Union Pacific Corporation (UNP) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us. My name is David Vernon. I'm the first analyst covering transport railroads Airlines, all things freight and passenger related. We are thrilled to be hosting Union Pacific today for a bit of a fireside chat. We'll catch up on the state of the railroad and is also talk about the sort of next steps in the UPO Southern merger. Our CEO, Jim Vena, CFO, Jennifer Hamann, are here joining us. They're going to kick us off with some prepared remarks. To the extent that you want to have some questions work them into the chat, you can do that either through the visional link that you should have had e-mailed to you when you're registered or you can try to hit me on Blumberg and I'll try to keep track of kind of where we are so that we can get as much client input into the conversation as we can. With that, thank you both for joining us. I'm going to hand it over to you, and you can kick us off with some prepared remarks.

Well, David, thank you very much, and great day here. I look outside and the weather is just perfect for September 1 of real world anyway. That's the way I look at it. I don't really look at it whether it's beach weather or holiday weather it's how good is it a railroad and I like it just about perfect through the whole network. We're looking at a big storm coming up in the Gulf that might affect us a little bit. But overall, we're ready to go. So railroads real good. . And of course, I have Jennifer Hamann here with me, Chief Financial Officer. Unless I'm going to go through slides real quick and then open up for questions. So Jennifer is going to add a few comments right after me. So of course, a big long list of boiler plate, got will go after the merger than it was before, but we'll be making some forward-looking statements. So if you have any questions, please refer to the UP website and SEC filings for additional information. We look at the first slide we have up -- let's recap the past month or so since we talked in our earnings. In late July, we announced our agreements with Canadian National and provided the supplemental information the STB requested. A few weeks ago on August 18, the STB published the procedural schedule. Certainly, we wanted the process to move faster, but we'll take the win. They published a schedule confirmed that the 12-month statutory clock started when they accepted our application on May 28, 2026. And last week, we filed our comments that our merger easily meets the primopacia standard. We are confident our merger satisfies the STB's requirement to the overwhelming in the public interest. It removes 2.1 million annual truckloads off the road, reducing highway congestion and improving driver safety deliver $3.5 billion in annual shipper savings and improves rail safety because of the touch points that it removes. Our merger enhances rail competition by adding seamless coast-to-coast rail service, which is faster and more reliable. It provides for new intermodal and manifest service products providing more options for our customers and single line shipments have generally lower prices than interline shipments. And I don't have to explain it too much. Anybody who knows a little bit about business and a couple of companies within margin. There's a big difference in 1 company with margin. And beyond that, we've offered additional enhancements. We've expanded the committed gateway pricing and included bulk unit trades. We added protection to preserve Class 1 rail auctions for 3 to 2 and 2:1 shippers, new service level protections in case unexpected issues arise. Stronger oversight and accountability for customers with additional access to a new rate relief process. We improved connectivity options with Canadian National, Canada, 2 and from Mexico and UP's access for the route around Chicago and the EJ&E. So what's next? Let's move to Slide 4 and the time line. We're in the merit review, which is a great place to be as the conversation will be focused on data and facts, not what people think. I never like what people think. I like people to give me the facts, and then we'll make the best decision for back and figures. Those are the ones that participate in the process must submit their notice to participate by the end of the week and competing railroad to stakeholders, we need to submit their comments. I think there's some change a little bit from the September 9 that the SCB put out, but we're okay. It gives us some time to do that. And if they have asked, they need to be back up with support by November 18. So some details about what they're looking at and what the issue is. Our components are also still talking about what if a subsequent mergers. We expect the STB will evaluate our merger on its merits and we'll do the same for another application. At this point in time, there is no other merger. There's only one merger of Class Is, and we are in the middle of it. When and if that happens, because at this point, everyone want to say the participating parties that they are not interested in a merger. But if they became interested in a merger, and we've done a good job in our application to talk about that and take people through, and the STB needs to look at the new place in time and what's happening at that point, not try to protect it at this point where they have complete control over any process that happens for any subsequent merger. With that, I'll pass it over to Jennifer.

