Union Pacific Corp (UNP) — Q4 2024 Earnings Call Transcript

Thank you very much, Rob, and good morning, everyone. I'm pleased to have you with us this morning. There has been a bit of winter in some parts of our company, even lots of snow in the Southeast, but I love the way the operating team has worked through it and we are in way better shape already. So great recovery by everybody, but lots of hard work by the men and women of Union Pacific. Let's get started. I'm joined here this morning in Omaha by Chief Financial Officer, Jennifer Hamann; our Executive Vice President of Marketing and Sales, Kenny Rocker; and our Executive Vice President of Operations, Eric Gehringer. Let's dig into 2024. It was a very successful year for the Union Pacific team, and we really finished the year on a high note in the fourth quarter with an adjusted 58% operating ratio, removing the impact of a new regional Brakeperson Agreement, which is really excellent work. It shows that the team is executing our strategy to lead the industry in safety, service, and operational excellence. Now, let's discuss the fourth quarter results, starting on Slide 3. This morning, Union Pacific reported 2024 fourth quarter net income of $1.8 billion and earnings per share of $2.91, both 7% improvements. Fourth quarter revenue, excluding the impact of fuel surcharge, grew 4%. Our ability to generate strong volume growth and core pricing gains more than offset an unfavorable business mix. Reported expenses year-over-year improved 4%, while lower fuel prices led the way. The team demonstrated strong productivity utilizing 3% fewer employees to move 5% more volume. This led to operating income growth of 5%, and the operating ratio outcome that I mentioned earlier. This is the result of the team's commitment to build a safer, more durable, and more efficient network. A fantastic way to end 2024. Throughout the year, we built momentum behind our strategy, and you see that in the financial results we delivered. While internally we've already turned the page to work on further improvements in 2025, we need to pause and celebrate the team's success in 2024. We set a goal to achieve industry-leading results, and when the dust settles, I'm confident that's where we'll be. So with that, I'll let the team walk you through the quarter and the year in more detail before we go to Q&A. Jennifer, it's all yours.

All right. Thank you, Jim, and good morning, everyone. Let's begin with our fourth quarter income statement on Slide 5. Operating revenue of $6.1 billion decreased 1% versus 2023 against strong volume growth, while our fourth quarter freight revenue finished flat at $5.8 billion. Breaking down the drivers of freight revenue, increased volume in the quarter added 525 basis points. Fuel surcharge revenue of $588 million declined $207 million as lower year-over-year fuel prices reduced freight revenue by 450 basis points. Similar to our third quarter results, strong core pricing gains were more than offset by business mix, reducing freight revenue by 100 basis points, with our 16% intermodal growth driving that mix dynamic. Of significance, our price dollars met the long-term commitment of exceeding inflation dollars while also being accretive to fourth quarter operating ratio. Wrapping up the top line, other revenue decreased 7% as a result of lower accessorial revenue from the second quarter intermodal equipment sale and reduced revenue from the ongoing transfer of metro operations. As a reminder, we see offsets against this revenue decline in operating expense. Switching to expenses, our appendix slides provide more detail, but let me share some highlights of our strong cost control as total operating expense declined 4% to $3.6 billion against a 5% increase in quarterly volume. Looking closer at the expense line, compensation and benefits expense increased 8% compared to fourth quarter 2023, driven by the $40 million Brakeperson Buyout Agreement, which Jim mentioned, and wage inflation. This is the second Brakeperson Agreement that we have reached in the last couple of years, both of which have enabled more efficient car handling. Quarterly workforce levels decreased 3%. Our train service employee workforce was flat against the 5% volume growth as we effectively handled the additional volume. All other workforce areas decreased by 4%. These efforts resulted in record workforce productivity, demonstrating our strategic focus on delivering operational excellence. For 2025, we expect our all-in cost per employee to be around 4% as we continue to find ways to be more productive with our workforce through process improvements, technology, and investment. Fuel expense decreased 23% on a 24% year-over-year drop in fuel prices from $3.16 to $2.41 per gallon. Our fuel consumption rate improved 1% in the quarter as we more than offset the impact of moving a less fuel-efficient business mix. Equipment and other rents expense increased by 8% due to inflation and volume-related growth in our intermodal business. Finally, other expense declined 22%. As you'll recall, in the fourth quarter of 2023, we highlighted elevated casualty costs due to the catch-up of case backlogs. In the fourth quarter of 2024, we benefited from lower casualty expenses as well as a reduction in bad debt expense. Operating income improved 5% to $2.5 billion and was a fourth quarter record. Below the line, other income decreased by $40 million on lower real estate gains, while interest expense declined 6% or $19 million as a result of lower average debt levels. Altogether, these results total a record fourth quarter net income of $1.8 billion and earnings per share of $2.91, both up 7% versus 2023. Our fourth quarter operating ratio of 58.7% improved 220 basis points year-over-year. As Jim noted, when you adjust for the Brakeperson Agreement, our quarterly OR came in at 58%, a great outcome reflecting very strong quarterly performance by the UP team as we work to safely and efficiently serve our customers. Moving to Slide 6, let me quickly recap the full year 2024. Operating revenue of $24.3 billion grew 1% on a 3% volume increase. Core pricing gains were partially offset by lower fuel surcharge revenue and business mix. Excluding fuel surcharge, our freight revenue grew 4% versus 2023. Operating income totaled $9.7 billion, a 7% increase, and our full year operating ratio of 59.9% improved 240 basis points, both great indicators of how good railroading produces solid operating leverage and cost control. Earnings per share of $11.09 increased 6% versus 2023, while our return on invested capital improved 30 basis points to 15.8%. Let's turn then to shareholder returns in the balance sheet on Slide 7. Full year 2024 cash from operations totaled $9.3 billion, up almost $1 billion from 2023. Our cash flow conversion rate improved to 87%, and free cash flow increased from $1.5 billion to $2.8 billion. These year-over-year improvements reflect the change in year-over-year labor agreement payments as well as the growth in our operating income. We rewarded our shareholders returning $4.7 billion in 2024 through dividends and share repurchases. Our adjusted debt-to-EBITDA ratio finished the year at 2.7 times as we maintain a strong balance sheet and continue to be rated A by our three credit agencies. 2024 proves that our strategy of safety, service, and operational excellence leading to growth also generates strong cash returns for our shareholders. With that, let me turn it over to Kenny.

