Union Pacific Corp (UNP) — Q1 2023 Earnings Call Transcript

Thank you, Rob, and good morning, everyone, and welcome to Union Pacific's first quarter earnings conference call. With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales; Eric Gehringer, Executive Vice President of Operations; and Jennifer Hamann, our Chief Financial Officer. The story of the past quarter for Union Pacific is one of resilience, battling heavy snow, Arctic temperatures, flooding, and tornadoes. The team maintained service levels and exited the quarter on a positive trajectory. Persevering through those harsh conditions, our employees delivered for our customers, which demonstrates again that our people are the foundation for the great things that lie ahead. Turning to the first quarter results, this morning, Union Pacific is reporting 2023 first quarter net income of $1.6 billion or $2.67 per share. This compares to first quarter 2022 results of $1.6 billion or $2.57 per share. Our first quarter operating ratio of 62.1% deteriorated by 270 basis points versus 2022, driven by excess costs, inflation, and lower volumes. A series of weather events throughout the quarter had a real impact on our ability to capture demand, especially within our coal business, as well as added cost to the network. Through those events, our service products showed greater resiliency, quickly rebounding each time as we were better positioned with crew resources to support our customers. And with April month-to-date, freight car velocity is about 200 miles per day. We are operating a network that is positioned for consistent and reliable service. While a more difficult start to the year than expected, it doesn't reduce our expectations for 2023. As you'll hear from the team, all of our goals are still in front of us. Let me turn it over to Kenny for an update on the business environment.

Thank you, Lance, and good morning. Freight revenue for the first quarter increased by 4%, driven by higher fuel surcharges and solid pricing gains, partially offset by a 1% decline in volume. Bulk volumes were muted in the quarter as weather and service-related challenges impacted shipments. Additionally, weaker market conditions for premium also drove lower volume for the first quarter. However, our strong focus on business development and new business wins partially offset some of that decline. Let's take a closer look at each of these business groups. Starting with bulk, revenue for the quarter was up 4% compared to last year, driven by a 7% increase in average revenue per car reflecting higher fuel surcharges and solid core pricing gains. Volume was down 3% year-over-year. Grain and grain products volume was down 1%, driven by weaker export grain shipments as world demand for U.S. grain has softened, coupled with drought impacts affecting supply in UP's served region. Fertilizer carloads were flat in the quarter. Strong export potash was offset by a decline in phosphate volume from weather conditions delaying shipments. Food and refrigerated volume was down 6% due to reduced beer imports and weather conditions negatively impacting both fresh and canned shipments. Lastly, coal and renewable volumes were down 4% compared to last year, driven by weather interruptions and associated service challenges that impacted our locomotive and crew resources. Moving on to industrial, industrial revenue was up 5% for the quarter driven by a 5% improvement in average revenue per car due to higher fuel surcharges and core pricing gains. Volume for the quarter was flat. Industrial chemicals and plastics volume was down 2% year-over-year driven by lower industrial chemical shipments due to challenged industrial production and reduced housing demand. Metals and minerals volumes continued to deliver year-over-year growth. Volume was up 3% compared to last year, primarily driven by growth in construction materials and increased frac sand shipments, along with new business development wins. Forest products volume declined 19% year-over-year driven by soft housing starts and lower corrugated box demand for nondurable goods shipments. However, energy and specialized shipments were up 6% versus last year driven by strength in demand for LPG and petroleum products. These gains were partially offset by fewer soda ash shipments due to weather and service-related challenges. Turning to Premium, revenue for the quarter was up 3% on a 1% decrease in volume compared to last year. Average revenue per car increased by 5%, reflecting higher fuel surcharge revenue and core pricing gains. Automotive volumes were positively driven by strengthening OEM production and dealer inventory replenishment for finished vehicles. Domestic intermodal business wins were offset by a weak freight and parcel market, driven by high inventory, increased truck capacity, and inflationary pressures. On the international side, despite weakened imports, more containers shipped inland versus the first quarter of last year resulted in year-over-year growth. Now moving on to our outlook for the rest of 2023 as we see it today. Starting with our bulk commodities, we expect grain to be challenged near term as export demand softens and supply tightens throughout this crop year. However, as we look ahead towards the next crop season in late fall, we're encouraged by the initial forecast. For coal, low natural gas prices and a milder winter allow utilities to build more inventory. We are experiencing normal softness through the shoulder months. Looking further out in the year, demand will largely be dependent on natural gas prices and summer weather. Lastly, we expect biofuel shipments of renewable diesel and their associated feedstocks to grow due to solid market demand, new production coming online, and business development wins. Moving on to industrial, the forecast for industrial production is to shrink in 2023, and the demand is getting weaker in forest products. However, we expect to see continued strength in construction and metal with new business wins. And finally, for Premium, we expect near-term challenges in the intermodal market from high inventory levels, inflationary pressures, and weak consumer spending as people shift back to spend more towards services than goods. We will be closely watching for a potential market uptick in the latter part of the year. In addition, we expect automotive growth to continue, driven by strong OEM production and dealer inventory replenishment.

