Union Pacific Corp (UNP) — Q2 2019 Earnings Call Transcript

Good morning, everybody, and welcome to Union Pacific's second quarter earnings conference call. With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales; Jim Vena, our Chief Operating Officer; and Rob Knight, our Chief Financial Officer. This morning Union Pacific is reporting record 2019 second quarter net income of $1.6 billion or $2.22 a share. This represents an increase of 4% in net income and 12% in earnings per share compared to 2018. Our quarterly operating ratio came in at an all-time best mark of 59.6%, a 3.4 percentage point improvement compared to the second quarter of 2018. This is the first time Union Pacific has ever recorded a sub-60% operating ratio for a full quarter. And while that's a remarkable achievement, it's magnified when you consider the challenges we faced from significant flooding that adversely impacted volumes and added incremental operating costs during the quarter. That's a testament to the tireless dedication of the men and women of Union Pacific. Working with our customers and the communities that we serve, the team safely restored our rail operations while continuing to drive productivity through our G55 + 0 and Unified Plan 2020 efforts. As a result, our operations have returned to normal, enabling us to focus on providing a safe, reliable, and efficient service product for our customers. The Unified Plan 2020 transformation at Union Pacific is full steam ahead, and I continue to be encouraged by the great opportunities we see for our customers and for our shareholders. With that, I'll turn it over to Kenny to provide some details on our results.

Thank you, Lance, and good morning. For the second quarter, our volume was down 4% as gains in our Industrial business group were more than offset by declines in Premium and Energy. However, we generated a positive net core pricing of 2.75% in the quarter, as we continue to price our service product to the value it represents in the marketplace while ensuring it generates an appropriate return. Freight revenue was down 2%, driven by the decrease in volume, partially offset by a 3% improvement in average revenue per car. Let's take a closer look at the performance of each business group. Starting off with ag products: Revenue for the quarter was up 4% on flat volume and a 4% improvement in average revenue per car. Grain carloads were down 7% driven by continued reduction in export grain shipments. This was partially offset by strength in export wheat and domestic corn. Volume for grain products was down 1% as sustained demand for biofuels and related products was more than offset by challenging environment for exports. Fertilizer and sulfur carloads were up 12% due to strength in export potash, diesel exhaust fluid and sulfur. Moving on to Energy: Revenue was down 13% as volume declined 9%, coupled with a 4% decrease in average revenue per car. Sand carloads were down 50% largely due to the impact of local sand within the Permian Basin. Coal and coke volume was down 7% driven by ongoing headwinds of contract changes and retirement. Flooding in May and June also negatively impacted shipment. In addition, coal exports were lower due to softer market conditions. However, on a positive note, favorable crude oil price spreads drove an increase in crude oil shipment, which was a primary driver for the 30% increase in petroleum, LPG, and renewable carloads for the quarter. Industrial revenue was up 4% on a 2% increase in volume and a 2% improvement in average revenue per car during the quarter. Construction carloads increased 4% primarily driven by strong market demand in the south for rock shipment. Plastics volumes increased 6% due to higher production. Forest products volume decreased 10% driven by reduced paper shipment as a result of high containerboard inventory and decreased lumber shipment associated with lower housing starts. Turning to Premium: Revenue for the quarter was down 2% with a 5% decrease in volume, while average revenue per car improved by 4%. Domestic intermodal volume declined 11% during the quarter as a softer market coupled with weather-related service issues led to lower volume. Industrial intermodal volume was up 1% in the quarter as volume returned back to seasonal levels following a tariff pull ahead in the previous two quarters. And finally, finished vehicle shipments were up 1% as second quarter U.S. auto sales were down approximately 1% from 2018. Light truck and SUV sales were stronger and able to offset declining car demand. Looking ahead for the remainder of 2019, for ag products, we anticipate continued strength in biofuel shipment due to the increased market demand for renewable fuels to help offset the headwinds in the ethanol marketplace associated with exports. We also expect stronger beer shipments, along with long-term penetration growth across multiple segments of our food and refrigerated business. Furthermore, we expect uncertainty to persist in the grain market due to reduced U.S. crop production and foreign tariffs. For Energy, we expect favorable crude oil price spreads to drive positive results for petroleum products. While year-over-year comps for sand ease in the second half of the year, local sand supply will continue to impact volume. We also expect coal to experience continued headwinds throughout 2019, and weather conditions will always be a key factor for coal demand. For Industrial, we anticipate an increase in plastic shipments driven largely by plant expansions coming online later this year, coupled with continued strength in the construction market in Texas. However, we are watching the forest products market as housing starts are forecasted to be down year-over-year in the second half. And lastly, for Premium, the U.S. light vehicle sales forecast for 2019 is 16.8 million units, down about 2% from 2018. However, consumer preference for SUVs over sedans will continue to help offset the declining car demand. Domestic intermodal volume is expected to be impacted by truck competition in the second half of 2019, which may limit opportunities for over-the-road truck conversions, but longer term fundamentals still provide a bullish outlook for over-the-road conversions. In addition, uncertainty in trade and the economy could create a tough fourth quarter comp due to the pull ahead we saw in late 2018 for international intermodal shipment. And so before I turn it over to Jim for his operational update, I want to share that I continue to be encouraged how we work collaboratively with the operating team. Jim and I have been making difficult decisions to improve the overall supply chain and align our sales with our customers to find the best way to serve and grow with them. In the end, this builds a solid platform for more reliable service products for our customers. And now I'll turn it over to Jim.

