UNION PACIFIC CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Financial Performance: 2024 third quarter net income was $1.7 billion, a 9% improvement, and earnings per share were $2.75, a 10% improvement. Operating revenue was $6.1 billion, up 3% year-over-year. Freight revenue was $5.8 billion, up 4% year-over-year. Operating expense was $3.7 billion, improved 2%, and operating ratio was 60.3%, improving 310 basis points year-over-year.
• Operational Highlights: Successfully handled a 33% increase in international intermodal volume while improving service metrics. Year-to-date, derailment and personal injury rates improved. Freight car velocity improved 5% to 210 miles per day. Third quarter terminal dwell set a record, improving 5%. Locomotive productivity improved 5%, and locomotive dwell results tied for the best ever quarterly performance. Workforce productivity improved 12% versus 2023.

Segment Performance

• Bulk segment: Revenue for the quarter was up 2% compared to last year on a 3% decrease in volume and a 5% increase in average revenue per car. Coal faced difficult market conditions due to reduced demand and competition from low natural gas prices, while grain products and export grain business saw growth.
• Industrial segment: Revenue was up 3% for the quarter on a 2% decrease in volume. Average revenue per car increased by 5% due to strong core pricing gains and positive mix in traffic, but was offset by softer demand for rock. Petroleum and petrochemicals saw growth, while automotive volumes were down.
• Premium segment: Revenue was up 7% on a 14% increase in volume but a 6% decrease in average revenue per car, reflecting increased international intermodal shipments, lower fuel surcharges, and truck market pressures. International intermodal volume was up 33%.

Guidance

• Affirmed prior 2024 guidance, including continuing to improve profitability through safety, service, and operational excellence. Pricing dollars will exceed inflation dollars. Will purchase $1.5 billion of shares and invest roughly $3.4 billion of capital. Fourth quarter results are expected to closely mirror the third quarter while improving year-over-year, marking the fifth consecutive quarter of year-over-year gains.

Risks

• Coal market faced challenges due to high inventories and competition from low natural gas prices. Weather and other factors could impact railroad operations. International intermodal volume growth may bring service pressures.

Q: Can you just clarify, when you talk consistent with last quarter, are you talking on an operating ratio level? Are you talking on a revenue or op income level?

A: Jennifer Hamann said when referring to 'consistent', it was broad and applied to various categories including operating ratio, revenue, and operating income.

Q: Kenny, it seems coal has taken a big step down lately. Can you talk about what puts and takes about what's built into the full year target that you're targeting there?

A: Kenny Rocker said no surprises with coal, volumes would continue as seen in public numbers, and efforts were being made to counter challenges with renewable fuels and grain network.

Q: I guess I just maybe wanted to understand a little bit about how you think about the intermodal outlook and maybe how that influences that comment around the fourth quarter.

A: Jennifer Hamann said mix pressures would continue into the fourth quarter, including normal seasonality and fuel dynamics, and Kenny Rocker added international intermodal would be elevated year-over-year but start to step down.

Q: Jim, in your prepared remarks, you kind of alluded to margins that perhaps weren't what you were hoping. Is that to say that kind of the prior margin improvement that you achieved in your first few years ago is not possible in the current environment or is it just taking longer?

A: Jim Vena said they would be the best margin operating ratio company this year and would continue to improve, acknowledging inflationary pressure but confident in EPS growth and capital allocation.

Q: With headcount down 5% year-over-year and carload growth up nicely at 6%, you achieved strong incremental margins in the quarter both year-over-year and sequentially. Could you just talk a little bit more about the productivity opportunity set that you guys are taking and the actions there and how that sets up for 2025?

A: Eric Gehringer talked about locomotive dwell, workforce productivity, and fuel opportunities, stating they would continue to find productivity improvements daily.

Q: David Vernon had a question on the intermodal train speeds. How do I reconcile some of those external data points with the performance that you guys are driving in the results today?

A: Eric Gehringer said they were proud of handling the 33% international intermodal increase, and they would continue to execute to improve intermodal speed by deploying buffer resources and working with other railroads.

Q: Mike Triano asked about productivity improvement and if another mid-single-digits improvement could be achieved next year.

A: Jim Vena said they were comfortable with their 2025 guidance and confident in continuing productivity improvements unless the economy implodes.

Q: Daniel Imbro asked about competitive standpoint and core merchandise pricing.

A: Kenny Rocker said they compete against truck and focus on service product, and the team had secured strong pricing on merchandise freight.

Q: Jon Chappell asked about mix discussion in the fourth quarter and margin contribution from coal.

A: Jennifer Hamann talked about mix within mix, with industrial business down and grain to Mexico growing, and Kenny Rocker emphasized preparing for volume increase.

Q: Brian Ossenbeck asked about getting over labor challenges and hurdles.

A: Jim Vena said they had done well comparatively, were comfortable with their three-year expectation, and expected improvements in operating ratio, net income, and EPS.

Q: Ben Nolan asked about service performance index and pricing advantage.

A: Kenny Rocker said there was no magical number, but improved service created a better environment for maximizing price, and they would always strive to improve.

Q: Eric Morgan asked about mix effects from other commodity groups and margin contribution from coal.

A: Jennifer Hamann talked about industrial business being down and grain to Mexico being a positive, and Kenny Rocker emphasized preparing for volume increase.

Q: Stephanie Moore asked about Mexico business and geopolitical changes.

A: Kenny Rocker talked about grain business and facilities, and Mexico business having opportunities with multiple partners and daily service, and being excited about pro-business administration.

Q: Scott Group asked about comp for employees and 4Q comment.

A: Jennifer Hamann said comp for employees was driven by wage increase, incentive comp, and work rest agreements, and 4Q results were expected to be similar to 3Q.

Q: Elliot Alper asked about domestic intermodal volume outlook in Q4.

A: Kenny Rocker said they were encouraged by domestic intermodal, which had been positive, and would see more benefit from international intermodal in Q4.

Q: Ariel Rosa asked about pricing above rail inflation and customer pushback.

A: Jim Vena and Kenny Rocker said pricing dollars were exceeding inflation dollars, expected to continue, and service was sufficient to compensate for market conditions.