Thank you, Kenny, and good morning. Starting on Slide 9. We continue to make great strides on safety, as evidenced by our 10% improvement in derailment performance for the first quarter. While encouraging progress on safety, our goal remains a future with zero incidents and zero injuries. We've made progress on derailments by implementing state-of-the-art technology, like Precision Train Builder and our geometry inspection fleet. This is on top of our network of more than 7,000 wayside detection devices and our 24/7 operating practices command center. Further supporting our efforts, in March, the industry announced a set of key safety actions. These include the installation of additional wayside detectors and enhanced standards for how we proactively use and share critical data. In addition, the industry is expanding efforts in first responder training and deploying technology to provide real-time railcar condition monitoring. The railroad industry remains one of the safest transportation modes in the nation. And through our capital renewal program, Union Pacific invests almost $2 billion annually back into its network to further improve safety. Now moving to Slide 10 for a look at our current operational performance. As Lance mentioned, Mother Nature made her presence felt across the Union Pacific network this season, bringing extreme weather in many forms. UP crews in California battled flash flooding, persistent mudslides, and heavy snow. The Central Sierras, for example, recorded over 700 inches of snow this season, that's 222% above historical averages. Employees across our central corridor in upper Midwest portions of our system also worked through prolonged blizzards, ice, and Arctic temperatures. These events challenged our ability to maintain a fluid operating state on specific portions of the system. However, thanks to the dedication and proactive efforts of our employees, the network quickly recovered after each event. As the chart on Slide 10 demonstrates, we're exiting the quarter on a positive trajectory versus the congested state we were entering last time this year. Our April month-to-date metrics show a network in a healthier state with freight car velocity at 200 miles per day, intermodal TPC in the high 70s, and manifest TPC on the rise as well. That result also reflects our hiring efforts as we focus on backfilling attrition and targeting locations where crew challenges persist. We currently have around 1,000 employees in training, which is an increase of approximately 500 versus last year. In addition, we have utilized borrowed-out employees to address hard-to-hire locations and get crews where needed. Now let's review our key performance metrics for the quarter. Sequentially, we held our ground through the obstacles of the quarter. Both freight car velocity and manifest and auto trip plan compliance made slight improvements from last quarter's results. Intermodal trip plan compliance remained effectively flat as we battled resource imbalances driven by weather interruptions. With our current traffic mix, freight car velocity consistently running around 200 to 205 miles per day will strengthen our entire service product, including bulk, manifest, and intermodal performance. Turning to Slide 12 to review our network efficiency metrics. Locomotive productivity dropped 5% versus first quarter 2022. However, it remained flat sequentially from last quarter's results as we continue to operate a larger locomotive fleet in an effort to support the recovery of the network. In the second quarter, the team is focused on moving more freight and rightsizing the fleet. To that point, we are in the process of storing over 100 units to at the ready status. First quarter workforce productivity declined 6% to 991 daily miles per FTE driven by an increased number of trainees and lower volumes. Our strong training pipeline supports our ability to capture available demand and future growth while managing and reducing borrowed-out employees. As employees graduate from training, we expect productivity to improve. Train length is effectively flat compared to last quarter's results. Lower intermodal traffic, coupled with extreme cold temperatures across the Northern tier of our network presented a headwind to our train length initiatives for the quarter. The team remains committed to strengthening the network while we're covering loss productivity. Wrapping up on Slide 13, the success drivers for 2023 remain unchanged. The entire team is dedicated to building on the momentum gained as we exited the quarter. We remain committed to addressing employees' quality of life feedback and are pleased with the recent agreements regarding paid sick leave. We will continue to work diligently in finding win-win solutions that enable a strong service product and provide our employees with more consistent work schedules. In addition, as you heard from Kenny, we continue to aggressively look for opportunities to strengthen volumes. With the service product demonstrating resiliency, we have added back train sets and targeted freight cars to the network to capture available demand. I am confident that the foundation we're laying will provide a safer, more consistent, and reliable service product to meet the growth needs of our customers. With that, I will turn it over to Jennifer to review our financial performance.

