Union Pacific Corp (UNP) — Q3 2015 Earnings Call Transcript

Thank you and good morning, everybody. Welcome to Union Pacific's third quarter earnings conference call. With me here today in Omaha are Eric Butler, Executive Vice President of Marketing and Sales; Cameron Scott, Executive Vice President of Operations; and Rob Knight, our Chief Financial Officer. This morning, Union Pacific is reporting net income of $1.3 billion for the third quarter of 2015. This equates to $1.50 per share, which is down 2% compared to the third quarter of 2014. Total volumes decreased about 6% in the quarter, more than offsetting another quarter of solid core pricing gains. Carload volume declined in five of our six commodity groups, with coal down the most at 15%. Automotive was the one commodity group with a year-over-year increase in the quarter, with carloads up 5% versus 2014. On the cost side, we made significant progress aligning our resources to current demand. And I am pleased to report a quarterly record operating ratio of 60.3%. Going forward we will be intently focused on generating further productivity improvements. In addition, developing new business remains an important part of our strategy, whether we grow existing markets, develop new business with existing customers, or find new market opportunities. Our commercial team is constantly filling the business development pipeline. I'm encouraged with the progress we have made as the men and women of Union Pacific worked tirelessly and safely to serve our customers and deliver value to our shareholders. With that, I'll turn it over to Eric.

Thanks, Lance, and good morning. In the third quarter, our volume was down 6.5%, with gains in automotive more than offset by declines in the other business groups. We generated core pricing gains of 3.5%, but it was not enough to offset decreased fuel surcharge and mix headwinds, as average revenue per car declined 4% in the quarter. Overall, the declines in volume and lower average revenue per car drove a 10% reduction in freight revenue. Let's take a closer look at each of the six business groups. Ag products revenue was down 4% on a 3% volume reduction and a 1% decrease in average revenue per car. Grain volume was down 11% in the third quarter. The strong U.S. dollar and high worldwide inventories reduced grain exports by 32%. Slightly stronger domestic grain shipments partially offset the export decline. Grain products volume increased 1% for the quarter. July and August saw the largest domestic soybean meal crush on record, resulting in a 17% increase in soybean meal shipments. Partially offsetting this was a 4% decline in ethanol shipments driven by strong 2014 comps of higher production and shipments. Food and refrigerator product volumes were flat for the quarter as strength in import sugar and barley were offset by declines in frozen meat and potato shipments. Automotive revenue was flat in the third quarter as a 5% increase in volume was offset by a 5% reduction in average revenue per car. Finished vehicle shipments were up 5% this quarter, driven by continued strength in consumer demand. The seasonally adjusted annual rate for North American automotive sales was 17.8 million vehicles in the third quarter, up 6% from last year. In auto parts, volume grew 5% driven primarily by increased vehicle production. Chemicals revenue was down 6% for the quarter on a 3% reduction in both volume and average revenue per car. We continue to see strength in plastics shipments, which were up 7% in the third quarter due to stable resin pricing and strong export volume. However, our volume gains were more than offset by declines in shipments of both fertilizer and crude oil. Lower grain commodity prices and market uncertainty resulted in farmers delaying fertilizer purchases. This resulted in a 10% decline in our fertilizer volume. Crude oil volume, which was down 40% in the quarter, continues to be impacted by lower crude oil prices and unfavorable price spreads. Coal revenue declined 18% in the third quarter on a 15% volume decline and 4% decrease in average revenue per car. Southern Powder River Basin tonnage was down 12% in the quarter. Low natural gas prices continue to put downward pressure on coal demand as coal share of electricity generation declined from 38% in the third quarter of last year to 35% this year. Coal inventories, which are currently 20 days above the five-year average, contributed to the sluggish demand. Colorado Utah tonnage was down 32%, driven again by soft domestic demand and reduced export shipments. Industrial products revenue was down 16% on a 12% decline in volume and 4% decrease in average revenue per car during the quarter. Our reduction in shale drilling resulted in a 31% decline in minerals volume, primarily driven by a 36% decrease in frac sand car loadings. Metals volume was down 26% as lower crude oil prices suppressed drilling-related shipments and the strong U.S. dollar drove increased imports. Demand for construction products resulted in a 1% volume increase in the third quarter, driven by continued demand in road and construction projects in our Texas region. Intermodal revenue was down 11% in the third quarter on a 4% lower volume and a 7% decrease in average revenue per unit. Domestic intermodal volume was up 1% in the third quarter. Even though retail sales were down slightly year-over-year, we still achieved a best-ever third quarter of domestic intermodal volume. International intermodal volume was down 9% in the quarter as compared to a strong third quarter of 2014, when cargo owners advanced peak season shipments in anticipation of port labor strikes. With relatively high inventories, some international intermodal customers have reduced orders and not all east coast diversions have migrated back to the West Coast. To wrap up, let's take a look at our outlook for the rest of the year. In Ag products, although we have had another strong crop year, low commodity prices and abundant global supply created uncertainty in our volume outlook for grain. In food and refrigerator, we expect continued strength in beer, but we are facing headwinds in other markets from increased truck availability year-over-year. We expect automotive sales to remain strong for the rest of the year, driving growth in finished vehicles and part shipments. We continue to expect coal demand to remain below year-ago levels due to low natural gas prices, higher-than-average coal inventories and headwinds in the export coal market. As always, a key factor in demand will be weather conditions. Most chemical markets should remain steady for the remainder of the year, with strength expected in LPG. We continue to expect that weak oil prices, reduced production, and unfavorable spreads will remain a significant headwind for crude-by-rail shipments. In industrial products, lower crude oil prices will also continue to challenge our minerals and metals volume through the rest of 2015. While the housing market is slowly strengthening, the strong dollar and relatively weak China lumber import market are driving more imports of Canadian lumber to the U.S. We continue to expect demand for construction products to remain strong particularly in the southern part of our franchise. Finally in intermodal, we continue to see highway conversions and we expect this to be the seventh consecutive year of record domestic intermodal volumes. We expect that relatively soft retail sales will cause headwinds in our international intermodal volumes. Overall, we will continue to focus on solid core pricing gains, strengthen our customer value proposition and develop new business across our diverse franchise. With that, I'll turn it over to Cameron.

