Union Pacific at Gabelli Conference: Strategic Growth Amid Challenges

On Friday, 02 May 2025, Union Pacific Corporation (NYSE:UNP) participated in the Gabelli Funds 16th Annual Value Investor Conference, presenting a mixed strategic outlook. The company highlighted growth in international intermodal volumes and technological advancements, while also addressing potential challenges from trade tariffs. Union Pacific emphasized its commitment to safety, operational excellence, and strategic investments.

Key Takeaways

• Union Pacific reported a 7% increase in Q1 volumes year-over-year, with international intermodal volumes rising over 30%.
• The company plans significant capital expenditures of $3.4 to $3.7 billion annually, alongside share repurchases of $4 to $5 billion.
• Nearshoring in Mexico presents growth opportunities, with Union Pacific holding a 26% stake in FXE railroad.
• Technological advancements like adaptive planning aim to enhance operational efficiency.
• Potential impacts from trade tariffs could affect international intermodal volumes in the coming weeks.

Financial Results

• Q1 Volumes: Increased by 7% year-over-year.
• April Volumes: Sustained growth with a 7% increase year-over-year.
• International Intermodal Volumes: Surged over 30% year-over-year.
• Coal Volumes: Rose by approximately 5% in Q1.
• Industrial Segment: Experienced a 1% decline year-over-year.
• Premium Business: Achieved a 13% increase year-over-year.
• Capital Expenditure: Projected between $3.4 billion and $3.7 billion annually for the next three years.
• Share Repurchases: Planned at $4 billion to $5 billion annually.
• Dividend Payout Ratio: Target set at 45%.

Operational Updates

• Adaptive Planning: Implementing technology akin to "Waze for the railroad" to optimize network operations in real-time.
• Customer Vision: Enhancing product visibility for customers as it moves across rail lines.
• Infrastructure Investment: Allocating $2 billion annually for safety and maintenance.
• Network Diversification: Focusing on serving diverse markets to mitigate sector-specific risks.
• Mexico Operations: Holding a 26% stake in FXE railroad with interchange at all six border crossings.

Future Outlook

• Three-Year Targets: Aiming for growth in volumes and revenues faster than the markets served.
• Margin Improvement: Committed to maintaining an industry-leading operating ratio and ROIC.
• EPS Growth: Projecting high single-digit to low double-digit EPS growth over the next three years.
• International Intermodal: Anticipating a potential drop due to trade tariffs.
• Nearshoring: Exploring expansion opportunities in Mexico due to increased nearshoring activities.

Q&A Highlights

• Strategic Investments: Mergers face regulatory hurdles, emphasizing the need for enhanced competition.
• New Business: Focused on attracting new intermodal business and improving service for growth.
• EV Trucking: Monitoring advancements, though battery weight and charging infrastructure pose challenges.

For further insights, readers are encouraged to refer to the full transcript.

Full transcript - Gabelli Funds 16th Annual Value Investor Conference:

Unidentified speaker: Despite some volatility and seasonality for being a tougher quarter during the year. Maybe you could just give us a quick summary of your plans for this year, your interim goals from the Investor Day, and where you see the company in in five plus years.

Unidentified speaker: Okay. Well, thanks for that. There’s there’s a lot there, so I’ll maybe maybe take it in pieces. So let me start with what I consider what we consider to be the foundation for us, and that’s our strategy because that’s what sets us up for everything else that that we’re gonna talk about. And our strategy is safety, which is absolute.

It’s our primary importance. It’s something we have to start every day with, and that’s the safety for our employees, certainly, but also safety for our customers and the communities that we operate in. It’s providing a good service product to our customers and delivering to them what we sold to them. It’s doing it in what we’re terming an operationally excellent way. And when you think about our business, railroads, extremely asset intensive.

So we need to sweat those assets. We need to to use those very efficiently. And if we do those three things and do them well consistently, then that’s gonna enable us to grow the business. And that’s one of our key drivers of profitability is is growth. So you referenced our Investor Day.