Okay. Good morning, everyone, and thanks, Kenny. As you've already heard this morning, our network was once again challenged by significant prolonged flooding in our Mid-America Corridor. We responded by rerouting traffic and deploying additional people and equipment to quickly restore operations. And I am pleased to report that with the weather behind us, including Hurricane Barry, our network has returned to normal operations. I would be remiss not to say how proud I am of our employees who responded to the challenge, working efficiently and without injury to restore operations in the face of some pretty adverse conditions, while delivering an all-time best quarterly operating ratio of 59.6%. This truly was a remarkable achievement. It all starts for us with safety. As safety remains job one at Union Pacific, our commitment is relentless. We have opportunities to improve our rail equipment incidents, and we're working as a team to learn and improve each and every day. Turning to slide 11. I'd now like to update you on our six key performance indicators. Despite the weather, most of our metrics improved year-over-year. This is a direct result of our relentless focus on improving network efficiency and service reliability as part of Unified Plan 2020. Continued improvement in asset utilization and fewer car classifications led to a 14% improvement in freight car terminal dwell and a 4% improvement in freight car velocity compared to the second quarter of 2018. Train speed for the second quarter decreased 6% to 23.1 miles per hour as flooding impacted fluidity. Train speeds also were affected by the 30-plus percent increase in daily work events being performed as part of Unified Plan 2020. While these work events are helping us increase train size and drive asset utilization, the team is still working to execute these work events even more efficiently and drive faster train speeds. Turning to slide 12: Continuing our trend from the first quarter, locomotive productivity improved 19% versus last year as efforts to use the fleet more efficiently enabled us to park units. As of June 30, we had around 2,150 locomotives stored. Driven by an 8% decrease in our workforce levels, productivity increased 4% year-over-year. In addition to improving productivity, delivering a great service product is of equal importance to the team. Car trip plan compliance was basically flat year-over-year as the benefit from an increased freight car velocity and lower dwell were offset by the impact of weather on our network. We expect our service product to improve going forward. In fact, we're already seeing improvements in July. Slide 13: We continue to push forward with Unified Plan 2020, and the slide highlights some of the recent network changes. From a terminal rationalization standpoint, we stopped humping cars at our Proviso yard in Chicago and curtailed yard operations in Salem, Illinois, at our 36th St. Yard in Denver, East Yard in San Antonio. Proviso, in particular, was a very old and inefficient hump yard, still using retarder operators to manually flow cars into the ball tracks. By moving this work to outlying yards, including one of our most efficient in North Platte, we are not only saving labor dollars but avoiding capital as well. In addition, we have made a number of changes in the Kansas City complex to improve service and increase efficiency. We've largely consolidated traffic out of the Armourdale facility while cars previously handled in Des Moines, Iowa are now switched in Kansas City. And our plan to simplify intermodal operations in Chicago is well underway. We idled our Global three facility, and the Canal Street Container Depot will follow shortly. Going forward, we will continue to look for ways to reduce car touches on our network, which will undoubtedly lead to additional terminal rationalization opportunities. And we are making excellent progress with our train length initiatives, as illustrated by the graph on the right. By putting more products on fewer trains, we increased train length 10% since January of this year, and I expect to see continued improvement as the year progresses. To wrap up, while a number of bold steps have been taken and the results are evident, there are a lot of opportunities ahead of us to further improve safety, asset utilization and network efficiency. Once again, our network showed tremendous resiliency in the face of significant weather during the quarter as we have returned to normal operations. As we move forward, running a safe, reliable and efficient railroad for both our customers and our shareholders is our number one priority. And with that, Rob, over to you.