Thank you Eric, and good morning. Starting with our safety performance, our year-to-date reportable personal injury rates improved 12% versus 2014 to a record low of 0.92. While we continue to make significant improvements, we won't be satisfied until we reach our goal of 0% incidents, getting everyone of our employees home safely at the end of each day. With respect to rail equipment incidents or derailments, our reportable rate increased 17% to 3.56, driven by an increase in yard and industry reportables. While our reportable rate has taken a step back this year, we are confident that our strategy aimed at eliminating human factor incidents and hardening our infrastructure will put us back on a path of long-term improvement. In public safety, our grade crossing incident rate increased slightly versus 2014 to 2.25. We continue to focus on driving improvement by reinforcing public awareness through channels including public safety campaigns and community partnerships. Moving onto network performance, our operating metrics showed a step function improvement in the third quarter with network velocity reaching levels not achieved since 2013. While weather conditions in the quarter were more favorable from an operating standpoint, year-over-year volume swings and business mix shifts continue to create a dynamic operating environment. However, the men and women at Union Pacific proved up to the challenge, diligently leveraging the strength of our franchise to serve our customers proudly. In regards to service, one of the key metrics we use to track our performance is our service delivery index. The measure, which gauges how well we are meeting overall customer commitments improved 8% versus the third quarter of last year. We also generated improvement in our local service product to customers with a 95.3% service reliability, which measures the delivery of a car to or from a customer. Though we know there is still more work to do and we are working hard every day to further improve service and reduce cost. Adjusting resources to current demand continued to be a key focus area for us in the third quarter. While we noted back in July that we had our locomotive fleet close to being right sized, we have made meaningful progress adjusting our TE&Y workforce over the past couple of months. By the end of September, we had around 2700 TE&Y employees either furloughed or in alternative work status, compared with 1200 at the end of the second quarter. In addition to adjusting to lower volumes, our improvement in network performance has translated into fewer resource demands of our network. Overall, our total TE&Y workforce was down 10% in September versus June. Around half of this decrease was driven by fewer employees in the training pipeline. Our active locomotive fleet is down 140 units from the end of the second quarter. As we currently sit, we still have some work left to do when our resources at the end of the third quarter were more closely aligned with current demand. While resource alignment has been a key focus throughout the year, we have not lost sight of other initiatives which also drive productivity. We ran record train lengths in nearly all major categories, remaining agile and adapting our transportation plan to current demand. We were also able to generate efficiency gains within terminals, as productivity initiatives led to record terminal productivity even with a 4% decline in the number of cars switched. Growth capacity investments, alongside process improvements, have enhanced our ability to generate productivity and have increased the fluid capabilities of our networks. In addition, our progress in adjusting resources to demand has helped enable gains in asset utilization, including locomotive productivity. While the mix headwind from running lower coal volumes largely drove the 1% decline versus the third quarter of 2014, this fleet productivity metric has improved 6% sequentially from the second quarter levels. To wrap up, as we move forward, we expect our safety strategy will yield record results on our way to an incident-free environment. And while we gained significant traction throughout the quarter, we continue making operational improvements by leveraging the strengths of our diverse franchise to deliver service products our customers have come to expect. With our resources now closely in line with demand, we will continue our focus on other productivity initiatives to further reduce costs. Ultimately running a safe, reliable, and efficient railroad creates value for our customers and increases returns for our shareholders. With that, I'll turn it over to Rob.