Yes. Just a couple of things, a couple of kind of, I'll say, housekeeping niche items. So when we made our filing in late July, we did have a few tweaks to some of the things, but even with all the puts and takes as we have continued to run through the numbers a number of times, we keep coming back to basically the same place. So we're very confident in our net revenue synergy target of $1.8 billion annually and our cost synergy target of $1 billion. And then with that, we fully expect that we should be back in the mode of buying back shares in year 2. And remember, we are counting it from the day of the close of the merger. So within 2 years of the merger close, we'll be back buying shares. Our leverage targets will be back. We're going to stay solidly strongly investment-grade rated. We expect to generate cash roughly 11.8 million to just shy of $12 billion by year 3 and when you think about deal closing, that's really looking at some time in Q3, maybe as late as Q4 of 2027 based on the schedule that you see here on the slide and what the STB has put out. We feel like the -- having the time line is great for all parties involved. It's able to allow us to firm up our integration planning. And as Jim mentioned, we're very anxious to get into the merit phase of this discussion because we strongly believe in the benefits of the merger, the financials are very compelling, and we're in the process of putting together a very robust integration plan. So -- all of those things are coming together. Certainly, we've met all the deadlines that the STB has given us to this point. I know they did just, I think, last night or what you were referring to, Jim, they did push back the data of people to say that they were intending to participate, which shows on their September 4. They did just move that back to September 30, but no other deadlines change, and particularly the September 9 date is still impact in terms of when participants need to make their request of what they're going to be looking for through the merger. So we're just anxious to get going and into this year, and we're ready to go. With that, David, we're ready for your questions.

Well, thank you very much for the introduction. So I want to start maybe on process. What do you take away from the fact that this whole upfront process of getting the application approved has taken longer. I know you're on the back of a time line that you would have expected, but it did take a little bit longer. There was some back and forth -- what do you take away from that? And maybe what should investors take away from that? I get asked a lot like it's taken so long just to get here. Does that tell you anything in the process? Or is there a message in there that we should be reading?

I don't think there's a message. I think it's the way the STB does things. And if you take a look at the STB and the Chair knows that the STB sometimes has taken a long time to make certain decisions on certain things. We have some things outstanding even today on other topics that we've been waiting for, for a long time. The nice part about this process is, once the application gets accepted, which it was, there's a black and white statute that says that the STB needs to be finished with the gathering of information within 1 year. So that's not something that can be easily changed when the statute tells you exactly what it is. So what did we learn? We learned that we were probably right when we started this, and we did say to the STB. We said, listen, let's make this a 2-way discussion about what you need for information, and we ask them specifically. And I'm not trying to piss off the STB or anything else, and they have their reasons for it. And maybe it's because of other parties. But at the end of it, we said, if you need information, you ask us, and we'll give it to you. There's no big secrets other than sometimes some of the information was have to do with how we move markets and how we operate the railroad and why we are Union Pacific. But at the end of the day, what we learned was we probably should have pushed them harder and say, "Listen, open up, so tell me what you want and we'll give it to you. We went to the Board. We went -- David, on the PRNA, a small railroad that is run as a nonprofit company by all of us with single bolts in there. And it will give you an idea, the opposition has done everything they can the slower dumb, when we call them meet we didn't. The TRA managed to call a Board meeting to handle the issue of getting over 50% for the combined merger of railroad. None of them showed up. So we have the quorum to be the bulk, but that's not the way we do business. So we went through it and we had to answer it twice for the STB. But I think we've done a good job now. They've accepted the merger. They've told us that they have the information they need go through the merit stage, and we'll deal with it moving forward. So that's what I learned was is sometimes it takes a while, and we knew it was going to take a while. We never thought that the STB would move quick for us. But now they're on a time clock.

And the second 1 on process, and we'll switch to synergies. But as you think about the approach going forward, does anything look different from here? I think 1 of the criticisms that I've heard in industry circles is the filings were maybe bare minimum as opposed to being more expansive in making the affirmative case. Are we -- should we be expecting you to kind of change your approach to the process, you have the team's approach to the process now that we're actually in the merits discussion?

David, I disagree with that being then. There's thousands of pages we put in. We use data from every Class 1 railroad, full data that no 1 else ever has to drive to our conclusions about what's happening -- so we have not been in. whoever is asking you that you should tell them that maybe don't use AI to summarize, go through the 8,000 pages and see what's in there. .

Actually just thinking about whether or not there's going to be a little bit of -- any kind of change in your approach to the Q&A process, right? Like as far as kind of being more expansive in your responses or being more minimal in terms of scope out.

I think we've done -- be as open as possible, even this session today is we're open to anybody asking us questions, and we give the answers that people want. And we feel -- and if the STB needs some more information from us or they want us to look at something different. We've told them right from the start, we'll do that, and we'll go through that process. So I'm very comfortable . Jennifer?

