, maintain fluidity at terminals, and optimize our workforce. The team did a fantastic job in the fourth quarter, and I expect it to get better as we progress through the year. We're not shying away from these challenges, and we're addressing them directly. We're being straightforward with our customers about these pressures and what we're going to do moving forward. But in the end, we want our customers to win in the marketplace, and we're being careful about how we price and approach pricing; it's different for various marketplaces, and that's how we're handling it. I'm excited that by the end of the year, we'll position ourselves differently.

Thank you.

Our next question is from the line of Tom Wadewitz with UBS. Please proceed with your question.

Yeah, good morning. So Jim, you've realized a very fast and positive response in terms of the rail network operations since you've been at UP. Where do you think you're at in terms of further improvements? I don't know if you want to look at locomotives; what the active fleet is, and where it can go to. Maybe if you could comment a little bit on headcount. I think that the headcount was down pretty meaningfully sequentially. So I guess I'm just trying to get a sense of are we at the stable level now after that really quick improvement? Or are headcount and active locomotive fleet going to have further steps downs as we go into '24?

Well, listen, thanks for the question. The way I see it is this: I think there's still more on the railroad to become efficient. The concentration is a little different than the last time I was here and different from what we just achieved in the fourth quarter. I think there's opportunity in speed and car velocity that will help us move railcars faster, use fewer locomotives, and keep the network more fluid. But the real big piece for us that we'll concentrate on is how fast we operate our terminals and the fluidity there so we can move our products better. We are also looking into our maintenance processes on the engineering side on how to conduct maintenance and capital projects within mechanical. Every piece of the network still has room for improvement, so I think there's more left for us to do.

Can you offer a thought on how that translates to headcount? Do we think headcount goes down further? Or is it kind of stable at current levels?

The challenge we have with headcount is that we signed some collective agreements, and you live with what was given to you. Some of those agreements put pressure on headcount and require additional employees for planned work agreements. We need to navigate this moving forward, and we'll do so. It will be a bit noisy, and I can't give you a specific number because this is a moving target. But I think we showed in the fourth quarter that we were able to maintain headcount and reduce it overall despite the headwinds we faced. I see no reason we can't continue to do that while optimizing our processes.

Our next question is from the line of Jon Chappell with Evercore ISI. Please proceed with your question.

Thank you. Good morning. I was going to ask this anyway, and I guess it's a perfect follow-up. When Eric mentioned some of the challenges remaining from the work agreements that required additional employees, it was noticeable to me that you stressed near-term. So is there a time where these agreements will anniversary, where you could be a lot more flexible based on the volume environment? Or was the stress on near-term related to what you were just mentioning, Jim, regarding the programs in place and the hope that you can reverse that trend?

Yes. In 2024, we have dates of implementation for the agreements that we have yet to fully implement. These are pressures on our labor needs going forward. I view this as a two-year adjustment for the railroad, but we aim to mitigate these pressures through efficiency: by operating less frequently, but with more cars on each train. We must leverage our current facilities and personnel effectively to manage these dynamics, but it's more of a headwind through 2024 as we work to adjust.

Just a reminder, Jon, we only have the work-rest agreement in place with the BLET. We're still negotiating with SMART-TD.

Our next question is from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.

Good morning. Thanks. Hey, guys. Congratulations on the good results. Jennifer, I want to come back to the 5% inflation. You've got a $15 billion cost structure that translates to like $750 million of higher costs in '24. I assume that's a gross number because you've done a phenomenal job actually lowering the cost structures as we move from 3Q to 4Q. So is there any help you can give us in terms of how you think about that gross 5% translates to kind of like a net cost number in the context of the revenue outlook?

Yes. No. I mean, you've got that exactly right, Amit. The 5% is the gross number. So that's our challenge and opportunity is to offset that with productivity. You heard Jim talk and Eric mention that we have opportunities in virtually every cost category, except depreciation, which is fixed for the year. Think about wage inflation and think about fourth quarter. So we had wage inflation in the first half of this year. Our wages are going to be up 4%. For our Union Personnel, they're going to go to 4.5% in the second half, but our cost per employee was only up 1% in the fourth quarter. So that's productivity enabling us to offset some of that.