Thanks, Eric, and good morning. We'll start on Slide 15 with a look at our first quarter income statement. Operating revenue totaled $6.1 billion, up 3% versus 2022 despite a 1% year-over-year volume decline. Other revenue decreased by 5%, driven by a $30 million increase in subsidiary revenue, which was more than offset by a $50 million reduction in accessorials. Lower intermodal volume and greater supply chain fluidity drove the accessorial decline. Operating expense increased by 8% to $3.8 billion, resulting in first quarter operating income of $2.3 billion, down 3% versus last year. Below the line, other income increased by $137 million year-over-year, largely driven by a $107 million one-time real estate transaction that contributed $0.14 to earnings per share. Interest expense increased by 9%, reflecting higher debt levels. Net income of $1.6 billion was flat versus 2022. However, when combined with share repurchases, resulted in a 4% increase in earnings per share to $2.67. Our first quarter operating ratio increased by 2.7 points to 62.1%, following fuel prices during the quarter and the lag on our fuel surcharge programs positively impacted our operating ratio by 190 basis points. Core results offset the fuel benefit and were a 460 basis point drag on operating ratio. Included in that is the impact of weather, which is difficult to quantify; however, based on both lost revenue and additional expense, we estimate it to be in excess of $50 million. Now looking more closely at first quarter revenue, Slide 16 provides a breakdown of our freight revenue, which totaled $5.7 billion, up 4% compared to last year. Lower year-over-year volume reduced revenue by 150 basis points. Total fuel surcharge revenue of $883 million added 475 basis points to freight revenue, reflecting the lag in our programs. The combination of price and mix increased freight revenue by 75 basis points as ongoing pricing actions were mostly offset by our business mix. Fewer lumber shipments and more short-haul rock shipments were the primary drivers of the negative mix. Turning now to Slide 17 and a summary of our first quarter operating expenses, which totaled $3.8 billion. Compensation and benefits expense increased by 7% versus 2022. First quarter workforce levels increased by 4%, with transportation employees up 5%, the result of our dedicated hiring efforts over the last 12 to 15 months. Cost per employee only increased by 3% in the quarter as wage inflation was partially offset by a larger training pipeline. During the first quarter, we signed agreements with the majority of our labor unions to provide paid sick leave to our employees. These agreements became effective April 1 and represent just under half of our craft professionals. Assuming we are able to reach agreements across the board, we would expect cost per employee to be up mid-single digits for the year, consistent with what we discussed in January. Fuel expense grew by 7% on a 9% increase in fuel prices as we moved less freight. Our fuel consumption rate deteriorated 1% as the impact of our fuel conservation efforts was more than offset by reduced network fluidity. Purchased services and materials expense increased by 16% driven by maintenance of a 3% larger active locomotive fleet and inflation. Equipment and other rents increased by 9% as a result of increased car hire expense related to elevated cycle times, and the other expense line grew by 6% related primarily to higher environmental remediation costs. Turning to Slide 18 and our cash flows, cash from operations in the first quarter decreased to $1.8 billion from $2.2 billion in 2022. The primary driver was Presidential Emergency Board back pay settlements paid in January, which totaled $383 million. That payment also impacted our quarterly cash flow conversion rate and free cash flow, with both roughly in line with last year's performance when you exclude that payment. In the quarter, we returned $1.4 billion to shareholders through dividends and share repurchases. We finished the first quarter with an adjusted debt-to-EBITDA ratio of 2.9x as we continue to be A-rated by our three credit agencies. Wrapping up, we are maintaining our 2023 full-year guidance to achieve volumes above industrial production, price gains in excess of inflation, and operating ratio improvement. Our plans for capital allocation are unchanged. As with every year, there are puts and takes to how the year plays out. While 2023 started a bit slower than expected, I need to remind everyone it is only April 20. We have 8.5 months in front of us and many opportunities with volume, service, and productivity. Before I turn it back to Lance, I'd like to express my thanks to the UP team. We are skilled in running the outdoor factory that is our railroad. Mother Nature seemed focused on testing those skills this year given the extremes we faced, and yet the team forged ahead, keeping the network fluid and our customers served. Fantastic work by everyone. With that, I'll turn it back to Lance.

