Union Pacific's Q3 2025: Contradictions on Merger Application, Pricing Strategies, Service Efficiency, and Volume Growth

Date of Call: October 23, 2025

Financials Results

• Revenue: $6.2B operating revenue, up 3% YOY; freight revenue $5.9B, up 3% (freight revenue ex‑fuel grew 4%)
• EPS: $3.08 adjusted EPS, up 12% YOY; reported EPS $3.01 (includes $41M merger-related costs)
• Operating Margin: Adjusted operating ratio 58.5%, improved 180 basis points YOY

Guidance:

• Q4 volumes currently running down ~6%, driven by weaker international intermodal; mix expected to be modestly positive due to coal strength.
• Merger-related costs will continue into Q4 (but likely lower vs Q3); share repurchases paused while prioritizing debt reduction.
• Reaffirming 3-year EPS CAGR objective of high-single to low-double digits and focus on accretive pricing, industry-leading OR and ROIC.
• Expect cash generation to grow and plan to pay down debt; resume buybacks opportunistically in year 2 post-close.

Business Commentary:

• Record Financial Performance:
• Union Pacific reported adjusted earnings per share of $3.08 for Q3, a 12% increase excluding merger-related costs, with a 58.5% adjusted operating ratio.

• The growth was driven by strong pricing gains, improved operational efficiencies, and record freight revenue, which grew for the sixth consecutive quarter.

• Productivity and Operational Excellence:

• Freight car velocity improved by 8% to 226 miles per day, setting a third-quarter record, with train length increasing by 2% to over 9,800 feet.

• This improvement was achieved through enhanced fluidity, reduced locomotive dwell, increased train speed, and effective management of daily car touches on the network.

• Merger and Regulatory Support:

• The company has secured over 1,200 letters of support from stakeholders, including ports, government officials, and short lines, for its merger with Norfolk Southern.

• Support for the merger is attributed to the expected benefits of improved service and efficiency for customers, as well as the company's commitment to preserve jobs for unionized employees.

• Pricing Strategy and Market Conditions:

• Union Pacific's pricing strategy has yielded a 3.5% increase in average revenue per carload in domestic intermodal, supported by strong core pricing gains.
• The strategy has been successful despite challenges in international intermodal volumes and tough comparisons from prior periods, driven by a focus on delivering value to customers through service and pricing.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted record operating metrics, best-ever freight revenue ex-fuel streak, adjusted EPS +12% YOY, and a 58.5% adjusted OR (180 bps improvement). Executives repeatedly expressed confidence in execution and the merger filing timeline while acknowledging near-term volume headwinds (Q4 volumes down ~6%).

Contradiction Point 1

Merger Application Process and Benefits

It pertains to the status and expected outcomes of the merger application process, which impacts strategic direction, regulatory negotiations, and shareholder expectations.

Can you provide updates on the merger application process, its progress, and the impact on shippers and unions? - Thomas Wadewitz(UBS Investment Bank, Research Division)

2025Q3: The merger ensures Union Pacific's service level is high and meets customer expectations. The SMART-TD agreement formalized guaranteed job security post-merger. Union Pacific aims to provide a better service product to enhance competition, bolstering the value for customers and the U.S. The focus is on completing the merger application by late November or early December. - Vincenzo Vena(CEO & Director)

Why consider a multiyear distraction from potential M&A that could sidetrack your existing organic momentum? - Jonathan B. Chappell(Evercore ISI)

2025Q2: It's important to think about time and place. We've worked to build efficiency, drive productivity, and deliver a consistent service product. The world is changing technologically. The industry needs to move ahead; otherwise, we'll get left behind. I love where we are at Union Pacific because we are operating efficiently and can handle changes. Discussions on potential mergers are about possible improvements, not a distraction. - Vincenzo James Vena(CEO & Director)

Contradiction Point 2

Volume and Pricing Strategy

It involves the company's expectations and strategy regarding volume and pricing, which directly impacts revenue projections and market positioning.

What are the key factors impacting Q4 OR and earnings with a 6% volume decline? - Ken Hoexter(BofA Securities, Research Division)

2025Q3: Volumes are down, and freight revenue is expected to be flat. Mix rotation will be positive as international intermodal volumes are challenging. Merger costs will remain, but slightly lower than in Q3. - Jennifer Hamann(Executive VP & CFO)

Can you provide insights into factors that may not persist from Q2 into Q3? - Stephanie L.B. Moore(Jefferies)

2025Q2: This quarter, we achieved a 12% increase in EPS despite no volume help. Our results were driven by improved service levels, higher fuel surcharges and strict cost control. We are encouraged by our ability to convert modest volume increases into solid earnings growth. - Jennifer L. Hamann(Executive VP & CFO)

Contradiction Point 3

Service Quality and Network Efficiency

It highlights differing expectations and approaches to maintaining and enhancing service quality and network efficiency, which are critical for customer satisfaction and operational success.

Will Union Pacific maintain or improve service metrics after the merger with Norfolk Southern? - Stephanie Moore(Jefferies LLC, Research Division)

2025Q3: Union Pacific's world-class service performance will continue post-merger. The combined network will result in greater efficiencies, and the company is committed to maintaining high service levels. - Eric Gehringer(Executive Vice President of Operations)

Can you share the puts and takes of factors from Q2 that may not persist into Q3? - Stephanie L.B. Moore(Jefferies)

2025Q2: Eric Gehringer: There's always room for improvement. We're looking for ways to enhance service and efficiency, including reducing terminal dwell and locomotive dwell. Our focus remains on continuous improvement. - Eric J. Gehringer(Executive Vice President, Operations)

Contradiction Point 4

Pricing Strategy and Market Dynamics

It highlights different perspectives on the sustainability of pricing strategies and market dynamics, which are essential for competitive positioning and pricing strategy.