Thanks and good morning. Let's start with a recap of our third quarter results. Operating revenue was just under $5.6 billion in the quarter, down 10% versus last year. A decline in volume and lower fuel surcharge revenue, along with negative business mix more than offset another quarter of solid core pricing. Operating expenses totaled just under $3.4 billion, decreasing 13% when compared to last year. Drivers of this expense decline were significantly lower fuel expense, along with volume-related reductions and productivity improvements. The net result was a 5% decrease in operating income to $2.2 billion. Below the line, other income totaled $30 million, up from $20 million in 2014. Interest expense of $157 million was up 9% compared to the previous year, driven by increased debt issuance during the last 12 months. Income tax expense decreased about 7% to $781 million, driven primarily by reduced pretax earnings. Net income decreased 5% versus last year, while the outstanding share balance declined 3% as a result of our continued share repurchase activity. These results combined to produce quarterly earnings of $1.50 per share, down 2% versus last year. Now, turning to our top line, freight revenue of $5.2 billion was down 10% versus last year. Volume declined about 6%, and fuel surcharge revenue was down $407 million when compared to 2014. All in, we estimate the net impact of lower fuel price was a $0.05 headwind to earnings in the third quarter versus last year, and this includes the net impact from both the fuel surcharges and lower diesel fuel costs. And as we expected on our last earnings call, business mix was a negative contributor to freight revenue for the third quarter. The primary drivers of this mix shift were significant declines in frac sand, steel shipments, and bulk grains partially offset by a decline in international intermodal volumes. Looking ahead, business mix will continue to be a headwind to freight revenue for the remainder of the year. A 3.5% core price increase was a positive contributor to freight revenue in the quarter. While down slightly from first half levels, core pricing continued at levels that are above inflation and reflects the value proposition that we offer in the marketplace. Of the 3.5% this quarter, about 0.5% can be attributed to the benefit of the legacy business that we renewed earlier this year, and this includes both the 2015 and 2016 legacy contract renewals. Moving onto the expense side, Slide 22 provides a summary of our compensation and benefits expense, which decreased 2% versus 2014. The decrease was primarily driven by lower volumes and improved labor efficiency, as we continued to realign our workforce. Labor inflation was about 4% for the third quarter, driven by agreement wage inflation as well as high pension and other benefit expense. For the fourth quarter, we expect labor inflation to also be about 4%. Looking at our total workforce levels, our employee count was flat when compared to 2014. And excluding our capital related employees, however, our workforce level declined about 3%, and as Cam just mentioned, we made significant TE&Y reductions in the third quarter, and we are more closely in line with current demand. For the fourth quarter, we now expect our total force levels to be down 1% or so when compared with the fourth quarter of 2014. Turning to the next slide, fuel expense totaled $484 million, down 45% when compared to 2014. Lower diesel fuel prices, along with an 8% decline in gross ton miles, drove the decrease in fuel expense for the quarter. Compared to the third quarter of last year, our fuel consumption rate increased 1%, driven by negative mix, while our average fuel price declined 40% to $1.81 per gallon. Moving on to the other expense categories. Purchased services and materials expense decreased 9% to $589 million. The reduction was primarily driven by lower volume-related expenses and reduced repair costs associated with our locomotive and car fleet. Depreciation expense was $507 million, up 5% compared to 2014. We still expect depreciation to increase about 6% for the full year. Equipment and other rents expense totaled $302 million, which is down 3% when compared to 2014. Lower locomotive lease and volume-related expenses were the primary drivers. Other expenses came in at $205 million, down 15% versus last year. Decreased freight, equipment, and property damage costs along with a reduction in general expenses were the primary drivers. We now expect other expenses to be close to flat on a full year basis, excluding any large unusual items. Turning now to our operating ratio performance, the third quarter operating ratio came in at a record 60.3%, an improvement of 2 points when compared to the third quarter of 2014. The operating ratio did benefit about 1.5 points from the net impact of lower fuel prices in the quarter. Earlier in the year, we challenged the organization to safely and efficiently right size our resources and reduce cost, and I am pleased with the results that we have been able to achieve. Ongoing productivity initiatives, along with pricing above inflation, have been key drivers to improving our overall margins. Turning now to our cash flow, year-to-date cash from operations increased to just over $5.6 billion, and we invested around $3.3 billion in cash capital investments through the first three quarters. Taking a look at the balance sheet, we continue our efforts to rebalance our capital structure, while maintaining a strong investment-grade credit rating. Our adjusted debt balance grew about $1.6 billion through the first three quarters of this year, taking our adjusted debt to cap ratio to 44.5%, up from 41.3% at year-end 2014. Our adjusted debt to EBITDA has increased from 1.4 times at year-end to 1.6 times at September 30 on a trailing twelve-month basis. This is consistent with our target ratio of 1.5 or less. Our profitability and cash generation enable us to continue to fund both our capital program and cash returns to shareholders. Year-to-date we have repurchased more than 28 million shares. Almost half of these shares were repurchased in the third quarter. Year-to-date spending totaled $2.9 billion, and the third quarter alone was up 45% versus last year to over $1.2 billion. This demonstrates our opportunistic approach in the marketplace and should not be considered a new quarterly run rate. Adding our dividend payments and our share repurchases, we returned $4.3 billion to our shareholders through the first three quarters of 2015. This represents roughly a 22% increase over 2014. While we have made good progress in the third quarter we do expect to see some difficult year-over-year comparisons as we close out 2015. In the current demand environment, continued lower volumes versus last year and an even more challenging business mix will both negatively impact fourth quarter results. And when we compare it to last year, fuel prices will also continue to have a negative impact on earnings for the fourth quarter. Keep in mind we did report a $0.05 positive fuel benefit in the fourth quarter of last year, making the fuel comparison more challenging year-over-year. On the plus side, we will continue to focus on achieving solid core pricing gains and building on the progress that we have made with our cost reduction and productivity initiatives. And when you add it all up, we will fall short of last year’s fourth quarter and full year earnings per share records. As for next year, we are still early in the planning process. It looks like we may have opportunities in many of our business segments, but it also appears that our energy-related volumes will continue to be challenged. Given the uncertain environment, we are taking a hard look at our capital spending for next year. We haven't finalized our plans, so it is too early to tell how it will relate to our long-term guidance of 16% to 17% of revenue. But from an absolute dollar perspective, we do currently expect that it will be somewhat less than this year’s $4.2 billion and the plan does include the acquisition of around 200 locomotives as part of a long-term purchase commitment. Overall, we will remain intently focused on running a safe, cost-efficient, and productive operation, and we remain committed to providing our customers with excellent service and our shareholders with strong financial returns. So with that, I'll turn it back over to Lance.