So we had an Investor Day last September, and we laid out three year targets. And what those targets are is that we expect to grow our business, grow our volumes faster than the markets that we serve. We think we can do that because of our service, because of the products we put in the marketplace. We believe we should grow our revenues faster than those markets because pricing is a key part of of our story as well. We’re delivering something very valuable.

We wanna price to that. And so you you have that as kind of the the stage for the algorithm. Pricing, we believe it should be accretive to our margins. It wasn’t for a couple years when inflation really, ticked up on us, but we have committed that it will be accretive to our margins for the next three years. And if you put that together along with our commitment to have the best operating ratio, we talk about a little different in the rail industry.

Instead of margin, we talk operating ratio, that it should be the best in the industry. Our ROIC should be the best in the industry. We’ve committed to that over that three year time period. We do that. We believe we should grow our EPS high single digit to low double digit over the next three years.

You mentioned capital, obviously, very important. So capital returns, our first dollars go back into our business. So over the next three years, we expect to invest somewhere between 3.4 and $3,700,000,000 on an annual basis. We’re committed to returning good dividends to our shareholders as well. So we have a target of a 45% dividend payout ratio.

It’s industry leading. We also have a track record of dividend increases. We’ve increased our dividend the last seventeen years in a row, and we committed at that shareholder meeting or the investor meeting that we will continue to invest and increase that annually, and then returning excess cash So we have been using our balance sheet. You referenced the the debt that we have on our balance sheet.

We’re solidly a rated, great investment, great credit rating, but we do take on debt and use that for share repurchases in addition to the cash flows that we generate. We said over the next three years, we’ll repurchase between 4,000,000,000 and $5,000,000,000 annually, so continuing strong repurchases. And and we think, again, that’s that’s a great algorithm for for our shareholders. Bringing that down a level to to 2025, we really didn’t give what I’ll call specific guidance for 2025 even in January. A lot of uncertainty in the world.

Other than to reiterate, we think the things that we’ll accomplish in 2025 will be absolutely consistent with those three year targets that we laid out. Very confident that we can improve, our margins. I think the growth is the piece that’s a little bit more, you know, uncertain. We know there’s some things with international intermodal. We’ll probably get into that in a little bit, but, had very strong growth in 2024.

That’s gonna be tough for us to replicate, mark you know, tariffs aside in 2025, but very much committed to improving our margins, staying industry leading in terms of our margins, and and ROIC, the accretive pricing. And, really, you saw us start that in our first quarter. Earnings were flat year over year. There were some some different challenges mostly from fuel and the leap year that that impacted our business. But but even setting that aside, had a strong quarter, a good start to the year, a good start to the to the five year track record.

Unidentified speaker: So, I mean, they’ve seen the call last week. I know we’re it’s obviously very fluid with the, the trade impacts, the tariffs, etcetera. And, you know, you gave a nice synopsis of what the uncertainty is and so on. Maybe if you could just if we’ve progressed at all in in understanding a little bit more what’s going on and maybe against the headlines we’re hearing about, you know, some of the port, you know, the West Coast, you know, seeing a precipitous drop potentially in the next couple of weeks, Maybe you could just comment or bring us up to speed on on some of the tariff items and and whether, you know, what’s essentially happened over even the week since you just reported.

Unidentified speaker: Yeah. We did just report last Thursday. So, you know, our volumes have stayed strong in April. Our first quarter volumes were up 7% year over year. Our April volumes were basically up 7% year over year.

So we have not yet seen that. And and within that, our international intermodal volumes, so those are are the, you know, the steamship volumes that are coming in through the West Coast ports, they’re up over 30%. Some of that likely is some preshipping ahead of the tariffs. You know, we’re seeing and hearing some of the same things from our customers. We’re expecting probably in the next couple of weeks to see that drop pretty substantially.

It’s not gonna go to zero, because when you think about the West Coast ports, certainly China is a big part of that, but then you also have Southeast Asia. And we’re actually seeing some increases in terms of business that’s coming, from from the Southeast Asia part. So net net, we still think it will be down. We’ll see how long that lasts. Is this something that’s going to go down and stay down?