Thank you, Jennifer, and good morning. As Jennifer mentioned, we had a strong fourth quarter. Freight revenues totaled $5.8 billion for the quarter, which was up 4% excluding fuel surcharges due to increased volume. This also reflected strong core pricing gains as a result of our deliberate focus on maximizing price. Let's jump right in and talk about the key drivers for each of our business groups. Starting with our Bulk segment, revenue for the quarter was down 4% compared to last year on a 4% decrease in volume, while Average Revenue per Car remained flat, even with decreased fuel surcharges. Coal continued to experience the same challenges seen throughout the year as demand remained soft due to the high inventory levels and the competition from low natural gas prices. Grain volumes increased for the quarter as there was strength in export grain to Mexico, coupled with strong UP service during the harvest. Lastly, grain products grew in the fourth quarter as our work to locate renewable diesel plants on our railroad is paying dividends in the form of increased demand for feedstocks, and we expect that growth to continue with the startup of two new facilities, one in Nebraska and one in Kansas that came online in the fourth quarter, bringing the current count of UP accessible plants to 15 with more expected this year. Turning to industrial, revenue was up 1% for the quarter as volume remained flat. Strong core pricing gains were mostly offset by lower fuel surcharges and a negative mix in volume. Business development in our Petrochemical and Petroleum commodity segments drove growth. Demand improved for our plastics business in both export and domestic markets. However, these gains were offset by softer demand for Metals, Sand, and Rock. Premium revenue for the quarter was up 3% on a 13% increase in volume and a 9% decrease in Average Revenue per Car, reflecting increased intermodal shipments and lower fuel surcharges. Intermodal volumes remained strong due to international West Coast import demand and positive domestic growth driven by business development efforts. International volumes were up 26% in the quarter, outpacing the growth rate of West Coast imports by utilizing our buffer resources, which includes people, locomotives, and railcars. Our operating team efficiently moved the traffic and maintained fluidity in the supply chain. Automotive volumes were flat due to unplanned downtime, partially offset by business development wins with Volkswagen and General Motors. Now, let's focus on 2025. Here are some of the key macroeconomic indicators that we're watching this year on Slide 10. These are S&P Global's forecast from their January report. You'll notice that it shows a mixed picture for 2025, which is not materially different from what we shared back in September at our Investor Day in Dallas. The forecast for industrial production shows a slight increase, while GDP growth slows from 2024. Housing starts are expected to remain challenged, but with December's sharp uptick, we are closely watching the situation. Now turning to Slide 11. Here is Union Pacific's 2025 outlook as we see it today for the key markets we serve. Starting with Bulk, we anticipate coal to continue to decline, though not to the levels we've seen in 2024. We expect coal demand will be met from existing high inventory levels. However, a new contract win with the Lower Colorado River Authority, also known as LCRA will help offset losses from the 2025 coal retirement. While it's premature to predict grain export demand, domestic grain demand is expected to remain steady through the first half of 2025, driven by strong grain yields from a good harvest in 2024 as well as our efforts to serve both new and expanding facilities. Lastly, we expect continued strength in grain products, driven by intense business development and expanding markets for renewable fuels and the associated feedstocks. We will continue to monitor potential changes in renewable diesel incentives and tax credits. Moving on to industrial, while the forecast for industrial production in 2025 remains muted, our diverse business mix, strong service, and robust franchise will help us grow in some markets. The metals market is expected to remain soft. However, our industrial chemicals and plastics markets will remain favorable based on plant expansions with multiple strategic customers and our strong focus on business development. This strong focus is all about unleashing what's possible by empowering the commercial team. They are leveraging our Gulf Coast franchise and strong service to win. And wrapping up with premium on the intermodal side, we expect growth in domestic intermodal with over-the-roll conversions. Strong international intermodal volume experienced in 2024 creates tough year-over-year comparisons for us. Additionally, we are keeping a watchful eye on potential tariff changes that could further impact volumes. Even though we are early in the year, we are seeing automotive OEMs curtail production to better manage high inventories. However, consistent with S&P Global's outlook and our conversations with customers, we expect a positive trend with output increasing as the year progresses. Overall, we anticipate a soft economic environment and face difficult comps in 2025, but I'm excited about onboarding LCRA, the new coal customer mentioned earlier, and I'm encouraged by the incremental volume we will gain from new and expanding facilities across multiple business segments. In fact, we currently have over 200 track construction projects in progress with a potential revenue of $1.5 billion, and our business development pipeline is just as strong as it was this time last year. We continue to invest in intermodal, which Eric will touch on. You heard me discuss new unit train facilities added to our network, and we are bullish on industrial development projects in the Gulf Coast with a mix of large and small customers. I'm proud of the commercial team. They continue to hustle and we will maintain our strong pricing posture in 2025. 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. Before diving into our results, I want to express my appreciation to the team for their hard work. Historically, vast surges in volumes such as those we witnessed in 2024 significantly disrupt rail operations. However, the team bucked that trend and was able to improve our service product while also driving growth and network efficiency. It's proof our relentless focus on operational excellence is working, and I'm excited we are carrying that momentum into 2025. Safety also improved in 2024 and continues to be at the forefront of everything we do. For the year, both derailment and personal injury rates improved significantly, a strong step towards becoming the safest railroad. We remain committed as well to enhancing safety as we strive to send every employee home safe each day. Moving to our results this quarter. Freight car velocity improved 1% versus last year. A favorable business mix coupled with continued improvements in terminal dwell drove the performance. Notably, 2024 marked an all-time record for terminal dwell, a meaningful improvement in our service, which reduces customers' fleet costs through improved cycle times. Exceptional work by the team as they continue our focus on the fundamentals to drive terminal fluidity and capacity for future growth. On the service front, our intermodal service performance index declined 7 points year-over-year, while manifest improved 5 points. Intermodal SPI specifically improved month-by-month through the quarter, with December ending with our second-highest level of the year at 97%. The team continued to deploy buffer resources and adjust trip plans to minimize the impact of the quarter's 26% surge in international intermodal shipments. Now let's review our key efficiency metrics on Slide 14. Our full-year locomotive productivity metric improved 5% versus 2023, while the deployment of buffer resources to handle higher volume levels drove a 3% decline in our fourth quarter results. Workforce productivity, which includes all employees improved 6% in both the fourth quarter and full year versus 2023. Furthermore, 2024 marked a fourth quarter and full year record for workforce productivity. We continue to remove unneeded work and automate operations while improving the safety of how we work. Train length improved 1% versus 2023, marking our sixth consecutive quarter year-over-year improvement. All in, 2024 set an all-time record for train length. We have made great strides in this area; however, there are still opportunities to adjust the transportation plan and leverage targeted investments as we push to generate mainline capacity in the pursuit of growth. To wrap up, let's review our capital outlook for 2025 on Slide 15. In 2024, we invested approximately $3.4 billion across the railroad as we continue to reduce capital intensity while still delivering value to our shareholders. In 2025, we are targeting capital spending of roughly $3.4 billion, flat versus last year. As always, our first capital dollars will support safe and productive operations as we invest in our infrastructure and renew older assets. This includes modernizing our locomotive fleet and acquiring freight cars to support replacement and growth opportunities. We will also continue to invest in capacity projects that support our growth initiatives while enhancing productivity. This includes site construction and extension projects such as those in the Pacific Northwest and the Southwest along our Sunset Route. Furthermore, terminal investments supporting our manifest network such as those in and around our Houston Gulf Coast region aim to improve fluidity and increase capacity. On the intermodal side, we will continue to invest for growth in areas like Kansas City, Inland Empire, and Lathrup, to name a few. At the end of the day, it's about ensuring we have the right resources in the right place to support growth and drive efficiencies. Wrapping up, I'm encouraged by the progress we made in 2024, but our work is not yet done. Continuing to focus on the fundamentals of railroading and leveraging new innovative technologies, we will further improve our service product and build a more resilient, efficient network in 2025 and beyond. So with that, I'll turn it back over to Jennifer to lay out our initial financial thoughts for 2025.

