Union Pacific Corporation (UNP) Earnings

Management highlights

### Financial Performance - The company reported record Q2 2026 results: net income of $2 billion, reported EPS of $3.36, adjusted EPS (excluding merger costs) of $3.41, and an operating ratio of 59.2%. Operating expenses increased 13% YoY to $4.1 billion, driven primarily by higher diesel fuel prices. - Cash from operations totaled $5.5 billion (up 21% YoY), with free cash flow of $1.8 billion after capital reinvestment and dividend payments. The company paid down $1.5 billion of long-term debt in H1 2026, bringing its adjusted debt to EBITDA ratio to 2.5x. ### Operational Highlights - Both employee and derailment safety rates improved against their 3-year rolling averages, driven by ongoing focus on safety rule compliance and human factor prevention. - Core operational metrics set Q2 records: freight car velocity increased 5% to 231 miles per day, train speed rose 3%, terminal dwell improved 7% to 19.7 hours (matching the Q1 record and marking the third consecutive quarter below 20 hours), and intermodal/manifest service performance indices hit 95%. - Efficiency metrics hit record levels: workforce productivity increased 5% on 2% higher volume, with active train/engine/yard workforce decreasing 2% to maintain volume variability. Train length grew 2% YoY, locomotive productivity improved 1%, and fuel consumption rate improved 1% driven by conservation initiatives and locomotive modernization. - The company maintains a buffer of network resources to support unexpected volume growth and continues strategic capacity investments, including the Houston Complex, Pacific Northwest Siding Extensions, and Sunset Double Track projects. ### Merger with Norfolk Southern Update - The Surface Transportation Board (STB) accepted the merger application as complete on May 28, 2026, and the company will complete all requested supplemental information by the end of the week (Monday after the call). Additional voluntary competitive commitments, including expanded committed gateway pricing, have been added to the application based on customer feedback. - Union Pacific reached a mutually beneficial merger settlement agreement with Canadian National (CN) that addresses competitive concerns in the Kansas City/St. Louis region, adds customer optionality, improves east-west rail access through Chicago for Union Pacific, and grants CN improved access to Mexico to compete with Canadian Pacific Kansas City. The agreement is net positive for revenue growth and does not materially change projected merger synergies or concessions.

Guidance

- Full-year 2026 reported EPS growth guidance is raised to the high single-digit range, up from the prior January outlook of 6% year-to-date growth that the company met in H1 2026. - The company expects continued operating ratio improvement and maintains its industry-leading margin position, despite ongoing margin pressure from volatile fuel prices (recent purchases have been over $4 per gallon). - Full-year compensation per employee is now expected to increase around 6%, driven by hotter-than-expected health and welfare cost inflation in addition to scheduled union wage increases. - H2 2026 segment outlook: Grain and grain products are positioned for further growth on strong export demand and new facility openings; renewable fuels and feedstocks continue to have upside; coal will remain challenged due to elevated inventories and lower natural gas prices; domestic intermodal will continue strong performance driven by over-the-road truck conversions; international intermodal volume is expected to turn positive in H2 after lapping last year's tariff volatility; new automotive business will offset broader market softness; and overall industrial demand is seeing a slight broad-based uptick, with continued strength in metals and petrochemicals.

Segment performance

Overall freight revenue grew 12% year-over-year to $6.5 billion, and 4% to $5.5 billion when excluding fuel surcharge, both record highs. Operating revenue for the quarter totaled $6.9 billion, up 12% YoY, with other revenue reaching $346 million (up 11% YoY). - Bulk segment: Revenue increased 7% YoY on a 1% volume decline. Grain and grain products posted double-digit volume growth, and renewable fuels and associated feedstocks achieved record second quarter volume and revenue. Coal volume faced headwinds from weaker natural gas prices, mild weather, and customer downtime. - Industrial segment: Revenue grew 8% YoY on a 3% volume increase. Excluding fuel surcharge, the segment achieved record freight revenue and average revenue per car. Petrochemicals grew on improved demand and new business; metals and minerals volumes rose on higher domestic steel production and new business wins, offsetting weakness in the export soda ash market. Premium revenue increased 21% on a 4% volume increase and 16% increase in average revenue per car. - Intermodal: Domestic intermodal delivered its fourth consecutive record quarter for both volume and revenue, with private asset, rail asset, and parcel volumes all up double-digits, driven by constrained truck capacity and share gains. International intermodal volume was down 14% YoY, but showed improvement by quarter-end on stronger West Coast import volumes. - Automotive: Results were positive despite broader market softness, supported by strong new business development wins.

Risks & headwinds

- Volatile global fuel prices create ongoing margin pressure; recent fuel purchases have exceeded $4 per gallon, adding a 120 basis point headwind to the Q2 operating ratio, and are expected to continue pressuring operating ratio in the second half of 2026. - The proposed merger with Norfolk Southern remains subject to STB regulatory review, and potential opposition from other industry participants could create delays or require additional concessions. - Broader macroeconomic weakness remains a headwind for some segments, including coal and automotive, even as new business offsets market softness in automotive. - Pricing mix may face continued pressure in H2 2026 from stronger-than-expected domestic intermodal growth, though the company notes this is high-quality, profitable growth.

Analyst Q&A

• Q: The analyst asks for clarification on a 14-cent fuel gain, and asks to expand on the terms and benefits of the commercial agreement with Canadian National covering EJ&E access and southern network rights. /

  A: Hamann explains the 14-cent figure is the net benefit of fuel after matching the 120 basis point operating ratio headwind from higher fuel expenses with fuel surcharge revenue. Vena notes the agreement resolves ownership concentration concerns in the Kansas City terminal, adds CN service optionality for local customers, grants CN improved access to Mexico for cross-border traffic from Canada, and gives Union Pacific more seamless east-west access through Chicago, reducing interchange delays. He frames it as a win-win that will grow overall rail volume and take freight off public roads.

• Q: The analyst asks how the CN agreement impacts projected merger revenue synergies and concession totals, and whether this is the first of multiple similar industry agreements to gain support for the merger. /

  A: Vena says the agreement was a planned, mutually beneficial growth arrangement that does not reduce projected synergies; CN will pay Union Pacific for access, so it will add rather than reduce revenue. He adds that the company is open to future reasonable agreements with other railroads, but does not see many other overlapping issues that require resolution, and the CN deal was driven specifically by the merger process.

• Q: The analyst asks where the EPS guidance upside comes from, given the upward revision to compensation per employee costs. /

  A: Hamann explains the upside comes from multiple factors, primarily stronger-than-expected volume growth across most business segments in H2 2026, which the operations team is handling very efficiently with existing capacity, keeping incremental costs low. She adds that strong core pricing that outpaces inflation also contributes to the upside.

• Q: The analyst asks how Union Pacific is positioned to capitalize on the multi-year U.S. reindustrialization trend of increased domestic manufacturing and reduced West Coast imports. /

  A: Rocker notes the industrial development pipeline of new and expanded facilities on Union Pacific's network remains very strong, with a robust number of customer requests for proposal and high conversion rates of opportunities to active volume, including new steel production, grain export facilities, and other major projects. Gehringer adds that the railroad has a large buffer of existing latent capacity, has consistently delivered strong operational performance even with double-digit volume growth, and has proactively invested in key network chokepoints (including Houston, the Sunset Route to Mexico, and Pacific Northwest sidings) to support future growth. Hamann adds there are roughly 200 active industrial projects in the current pipeline, giving the company strong visibility into future growth.