Is this something that’s gonna be a temporary interruption, and and we’ll see things come back as the summer progresses? Obviously, a lot to to be determined there, but it’s one part of our business. That’s really where we like our franchise position and that we’re very diversified against the 23 states that we operate in. When one part of the business is down, you usually see other parts that are up. And so that helps us offset some of these uncertainties that are out there.

Unidentified speaker: Okay. And as an admirer of your business, I’m fascinated by all the stuff that you guys carry on your on your rails. Maybe you can talk a little bit about the the mix today. What are some of the puts and takes around, you know, the current dynamics and shifts, you know, from the ports, etcetera? And then we’ve seen some initiatives by the executive branch, you know, like coal initiative, ex so on.

That’s a big piece of the freight. So maybe you could just provide a little more color about the the current mix, some fluctuations that’s happening today. And then as as we think about the the optimal mix for the future, you know, how do you see that, you know, that sort of the best mix in in terms of diversification with customers, etcetera. So just a lot more about the flavor.

Unidentified speaker: A lot more about mix and flavor.

Unidentified speaker: Questions there, but we’re all interested in the cool products.

Unidentified speaker: Okay. Well and and so the mix, when we talk about mix in our business, we’re talking about it more from a standpoint of what’s the average revenue per car that we bring in for all the different types of freight that we move. And when you hear us talk about something that’s lower mix, we’re referring to something that has an average revenue per car that’s below the system average. And so international intermodal, and and we’ve talked very publicly about this, it is our lowest average revenue per car business, and it’s actually 40 to 45% below kind of the system average. So that gives you some perspective.

That doesn’t mean it’s not profitable business because all of our business is profitable, and that’s something that we insist upon, that we’re not going to move some commodity to subsidize another commodity. So so we’re very conscious about that. When you look at our mix in the first quarter, which was a bit of a headwind to our earnings, it was because in part international intermodal was up so much. The other thing that was up, you mentioned coal. So our coal volumes were up, I think, about 5% in the first quarter.

Coal is actually, a little bit below our system average as well when you look at at that on an average revenue per car basis. The other thing that we saw in the quarter is that some of our higher average revenue per car businesses, which tend to move in what we call our industrial sector so think about construction products. Think about steel, plastics, lumber, all of those different commodities. Those are commodities that require more handling, more specialized cars, and so those tend to move at more of a premium or a higher average revenue per car. Many of those segments were down year over year in the first quarter that further contributed to some of that negative mix.

In fact, our industrial segment, as a whole was down 1% against our bulk segment, which is where coal is at, which was up, I think, two or 3%. And then the last part of our business, which is the premium business, that’s where international intermodal falls, that was up, I believe, 13%. But within that, again, strong international intermodal, so low average revenue per car. Finished vehicles were actually down year over year, and that tends to be a higher average revenue per car. So, you know, the neat thing about it is we do touch virtually everything, that you use in your daily life.

You know, the the coal that’s firing the the electricity that moved by rail. Probably shares came by rail. The cars that you drove to be here today probably moved in a in a railcar at some point. So that’s what we like about our franchise. We like that that mix of business because it is a natural economic hedge, as I mentioned.

And so while you may have pressures in in one quarter, other quarters, if you get greater grade growth on, say, the grain side or some of that industrial commodity, those can help help support it. But we are a network business, and so I’m not going to say I just wanna move coal or I just wanna move finished vehicles. Because if I’ve got an intermodal train that’s moving from LA to Dallas, maybe those locomotives are pulling an intermodal train, but then it’s gonna head back to Denver pulling plastics that are coming out of the Texas Gulf Coast. So it’s all very much interrelated. And so our key then is to, again, price every piece of business we can as competitively we can to the market and and taking into account the service we’re providing and then move it in a very, very efficient manner.