Thanks, Eric. If you turn to Slide 17, I want to start by pointing out that in the appendix, we have a modeling slide that contains several 2025 assumptions that should be helpful in framing our current expectations. All of our guidance is within the context of the three-year targets we provided at our Investor Day in September. Our team understands those commitments; we are focused on achieving them, and our 2025 performance is the first step. As you heard from Kenny, economic indicators for this year are a bit muted and mixed, some growth, some contraction. Add to that outlook, questions around possible tariffs, interest rates, regulatory changes, etc. and our ability to forecast only gets more challenging. As we see the year ahead, there are positives on the volume front. First, we're starting the year with a bang. Volume is growing, and the network is running well. Mother Nature has certainly taken a couple of early shots and will likely fire a couple more, but our resiliency is strong as we focus on meeting our customer commitments. You heard Kenny talk about how that service product has helped us secure new business for 2025 as well as the continuing pipeline of opportunities that span our entire portfolio. We also acknowledge there are some tough spots, namely from reduced coal demand and the year-over-year international intermodal comparison we'll face in the second half of 2025 as today’s mix impact turns into a volume challenge. So while there are puts and takes on the volume side, we are confident that we will continue to drive operational and financial improvement in 2025. We expect that we will achieve our goal by controlling the controllables by generating pricing dollars that are accretive to our operating ratio, gaining further productivity through technology, and by empowering every UP employee to drive asset efficiency. We expect the combination of our activities to deliver earnings per share growth for the full year that is consistent with attaining our three-year Investor Day CAGR of high single to low double-digit growth. With the capital allocation, as you heard from Eric, this year, we plan to invest $3.4 billion back into the railroad. We remain committed to our industry-leading dividend payout ratio of around 45% of earnings and we plan to return excess cash to shareholders through share repurchases of $4 billion to $4.5 billion during the year. The team has done an excellent job positioning ourselves for whatever environment we face this year. We are on target to achieve our long-term goals while maintaining our industry-leading position. We're excited for this new year and we're ready to deliver. With that, I'll turn it back to Jim.