But is there any help? Can you offset half of it? Can you offset 40% of it? That's obviously critical to understand the EBIT and margin outlook.

You also know, Amit, that the volumes play a role in that in terms of how we're able to leverage and build longer trains and have more work to put up against some of those inflationary costs. So that's our challenge, but I'm really not going to be able to give you any more than that.

Our next question is from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

Hi, good morning. Obviously, service is improving here. Just in terms of customer engagement, any color on the pipeline of opportunities? Is it starting to accelerate? Are there unique opportunities? And I guess along with that, are you seeing any improvement in some of the conversions of some opportunities out there? Just any thoughts. Thanks.

Allison, let me start and then Kenny, please jump in. If we look at this railroad that we operate, and I think you've seen some steps we've taken, providing a level of service that's what we sell to customers is key, and we work hard every day to achieve that. We have a mix of traffic that originates on our railroad. We are comfortable that we have that capability to offset with traffic. We focus on the industrial complex all from New Orleans to Brownsville, Texas, the grain, soda ash, and the intermodal at the West Coast. We can provide speed for those who require it. We moved a close to 2,000-mile journey from LA to Texas in 48 hours. So our service that is provided from Mexico into Eastern Canada is unmatched. We can move it as quickly as anybody. There's a lot out there, and we have to show customers what's possible, which creates partnership opportunities with Union Pacific.

First of all, we have a robust business development pipeline. It's a healthy one; it's an encouraging one. We are excited about the pipeline in front of us, so many opportunities are out there. Our service product is in a strong position. As we talk about the service sold to customers, look at coming out of Mexico, that's a service that Eric has provided us daily, unmatched in speed and consistency. We have great customers who have been growing in that market. We have a strong network servicing the supply chain, and we are looking to capitalize on all the opportunities ahead of us.

Our next question is from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Hey, good morning, and thanks for taking my question. Eric, I wanted to come back to you because I think in response to an earlier question, you spoke about, there's still more to come on things like velocity and train length. And I think Jim even alluded to some local service plan changes. So do you want to elaborate a little bit more on where you see productivity gains this year?

Absolutely. You mentioned car velocity, so let's start there. As you're thinking about 2024 and what's in front of us, we saw a 14% improvement in freight car velocity, which we expect to continue. We have opportunities in train length. First, we can simply add more volumes to current trains or consolidate services; both improve efficiency. Additionally, we focus on how we operate trains and how we manage our terminals, and we are testing new ways to bring technology into it all. We saw real improvements in locomotive productivity and will continue to leverage these gains. Down the line, we can also explore efficiencies in fuel consumption – that’s crucial. We're committed to continual progress as we move into 2024.

Thank you.

Our next question is from the line of Bascome Majors with Susquehanna. Please proceed with your question.

Following up on the locomotive piece earlier, you talked about storing 500 units and having a 9% sequential increase in productivity. Jim, as you look forward a bit further, can you talk about how you think about UP's fleet renewal strategy for locomotives over the next few years, and how are the proposed regulations in California impacting your thoughts on this significant investment for the railroad? Thank you.

Bascome, I think it's a great question. If you looked at the bottom line, we have enough locomotives that we would not have to look in the planning period of 3 years out that we would have to purchase any locomotives. But we always look at the greenhouse gas emissions of our locomotives, what we need to do to be able to invest to make them more efficient, both concerning fuel spend and emissions. We will target certain capital expenditures. It's not in the plan this year, and we'll consider it again. We're testing new innovative ways to have propulsion. We will continue to invest in locomotives that can be hybrid and work for us in certain situations. I don't see the requirement is that we do not have to spend, but we know we will invest in our fleet. We don’t want to be left with an aging fleet.

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

Hey, good morning, and congrats on solid and rapid results. Just want to check, I guess you're not changing that you don't need volume gains to get margin improvements, is that right? Am I hearing that right? And then your thoughts on outpacing normal sequential shifts into the first quarter; should we still expect that like you did in the fourth quarter, given the weather or accelerating gains? And then, Kenny, can you talk about the scale of the intermodal loss in '24? Did we see it in the fourth quarter, or is that all coming? Can you talk scale? I guess that was a surprise to everybody so far.