And thank you, Jennifer. As Eric discussed, we continue to make great strides on safety. Derailments have been in the spotlight recently. The entire industry understands the critical role we play in supporting the communities we serve. In fact, since 2000, Union Pacific's mainline derailments are down almost 30%, helping make this past decade the safest for the rail industry. Working collaboratively and proactively, the industry can further improve on that safety record. Looking forward, as you heard from Kenny, consumer-facing markets are in rough shape right now. Importantly, though, there remain opportunities to capture additional demand in a number of markets. The entire team is executing a plan to capture those additional carloads supported by an improved service product. Finally, with Earth Day approaching, I'd like to highlight the actions Union Pacific is taking to protect our planet. At the end of 2022, we released our second annual Climate Action Plan, highlighting updates to achieve our greenhouse gas emission reduction targets. This includes our goal of net zero emissions by 2050. Over the past year, we've turbocharged our locomotive modernization program. We've committed to both battery and hybrid electric locomotives, and we've increased our biodiesel blend to over 5%. We're being recognized for that work. This past year, Union Pacific was selected as a member of the Dow Jones Sustainability Index for the first time. We were the highest-ranked railroad in the transportation category on Fortune's most admired companies list. Union Pacific is committed to being a sustainability leader, driving long-term value for all of our stakeholders. Before turning to Q&A, as it relates to the CEO search process, the Board is fully engaged in executing its duty to identify the next leader. I can say from personal experience what a wonderful job it is to be at the helm of a company like Union Pacific. I'll continue to lead the team until the new CEO is identified, and I'm energized by what we can accomplish in the coming months, as well as the great potential this company has for years into the future. With that, let's open up the line for your questions.

Lance, any timing on CEO search? And any thoughts on what you and the Board are looking for? And then Jennifer, margins are down 270 basis points. Obviously, we need some nice improvement the rest of the year to get to full-year improvement. Can you help us bridge us to that full-year improvement? And any thoughts on second quarter? It's an easier comp. Do you think margins inflect positively in Q2? Just any thoughts?

Yes. Thank you, Scott. I will circle back to the press release that the Board sent when they announced earlier in the year that we were in the process of identifying a new CEO. They were clear on what they were looking for then: a track record and experience in safety, customer service, business development, a clear vision on culture, and good operating experience. They are crystal clear on what they're searching for. The only update I have for you is we're using an excellent external consultant, and they're being very thorough in their search, which is underway.

Scott, to your question, you are exactly right. We need to make sequential improvement through the year, and then that needs to become year-over-year improvement at some point for us to be able to meet that guidance. The factors that are going to help drive that certainly include fuel, which is looking different to us this year than it did last year. Particularly right now, you saw the 1.9 points that it benefited our OR in the first quarter. That will comparison will get a little tougher in the back half, so it may look different than '22 did. But certainly, fuel, I think, is something. It's the main levers we have available to us. It's volume, price, and productivity, and of course, volume depends to a degree on that. But we also have pure cost control. If volumes are something that are not in our favor, and we're not able to get that leverage, we also have the ability to control costs through careful management.

And Jennifer, one last thing. What gives us a lot of confidence as we look into the year is how the network is operating right now. It's in a place where we can get the volume and we can squeeze out the excess costs.

I wanted to ask you about the headcount level. I think the training pipeline for T&E looks like it's larger, but I think that the level of people that you've had that are trained on the system seems like it's been static for a while. I’m just wondering what you think about in terms of where you need to get for TE&Y that are trained in on the system? In terms of attrition, has attrition been an ongoing problem? Has that stabilized? Just thinking about that headcount dynamic and how that fits into how you would expect network performance to go from where we are.

Yes. So Tom, we entered the year stating that total headcount hires in addition to the TE&Y would look similar to what it did in 2022, predicated on our plan for volume. Volume is looking a little cloudy right now, certainly in the first quarter and the back half, and so of course, that hiring plan is being looked at and adjusted. Net-net, in the second quarter, you're going to see us add to the active TE&Y headcount coming out of the training pipeline. The question really is, what does the training pipeline look like for the rest of the year? Having over 1,000 in the pipeline is very strong for us. In terms of attrition, we tend to have about a 10% turnover in our TE&Y workforce, and that really hasn't changed over the last five years. We don't see it changing right now. One of the adjustment factors is that if we find ourselves getting out over our skis a little too far, attrition can help us adjust quickly.