Thanks, Jim, and good morning. Today, we're reporting second quarter earnings per share of $2.22 and 3.4 points of year-over-year improvement in our operating ratio to 59.6%. This represents an all-time best quarterly operating ratio for Union Pacific and is a testament to the great work we are doing with G55 + 0 and Unified Plan 2020. Our quarterly results were, however, affected by some one-timers, so before I jump into the details, let me give you some context. Like the first quarter, significant weather events impacted volumes and added operating expenses. These weather challenges resulted in a 0.6 point negative impact to our operating ratio and $0.07 earnings per share compared to the second quarter of 2018. And I'll detail that more in a minute. We also recognized a $32 million payroll tax refund, along with $3 million of associated interest income. This was part of the $78 million refund that we outlined in the 8-K filed in March. The refund had a 0.6 point favorable impact on the operating ratio and $0.04 EPS tailwind in the quarter compared to last year. The combined impact of lower fuel price and our fuel surcharge lag had a favorable impact for the quarter of 0.6 points on the operating ratio and $0.04 of EPS compared to 2018. The good news is that despite the weather challenges and lower volumes, we drove core operating margin improvement of almost 3 points or $0.23 of EPS compared to the second quarter last year. To give you a little more detail on the weather impact, we attribute about 2 points of the 4 points second quarter volume decline to flooding or roughly $75 million. We also incurred around $19 million of weather-related costs in the quarter, primarily in the compensation and benefits and purchased services and materials cost categories. With all of our routes returned to service, we do not expect any weather-related cost to carry over into the third quarter. And now let's recap our second quarter results. Operating revenue was $5.6 billion in the quarter, down 1% versus last year. The primary driver was the 4% decrease in volume. Operating expense totaled $3.3 billion, down 7% from 2018. Operating income totaled $2.3 billion, an 8% increase from last year. Below the line, other income was $57 million, an increase of $15 million compared to last year. Interest expense of $259 million was up 28% compared to the previous year and this reflects the impact of higher total debt balance, partially offset by a lower effective interest rate. Income tax expense increased 14% to $488 million. Our effective tax rate for the second quarter was 23.7%. For the full year, we expect our annual effective tax rate to be in the mid-23% range. Net income totaled $1.6 billion, up 4% versus last year, while the outstanding share balance decreased 7%, as a result of our continued share repurchase activity. As we noted earlier, these results combined to produce second quarter earnings per share of $2.22 and an all-time best quarterly operating ratio of 59.6%. Freight revenue of $5.2 billion was down 2% versus last year. Fuel surcharge revenue totaled $399 million, down $13 million, when compared to 2018. Business mix was essentially flat for the second quarter driven by decreased sand volumes and significantly less intermodal shipments. Core price was 2.75% in the second quarter. Slide 19 provides a summary of our operating expenses for the quarter. Compensation and benefits expense decreased 8% to $1.1 billion versus 2018. The decrease was primarily driven by a reduction in total force levels, which were down 8% or about 3,500 FTEs in the second quarter versus last year. Productivity initiatives along with lower volumes resulted in a 5% decrease in our TE&Y workforce, while our management engineering and mechanical workforces together declined 11%. Fuel expense totaled $560 million, down 13% compared to 2018, due to lower diesel fuel prices and fewer gallons consumed. Average diesel fuel prices decreased 4% versus last year to $2.21 per gallon and our consumption rate improved 5% through the combination of lower volumes and more efficient operations. Purchased services and material expense was down 9% compared to the second quarter of 2018 at $573 million. The primary drivers of the decrease in the quarter were reduced mechanical repair costs and less contract services and materials, partially offset by weather and derailment-related expenses. Turning to slide 20. Depreciation expense was $551 million, up 1% compared to 2018. For the full year 2019, we estimate that depreciation expense will be up 1% to 2%. Moving to equipment and other rents. This expense totaled $260 million in the quarter, which is down 2% when compared to 2018. Other expense came in flat versus last year at $247 million. For the full year 2019, we expect other expense to be up around 5% compared to 2018. Productivity savings yielded from our G55 and Zero initiatives and Unified Plan 2020 totaled approximately $195 million in the quarter, which was partially offset by additional costs associated with weather and derailments. As a result, net productivity for the second quarter was $170 million. It has been a tough first half of the year, but as we exit the quarter, the positive momentum from our productivity initiatives gives us confidence that we will still deliver at least $500 million of net productivity in 2019. Looking at our cash flow. Cash from operations through the first half totaled $3.9 billion, down slightly compared to last year. Free cash flow before dividends totaled $2.3 billion, resulting in a free cash flow conversion rate equal to 77% of net income for the first half of 2019. Taking a look at adjusted debt levels. The all-in adjusted debt balance totaled $27.7 billion at the end of the second quarter, up $2.5 billion since year-end 2018. We finished the second quarter with an adjusted debt-to-EBITDA ratio of 2.5 times. As we have previously mentioned, our target for debt-to-EBITDA is up to 2.7 times. Dividend payments for the first half totaled more than $1.2 billion, up $123 million from 2018. This includes the effect of 10% dividend increases in both the third quarter of 2018 and the first quarter of this year. We repurchased a total of 21.9 million shares during the first half of 2019, including 3.7 million shares in the second quarter at a cost of $639 million. Between dividend payments and share repurchases, we returned $5.4 billion to our shareholders in the first half of this year. Looking out to the remainder of 2019. Although we expect second half volumes to improve sequentially from the first half, that improvement will not be enough to produce year-over-year volume growth. In fact, our best thinking at this point is that volume for the second half will be down around 2% or so versus 2018. And as Kenny mentioned earlier, our pricing strategy is unchanged as we continue to price our service product to the value that it represents in the marketplace, while ensuring that it generates an appropriate return. We remain confident that the dollars we yield from our pricing initiatives will again well exceed our rail inflation cost in 2019. As it relates to our workforce, strong productivity initiatives and to a lesser degree lower volumes have resulted in a 6% year-to-date reduction. Looking out to the balance of 2019, we expect the combination of operating efficiency and lower business levels should result in full year force levels to be down around 10% versus 2018. Importantly, we are still confident in our ability to achieve a sub-61% operating ratio in 2019 on a full year basis, which implies that our second half operating ratio will be better than the first half. Furthermore, we still expect to be below 60% by 2020. We have to play the hand that we are dealt when it comes to volumes, but rest assured our commitment to achieving our financial targets is unwavering and has never been stronger. So with that, I'll turn it back over to Lance.