Yes. No, I think we've been very thorough with our filings. I think to Jim's earlier point, had we had maybe some more direct feedback from the STB at the beginning of the process. We would -- we could have -- would have been more expensive to start that wasn't how we read what was required. They came back and asked for more and no problem we provided it. .

So fundamentally, David, I know maybe I'm answering another question here. Let's think about what we're doing. This is a -- this is an end-to-end merger with a small piece that we knew we have to take care of, which we have with the Canadian National Railway access between St. Louis and Kansas City. The rest of it is actually what we're delivering is better opportunity for customers in the United States of America to receive their product in a faster, more efficient, less touch point, and much more competitive, and it drives all our competitors starting with the biggest competitor, we have trucks and other railroads to compete and decide how they're going to compete against that product. So, we see this as a truly a beneficial -- and that's why you get so much noise sometimes from some of the parties that I'm not sure what else they want when I go to sleep and when I get up and I told people that even to speak at midnight and I get up to 6 in the morning.

There's certainly going to be some in the market that you're not going to be able to present enough forward to get them behind it. But -- so maybe turning to that benefit number, that $1.8 billion of net revenue, EBITDA, $1 billion of cost -- that's all based on a 2022 baseline, right? You basically ran the numbers 2023 baseline. But we're obviously in a very different world now. Truck rates have corrected pretty significantly from where we were. The cost basis have changed. How do we think about -- or how should we think about the value of that embedded the value of those synergy targets when you mark them to market for the changes that have happened in the end markets.

I mean certainly, David, we had to have a base year that we started from, to your point, 2023, when you look at it either on a volume standpoint, redo the pricing standpoint relative to truck pricing there's been some uplift on both sides. So that would be to the positive relative to how the numbers could roll forward. But we also don't know what the economic climate is going to be once the merger gets approved to 2027 and forecasting our future -- there's always a little bit of full there. But I think the bottom line is we feel very confident in the business that's available to us to win by putting together to strong railroads provide that single line service and really create new markets for our customers. And so that's what gave us the $1.8 billion of net revenue synergies. And then on the cost side, no understanding still Union Pacific, we're committed to having the best operating ratio of all the Class 1s. We're in that position here still today. And the only way we're able to do that is we're growing our top line, we're doing it productively, and we're continuing to improve on the cost front. So no understanding still and we won't stand still once we get the green light to put the 2 companies together, and we'll go attack the synergies and the operational efficiencies that we see ahead of us.

The other thing is David. The amount of share that we have on the intermodal side and even on the closer to the Mississippi, what we call that area on both sides of the Mississippi. That doesn't change. That happens when the merger has been finalized. The longer length of haul that allows it. So we see even more opportunity if there's more pressure on fuel and places for trucks and availability of drivers and everything else, sure, we've all seen an improvement in products. You can see our car rolls our car rolls are running substantially higher than last year. But I don't think that takes away any of the synergy. The benefits are being able to give somebody in Indiana access to the Western U.S. for that cross. We can't do that as easily today. They have to touch the railcar multiple times. We won't have to do that. We give sand movers, and there's a lot of them in the U.S., not just one place in Arizona that's on Burlington Northern Sanity we can easily give them better products to move and compete. And the other thing, David, is when you're faster and cleaner, a lot of the products we move are worldwide competitor, whether it's soybeans, whether it's sand, whether it's products that come out of the Gulf area, products that are produced in the Eastern U.S. lumber is there is competitiveness from other countries and other producers. And what we're going to be able to offer them is a much more efficient. So it's nice to -- we're all in a different place today and it's nice to see all railroads with car rolls up. But at the end of the day, that opportunity when the merger happens, is still there to just build above what we have.

And some of the discussion, particularly among some of your competitors is that the transactions may be not as necessary to unlock some of these benefits. In your filings, you talk about double marginalization capital investments that wouldn't occur without the merger. As an operator, as a guy who's been around the industry for a long time, as you think about aligning the interest between 2 railroads when they're negotiating a Rule 11 interchange versus a through rate versus a single line like why is that alignment of interest through ownership, so essential to being able to kind of make the better decisions for customers. And can you talk also about how that differs a little bit between intermodal and carload because intermodal it seems like that's easier to align through partnership in some ways than carload.