Okay. So three questions, Ken. That was very good, I like it. So why don't we start with the contract; it's real simple. The contract was lost early in 2023, and the business has actually been lost since January 1; correct, Ken?

That's true. We'll still see the bulk of that showing up in 2024.

Yes. And if I may, in terms of your margin questions, again, not going to give you any specifics. We have three levers, as you know, that we use to generate profitability: volume, price, and productivity. You've heard us talk about the fact that price is not going to be accretive to margins here in 2024. We are unsure about the volume picture. There's a lot of puts and takes as you heard, and we have headwinds from a contract loss in coal. The lever we are most confident about and have ultimate control over is productivity. We've demonstrated that, regardless of volume changes in the past, we can generate margin improvement through productivity and price.

I appreciate the multiple part answers to my one question. Thank you.

Our next question comes from the line of Justin Long with Stephens. Please proceed with your question.

Thanks. Taking a shot at asking that question a little differently, Jim, you've now been at the company for a couple of quarters. Do you have any updated thoughts on the size of the total productivity opportunity going forward, and roughly how much of that is dependent on volume growth? Can we hypothetically see meaningful margin expansion year-over-year with flattish volumes this year?

Listen, it's a well-framed question. I like it because it goes to the core of who we are at Union Pacific and what our vision and objectives are. I'm very clear on it. I expect to have quarters similar to the first quarter, but may not see as much sequential improvement due to pressures from January. I've been around too long to forecast winter events into spring, but fundamentally, I see us aiming for the best operating ratio in the industry. That's our goal, and I believe we will get there, and I see it in our near future. Regardless of the business marketplace and available volume, I know we can win with what we've got. I returned to drive growth and profits, and I have complete confidence in our team and our ability to leverage resources effectively. We have the tools to replace lost business and win in the marketplace. I came back because I believe we can win and grow this railroad.

Our next question is from the line of Ben Nolan with Stifel. Please proceed with your question.

Thanks. Good quarter, and by the way, Jennifer, I do like that last slide; it's helpful. My question relates to Mexico. Obviously, that's an initiative that you guys really tried to accelerate last year. And then around the end of the year, there were border closures. Just thinking through how you expect that business to trend moving forward? If you’re seeing many of the reshoring impacts, are any of these interruptions causing a second guess?

Yes. We're seeing significant growth momentum in our near-shoring efforts; there are billions invested in 2023 geared towards industrial and rail-centric prospects which we find encouraging. The service product coming out of Mexico is unmatched, particularly for time-sensitive goods; we maintain daily service and have expanded services into the Southeast. We continue to engage with our customers to ensure we capitalize on these needs while maintaining competitive solutions.

I was disappointed with the border shutdown, and I believe it is not the way forward. We've seen a humanitarian issue arising, as many people are affected daily. I personally visited the borders, witnessing these challenges firsthand. For us, it is vital that the border remains fluid. We are committed to enhancing our systems to ensure rail crossing remains secure, and we are working closely with customs to ensure rail operations continue without interruption.

All right, thank you.

Our next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Thanks, everyone. You said that you're looking to push on rail length, which is understandable. How much room do you have to get more leverage there, especially with ongoing regulatory scrutiny, does this require the STB or Congress's sign off?

Yes. Core to your question is understanding the approach we take with train length and how we execute that. We certainly have capacity for longer trains. We continue improving our systems to recognize opportunities and are exploring all possibilities. I can't provide a specific number here, but we are seeing opportunities that we'll capitalize on in '24, and I'm excited about what our team is doing in this regard.

Our next question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.

Good morning, Jim. Thanks for taking the question. Quick follow-up first on the work rest rules. Is there anything in your guidance where you're assuming that SMART-TD actually does come on board? So far, is it just assumed that it's the BLE? And then maybe for Kenny, industrial pricing-adjusted for coal - is that something that we should anticipate being a significant headwind for next year based on what you've been seeing? Is it getting worse?

In terms of the work-rest piece, we do assume that we will come to an agreement sometime later in the year, and that is factored into our overall thinking.