Thanks, Rob. As you have heard from the team, we have made great progress in meeting this year's challenges. Our operating metrics have improved to more efficient levels, and our resources are now more closely in line with demand. We will continue our unrelenting focus on operating safely and providing a quality service product for our customers. We will also continue to grow existing business and to establish new markets. Even so, as Rob said, there are some question marks as we finish 2015 and head towards next year. One uncertainty, of course, is the extension of the positive train control deadline. We continue to believe that Congress will do the right thing for our country and our customers and will vote to extend the deadline. Beyond that, energy prices, the consumer economy, grain markets, the strength of the U.S. dollar, all will be key to future demand. Over the long term, we are well positioned to safely provide our customers with excellent service, while delivering strong value to our shareholders. So with that, let's open up the line for your questions.

Hi, good morning and thanks for taking the question. Rob or Eric could you help us frame the – how challenging coal could be next year from a volume outlook if we were to assume kind of normal demand patterns, gas prices kind of staying where they are, are we looking at similar declines as we saw this year or something smaller than that?

As we said, David, coal demand really depends on a couple of major factors. One is the competitiveness against natural gas, and so what the outlook for natural gas pricing is, and certainly the weather and certainly export markets will have an impact on the coal market. Now at this point if you look at natural gas futures, there is no discernible improvement in that natural gas pricing. So you would assume natural gas will remain very competitive versus coal. I don't think you would project any improvement of coal market share against natural gas pricing and the weather is always an open factor.

But deterioration, would you expect – are there things about your retirements on your fleet or new builds anywhere in the network that will give you some cause for saying that there is going to be material deterioration assuming the competitiveness remains unchanged?

So, again the main driver is kind of the competitiveness of coal. I think you should also look at the current inventories. The inventories as we mentioned are about 20 days above historical five-year average levels. They are actually about 30 days above last year's third quarter levels. So you can assume that there would be some desire of utilities to manage those inventories down to a more normal level.

Okay, great. And then maybe just one quick follow-up on the pricing, obviously we heard a little bit from one of your interchange partners down in the Central South making some discussions on rates to maybe incentivize some coal burn. How do you guys think about that, are you guys changing your thinking about that given the change in competitiveness right now of coal and natural gas?

We don't discuss specific customer issues or specific commercial issues with customers. Our strategy has not changed. We think we have a strong value proposition. We are going to price to the value proposition to generate a return for our company. Our strategy has not changed.

Great. Good morning. Lance and team, great job on the operating ratio, but now that you are kind of at this 60 level, can you maybe talk a little bit about what projects you still have that can improve? Obviously, we saw tremendous improvement in the velocity during the quarter, is that something that you still see can return to even a couple of year ago levels and there is more room to get that into the 50s, and maybe just talk about what projects you have underway that can keep improving that into the next few years?

Sure Ken. Before I turn it over to Cameron for a little more detail, like we have answered historically, there are just almost limitless opportunities for us to continue to improve the business. What you saw in the quarter and what we have reported for an average quarterly fluidity reflected in velocity has been accelerating through the quarter. So as we are stepping into the fourth quarter we feel pretty bullish about the ability to continue to make gains. And the other thing to think about from a service perspective is while the fluidity of the network at this moment in time looks like it has that any previous period from the standpoint of very good, there are still opportunities in specific service products that we can continue to make strides on. So, Cameron, I will give it to you to talk a little bit more specifically about projects for productivity.

We continue to see opportunities in a number of different areas, including variable cost control, train length growth, terminal productivity, see greater fuel efficiency, and engineering and mechanical efficiency initiatives to help squeeze out as much productivity as possible. And we are gaining traction in all of these areas as Rob mentioned.