Thank you, Rob. As discussed today, we delivered record second quarter financial results driven by exceptional operating performance. For the remainder of 2019, we look forward to building on the momentum from Unified Plan 2020 and providing a consistent reliable service product for our customers. As always, we're committed to operating a safe railroad for both our employees and the communities we serve and we remain focused on driving increased shareholder returns by appropriately investing capital on the railroad and returning excess cash to our shareholders through both dividends and share repurchases. With that, let's open up the line for your questions.

Hey, good morning, and great job on the execution on your UP 2020. Just maybe Jim or Kenny, your thoughts on the lane closures as you shift yards and the impact on volumes as you move into the second half. Is this more an economic call Rob on the volumes? Or is this more lane closures and shifting target on volumes?

Good morning Ken, this is Kenny. Firstly, the impact has been very minimal, and most of the affected volumes were from the less profitable segments. The commercial team has done an excellent job being proactive in collaborating with customers to ensure we have solutions in place. Therefore, we believe the impact is minimal, and we feel confident about the decisions we've made.

One thing I would add, Kenny, is that we are not just trying to do it; we are doing it. We believe we have developed a better product for our customers and improved our service in Chicago and other areas by analyzing traffic flows. It doesn’t make sense for us to have six locations handling railcars, so we have consolidated to the fewest locations possible and positioned them strategically for success. We aim to expand alongside the customers we serve, particularly in Los Angeles. Our goal is to provide the best service across our network. Once we address these key touch points, we will be able to offer the best service possible and grow with our customers.

And Rob, just as a follow-up given your move to keep the sub-61% OR and a better OR in the second half which seems reasonable just given the pace you're at just want to understand the kind of cadence of your employee cuts. Is this something you see accelerating just given the steps Jim is taking on reducing locomotives? Is it spread out on different parts? I guess is it T&E focused or is it kind of more widespread?

It’s quite widespread, Ken. Year-to-date, as I mentioned earlier, we are down about 6%, and we anticipate the average for the year will be around 10%. This indicates improvement, and it is indeed widespread, primarily driven by the success of Unified Plan 2020. We are hopeful that we will have a free and stable environment to operate in starting today.

Great. Appreciate the time guys.

Thanks. Good morning and congrats on the quarter. So, maybe to focus on productivity, you reiterated the guidance for over $500 million in productivity for this year, but given you're maintaining the OR outlook despite the weakness in volumes and weather it seems like the expected productivity in 2019 is moving higher. Can you just give us a sense for the incremental productivity gains you expect to achieve this year versus your original expectation? And maybe give us some sense for how you're thinking about the second half relative to the $170 million of net productivity in the second quarter. Just curious do you expect that number to continue trending higher sequentially?

Rob, do you want to take that?

Yes, Justin, I want to emphasize that the lack of volume will not be an excuse for us to refrain from making significant strides in our productivity. With Jim and his team's implementation of Unified Plan 2020, I feel more confident than ever. We are committed to achieving at least $500 million in productivity. This indicates that we expect stronger results in the second half compared to the first half, which was impacted by inefficiencies due to flooding and other weather events. Thus, we anticipate an increased pace in the latter half, driven mainly by the success of the Unified Plan 2020.

And just thinking about that sequential change, do you think third and fourth quarter can look better than what you posted in the second quarter from a net productivity perspective?

Overall, we will refrain from providing quarterly guidance on that. However, if you compare the second half to the first half, especially considering the negative impact from flooding costs in the first half, we anticipate that the net figures will improve in the second half.

Okay. And then I guess finally thinking about productivity into 2020 you maintained the guidance for a sub-60% OR next year. Can you talk about what that assumes for productivity even if it's just from a high level? Does that assume that the productivity dollars next year are higher than what we're going to see in 2019?

Hey Justin, we haven't yet put together a game plan for 2020, but you're right, we're holding firm on our guidance for overall OR. And I'll let Rob speak to the details of that.

Yes. Justin, I would say Lance is right. We don't have the final numbers on that. But I would tell you that the levers that we pull will be the same levers they always are and that is volume which we haven't finalized our outlook in terms of volume; quality reliable service that we're confident we are improving that product which enables us to continue to get appropriate price in the marketplace. And we're in the sort of still early innings by my definition of the Unified Plan 2020. So, clearly there is more productivity dollars that we will be going after to achieve that sub-60% next year.