Thanks, Jennifer. Before we get to your questions, I'm looking forward to the questions; I'd like to summarize what you've heard. First, you heard from Jennifer in the fourth quarter we leveraged the network to handle volume growth and drive strong quarterly results. Similar to the third quarter, our business mix profile presented a margin headwind. So it was imperative that we generated strong productivity and pricing to offset that impact, and that's exactly what we did. Kenny gave an overview of fourth quarter volumes and laid out initial thoughts for 2025. There are a lot of unknowns, but in my 48 years of railroading, I've never entered a year without some economic question mark. It is what it is. Our team will focus on outperforming our markets and generating strong pricing for the value we provide. Importantly, I believe our 2024 performance demonstrates that our strategy to operate with a buffer and connect more closely to our customers is paying dividends, both in terms of meeting our customer commitments and as a direct result winning new business. Eric provided an update on our progress to improve safety, service, and operational excellence. From a safety perspective, we made great strides, but we still have work to do. On the service front, we're showing our customers what's possible while at the same time driving productivity. What's exciting for me is that I know we're not done. There are more opportunities ahead and we have a clear line of sight of how we drive further improvements in 2025. Finally, you heard from Jennifer our expectations for the upcoming year. Key for me is that we're on target to achieve the long-term guidance laid out at the Investor Day in September. We operate the largest, most complex rail network in North America, and with it comes challenges and opportunities. The team understands our goal is to deliver what's possible from this franchise. We intend to do that as an industry leader that keeps rates high while driving value for our shareholders. Let me finish with one of my favorite quotes from a mentor, "It's the fundamentals, stupid. Do what you say, commit to it, and deliver." And that's who we are at Union Pacific. And with that, I'll turn it over back to you, Rob, and let's start the questions.

Hi, thanks. Good morning. I just want to start on the guidance. The comment consistent with attaining the long-term CAGR seems carefully chosen language. Just so we're all on the same page, does that just mean you expect to be in that high single-digit to low double-digit range on earnings this year? And then I just want to understand also, Jennifer, is the pricing starting to become accretive to margin? Does that start right away in Q1? I don't know if there's any sort of Q1 color you want to give us. Thank you.

Let me start, Scott, with the question of where we are. We were clear that we had a three-year commitment. Just like I said from my favorite quote from my mentor, early we committed, and you never know exactly what's going to happen this year, what are tariffs going to do, what are the regulatory changes that the administration is going to put in. Our goal is just as we showed in 2024 with a 7% increase, and I think that's where we're going to be. We are looking at high single-digit to low double-digit. If there are things outside of our control, then we're going to have to work harder. But this is not a change from what we said before, and I would expect that every year we deliver high single-digit to low double-digits. That's the win for us. So that's what we committed to and that's what we look forward to delivering. Jennifer, on the accretive piece.

Yes, Scott. So just going back for a second. So fourth quarter, we were accretive. We actually outperformed ourselves a little bit there because we did not think we would achieve that here in 2024, but we did in the fourth quarter. I'm not going to parse out the quarters in 2025, but I don't see us taking a step back and we're going to be accretive throughout 2025.

Thanks, Scott.