In intermodal, the rates have shown a slow but steady improvement over the last four months, along with contractual pricing similarly improving. However, we're closely monitoring the economic indicators that could impact overall demand. The pricing structure mechanism in our contracts will keep our customers competitive during challenging times, allowing us to procure more favorable pricing when the market improves.

Yes, and Brian, I think you also asked about broader composite impacts. That's hard to gauge precisely, but intermodal pricing plays a critical role in our overall profitability, particularly in any fluctuations with coal. The intermodal side is where the most unknowns exist.

I appreciate the multiple part answers to my question. Thank you.

Our next question comes from the line of Justin Long with Stephens. Please proceed with your question.

Thanks. Can we look at pricing and exclude intermodal and the natural gas impacts? Would pricing be accretive to margin in the remainder of the business? How should we think about that in the context of near-shoring long-term impact beyond '24?

We just won't go into that level of detail. We continue to see headwinds impacting yields, particularly in the intermodal area, that will persist into 2024.

In the future beyond 2024, our focus on industrial growth in areas such as automotive, metals, and petrochemical is particularly promising. We see an opportunity to capture market share there and are engaging customers proactively to navigate these emerging markets and industrial developments.

The next question is from the line of Jeff Kauffman with Vertical Research Partners. Please proceed with your question.

Just a follow-up on the near-shoring for Kenny. A lot of the companies we talk to say all that's been done at this point is concrete has been poured in the ground and some of these facilities have been announced. Really, you're not going to see a lot of these potentials until kind of '25, '26, '27? Looking at your industrial development plan, what do you think this could look like, could it be 100 basis points in magnitude to volume over the next 3 to 5 years? No guidance, but how should we think about this long-term opportunity for Union Pacific?

We're not providing guidance on your question. I want to repeat that we believe we've got a solid service product coming from Mexico that is compelling. As we improve and grow our industrial base, we maintain daily product offerings and provide our customers unmatched service and timelines. The ongoing efforts we have around near-shoring will play a significant role as we grow and thrive together.

The ownership position we have in the FXC brings further opportunity as we optimize everything we can do as near shoring happens. We are able to offer customers the best products and produce the most effective operations moving forward.

Our next question is from the line of Jairam Nathan with Daiwa. Please proceed with your question.

Hi, thanks for taking my question. On casualty, I guess on the other expenses, you have flat to down; it looks like casualty will be favorable. Can you talk about some things that could offset that?

Yes. I've mentioned that we have seen increased casualty expenses over the last few years due to several factors, including some larger outcomes and decisions made in the courts. While we don't expect that trend to continue, we feel confident that we have clean-up efforts behind us and are aiming for better performance moving forward in 2024.

And finally, just on the CapEx question. Jimmy talked about FXE; in terms of capital additions, would FXE be on the same page as you guys in terms of investing in the business?

Yes, they have the same capability. They do a great job. I'm on the board, and so is Jennifer, and they have a great plan for 2024 and invest in their railroad similarly to us — bottom up, filtering what is needed.

Our last question is from the line of David Vernon with Bernstein. Please proceed with your question.

Hey, guys, thanks. Good morning and thanks for taking the questions.

They put you last, David?

It's been happening since the second grade. The last name is V; you should be familiar with that process.

You and I were always called last; I hear you.

So a couple of questions for you here. First, on CapEx moderation, Kenny, are you worried about how that's going to impact you for growth? Second, given your exposure to the situation down in Mexico, Jim, I'd love to hear your thoughts on what you think the introduction of passenger rail might do down in Mexico in terms of freight flows coming cross-border. Any perspective or insight you can share in terms of the response that FXE seems to have to give the Mexican government in the last couple of weeks?

Not at all. We simply build our capital for the needs of our growth through basic planning. We identify the investments necessary to uphold the railroad's functionality and safety requirements.

I agree with Kenny's assessment around passenger service. We put significant effort into ensuring both freight and passenger operations can harmoniously coexist without negatively affecting the operations of either. I believe both the FXE and CPKC have said the right things, and I see little impact ahead as they move forward.

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect your lines.