Okay, great. I'll leave it at that. Thanks for the time.

Thank you.

Hey, good morning guys. Thanks. So, Rob, I just want to just quickly clarify. The 10% head count that's an average or year-end? I'm not sure.

That's an average of 10% reduction year-over-year.

Okay. Kenny, on the pricing side so with the moving pieces here the volume environment maybe, I don't know if anything's changed with BNSF just directionally is the pricing environment getting any tougher as you see it? And then I know mix is sort of an impossible one to forecast but such a dramatic change from minus 4% in the first to flat in the second. Any directional at all sort of color or idea on how we should think about second half?

Yes. You asked a number of questions there. I'll take a few here. First of all, we're focused on our pricing strategy. We've got a number of competitive forces out there beyond just the competitor in the West. There's barge and there's trucks. I'm really proud of our commercial team and their ability to just stay very focused on pricing to the service product that we have and the value we present. I'll tell you that I'm also looking forward to getting this weather behind us because I expect that our service product as it improves is going to give us an ability to compete in the marketplace. So, I like our chances as our service product improves to stick with our pricing strategy and price to the market.

Scott, I'll address your mix question. You know we don't guide the mix because it's very hard to figure out as we just demonstrated Q1 to Q2 and there's mix within mix as Rob says all the time. So, bottom-line is when you look backwards what happened between Q1 and Q2 was about a large drop in intermodal that aided mix. And as you look forward, we'll just have to see what the markets present to us.

Okay. Thanks. And Rob if I can just ask you one more quick one. So, the other railway revenue was sort of flattish year-over-year down a little sequentially, any thoughts on how to think about that in the back half?

Yes. Nothing I would call out that's going to change the pace of that at this point.

Thank you guys. Appreciate the time.

Yes, thank you.

Hey thanks. Good morning. I wanted to ask you about the head count. And so some significant improvement on head count and certainly for productivity. I was wondering if maybe you could help us sort of understand if there's a piece of that that's sort of reaction to weaker-than-expected volume and sort of what piece of it that's sort of more of a sustainable run rate. And presumably at some point as we move into 2020, I'm guessing you guys are assuming sort of a better more stable potentially growth volume environment. So, I would imagine you wouldn't cut heads beyond what you think you can kind of manage that, but if you could give us some sense of what you're doing that's going to catch up because the volume environment's been soft. And really what's kind of core to the bigger-picture plan?

Yeah. Chris, you've got it just right. When volumes get softer, we know how to adjust our resources to match what volume represents. But I would have to say, the lion's share of what you saw was about Unified Plan 2020 and productivity. And you can see that kind of across the board. We had to adjust the amount of resources we put at locomotives as we parked about a quarter of the locomotive fleet if not more. And you can see that directly related to the headcount, to the manpower that we have attached to maintaining locomotives. The same is true on maintaining cars. The same is true on the TE&Y workforce. We've taken a lot of work out of the network and it's being reflected now on our manpower. And we've got – there are more of those adjustments to be made as the network continues to stabilize and as we continue to find opportunity.

Okay. That's very helpful. I appreciate that. And maybe just a broad question, Kenny about sort of the demand environment. So, clearly softness in volume – some of it might be some lean dynamics where it sounds like it's relatively minimal on your network. When you think about sort of what you're hearing from the customer environments why has it been so sluggish over the course of maybe the last four, five, six weeks?

Yeah. So I'd tell you, we are seeing some softness in the truck environment. Clearly, trade is impacting some of our ag business and we'll continue to look at other pieces of the business in the second half. I'd tell you at the same time, I am feeling bullish about our franchise. We've got a lot of upside with our petrochem business, our industrial chem and plastics, our construction product. And I'm feeling really good about our crude oil business. So we'll see what happens in the second half. And like I said as our service improves, I like our chances to compete in the marketplace.

Got it. That's helpful. Thanks for the time. Appreciate it.

Hey, good morning. Thanks for taking my questions. I just want to go back to price for a second. I don't think you really showed too much leverage to the tighter truck market in 2018, when you calculate, it differently. So there's a 2.75% price still on the core side. Is that really sort of a lag basis from what we saw in the truck market and things are getting re-priced and showing up now? Hence I guess, the formulary would be, if you think the truck market is going to soften a little bit more can you maintain that level of core price or something pretty close to it through the rest of this year and into 2020?

Hey, Brian, this is Lance. I'll let Kenny or Rob speak to more of the detail. But when you mentioned, we calculate our price on a holistic basis that is the absolute dollars yielded during the period divided by all revenue. So in the second quarter 2.75%, that's pretty solid performance in a relatively soft truck market and there is an impact in terms of what moves as to what gets counted as yield, right? I mean, you can take a price action last year on a book of business and if it doesn't move this year you get no credit for it. That's how we calculate our price. So there's a price/volume impact in there that is very hard to tease out.