When we do that and we leverage volume across that asset base, it can be a very powerful algorithm for us. So we like the coal. We like the intermodal. We like the unit train business. We think our manifest business does set us apart from from others in terms of that touch point extra touch point into the industrial economy, particularly that Texas Gulf Coast.

So it’s a it’s a great, I’ll say, problem to have and that we have that diversity. It does mean we have to wear a lot of different hats for our customers and be able to meet them where their needs are at. But it’s hard for me to say this is an optimal mix because everything supports one another. And our overall objective is to grow with our customers and to find where their service needs are at so that we can drive that growth. Growth again across the fixed network is very powerful.

Unidentified speaker: And and then I’ll ask one more before we go to the audience. You know, obviously, we’re gonna be debating the the trade tariffs dynamics going forward, but I think the there does seem to be some consensus on nearshoring and on well, certainly, onshoring, but nearshoring. And, you know, you have a wonderful business down in Mexico, and we, you know, we we heard from the previous panelists about the importance of a comparative advantage. And so to the extent that we do move to a more, you know, a more focused area like using Mexico, the trade, and and bolstering that and with your investment there, maybe you could just talk a little bit about the investments you have today in Mexico that puts you in a kind of a unique leadership position, the potential to ramp that up. How flexible are you in terms of being able to move your capital allocation if we do get more clear dynamics from the executive branch in terms of, you know, where this all sort of shakes out in the next couple months?

And and the returns from Mexico in the past, have they sort of matched in in invested capital, that you’ve achieved today?

Unidentified speaker: Yeah. So, to start off with, so we own 26% of one of the Mexican railroads. There’s two railroads in Mexico. We own 26% of the FXE railroad. We actually are the only railroad in North America that interchanges at all six border crossings.

So we do interchange with the other Mexican railroad. We just have the ownership interest in the FXE. The FXE runs a very good network. We’ve owned that interest since the the the industry was privatized. They they auctioned the concessions, and so we’ve had that ownership relationship for just over twenty five years, and it has been a great investment for us and certainly has has paid dividends to us quite literally in terms of of how that business has grown.

And it fits very well within our portfolio. When you think about the business that moves north south, you’ve seen tremendous growth over the last several years in the automotive space, automotive manufacturing, automotive parts, intermodal when you think about some of the Micheliadoro manufacturing that is set up more closer to the northern part of the border, which is where, certainly, you could see some expansion if you see more near Shoring, and that’s where you’re you’re seeing some of that manufacturing base grow. And then you have, you know, the so so that supports the intermodal piece. And then you have things like food and beverages as well. In fact, a fun fact that I’ll share with this group.

So we move a lot, and I do mean a lot of beer out of Mexico. And in fact, in one boxcar, you can ship I think it’s close to a 10,000 bottles or cans of beer, so that would be enough to supply everyone in Memorial Stadium, for for a Husker game day. Or for those of you I know who aren’t from Omaha, maybe East Coast, West Coast, you could have Dodger Stadium filled and Yankee Stadium filled and give everybody a beer. So, just something to kinda lock into your brain there, that it’s a a great business for us. And, you know, we like the partnership.

In terms of investment, obviously, the FXE, they make their capital allocation within Mexico. We, though, support and can support it with things that we invest on north of the border here in The US. And we’ve got tremendous flexibility really with our capital spend. As I mentioned, you know, we’re gonna spend annually 3.4 to 3 point 7 billion dollars. If you break that down, call it 2,000,000,000 of that is basically to invest and reinvest in our existing infrastructure for safety, for maintenance, to to keep things running well.

The other portion is for growth. And so that’s where we’re looking for for opportunities to invest with customers, to invest in facilities, to support the growth, and we can be very targeted with that. Sometimes those investments are in our track structure so they can support all the different businesses. Sometimes it’s maybe just in an intermodal ramp, and so it’s gonna be something specific for the intermodal business.

Unidentified speaker: So we’d like to, go to the audience with questions. So there’s one in the back there, Sadie. Again, if you could just, say your name and and a quick SUSIC question, please.