Great. I appreciate the insight. If I could just have a quick follow-up on the fuel pricing, you mentioned that it decelerated to 3.5% from 4%, is that due to more truck competition? I don’t know, Eric, if you mentioned it, I don’t know if their pricing contracts are down or what's driving that, but maybe you can dwell into that a little bit.

Ken, this is Rob. Let me jump on that. A couple of points. One, how we calculate price, we are very proud of it. That is, we only count what actually moves. So, we calculate the yield, the price. So, the point being, volume has an impact clearly on our reported price. Anything I would say is our attitude. Our focus has not changed at all in terms of our commitment and understanding to drive price as a key contributor to what we've been able to achieve up to this point and it will be a key contributor as we move forward, continuing to get that solid core pricing. I wouldn’t read too much, frankly, into the change from the second quarter to third quarter, because there are volume issues, there is the legacy that we called out. And there is some round, we always round the numbers in terms of what we report here. So, there's not as big of a gap if you will from the second to third as you might otherwise think. Again, our commitment and our focus on pricing is unchanged.

I appreciate the comment and insight. Thanks, guys.

Thank you, and good morning everyone. You guys talked a little bit about some of the east coast business not falling back to not all there at least flowing back to the west coast ports. Do you think it's now permanently based on the east now, or do you think people are changing their supply chains?

This is Eric, Jason. No, we do not. Frankly, as we said last quarter and I think the previous quarter, we do think that ultimately the cheapest best fastest supply chain will win and that still is west coast ports. There are still probably a couple 3% points of share that migrated over to the east coast ports during the port strike that has not migrated back. We think some of that is just some short term risk management, some hedging for the market and retail inventories. But we fully expect that the shortest quickest, most economic supply chain wins in the end and that's the west coast.

Okay. Now, that's great color. And Rob, just a quick question on pricing. I think you mentioned that about half a point was due to the legacy mix brought forward, just had. So, as we are certainly looking out to 16, should start just basing our assumptions on about 3% core pricing?

Nice try.

You can't blame the guy?

No, I get it. I mean, clearly we are saying that you can assume that the legacy is not going to continue, but in terms of what happens underneath or beyond legacy, we haven’t given a precise number of guidance, other than our commitment to core real core pricing gains above inflation. And we're not changing our attitude or focus there. What the number actually ends up being, stay tuned.

Sounds good. Guys, I appreciate the time as always.

Good morning. I wanted to ask a couple of questions about pricing. I understand that you are maintaining your current approach, but I'm curious about how the market may be evolving. Specifically, regarding what we heard about your company and another competitor lowering coal rates, do you believe the market is changing more broadly, or are there specific actions that shouldn't be interpreted too widely? I know you have a clear strategy, but I'm interested in your thoughts on whether we can expect significant market changes.

Tom, this is Lance. Historically, we've always focused on providing an excellent product and then charging for the value that that product represents to our customer base. We faced markets that are very difficult, different headwinds, and we faced very robust markets and that philosophy doesn't change. So, we are in a very competitive business. We compete aggressively for the business that we enjoy. And at the same time, we expect to receive a price that represents the value that we provide, and it has to be reinvestable. All that's real, and all that continues to be real as we look into the future.

Is it fair to compare your performance against the market or competitors? How do you view that? In recent years, it seems you've been somewhat willing to sacrifice volume. There were some contracts that shifted away from you in coal around 2013 and 2014. This might illustrate your honesty with pricing and your readiness to give up a little volume. Should we understand your approach as a continued willingness to maintain prices even at the cost of some volume?

Tom, I wouldn’t change my answer to you at all. We expect to be paid for the value that we represent and we expect to be able to reinvest in our business.

Thanks. To get back off of Ken's earlier question on the productivity front. It was very impressive that you guys were able to pretty much extend train length across the network in an environment where volumes were down about 6%. Can you give us a sense of what sort of siding constraints you guys are having across the network and the opportunity to expand that further?

Both of the train size as you saw there equates at about 6000 feet and almost 90% of our network is 7200 feet capable. So, we really don’t have any siding constraints and it is up to us to maximize train length and meet customer commitments. So, while we have a lot of opportunity in that category going forward.

Yes. I would add, it's very dependent on the lanes around the network. We still do have targeted capital investment that's oriented toward siding length extensions and being able to increase maximum train length on a particular route over and above what you see as average train length here. So, there are always or right now there are opportunities for us to continue to invest targeted capital to make that happen but we're a long way away from being at our average train length threatening our current siding length.

Thanks, really. I appreciate that color. With regard to PTC, Lance, you had briefly alluded to it in the prepared comments. Can you give us a sense of what the impact across the network would be if Congress doesn't extend it, and any lessons that you learned from the massive uptick in volume we saw in 2014 that you could deploy. Because to me, reading the announcement, the press release you guys had put out on the topic, it would impact a substantial amount of the network.