Thank you. Good morning. Eric, in Jennifer's comments at the start, you noted the record workforce productivity. You also said all-in cost per employee of 4% in '25 as you continue to find ways to be more productive. You've done a lot of volume with a lot fewer resources. Is it still a labor productivity issue, or what are some of the other initiatives you're looking at in '25 to kind of maintain or manage that cost inflation?

Yes, thank you for the question, Jon. Let me be clear; there is more opportunity, and we're working to capitalize on that. First thing I said at Investor Day was that we focus on productivity because it puts Kenny and the team in the best position to grow in the markets and that's still and will always be true. The second thing that we focused on was our culture, our mindset here at Union Pacific, which is to be perpetually dissatisfied with ourselves regarding productivity, to keep pushing to find additional opportunities. So specifically to your question about what those opportunities are, it's going to be some of the same things you've heard in the past and a lot of new things that I'm excited about. The fundamentals always stay true. One improvement we made in the fourth quarter regarding our recruit rate, even moving that just a single point has a significant productivity driver for us. The work that we did to reduce our people starts in our yards and locals approximately 2% and 4% respectively in the fourth quarter that adds to the technology we're putting in the yards and being able to be even more productive with it. On the technology front, we're focused on the automation of our terminals and pushing to reduce dwell. Outside of the terminals and the transportation side, you mentioned a couple of them and the engineering team as they work to continue to automate inspections, maintenance tasks, and distribution of materials. We see great opportunities in that. We capitalized on those in 2024, but there's more. When you think about the technology we have to automate some of our vans across the system, when you're using hundreds of thousands of van starts per year, a 10% improvement in that is meaningful for us. There are more than 75 initiatives up against how we think about driving productivity across this company, and I am very confident about our plan in '25. I'm encouraged that we'll be telling you about those results as we go through '25.

Thanks.

Good morning, Stephanie.

Sorry, I was on mute. This is Joe Hafling on for Stephanie Moore. Thanks for taking our questions and congrats on the good results. I wanted to talk about one of the things you've mentioned over the last couple of months has been maybe a reduction in regulatory burden. What are some specific areas maybe that you've seen additional red tape, or what areas do you think you guys could particularly benefit if there is reduced regulatory burden on you in particular? I know you guys had mentioned a lot of things on the Investor Day. So if there are any specific examples, that would be very helpful. Thank you.

I think the largest thing is that we've applied for a lot of waivers that would help with the technology that we've implemented to make the railroad more efficient and provide better service to our customers. Those are the things that we're hoping with the turning of the page and how regulations are being talked about at the federal level that we get those improvements, which will allow us to provide better service and, of course, be more productive. There are a lot of waivers that we've applied for that are outstanding that we're looking forward to seeing progress on.

Got it. Thank you.

You're welcome.

Good morning, Brian. How are you this morning?

Hi, good morning, Jim. Good morning, team. Thanks for taking the question. I'm doing well, thanks. I hope you're all well. I wanted to come back to the Brakeperson rules. I wanted to hear a little more about that because you mentioned there was one earlier. And then also, Jennifer, on the comp per employee for the full year, you're still rolling out, last we heard, some of the predictable work schedules for the engineers because I understand there's still some negotiation going on with the conductors for something similar. Could you give us context in terms of the other Brakeperson Agreement, how it's different from the first one? How do you see those other two agreements for the engineers and conductors rolling out for the rest of this year and what you expect in the numbers there? Thank you.

I'll let Eric talk about the Brakeperson Agreement and what that really does. But just as a reminder, we did one in the second quarter of 2023 and now this one here in the fourth quarter. We actually have one more region that we're working on there. In terms of the rollout of work rest, we continue to rollout on the engineer side and we continue to work with our conductor SMART-TD in terms of coming to an agreement. That's all really part of the mix as we think about the statement I made about the all-in 4% comp per employee in 2025.

Yes. If you think about the engineer side, there are 28 hubs across Union Pacific and 20 out of 28 are already cut over, so we're nearly 75% cut over. Regarding the Brakeperson, the way to think about it is you need to go back in time a little. In the past, there were five people on every single train. As technology has improved over the last 40 years, including the technology that we're still implementing, there's less demand for some of those five people. At most, a crew today has three. That third person is the Brakeperson, and we have that in some parts of our railroad. In Jennifer's comments, she referred to it as a regional Brakeperson Agreement because not every area of the Union Pacific has it. This is very similar to the first agreement we reached in almost every regard, and the goal is still the same, to utilize those in Brakeperson positions as conductors and our normal crew base to provide the service that we sold to our customers.

The only thing I would add is the discussion about where we are on implementing with SMART and with the BLET. Eric mentioned that 20 out of the 28 hubs have implemented. What you always want to do in these situations is ensure that you maintain the same number of starts per week per employee. That's really important. We committed ourselves to make sure that goal is met, and the unions have understood that as well. We've worked hard to find a way to set up schedules to help our employees balance their work and life. We can find the right place that is good for our employees while also keeping it cost-neutral for the company with the wages that we've agreed on, which went up 4.5%. I'm comfortable that we'll finalize the deal with SMART and BLET in the right way that will result in increased efficiency in the long run.