So it sounds like the trained level goes up, but overall headcount remains static as the training pipeline comes down, is maybe the best way to look at it.

I think it really does depend on volumes to a degree, Scott. As Lance said, in the second quarter, I think you'll see our total headcount go up. It's going to be probably different than last year. In the first half, we have the training pipeline loaded in the first half. The question is going to be what does the second half look like?

It looked like the operating service levels were flat — you mentioned that a couple of times, I guess Eric did, but velocity really came down the past few weeks, I guess, during the quarter, and then more recently showed a pretty solid rebound. Is there anything changing with the operating plan? Whether it was, I don't know if Eric or Lance, you want to throw in some thoughts? Or was this just kind of the end of some of the weather stretches that you were talking about? Maybe just talk about how operations are doing now and what's changing.

Yes, Ken, thanks for the question. Your summary is exactly accurate. It was towards the tail end of winter where we were about three weeks ago, having come out of that. With all the work we've done on the hiring side, among other actions, you're seeing the output of having 2 to 3 weeks without weather being that headwind. With winter largely behind us, you should expect us, as our customers do, to maintain where we are. We've reinforced that freight car velocity is around 200 to 205 miles per day. It's what drives our TPC metrics to the level our customers expect.

A quick follow-up on the headcount point. Given what you guys have been able to do with some degree of service recovery, would you think about pausing hiring as you sort of reassess volumes depending on how that plays out in the second half of the year? Curious about that. And maybe on that point for Kenny, what you're seeing in the month of April, it seems like March and April have been a little softer across the board of transport, not necessarily Union Pacific specifically, a little softness there. Curious what you're hearing from the customers. Has there been a bit of a spring lull here? Or maybe that picks up in the near term? Just some thoughts there would be helpful.

Chris, this is Lance. I'll start and then turn it over to Kenny on your second question. Let's unpack the headcount question a little bit. We are in much better shape this time this year versus the same time last year. The hiring pipeline is full, but more importantly, we've been filling our classes everywhere we've been looking for people across the railroad for about the last 3 or 4 months. That is very different than our experience last year, where we found it very difficult in about crew hubs across the Northern region to find, candidly, the workforce to be able to hire. We've been much more aggressive in the back half of last year, ramping up things like hiring bonuses and finding creative, unique ways to create a workforce pool to hire from. And that’s paying dividends right now. As we look forward, we're starting to evaluate our original plan for hiring against what volumes are doing in the back half of the year. While our longer-term guidance remains in place, we expect to be volume variable and have our headcount grow at less than our volume numbers are growing. We've essentially solved some of the problem with borrowed crew members, so we need to replace them because they're expensive, and we are in much better shape looking into the rest of the year. Kenny?

Chris, starting off, coal is expected to have a seasonal lull this time, the shoulder months that I mentioned. Looking at it last year, natural gas prices were much higher, so this appears to be more normal for domestic intermodal. We'll keep an eye on it, as it's a very loose market right now with plenty of truck capacity. So we'll be watching that. Last year, our grain business was pretty strong at this time, and currently, we're seeing more global grain going to places where we exported last year. With all that said, we're still bullish about some of these markets that I mentioned, whether it's finished vehicles, the metal, and rock in our construction area, and then biofuels.

Kenny, if I could just follow up on that, we've been hearing a lot about near-shoring and reshoring, particularly around Mexico. Could you share any notable business wins or anything specific to the moving of manufacturing back to North America that you're hearing from your customers?

We are seeing a little bit of that. We've seen production related to the auto OEMs. There was one pretty large analysis that came out. Remember there are a lot of other inputs that move by rail, whether it's soda ash or the glass and metals that come in for the car. That's good for us. In our bulk commodities, on the ag side, we're expecting some new production and receivers to come out. This is looking encouraging, and this is the first time that we're seeing tangible results we can point toward, which is positive for us. I won't elaborate further. We enjoy a fabulous network there.

Okay. To clarify, how should we think about the timing of that impact? Is this a near-term occurrence, or is it more of a big-picture, longer-term dynamic?

This is a big-picture, longer-term view. You've got to give it time for these locations to build up the physical infrastructure.

Ben, it's wonderful to have new production facilities in the North American market. We will gain our fair share. We have a wonderful franchise to and from Mexico. Any time industry shows up in North America, it's positive for us and for railroads.