Yes. So, Rob, what we've announced, well we said that we would do is there is not an extension. And again, I'm very optimistic that Congress will be prudent and well, has an extension before we have to take any action. But what we've said is around Thanksgiving, in order to remove TIH from our railroad, we would have to start imposing an embargo. And that would be impactful. That means we'd have to stop allowing interchange product onto us of those commodities as well as start working with customers, trying to figure out a way for them to ship it on alternative lines. Also, we said as we approached the end of the year, we would start working with our Amtrak as well as the commuter agencies that we host to stop passenger traffic. Both of them would be very bad for the U.S. economy and for commuters. The TIH includes commodities like chlorine, that's used to clean drinking water. It includes products that go into fertilizer and other manufacturing processes. So, that would all have an impact on the U.S. economy. And then you can imagine in a place like Chicago, if the commuter lines were to stop running January 1, what commutes would be like for the 300,000 people a day that rely on those commuter lines.

Thanks so much for the time.

Hi, good morning guys. Nice quarter. With regard to the cost side, obviously we're seeing them come down year-on-year but also importantly sequentially. I'm trying to get a sense of like the pace of declines we should be anticipating for the fourth quarter? Do you think the run rate we've seen in Q3, is it a reasonable Q-on-Q?

Rob.

Yes, Tom. While I wouldn't focus solely on the run rate, we are really pleased with the significant progress we've made. The decline from the second quarter has been impressive, and we're proud of that achievement. I want to emphasize that we’ll focus on what we can control, and as Cam mentioned, we still have ongoing opportunities. Although we are making strides in right-sizing and realigning the organization, we’re not finished yet. We will continue to implement initiatives to enhance our effectiveness. Therefore, the run rate may change, but we will keep realigning and seeking every opportunity to improve our productivity initiatives.

Thank you for that information. I'm hearing that trucking is becoming more competitive with rail transport, and there seems to be a suggestion that pricing is declining for truck load services, which could potentially lead to a loss of market share. While this seems like a distant possibility, I'm curious about the rest of your business. How much do you think could be at risk of shifting towards trucking? I suspect the impact might be minimal, but I would like to know your perspective on this.

Yes. I think if you look at what's going on currently in the trucking environment, the lower fuel cost is allowing trucks to be more competitive vis-a-vis rail just by virtue of that fact. Long term trucks still have the same systemic long-term issue that they've always had in terms of driver shortages, some of the productivity headwinds that they have with some of the CSA regulations, road congestion, etcetera. So, we are still very confident of our ability to drive truck conversions which we demonstrated even in the third quarter in earning a model business. Certainly trucks are a great competitor and there is some competitive impact that we always, that we are always cognizant of. We are still positive about the position that we are in as a rail and driving conversions from truck to rail.

And case and point, you grew domestic intermodal in the third quarter by 1%.

Outside of intermodal, is it much of a threat or something we should be thinking about?

Trucks are always a competitor. We feel very good about our value proposition and our ability to compete.

Thanks very much.

Hey, thanks. Good morning guys.

Good morning.

So, Rob, why don’t you just follow-up your comment about head count in the fourth quarter being down about 1%. Could that imply a slight sequential increase from the third quarter average, even though ended the third quarter a lot lower than the average? I guess I'm just not throughout follow the down 1%. Are you adding head count back in the fourth quarter?

No. Scott, I just got to take you back. Remember, we had previously guided that we thought we would finish the year flattish with 2014, I think was roughly 48,000 number. What we're saying now given the confidence we have in the progress we've made today is we expect to end the year with the number being down a percent or so. So, I think compared to where we are now, it's flattish but good volume and other initiatives will dictate exactly where that number lands but okay that's the map.

Yes. Our focus moving forward, Scott, is to ensure that Cameron continues to emphasize obtaining the housing order based on our operational craft headcount. We are also working on securing our housing order from a non-agreement perspective, which we discussed in an announcement late in the third quarter. Additionally, we see potential in capital headcount, especially considering Rob's comments that capital is likely to decline next year. As we approach the end of this year, we have the opportunity to make adjustments in that area.

Okay. And then, Rob, you said a couple of times I think, about 4% labor inflation. What does next year look like?

We haven't finished our planning for next year, Scott, on a number of initiatives. But I think it's safe to say that the labor inflation will be lower than it was this year. Remember, this year we had the double wage, we had other issues that pushed the labor inflation for the full year up closer to that we had 5% to 6% in the first half of the year. So, I think it's competent, we're competent, says it's going to be lower than that. Exactly where that number lands at this point in time, again stay tuned.

Okay, great. And just, last just a quick thing on the CapEx. Is your comment that it's going to come down but we may not be able to get it down all the way to 16% of revenue? Are there lots on table, we could get it even lower than 16%, we just don't know.

Yes. What I'm saying there is the absolute number we would expect to come down, but it may not be in that 16 to 17 guidance range, yet, because remember this year because of the fall-off in the revenue, driven largely by the fall-off in the fuel surcharge revenue. And as you know and others know, we don't set our capital plan based on revenue. It's just the kind of guiding marker that we provide to you. So, it's possible that we'll quite make it all the way down to that 16 to 17 depending on how the revenue number looks as we work through our planning process and that's what I am suggesting.