Understood. Thank you, Jim.

Thanks, Brian.

Thank you, operator. Good morning, Jim and team, and nice job on the quarter. You briefly touched on some of the unknowns that are out there. There's been a lot of talk about potential tariffs with two of our largest trading partners, Canada and Mexico. You guys have a big position in Mexico with your access to the Mexican interchanges, as well as partial ownership of Ferromex. If we do get a tariff on February 1, sort of what are the expectations on volume, and what impact could cross-border business with you guys face if that were to decline because of that?

Let me start and then I'll pass it over to Kenny, who knows our markets and the different business mix. If something happens south of the border, does it give us more business out of origination in the U.S.? I'll leave that to Kenny. But let me talk in general. Throughout my years, there's always been something. I believe at Union Pacific we can react to anything that's thrown at us. We have a good strong balance sheet and focused marketing team operations to be more efficient. If we get tariffs while also getting regulatory and tax changes, there could be a lot of positive. I don't expect any of that; that's not what we plan. We plan for the worst and ensure we're in a good position to handle that. I think with the puts and takes of our business, we will deal with it and we'll wait to see what happens. I'm hoping it's a negotiating position by the President because consumers in the U.S. wouldn't love to have price increases unless for security of the country. Overall, I feel confident we'll be in a good position as we move forward.

Jim, you covered a lot. So all I'll say is we’ve seen this before. Being prepared is critical. What generally happens is maybe the origin location shifts from Asia to Mexico or Canada, and that commodity is priced in, that tariff is priced in. But being prepared is key, and as we're humming along from an operating and service perspective, I feel good about our posture going in regardless of what happens.

Thank you very much. Good question.

Good morning, Chris.

Good morning. Thanks for taking the question. I wanted to pick up on the West Coast and get some perspective on how you think about the shifts. I know international intermodal has tough comps in the second half of the year, but any perspective you can give on what you're seeing from your customers, and how real-time any of those shifts may occur. I know we have a tentative agreement on the East Coast, so potentially business could move around. Also, in terms of pricing, as we move forward, how do we think about what the opportunity is while recovering service in the network and inflation across the broader market? How do you expect that to play out?

Yes, Chris, on the International intermodal side, we are seeing some pull ahead taking place. Whether it's the hangover from some of the strikes on the East Coast or just the idea of the tariff, you can see our numbers and they're strong as we walk into January. We’ll see how that plays out for the rest of the quarter before I can really tell you what will happen. We've got tough comps, and I've talked about that. We'll see how that all plays out in the second half. Sitting here on January 23rd, it’s premature to make a strong forecast. Regarding prices, as I reiterated, Jennifer mentioned we were price accretive in 2024 and we expect to continue that in 2025. Eric and the team have really done a great job providing a strong service product that our commercial team sells, and we'll ensure the service aligns with the pricing we give so we can maximize it.

Thanks, Chris.

Good morning, Ravi.

Hi, good morning. This is Christyne McGarvey on for Ravi. Thanks for taking our question. I just wanted to circle back to some of the service comments. It sounds like you guys have confidence going into 2025, but I wanted to touch on what's underpinning that. Particularly in the context of perhaps a better environment than you're currently thinking about, if the volumes do snap back more aggressively, how do you feel about capacity to meet that without disruptions for customers?

I love that question about what happens if we have more business. That would be a great outcome for all of us if the U.S. consumer stays strong and grows the demand for us. We operate a railroad, and we keep talking about buffer. We saw a large increase in international, which is how we look at it. We want our assets in place efficiently operated, and we carry a buffer, especially the assets that we can't inbound into the company if we need them quickly. We run with about a 20% to 25% buffer on our rail capacity because our business fluctuates, and customers don’t release cars seven days a week. Having that buffer is key for us. If we see a 10% increase in volume, I think we’re set up to handle that and onboard the people quickly to take care of it. That would be the best problem to have in 2025. Thank you for the question.

Thanks. Appreciate the color.

Good morning, Ari.

Hi, good morning, Jim, and congrats on the nice results in the fourth quarter. I wanted to ask about the operating ratio. You mentioned this expectation of industry-leading operating ratio. I would like to understand what gives you confidence in that target? Can you talk about how you perceive the structural advantages of UP relative to some of your competitors, especially given the context of BN facing some challenges in the fourth quarter that may have impacted some of their intermodal partners?

I'm not going to comment about any other railroad. Our position is that it's a complicated network that we operate, and we want to be leaders when it comes to operating ratio, and that's what we're delivering. The other railroads should be very close when it comes to operating ratios, but at the end of the day, we want to operate efficiently. We want to provide good service that maximizes price so our customers can win in the marketplace. Operationally, we look at our assets and how we operate along with people and technology. I personally believe our 2024 performance demonstrates that we are well-positioned, and we expect to maintain high operational ratios. Are we always going to be at a 58% level? No, it may go up depending on market conditions. But we’ll drive to have the best outcome. Stay tuned. Thank you for the question.