Shweta: Thank you. My name is Shweta. Just continuing with what we were discussing just before you open it up for q and a. I was sort of curious as to what Union Pacific is thinking in terms of any mergers, like, not asking specifically, but, like, broadly, what are the key pieces of, investments or or pieces that you would wanna sort of own similar to FXE? And that, yeah, that was my question.

Okay.

Unidentified speaker: So in terms of capital allocation, as I mentioned, you know, we are buying buying shares back. We consider that part of our investment to be flexible. So we’re always looking, is there something that we can invest in that can bring more carloads to Union Pacific? That’s the growth engine. That’s the moneymaker.

How do we bring more business to that profitable railroad franchise? And so that’s an evaluation that we’re making all the time. Certainly, when we made the the 26% investment in the FXE, again, twenty five years ago, I think that investment I I think I know that investment, certainly paid dividends. You mentioned mergers. You know, we are regulated in our industry by the Surface Transportation Board, and so they have a a set of rules that are out there that govern, whether you can and can’t merge in different thresholds that you have to to meet.

The merger that was done between the Canadian Pacific and the Kansas City Southern a couple years ago was done under a different set of merger rules. Prior to that, they had actually changed it. And so you can’t just put together a merger that is going to maintain the competitive level. They’ve actually upped the ante on that, if you will, to say you have to actually enhance competition if if you do a merger. So that’s a that’s a pretty high bar.

When I think about the freight industry and I think about the fact that, you know, we’re interchanging business with our partners to the East. We interchange partners to the north and south. We actually interchange traffic with the Burlington Northern Santa Fe, who’s our our closest western competitor. You know, to the extent that we can do things that help improve those interchanges, that we can make that more seamless for our customers, that’s really gets to back to that growth piece. It all kinda goes back to that growth.

How can we operate better that can help us support and support our customers’ growth? If we’re gonna have more near shoring into The United States, that’s, I think, great for the rail industry. Generally speaking, if you have manufacturing plant on your lines, you get the loads into the plant. Maybe you’re taking scrap into a steel mill, and then you’re taking the finished goods out. There’s a new soybean crush plant that just opened in Norfolk, Nebraska, so we’re taking soybeans into the plant.

We’re taking oils out. Those are great pieces of business for us. And so we’re gonna look to make investments to support that, support our customers, but there’s from a regulatory standpoint, there’s there’s a lot of considerations.

Tyler Crow: Good morning. My name is Tyler Crow. Just a quick question. Well, not quick. Past fifteen, twenty years, margin expansion or operation ratio reduction in rail has been pretty spectacular.

Just going forward from here, do you foresee similar reductions, or are we starting to hit, like, an upper bound in terms of margin expansion?

Unidentified speaker: Yeah. No. Thank you for that question. So when we think the levers that we have used to improve our margin are pretty basic. It’s probably the same for every business.

It’s your pricing, which we’ve talked about. It’s your ability to per be productive, use those assets very efficiently, and then it’s your volume. How how much more volume and density can you put across that? If you look over the past many years, the way that we have improved our margins have been primarily through the price piece and the productivity piece. Productivity piece.

We have not seen substantial growth in our industry. In fact, things have been flat. There’s a number of reasons. Coal going down and and being in secular decline is one of those. Getting maybe a little reprieve right now, but but long term, it still seems to be be declining.

That’s why we’re very anxious to improve our service product and attract new business, more intermodal business to our network. So we do continue to see opportunities to improve. As I mentioned, our guidance that’s out there is that we’re going to be industry leading in terms of our operating ratios. We think we can do that with the knowledge that all of our other competitors are working to improve their margins. When you have better margins that makes you more competitive, it opens more markets to you that can further facilitate that growth.

So is it going to be at the same level? You know, it does get harder every time you take that step down, but we don’t know that there’s an absolute floor out there. We’re continuing to work to improve, and that’s our commitment over the next many years.