The only thing I'll add is that, we'll see what happens in the second half. It doesn't change our pricing philosophy or our approach to be disciplined here. Maybe it means a couple of few more opportunities. But regardless the opportunities that we're presented, we're going to be very disciplined about what business we accept and compete for.

Okay, thank you for that. And then Kenny one more for you to follow up on coal. We've seen a lot of headlines there recently a couple of bankruptcies a big push for large-scale consolidations. So I just wanted to get your thoughts. It's been challenging for a while, but this seems like it's another step change. Just want to get your thoughts on how you adjust for that for the commercial side both in the short-term and long-term. Do you need to change how you price maybe more to natural gas try to push more exports? And then Jim, if I could get you to comment on the operating side, I think the network did a really good job of adjusting for the fallout in frac sand but this is clearly a bigger chunk of the business. It's probably got a longer and potential tail downward than some of the secular challenges.

Yeah. So we've been living in a coal environment for some time, so this is not a surprise or anything new to us. It doesn't change our approach to ensuring that we compete and win the business at the appropriate return for us. We're going to stay committed to that. I will say that as you hear about some of these bankruptcies or closures it doesn't take away from the fact that another producer or shipper up in that area might be able to move that volume. So you got to keep that in mind as you're thinking about that.

So, Brian, the only thing I'd add is this is a railroad and as long as I have and the gray hair I have markets go up markets go down pieces of the business go up and down. If you're a good operator, good company you know how to react to it. We've reacted by making sure that we don't get ahead. We plan properly with our assets. We make them as efficiently as possible. We're making the coal train, specifically more efficient so that we can have a better return on the product that we're moving, and that's what's it's all about. We have to react fast. And in other places where we see increasing business, we have to put assets in there to do that in a smart way. So it's as simple as that, Brian.

Hey, Brian, one last – this is Lance. One last thing to note and that is thinking about this market holistically long-term, we've talked about this that coal has been challenged in kind of a secular decline. You see that in coal unit closures. You see it in investment in alternative sources of energy. And we'll – we've got a game plan for that in the long term at – and over time, we also care deeply about making sure that there are good healthy capitalized coal producers to serve the market. They exist today, and I know they're working hard to make sure that their future is solid and we just support them as they do that.

All right. Thanks for the thoughts.

Thanks, operator. Good morning, everybody. Jim, I was just hoping you could talk about the additional and maybe structural cost opportunity. For example, where is the active locomotive fleet today? Where do you think you could go? What's the target for car velocity against the 200 miles per day you're achieving today, opportunity for system-wide train length? Anything else that just gives us a sense of where you think the further opportunity is on the structural cost side relative to the improvements – the significant improvements you guys have made to-date? Thanks.

Appreciate it. Listen, you just don't list it. And I think there's opportunity in car velocity, there's opportunity in the locomotives, there are opportunity on terminals, there are opportunities on how we handle our trains, how we – how many touch points we have on cars. So I think like Rob said in the prepared notes, we're early in this. We've got lots of long runway to go, and many innings left to be able to deliver Amit.

Okay. I wasn't going to ask you what inning you're in but thanks for adding that anyways. But you kind of teed up my follow-up question with respect to how all that translates to the OR. And given your early innings into all this, I would just expect your OR targets at this point when you've got six months of very strong operating performance in a tough environment to be frankly more ambitious, because there's another rail out there that has much lower revenue per carload but significantly better OR. It obviously takes time. So this is not a critique by any means but I just wanted to get your updated thoughts on what the structural profitability potential is for the business based on both your longer tenure at the company and then also what other industry peers are being able to achieve? Thanks.

I'll comment on that. Jim, if you want to add anything, feel free. I've always felt optimistic about our ability to meet our targets, especially considering what you mentioned and what Jim and the team are doing with Unified Plan 2020. We're aiming for the best sub percentage we can achieve this year at 61% and moving towards 60% next year, ultimately aiming for 55%. We see the opportunities you mentioned, and when everything is accounted for, that's what will take us to 55%. I understand the criticism for not providing a specific date for reaching 55%, but our approach and goal at Union Pacific is to first reach 60% and then continue pushing towards 55%.

The only thing I'll add is I like to just deliver the number and then we'll talk about it like we delivered a 59.6%. I like that number and there's opportunity there. And we'll continue to deliver. I'll let Rob worry about how we appraise the number, okay?

And just to be clear it wasn't a criticism. I think we all respect and appreciate how hard it is to deliver the results you achieved. But I just wanted to I guess ask the question because I had to but I appreciate it. Thank you.

I got the whole question. I understood a bit.

Thanks. Good morning. Maybe if I could ask that OR question in a slightly different way. Jim, as you just said you're at a sub-60% already. I realize that's just a one quarter number but it was a difficult quarter. You have a lot of momentum going forward. So I wanted to get your thoughts on the feasibility of getting to that sub-60% by 2019. And specifically what would need to go right for that to happen? Would volumes have to come in better than the down 2%? Any help framing that scenario would be great.