Thank you, Jim.

Good morning, Bascom.

Good morning, Jim. In one of the earlier questions, you talked about some opportunities with the FRA waiver backlog potentially clearing and opening up efficiencies. We also had Patrick Fuchs take over as STB Chairman this week. Can you talk about what you've learned working with him, and what opportunities does UP or the industry have that might not have been on the table under Primus or Oberman's leadership?

There's always changes in who leads. I've had meetings with Mr. Fuchs, who is a very smart individual, and the rest of the Board is very strong. The way I look at it is we have the same goal. We want to provide good service to our customers. If we provide good service, they win in the marketplace, and we both win. The STB deals with those things. At the end of the day, the STB also looks at mergers and acquisitions. Everyone wants quicker decisions and movement. I'm hopeful for that. I’m confident that relationship will remain strong, and we will continue to be transparent about what we're doing at Union Pacific.

As a commercial leader, we want quicker outcomes so that we can service the marketplace, and it’s encouraging.

Even in engagements we've had with them regarding service, we want to continue moving faster. Patrick has had great perspective on service and we’re looking forward to working with him.

Jennifer, you don’t meet with them as often, but maybe we should get you there more often because I think you have the personality for it. Anything to add?

No, I think your point about our goals being aligned is important. They want a strong rail franchise. It's the best thing for the nation, our national security, and our economy, and we want to grow with our customers. I think working together to fulfill that purpose is what everyone wants.

Great question. Thank you.

Good morning, Ken.

Hi, great. Good morning, Jim and team. Congrats on the solid OR and results. I wanted to dig in on that. Jen, you guided in the appendix the other expense to $325 million, $350 million. Can you delve into what happened in the fourth quarter? I think you mentioned the bad debt expense. Can you discuss the scale of one-timers or the scale of casualty expense that we should see bounce back? I'm basically trying to think about the cadence to the first quarter. Can you talk about seasonality and what we should expect?

Yes. When we look at other expense for the fourth quarter, casualty was the primary driver. I noted the bad debt expense, but the bigger piece was from casualty costs, looking at it year over year. In 2024, we're starting to see better performance, but it’s slower to come through on the expense side. Eric and Jim both talked about continuing to drive better safety performance. Regarding looking ahead to 2025, this category doesn't have a lot of seasonality. State and local taxes make up the biggest portion of that, and you do have other things like casualty, bad debt, travel, and other expenses. So I wouldn't think about that in terms of seasonal fluctuation.

Appreciate the clarification. Thanks for your time.

Good morning, Dave.

Hi, good morning and thanks for the time. So, Kenny, I have questions for you. In the intermodal business, can you give us a sense of where utilization is in the box pool fleet right now? There’s a lot of channel inventory built up by intermodal marketing companies through the pandemic, and I want to know where utilization is in railroad-owned equipment. The second question is whether the recent uptick in natural gas prices may have some benefit for you on pricing side with your utility coal contracts? Thanks.

We have deployed our rail fleet well in the second half of the year. We saw it grow and really perform well in our portfolio. It wasn’t fully deployed, so there's upside available. Regarding natural gas, it’s one of the most volatile trends. In my seven years in this role, I’ve gotten out of forecasting natural gas prices, but if they rise, we should see some benefits for our coal contracts.

Is there any way to quantify how many more boxes are stacked today versus maybe what you would have had normally pre-COVID?

No, I would say that if you look at the overall market, it’s still not where it should be. There is still upside. We feel good about deploying those boxes as the market comes back.

Thanks for the question.

Good morning, Jordan.

Good morning. Coming back to intermodal, if international-facing has tough second-half comps, can domestic intermodal offset that? Can it provide favorable net positive in terms of mix, margin, EBIT dollars, etc.?

Everything depends on magnitude, right, Jordan. It’s unfair to focus on one commodity line like international intermodal. The tough comps will be in the second half, but there are many other businesses that we move, and that’s what's going to determine our financial results. Domestic intermodal may offset some of that, but we have a broad range of business lines to capitalize on. So how that shapes out will depend on how the rest of the business performs at that time.

The bottom line is we’re confident and bullish on the domestic intermodal market going into 2025.

Thank you.

Good morning, Daniel.

Hi, good morning everyone. Thanks for taking my question. To follow up on the volume outlook, on Slide 11, there are more pluses than minuses. But how should we think about the mix impact on revenue per carload? Any visibility into changes of mix within these categories that we should be aware of when we think about market share wins? And Jennifer, I understand you don't want to guide in quarters, but how should we think about volume growth through the year, given the tough back-half comp? Can we grow volume each quarter? Would that be a base case expectation?