Unidentified speaker: I think I’m gonna jump in on just the I think one of the we’ve seen historically leaps in efficiency, you know, through different cycles of the technology and and management for the for the rails, and you’ve been working on adaptive planning. And I I would like to just just quickly dig into that, what you’re doing there, what’s unique about it, and what are the constraints in terms of being able to ramp that up for efficiency, whether it’s compute infrastructure at the, you know, the micro rail level, etcetera? Sort of curious as to, you know, on how that is is out progressing as well.

Unidentified speaker: Yeah. No. Thank you for that question. So technology really is going to be, in my view, the big unlock as we go forward in terms of making more of of the changes and improvements in our margins. Adaptive planning for us is still in its very early stages.

And probably the easiest way, and actually our chief operating officer, Eric Geringer, used this example of a month or so ago with investors and it resonated is, think about it like Waze for the railroad or your Google Maps where it tells you where you maybe have an outage or a traffic jam, and it suggests rerouting for you. That’s our goal for adaptive planning, is is to be able to be that real time that it’s prompting our dispatchers, prompting our terminal managers of how to change their operations to minimize the disruption to the network. It’s in earlier stages today. Today, we’re using it not quite real time, but it’s still helping us look at our transportation plan, change our transportation plan more frequently as our volumes are changing, helping us identify where I can build trains, where I can maybe reroute cars to minimize touches. Because every time we touch a car, there’s a safety impact, there’s an expense impact, and there’s a service impact potentially.

And so we’re using adaptive planning to help improve that process, streamline that process, and be more consistent in that decision making as well. I’ll mention another product called customer vision. We also know everyone in this room is used to the Amazon experience and used to be able to knowing where your package is is at any point in time. That expectation is coming to the railroad industry as well from the traffic managers. And so can we give customers the visibility to their product as it’s moving across our rail lines?

And whether it’s on our rail line or maybe on another partner’s rail lines, how to give them better visibility and management of their packages. So a lot to come there. One place where I would say UP is uniquely situated to be able to drive things like adaptive planning, like customer vision, is we are the only class one rail who has a fully updated platform of what we view as the three key technologies. So it’s positive train control. It’s our dispatching platform as well as our transportation control system.

Unidentified speaker: K. And we we have about two minutes left Okay. Of our discussion. Lightning round. So on the subject of technology, EV trucking, I know it’s still off.

Maybe you could talk about how management is thinking about that change in technology. And the question I have is, it would be the worry about transportation costs or the autonomous ability to be more bespoke with the delivery. So curious as to how you see that playing out, what what you’re doing to sort of be prepared for that evolution, and and what are the different aspects that could be competitive to your own system.

Unidentified speaker: Yeah. Well, so first of all, I obviously have to put a plug in for my industry. If you’re comfortable having an 18 wheeler on the interstate highway besides you going 80 miles an hour, you should be comfortable with a train on a fixed set of tracks without somebody in the cab of the locomotive. And so that’s you know, if you think about autonomous trucks, then you also need to think and be open to to autonomous trains. We think we can do that and be much much safer with that.

The EV aspect is interesting because the batteries today take up tremendous weight. And with that weight, it takes lading out of of the trucks and makes that less competitive just from a per unit haulage. You also have the issue with how far can they go on the EV charge, what’s the what’s the time then to charge, just the productivity aspect of that. I don’t say that to diminish it because we know that technology is evolving. We know that people are working on that, but it feels like that’s really getting elongated.

I mean, I can kinda think back probably ten to well, probably ten years or so ago. I think twenty twenty five was supposed to be one of the breakout years for EV and autonomous, and, obviously, we’re not quite there yet. But that’s where things like adaptive planning, continuing to refine our positive train control technologies, those are all the things that we need to do as an industry to continue to improve our safety, improve the product for our customers, and position ourselves for a a potential competitive threat like that.

Unidentified speaker: Great. Well, thank you very much. Yeah. Thank you. Pleasure to have you.

Unidentified speaker: Thanks so much.

Unidentified speaker: Get a break and be right back here with our next panel of Valmont. Yeah. Oh, great. We could take that off there.

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