I believe the best way to understand the operating ratio is to recognize that it reflects a great deal of hard work. I feel confident about the progress we've made. I've been here for six months and four days, and our entire team has put in considerable effort on various aspects such as train length, car productivity, the speed at which we move cars, and fuel conservation managed by our locomotive engineers. We are also focusing on how many mechanical staff we require and the thoroughness of their car inspections. This is an ongoing effort, and the entire company is committed to becoming the most efficient railroad in North America. That is our goal. I can't specify a timeline as there are uncertainties; for example, we experienced a hurricane impact last week, albeit a smaller one. So, unfortunately, I can't provide a definitive answer. What I can assure you is that we have the right team in place. Everyone at the company understands our mission: to deliver a better product to our customers, to grow our business, and to achieve the most efficient operation in North America. That's the essence of our objective.

I appreciate that. Lance, about a month ago, you mentioned in the media that your company was gaining market share from BN due to the success of the Unified Plan. Can you provide some numbers regarding the volumes or share gains? Additionally, could you share which end markets are experiencing these share gains? Thank you.

Thank you for the question, Allison. In the first half of the year, our growth is moderately better than our main competitors, which could be due to various factors, including how our network operates compared to theirs. One significant factor is that we believe our franchise is unique and superior, making it the best in the industry. Looking ahead, we expect that Unified Plan 2020 will provide a more consistent and reliable service for our customers. As a more efficient service provider, this positions us to excel in the market and help our customers succeed as well. Regardless of economic conditions, we believe this gives us the best chance to win and grow. I'm not exactly sure what that will look like in comparison to BN or others, but that's our goal.

Okay. Thank you.

Good morning, Jim. I have a couple of questions for you. I appreciate the detail and framework regarding your operations with yards and terminals. Could you take a moment to provide an overview of your starting point and current status? Additionally, it would be helpful to hear your thoughts on the potential future state. For example, what were the yard numbers in January, and where do they stand today? How much further can you reduce the count? Can you move from 12 to 10, or even to five or six? How would you frame this in terms of yard rationalization?

When I consider the hump yards, I focus on their efficiency, especially when processing a large volume of cars, which is crucial for our operations. If we can avoid sending a car through a hump yard, we can save significant time, which is essential for all yards. Currently, we only have one hump yard complex in our Northern region, located in North Platte. That area covers a substantial part of our railroad. There is also a non-mechanized switching yard in Northern California at Rolesville, which we classify as a major yard, but it lacks the full mechanization. It's challenging to make cuts in our operations; I believe North Platte will remain essential for a long time. We are pushing it to operate more efficiently by increasing the number of railcars processed. They are currently achieving record speeds for switching cars in that complex, and I anticipate further improvements with our capable team working on it. I don’t have the exact numbers on hand, but we know we need the complexes we have. Houston is a growing area, and we expect the hump there to function efficiently. Our focus is on moving cars more quickly. Regarding intermodal operations, Kenny and I share the same vision, and we have a plan for future developments that we will announce as we progress. Ultimately, our aim is to provide our customers with better service by handling their containers and trailers more rapidly, allowing us to compete with trucks and other railroads effectively. I am confident in our ability to do so. That's my summary at this point.

It seems you've made significant progress with hump rationalization, particularly in the North, so we shouldn't anticipate much more in that area moving forward. However, there is still potential for growth in the intermodal terminals. Regarding the train length expansion, you've shown about a 10% increase from June to January, which is quite impressive with an average of 7,700 feet. How much additional growth do you foresee in that area? Are there any limitations from a sighting perspective, or is there potential for that number to increase further?

Look, all I can tell you is we're not constrained. We'll invest in places where we're constrained. We did that on the route coming out of L.A. going towards El Paso closing some gaps. So we announced that three months ago. We're just about completed with that. It will help us. There's a little bit of investment, I guess, little against the $3.2 billion that we have, but we'll continue to invest to do that. Yes, train size will grow, no if ands or buts. It will grow across the whole network.

Okay. Great. Thanks for the time.

Yeah.

Thank you.

Thank you very much. Rob, my first question is for you. I know you mentioned returning to the operating ratio and that you haven't finalized your plans for 2020, but it appears you are guiding for a 100 basis point improvement based on your projections for 2019 and 2020. We are all considering the possibility that you might reach your 2020 target by the end of 2019. It seems that maintaining a 60% target for 2020, as you've guided, wouldn't be ideal. So, I'm wondering if we use the 100 basis point improvement as our baseline assumption for 2020 compared to 2019, what factors will you consider to determine if that estimate is too low or too high? Additionally, I know Jim wanted to contribute, but could the success you have achieved so far potentially enhance that 100 basis point improvement for 2020?

We are not limiting ourselves to just one area of improvement. Our goal is to get below 61% this year and aim as low as we can towards 60%. While the difference between 61% and 60% is one percentage point, we will strive to achieve as much success beyond that as possible. The process begins with our assessment of the economy in 2020 and our expectations for volume. As we continue to enhance our service reliability, we gain confidence to pursue core pricing gains, which will be a key factor. Additionally, improving margins will be part of our Unified Plan 2020. I can assure you that the team is very confident in our ability to enhance operational efficiency and increase productivity, which will positively impact our margins.