Hi, Daniel. Thanks for the question. We aren't giving volume guidance for the full year or on a quarterly basis. There are some positives and challenges through the year. The important thing is that we're well positioned. The service product is good, and Kenny's team is out there winning new business. While we won’t predict specific volumes, we will push to increase them. Regarding mix perspective, I mentioned earlier that international intermodal's strength alleviates the mix pressure we saw in the back-half of 2024. How each component ultimately shapes out will depend on the overall business performance.

The credo here for the management team is we will have in place volume outpacing the markets and we expect revenue to outpace volume.

The business mix is strong with diverse customers across many different markets. Maximizing that smartly while ensuring good service is vital for us, and it benefits the economy overall. We manage our products across the supply chain efficiently, and that makes us much more competitive. Thank you for the questions.

Good morning, Walter. How is it in Canada?

Yes, it's pretty cold, but my backyard rink is good, Jim. That mentor quote, it sounds like it was a quote from Hunter, am I right?

Yes, it was a little earlier, but I think Hunter would say something similar. At the end of the day, it’s important not to worry about things we can't control. It’s all about the fundamentals. If you run a strong railroad, keep a close eye on your costs, and remain efficient. You will win. A solid defense in hockey always prevails, not just the flashy goals.

We're in agreement on that. Speaking of fundamentals, Jim, you conveyed guidance is contingent on a mixed economic outlook. I know several of your trucking peers have shared constructive views on the potential for economic improvement. If we do see improvements, where do you see the most leverage?

Well, I’m glad you asked. We're excited about what we're witnessing in grain products with renewable diesel. The structural changes we expect to see in industries should translate to growth. In Petrochem, positive developments should come from expansions this year. We also keep an eye on key macro indicators, including housing starts, which influences many commodities. Automotive markets may improve over the year as we see positive signs of production increasing. Our diverse business sets us up well to adapt, whether for challenges or opportunities.

We have proof statements in recent history that indicate we can achieve what we set out to do. We've demonstrated this in areas like international intermodal and grain. For instance, we adjusted our operations to pivot from Pacific Northwest markets to Mexico efficiently. Our projects also reflect strategic investments aimed at maximizing operational efficiency.

Every expansion we undertake is strategic, helping us support what Kenny mentioned. We're continuously investing to ensure we meet Kenny's ambitions and expectations for 2025.

I appreciate both Kenny and Eric for emphasizing those vital points. As a team, we aim to maintain the strengths of our franchise.

Thanks for having us, Jeff. Good morning!

Thank you, and congratulations on a terrific execution quarter. Kenny, I want to come back to you. I liked your answer regarding better preparedness. But when thinking about what could be at risk with the tariffs, I'm not talking about taxes or regulatory benefits. What would you think could impact your traffic mix that might have Canadian or Mexican endpoints that would not be immediately evident?

I'm not aware of any specifics, but most of our commodities have various entry and exit points within our network. Being prepared is key—we have a robust franchise to capture shifts. Our commercial team is focused on finding solutions regardless of the changes that may arise.

To your point, should we believe that the way products arrive may change, but you would still be positioned to find an optimal solution? Is that a fair assessment?

That’s correct. As our commercial team works together, we're finding avenues to ensure we can maintain customer service and be agile through this. Thank you.

Well done, Kenny. Great execution team. Thank you very much.

Good morning, Tom.

I wanted to discuss your views on pricing, as you've consistently communicated your focus on price. How do you view assumptions on the truckload market? Do you expect modest contract increases on truck that assists you, or how do you feel about that?

For the last few years, I’ve avoided making forecasts regarding the truckload market. If the market improves, we may see a favorable impact on revenue per box.

The nature of intermodal revenue per unit has been a significant drag, stemming from several factors. We need to manage our revenue streams better. Eric’s team has worked on optimizing everything we do, and we must identify any products that don’t fit well within our pricing strategy. We are excited about what the future holds.

Great. Thank you.

Oliver, you're breaking up. I can't understand it. Can you get into a spot where your connection is better?

Good morning, Brandon.

Hi, good morning. Thanks for taking my question. I know it's been a long call, and I bobbled in the front part of it, so apologies. But Jim or Kenny, we’ve heard about better service—investors seek real volume growth at Union Pacific and other railroads. Given the gains made on service gains, Kenny, with your comments regarding the ability to outpace market growth this year, would that be strong wins? Would business development efforts drive this, or is there a solution in leveraging your service product?

Absolutely. If you analyze our network without business development wins, especially in automotive, our projections remain strong even in structural decline areas like coal, and in emerging markets like renewable diesel, we expect to grow. Customer sentiments indicate a market recovery, so we remain optimistic on volume growth this year.

Thank you for the question.

Thank you. Can you talk about CapEx? Your locomotive investments were impressive.

We continue to focus on our planned capital expenditures in alignment with the potential growth opportunities, but we've also ensured we align it with efficiency.

Thank you all for taking part in this call. I'm very proud of the entire team for their hard work. Today, we have 15,000 people moving products that we rely on each day. We experienced a wonderful quarter because of their efforts. I look forward to reconnecting with all of you at the end of the first quarter. Thank you, and enjoy your day.