I wanted to circle back to the full-year guidance. The start of the year has been more challenging than you anticipated. So, do we need to see a significant positive inflection in the freight market to hit your outlook? When does that need to occur? And Kenny, can you clarify intermodal volumes? I believe you said international volumes were up, but what was the percent change in both international and domestic intermodal?

I'll take the first part of that question. Our guidance relative to volumes is exceeding industrial production. We entered the year with industrial production forecasted to be down about 0.5%. It has actually gotten slightly worse. Now down about 0.7%. Not a significant bump to exceed. We started slower, down 1.5 points in the first quarter. But you heard Kenny talk about the various markets available to us. With improving service product, we're deploying more assets to move more carloads. We’re confident we will succeed in achieving our goal for volumes and the rest of our full-year guidance, which we have reiterated.

I don't plan to break out domestic and international here. However, we did see a more fluid intermodal network on the international side. Now that we have fewer stack boxes on either end of our operations, we’re witnessing improvements— including at our grain facility down in Dallas, where they just announced they are expanding, reflecting record volumes in the first quarter.

I’m curious, other than volume, what are some of the other productivity or cost levers that could help drive operating ratio improvement over the course of the year? Obviously, volume is a variable, but what else can contribute?

It's a great question, Jordan. As you consider that and the progress we're seeing right now, it’s impacting nearly every one of our cost lines positively. The large focus is on fleet size. In our prepared comments, I mentioned the fact that we're taking 100 locomotives and putting them in storage, but they can quickly be re-engaged to gain volume. After that, it’s all about crew utilization, stretching everything from recrew rates to deadhead and managing overtime usage carefully. We are encouraged by the first quarter; January started strong, February was average, and March was weak. With weather behind us, we should rebound similar to January now that we’re moving more efficiently.

Two quick things. Kenny, you mentioned pricing pressures in a few of your industries. I understand intermodal may be one. Would love to hear what other areas are experiencing pressure. Regarding the West Coast port labor situation, how much freight do you think has been diverted? If there's a resolution soon, do you think it would come back quickly as well?

Before discussing domestic intermodal, I want to reiterate that we have a broad and diverse set of customers and markets that will provide the price we need. Approximately half of that business can be touched each year outside of any particular market, yet there is a lag impact to that. Our sales leaders and teams have done a superb job communicating our investments in CapEx and resources, and they understand the industry labor pressures. Now about domestic intermodal: the market has been loose, and we see a lot of truck capacity available. We are receiving bids and RFPs with the mechanisms in place for our intermodal customers to compete and win business based on their strengths. As for the West Coast ports, we've been in close contact, and they believe an agreement should be reached soon. Quantifying what has been diverted due to labor challenges is difficult. However, we see fewer negative deltas year-over-year in the order book for shipments to the West Coast.

Kenny's last point about West Coast ports and ILWU.

I'd love to be precise, Jason, but we need to remain cautiously optimistic. If there is an agreement, we might recover quickly, but to be exact is difficult.

Kenny, following up on pricing, is it progressing as you expected? Is there a lag because volumes may be weaker than anticipated? Will this accelerate? Also, in terms of price/mix, is this probably the worst situation you'd expect in the near term?

Certainly, the way we calculate price volume increases and improvements helps us. Because it is April and not December, we have time to get more volume in play as we move throughout the year. Some markets have been harder than others to capture pricing, but in some cases, we have also taken some risks to ensure we price correctly relative to the market.

What you said about domestic intermodal, to a lesser degree, also applies to coal, as natural gas can influence some pricing.

To the mix part of your question, we anticipated that mix would likely be negative throughout the year. We continue to expect more growth on the intermodal side, but that's changed somewhat. Looking towards the second quarter, we could be expecting a positive mix at least; beyond that, it’s too soon to say. This is different than when we spoke with you in January.

What gives us confidence is the regulatory and legislative discussions that have arisen lately, especially around train lengths. We know train length does not correlate to derailments statistically. We address several safety issues, such as wayside detection—something the FRA can assist with, and we engage openly with legislators to help them understand where regulation will actually impact safety improvements and where it won't.

Regarding EV penetration, does UP need to invest due to battery fire risks?

We have not seen that risk at this moment. We maintain close relationships with EV leaders and have enjoyed growth there. Our ramps are ready to handle those EVs, and we're considering forecasts on size and infrastructure needs moving forward.

I believe the fundamental answer is we have not encountered a shift in risk based on our EV shipments.

Thank you all for joining us today and for your questions. We're looking forward to reconnecting with our owners in May at our annual meeting. Until then, take care.