How will Union Pacific adjust its Intermodal pricing strategy as the truck market improves? - Jason Seidl (TD Cowen, Research Division)

2025Q3: Intermodal pricing is market-based and supported by strong service. Union Pacific will leverage its service and market reach to maintain competitive pricing, even if truck market improves. - Kenny Rocker(EVP of Marketing & Sales)

What's driving the strong pricing, and how sustainable is it? - Fadi Chamoun (BMO Capital Markets)

2025Q1: Strong pricing is supported by strong customer demand, especially in coal due to favorable natural gas pricing. - Kenny Rocker(EVP of Marketing and Sales)

Contradiction Point 5

Volume Growth and Market Conditions

It involves the company's expectations for volume growth and market conditions, which are crucial for understanding the company's performance and strategic positioning.

What are the key factors driving Q4 OR and earnings given a 6% volume decline? - Ken Hoexter (BofA Securities, Research Division)

2025Q3: Volumes are down, and freight revenue is expected to be flat. Mix rotation will be positive as international intermodal volumes are challenging. Merger costs will remain, but slightly lower than in Q3. Productivity may be impacted by reduced volumes, but strong fundamentals are expected to support sound Q4 results. - Jennifer Hamann(Executive VP & CFO)

Does the guidance reflect high single-digit to low double-digit earnings growth, and is this consistent with - Scott Group (Wolfe Research)

2024Q4: We expect to see low single-digit to high single-digit volume growth in 2025 but continue to maintain a healthy level of financial discipline. - Jennifer Hamann(CFO)

Q&A:

• Question from Thomas Wadewitz (UBS Investment Bank): Update on merger application progress, shipper/union support, SMART agreement and timing for the STB filing?
  Response: Expect to file the STB application by end-November/early December; have formalized union agreements (e.g., SMART‑TD) and >400 customer letters of support—management is confident in approval.

• Question from Ken Hoexter (BofA Securities): Can you walk through Q4 puts and takes and whether earnings should be flat/down/up y/y given volumes down mid-single digits?
  Response: No specific Q4 guidance; volumes down ~6% (mainly international intermodal) will create headwinds, partially offset by stronger mix in coal and continued productivity, with some ongoing merger costs.

• Question from Brandon Oglenski (Barclays): Do competitor collaborations since the merger announcement pose a risk to the deal?
  Response: No—competitive responses validate the merger's pro‑competitive benefits and bolster UP's argument to regulators rather than posing material risk.

• Question from Jonathan Chappell (Evercore ISI): Can you remain nimble and preserve productivity if volumes stay weak?
  Response: Yes—will protect operational buffers (locomotives/crews/cars) and dynamically adjust transportation plan, fleet sizing and hiring monthly to preserve service while managing costs.

• Question from Scott Group (Wolfe Research): Does public opposition from other railroads (e.g., BN) matter for the merger?
  Response: Opposition is anticipated but manageable; UP views such responses as evidence of competitive impact and expects the STB to assess net public/customer benefits.

• Question from Brian Ossenbeck (JPMorgan): Are you seeing intermodal share shifts and how will you address vocal Gulf chemical shippers/associations?
  Response: Intermodal dynamics shifted; UP focuses on direct customer engagement, leveraging network investments to win business and arguing the merger will materially speed merchandise (management cited ~15–20% faster transit).

• Question from Stephanie Benjamin Moore (Jefferies): Can UP’s service best practices be implemented at Norfolk Southern post‑merger and on what timeline?
  Response: Yes—methodology is the same at larger scale; UP believes its operational playbook can be applied across NS given existing working relationships, though no specific timeline was given.

• Question from Jason Seidl (TD Cowen): How do domestic intermodal yields react if truck market tightens, and how to think about ag RPU?
  Response: Intermodal yields are market‑linked—if truck tightness emerges UP can lift domestic yields; ag RPU is primarily driven by length of haul, with PNW and Mexico exports generating higher RPU but affecting cycle times.

• Question from Christian Wetherbee (Wells Fargo): Do you expect pricing growth to be better in 2026 than 2025?
  Response: Service strength underpins pricing discussions; management is confident pricing can reflect delivered service, but customers seek market clarity—no explicit 2026 guidance given.

• Question from David Vernon (Bernstein): How are current network collaborations evolving and what's the plan for UMAX long term?
  Response: Existing alliances continue; UP supports UMAX as a durable product and will maintain optionality for customers—no pre‑merger changes to commitments.

• Question from Walter Spracklin (RBC Capital Markets): S‑4 financials appear below Street—how should investors interpret them vs reiterated long‑term targets?
  Response: S‑4 figures are directional/unstressed estimates and not formal guidance; they excluded merger costs/share repurchases, and management reaffirmed the long‑term high‑single to low‑double digit EPS CAGR view.

• Question from Bascome Majors (Susquehanna): How will you manage near‑term maturities and the financing needed for the deal?
  Response: Plan to use operating cash to pay maturities, work with bank groups and facilities to access financing, opportunistically pay down debt and aim to resume buybacks in year 2 post‑close (~2028).

• Question from Ariel Rosa (Citigroup): Could macro deterioration force reassessment of synergies or walking away from the deal?
  Response: Management sees the investment as long‑term and is comfortable with merger value; no current macro scenario prompts reassessing synergies or abandoning the transaction.

• Question from Brady Lierz (Stephens): What's driving the recent business wins and can pipeline drive 2026 volume growth absent broad macro improvement?
  Response: Wins are driven by plant expansions and new facilities built on UP’s network; the pipeline is strong and can drive incremental volume even without immediate macro improvement.