The only thing I'll add is this is a railroad and as long as I have and the gray hair I have markets go up markets go down pieces of the business go up and down. If you're a good operator, good company you know how to react to it. We've reacted by making sure that we don't get ahead. We plan properly with our assets. We make them as efficiently as possible. We're making the coal train, specifically more efficient so that we can have a better return on the product that we're moving, and that's what's it's all about. We have to react fast. And in other places where we see increasing business, we have to put assets in there to do that in a smart way. So it's as simple as that, Brian.

Hey, Brian, one last – this is Lance. One last thing to note and that is thinking about this market holistically long-term, we've talked about this that coal has been challenged in kind of a secular decline. You see that in coal unit closures. You see it in investment in alternative sources of energy. And we'll – we've got a game plan for that in the long term at – and over time, we also care deeply about making sure that there are good healthy capitalized coal producers to serve the market. They exist today, and I know they're working hard to make sure that their future is solid and we just support them as they do that.

All right. Thanks for the thoughts.

Thanks. Good morning, everyone. Just looking at the kind of head count cuts in the back half of the year, can you just help us understand, if this was kind of always part of the PSR plan? Or are you being more opportunistic given a softer volume environment to kind of make more cuts here while you can?

Yes. I'll start with that. The short answer, Ravi, is we've always anticipated that labor would be a fairly large portion of our productivity savings for the year, which we've highlighted as plus $500 million net. So that's always been part of the expectation. If we do less work, we size the workforce for that less work.

But, yes, Ravi, I would add to that, that's the driver, that's the key drivers, is our confidence of the Unified Plan 2020. But given the fact that we have eyes on as best as we can at this point of the volume numbers that we gave for the back half, that we take that into consideration as well.

Understood. And just a follow-up. The Canadian rails have been really bullish on the international intermodal opportunity for the last couple of years and then going forward. Some of that kind of insinuates kind of some share shift from the U.S. ports, the Canadian ports. Can you just talk about what you guys are seeing on the international intermodal side? And kind of do you see that as a secular shift in the industry?

Yes. We have seen over the last few years a little bit of share shift versus the West Coast. I'll tell you that, if you look at the weather issues that we faced, coming out of the couple of quarters of pent-up demand, we still feel pretty good about the fact that our international intermodal volume was up 1%. As we get back to a more stable economy, again, we still feel good about our opportunity to compete and grow that international intermodal business.

Very good. Thank you.

Hi. Thanks for the time here. Kenny, just wanted to follow up on the back half volume outlook. Just to clarify, in terms of how you guys are thinking about the cadence through the back half of the year. Do you expect it to return to a more normal seasonal volume cadence through year-end? And maybe in that same vein, what are you hearing as it relates to IMO 2020 plans from shippers, particularly in the international intermodal side? Any plans to pull forward ahead of that? And how do you think about the impacts there for a petro-chem product perspective? Thanks.

Yes. So a couple of questions there. First I'll just say that, the things and some of the challenges will be what they are. We'll see what happens with the domestic trucking market. We'll see what happens with trade. We still feel very good, again, about the construction business that we have, the crude oil that we have. And the plastics business, we expect that to continue to grow. Everything that Jim is doing on the operating side, again allows us to compete. It allows us to get after rail-centric business that we lost during the floods, which allows us to increase a lot of the truck-centric business moving forward. So we feel positive about that. In terms of IMO 2020, we spent a lot of time with our international intermodal customers and we don't see anything significantly changing. We don't see anything from a pull ahead perspective changes. We don't see anything changing from a supply chain perspective, meaning that they might preference the Western port over an Eastern port. So, we haven't seen that. We've been talking to our customers all along the whole time. And right now, you shouldn't expect anything structural from what we're hearing.

Okay. Thanks. And a quick follow-up. Jim, could you just provide a little bit of perspective on the changes in Chicago the reduction in ramps? It sounds like there's more to come as it relates to intermodal from a service standpoint. But when you think about that change, how pleased have you been? Do you expect any further changes around the Chicago area to be able to accomplish what you're alluding to on the intermodal side?

Listen, pretty straightforward. We've announced the changes that we're going to make there. I think that change sets us up to have a great product within Chicago service that whole area and be able to stretch ourselves from Chicago to other markets. So, we're not changing anything. The timeline is good. People are on board. Kenny has done a good job of explaining it to the customers. So, you'll see us make the change as we move forward. Some of the changes will take us a little bit longer five, six months to get them in place to be able to do that or up to a year, but we've got the plan there as we do in other places.

Thank you.

All right. Thanks Rob, and thank you all for your questions. To wrap it up, I want to again acknowledge the tenacity and the determination of Union Pacific's workforce. Hats off to them for producing great financial results in a pretty challenging quarter. And with that, we look forward to talking to you again in October.