Yes. Listen, I think it's a basic crux of what we do is railroaders. So as railroaders, today, we make it work as good as we can and we get a partnership understanding to the deals -- but -- and those are necessary. We interchange a lot of traffic to other railroads, short lines. And those things, especially with the short lines are not going to change. We see more business for them coming on as we move ahead. But partnerships have a different view of the world at certain times, and I've seen it so many times in my career that I could list them off. But why don't I give you 1 that's very recent for the longest time, Norfolk Southern was able to operate 11,000-foot trains on the Meridian Speedway. And I think everybody knows the investment Norfolk Southern Meda on there with Kansas City Southern back a number of years to be able to get that access. All of a sudden, there's a partnership. There's not one railroad looking at it with 1 team and what's good for the customer and good for everybody. Canadian Pacific, Kansas City decided that they were going to limit the size of the trains going through that corridor. A real world that was 1 railroad would never do that. You would not affect your customers in that manner. I could go through and give you a whole bunch more. That's the difference between. And when you make decisions on capital, where you spend capital, what the investment it looks like, what your customer needs and what the competition is like you're better off having 1 team that leads the entire railroad versus multiple partners that have sometimes their own view I could go on, David, if you want, I could fill the hour. Locomotive use -- it's not begun. We fight about locomotive use. We hand off locomotives to each other. And sometimes, 1 railroad is a little price per open motives and they keep your locomotives-- back today, I could give you some specifics I won't. We have a buffer and people are using our locomotives, and we want them back, okay? Because they're type locomotives. So those are kind of things that just don't work in the real business world. People get narrow and look at themselves and not what's possible. Jennifer, anything to add?

No. But just to David's question about is there a difference between intermodal and carload. And I really don't know that there is that much of a difference. I mean, you have those friction points that Jim just enumerated in either class of freight. The carload piece is the 1 that we tend to talk about more in terms of that watershed market and where you have that friction. And when you have it over a shorter length of haul, that's maybe the 1 difference I would say on the carload side is it's actually magnified in terms of how big of a difference that can make for a customer to be able to choose whether they're going to ship by freight. Their freight by rail or by truck.

But people miss this intermodal, they think, oh, it's easy with intermodal. You drive an intermodal train to another railroad and 1 of the interchanges wherever we do that and they pick it up right away. No, that's not quite how it happens. The average time sometimes for our intermodal trains, both ways just because of crew, slotting, everything else because you don't control it, sometimes it doesn't come exactly when you want it. So you have something else going on, work programs, everything else, that trend can get impacted. And it's substantially longer the interchange time versus when we change crews, okay, in Tucson, if that brick and crew is not on in less than 10 minutes and pull in again to leave, we are not happy. That's the difference, 10 minutes versus a few hours. And you start adding that up through the time, makes a difference on making the spot time at 7:00 in the morning that the customers want. So even with intermodal, it's not as clean. And Carlos, you know we don't build blocks for CSX, and we sure the heck to build blocks for Burlington Northern Santa pay because those agreements never last, but we will be building blocks to go to destination at our hump yards and our handling and we'll take out 24 to 36 to 48 hours on those touch points on the railcars. I'm excited to do that.

All right. So...

That's why I'm sticking around, David, because that's the best part. The rest of it is like the -- the operating piece is the piece I'm looking forward to Sonagol people realize I've done a few things at Canadian National and UP that worked pretty good for us. So I can hardly wait.

So much bigger trains that -- so when you think about -- so let's say we accept the premise that we're going to take a bunch of handlings out. We're going to lower cost. The trains are going to run faster. The locomotives are going to move the crews are going to show up on time. That drives a lot of efficiency for you as the railroad. How does the savings from that efficiency in this transaction get to a customer? -- right? And some of it is going to be potentially directly through maybe you have a beer more efficient routing to even price lower than the interchange routing, so that it could be indirectly through faster cycle times. Just reading through a lot of the customer responses and there's -- we'll talk a little bit about that later, but there is some arguments around this is all well and good, but what does it mean to divide it by me. So how do you think about the benefits of the transaction, creating those efficiencies and then actually getting into the shippers where it matters, whether it's their car fleet or whether it's their rates or their service level, what is that?