Okay, great. Thank you, guys.

Good morning. So, I know there has been a lot of questions on price, but thinking about core prices of inflation, I was wondering if you could give us the sense of what overall rail inflation is currently running at?

Yes. Allison, this is Rob. I mean, this year overall inflation, again largely driven by that discussion I just had with the labor line is probably in the above three'ish, so maybe slightly higher than three, full year this year. Again, Allison, as you know, we don't set, again that's another marker similar to my discussion on capital. We don't set our pricing based on any one particular period inflation expectation. That's just a marker that we expect to continue to achieve above, that can be lumpy from one quarter to the next or one period to the next. But to answer your question, inflation overall was three-plus'ish this year.

Okay, that's helpful. And then thinking about intermodal, how much of the decline in the segment stems from your main competitor taking some share back as its network recovers and do you expect a further bleed in the fourth quarter given that the end has opened the northern region and added some new expedited intermodal service from Chicago to the PNW?

Yes. So, Allison, as we mentioned, the decline in our intermodal space was really in the international and the mobile space. And there is really a number of different dynamics that are going on in that. One is not to complete remigration if you will from east coast to west coast so that that is progressing. One is, as you know, in the liner steamship business, there are a number of different dynamics going on there with the different alliances and different entities deciding what lanes they're going to put their ships in. And certainly, kind of the suggested softness in China and other parts of the Asian and them all having the impact on that. So, those are really the drivers in terms of our domestic intermodal franchise. As we mentioned, we grew. This will be the seventh consecutive year of record of volumes. We feel great about our franchise, the position of our franchise and the strength of our franchise.

Okay. So, just to be clear on your answer, BN has not taken any of the share back that you may have gained last year or that's just not a significant factor?

So, as we talked at earlier earnings releases, we did have, I think Rob said a percent to 2% share benefit last year from business with the difficulties at our competitors; we fully expected that to migrate back. And elsewhere in a couple of areas, those were intermodal, those were in grain, those were in coal, and we have NRC and those migrate back and backwards aligned with our expectations.

Okay, great. Thank you very much.

Thanks, and good morning.

Good morning.

Maybe just a follow up on intermodal again. I know right now you're facing headwinds from tough international comps, there is uncertainty in the retail space. So, I was just wondering bigger picture, when do you feel this business can get back to more of a GDP or a GDP plus growth environment versus the declines we've seen year-to-date?

Eric. Let me take a stab at that. The longer term, we feel very strong, very bullish on the intermodal product in general that in the long run is going to be driven in large part by U.S. consumers and consuming both international product as well as domestic product. It's also predicated on our ability to have a service product that can penetrate against a truck. And all of those secular dynamics are set up positively for the long run. In terms of dislocations that are happening in the short term, it's hard to time things out. It is very dependent on what happens in the U.S. economy, what the jobs pictures look like what the earning picture for consumers look like, what the U.S. dollar is doing. Adds then to all that, we're focused on controlling what we can control, which is an excellent service product. We got the best franchise from a domestic and international intermodal perspective in the U.S. and that will serve us well over the long run.

Okay, great. And maybe then just follow-up on that. Looking at your intermodal business today, I know it varies by lane but what's the average discount for intermodal versus truck in your network today? And longer term, where do you think that percentage could go without causing a significant slowdown in intermodal volume growth?

Yes. We've said historically, a 15% to 20% as a rough we look on, would be part of our core strategy of course, to minimize that as we increase our value proposition.

Okay, great. I will leave it to that. Thanks for the time.

Hi, good morning. Thanks for taking my question. So, you guys have obviously made a lot of progress on aligning the resources in light of the softer volumes. And I know the volume outlook is uncertain in a lot of areas right now and it's tough to actually point to where and what might drive an acceleration. But should volumes actually start beginning to surprise to the upside in 2016 for whatever reason? How do we think about your ability to kind of leverage the resources you have right now and do you feel like there is a lot of operating leverage in the business in where your resources are currently or would you anticipate you have to kind of add back pretty aggressively? I know it kind of depends on what the volumes actually translate but how do we just sort of think about the operating leverage in intermodal if volumes actually do surprise the upside?

Alex, we would welcome nothing more than a surprise on the upside in terms of volume next year. And we are well positioned to be able to absorb that into the existing network. Cameron has got adequate locomotives and crews ready all around the network to be able to handle an uptick. The fluidity in the network would be able to absorb it rapidly. He and the operating team have done a great job in terms of getting the terminal and yard productivity up, and we will be able to bring in cars readily into that environment and handle it fluidly. And between Eric and Cameron and the rest of the team, they've done a stupendous job on stabilizing our train plan and making sure that it's robust enough to be able to handle some incremental growth. So, that would have significant leverage for us and we'd welcome it.

Okay, that makes sense. And then just my second question here on you suggested that there are some headwinds in the fourth quarter and that earnings per share would probably be down on a year-over-year basis. Can we kind of can you help us think directionally relative to the kind of 2% decline you saw in the third quarter? Can we expect another similar low single-digit decline in the fourth quarter or probably a bit of a worse year-over-year move there, given some of the puts and takes?