We're going to tag team on this 1 here because both of us love this question. So let's start with the fundamental. If you're in a business like we are, we are in business. That's what it is. What's the best thing you can do is grow your business and move more products, makes your fixed cost less percentage of your total expenditures in mix. You build up the network, you're able to move products and you're able to grow the business. That's the American way. That's what they talk about is we don't want to be segment, we want to grow. So -- if you do that, when you build a network that's more efficient, guess update, we will use price. We will adjust to what the market we will open up new avenues for our customers that are shipping with us today to be able to open up new markets for them. Now we're going to have to work with them. So if you have some room because you can be much more efficient we will do that. It's pretty hard to come out right now and say, listen, every movement is going to be 1% less cost, we'll pass it directly on because it's the market that drives it sometimes. Sometimes we have to take haircuts that are bigger than that, to be able to move into the market. So that's the people -- that's what the customers need to hear clearly is -- on the railroad side, we're going to open markets for them. We're going to give them every opportunity to win. We're going to get them to win against the competitors that want to bring imports into this country, even with the tariffs, steel and lumber and everything else that happens that moves into this country that we can move -- and then for the customer themselves, Jennifer, all their asset costs, everything else.

Oh, yes. I mean asset cost, obviously, is a significant piece for our customers. When you think about the freight cars and infrastructure just getting more turns per car, lets them lower that cost base. When you think about the greater usage that they'll be able to have across their network in terms of access to more customers. Certainly, that's a benefit to them, let them grow their top line at the same time that we're growing our top line. Certainly, one of the numbers that's in the application that you've heard us talk about is the $3.5 billion in savings and that's just a straight calculation, David, for the people that are moving from truckload today and moving on to the rail tomorrow. That's just that cost differential from truck rail and quite frankly, that number is probably understated today when you think about where fuel prices are where truck pricing has grown too. So those are immediate savings just from that change in mode of transportation from truck to rail.

And David, these are not small customers that we have. This is not mom and pop everywhere. I think some of our biggest customers are huge multinational, international companies that know a lot of negotiate and they do a really good job with us already. And I'm absolutely sure some of them will say, you're saying I don't want to get to this place that I can't do today, and let's work together and get a new pricing structure that gets me access and you get more business. That's a win-win, and we'll be doing that for sure.

And really, that's all that we've been following evidence, we have become more efficient as a row road. And then we've gone out and won new customers brought them onto the railroad. And what's enabled us to win in those marketplaces is the -- what Jim just described at the start. We've become more productive. -- we're able to compete for more business. It opens up that aperture. .

Okay. And since we're on the reconciliation of customer value here, I'm going to just kind of jump forward a little bit. But -- when we think about the -- some of the arguments that were put forward by a number of the shippers associations, right? These are the chemicals guys, the guys that are not really modally competitive in a lot of ways. One of the things that stood out to me in reading those filings without AI and with AI, with the idea that there's nothing really in it for the they're taking a lot of risk because you're going to convert a bunch of highway traffic that maybe screws up their service. If volumes are going to grow, how do you put forward some sort of compelling case that there are some actually benefits to more rail-centric shippers from your ability to convert more highway traffic? Like how does this become a portfolio win for all the customers in the rail industry as opposed to a one-sided win for UPS.

Well, any time you make a big change in the United States of America, whether it was when was purchased -- there's all these naysayers that look at things, oh my God, what's going to happen? I don't think anybody would give Russia back and take today's $7 million that the U.S. paid for it because there's some benefit there. It's the same with the Louisiana purchase. There was a lot of people that thought that there was no way, and I could go to more recent. But let's jump to the road. I have a problem dealing with associations. Not that I don't think they are valid and they have a point of concern. But they don't always Chuck Grassley wrote a pretty good article that talks about sometimes associations are not aligned completely with the people that they represent. So I've always had that thought. This is not new for me. So I want to deal with the customers that pay the bill because there is nothing like sitting down with a customer, whether it's a grain customer in Nebraska or it's others. -- and say -- and they want to move product to this location or a new location, and we figure out how to price it, how to use the new network and make them more competitive to win. That's where it is. And that's why I have a hard time with what -- it's not factual what they're saying. There is true benefits for the shippers and the consumers with a seamless railroad that goes further and longer. And in fact, one of our competitors sold that hard when they went through their own merger. It was all about how it was better and seamless than it was going to work. Now they don't agree anymore, but I don't know what happened there.

But the SDD agreed when they approved that merger because they said, right in the summary that the merger will enhance rail competition through single-line service. .

So we'll work through that. And remember, we do have 2,000 people that have written positive and 500 are customers. So we think that that's a pretty good show of people that see the benefits for themselves and be able to grow and have a better availability to move into different markets. And expand.

Is it somehow as simple as if you're growing the network and you're developing positive contribution from an additional set of traffic that your ability to accommodate more services for the rail centric guys grows with that. I mean I don't know -- it would seem like if you guys are doing better in intermodal, then maybe you don't have to be as aggressive on chemicals like I don't know, like do you think about from a portfolio like that or no.