Alex, this is Rob. What I am calling out there, I mean, we'll see how the world actually plays out in terms of volume. But as we look at this point, we're not giving precise earnings guidance. It does look like we're going to have a bigger headwind in the fourth quarter on mix year-over-year and the reason for that is last year's mix actually was quite favorable. And if you look at the business, we were running sand fairly strong, coal was relatively strong, Ag was a pretty positive mix player. And those are things that we just don't see repeating in the fourth quarter. In addition, as I called out, we see a headwind year-over-year in fuel because last year's fourth quarter we got the benefit of about a nickel of the timing of fuel the fourth quarter last year which we don't see that reporting repeating again this year. So, I am calling out that year-over-year, it does look to us like the fourth quarter does have some bigger challenges than frankly the third quarter did.

Okay, that makes sense. Thanks very much for the time.

Hey, thanks, good morning. I want to talk a little bit about the coal network and the outlook for next year. Obviously, still some challenges particularly market share relative to natural gas. When you think about the network, one of your eastern competitors has started to make some changes in terms of the network, that's a little bit more structural in nature. I guess I'm just curious from your perspective how you think about that as you look out to 2016 and maybe beyond, given the coal outlook. Are there things that need to be done there or things you could do to potentially improve that the value proposition there?

Chris, before I hand it over to Cameron for a little more technical color, the thing to note about our coal network is it's largely run on a shared network. So, we have made fundamental adjustments in resources that reflect coal being down. You see that in our adjustment to labor, with the locomotives, it's also embedded in some of the cars that we've stored. And we're constantly looking at our assets as they are currently deployed to make sure they fit the demand profile for commodity like coal. Cameron?

You are exactly right, Lance. And our coal network is truly built out. So, for us it's really more of how we manage the tangible assets around locomotives and crews and we'll continue to do that. Having said that, we'll continue to study the assets around our coal network and react appropriately.

Thanks very much for the color. With regard to PTC, Lance, you had briefly alluded to it in the prepared comments. Can you give us a sense of what the impact across the network would be if Congress doesn't extend it, and any lessons that you learned from the massive uptick in volume we saw in 2014 that you could deploy? Because to me, reading the announcement, the press release you guys had put out on the topic, it would impact a substantial amount of the network.

Yes. So, Rob, what we've announced, well we said that we would do is there is not an extension. And again, I'm very optimistic that Congress will be prudent and well, has an extension before we have to take any action. But what we've said is around Thanksgiving, in order to remove TIH from our railroad, we would have to start imposing an embargo. And that would be impactful. That means we'd have to stop allowing interchange product onto us of those commodities as well as start working with customers, trying to figure out a way for them to ship it on alternative lines. Also, we said as we approached the end of the year, we would start working with our Amtrak as well as the commuter agencies that we host to stop passenger traffic. Both of them would be very bad for the U.S. economy and for commuters. The TIH includes commodities like chlorine, that's used to clean drinking water. It includes products that go into fertilizer and other manufacturing processes. So, that would all have an impact on the U.S. economy. And then you can imagine in a place like Chicago, if the commuter lines were to stop running January 1, what commutes would be like for the 300,000 people a day that rely on those commuter lines.

Hi, good morning guys. Nice quarter. With regard to the cost side, obviously we're seeing them come down year-on-year but also importantly sequentially. I'm trying to get a sense of like the pace of declines we should be anticipating for the fourth quarter? Do you think the run rate we've seen in Q3, is it a reasonable Q-on-Q?

Yes, Tom. While we're pleased with our progress, I wouldn't rely solely on the run rate, as we experienced a significant decline from the second quarter, which we take pride in. I can assure you that we will focus on the aspects we can manage, and as Cam mentioned, we have ongoing opportunities. As we work on right-sizing and realigning the organization, we still have more to accomplish. We will continue to pursue initiatives to maximize efficiency. Therefore, the run rate may change, but we will keep seeking every opportunity to enhance our productivity initiatives.

Thank you for that information. I'm hearing that trucking is becoming more competitive with rail. There's a general thought that pricing for truckload might lead to a loss of market share. While that's more of a distant possibility, I'm curious about how much of your overall business might be at risk of shifting to trucking. I believe this impact would be relatively small, but I would like to hear your perspective on this.

Yes. I think if you look at what's going on currently in the trucking environment, the lower fuel cost is allowing trucks to be more competitive vis-a-vis rail just by virtue of that fact. Long term trucks still have the same systemic long-term issue that they've always had in terms of driver shortages, some of the productivity headwinds that they have with some of the CSA regulations, road congestion, etcetera. So, we are still very confident of our ability to drive truck conversions which we demonstrated even in the third quarter in earning a model business. Certainly trucks are a great competitor and there is some competitive impact that we always, that we are always cognizant of. We are still positive about the position that we are in as a rail and driving conversions from truck to rail.