Union Pacific Corp (UNP) — Q3 2019 Earnings Call Transcript

Thank you, Rob, and good morning, everybody. And welcome to Union Pacific’s third quarter earnings conference call. With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales; Jim Vena, Chief Operating Officer; and Rob Knight, our Chief Financial Officer. I have also asked Jennifer Hamann, our newly-appointed Chief Financial Officer effective January 1st, to join us for the Q&A portion of the call. So before we get started today, I want to take a moment and thank Rob for his service and contributions to Union Pacific over his 40-year career, particularly the last 16 years as CFO. Rob’s been a critical member of our senior team and was instrumental in driving Union Pacific’s financial success. We wish him all of the best in his upcoming well-deserved retirement and thank you very much, Rob. I also would like to welcome Jennifer to the CFO role. She and Rob are doing a great job working through the transition and I am confident that Jennifer is the right choice to lead our financial initiatives into the future. This morning, Union Pacific is reporting 2019 third quarter net income of $1.6 billion or $2.22 a share. This represents a 3% increase in earnings per share and a 2% decrease in net income compared to 2018. Our quarterly operating ratio came in at a 59.5%, a 2.2 percentage point improvement compared to the third quarter of 2018. Once again, this represents an all-time record quarterly operating ratio, beating our previous low established last quarter. That’s quite an achievement when you consider the fall-off in volume during the quarter. We are continuing to drive productivity through our G55 + 0 and Unified Plan 2020 efforts, which are also producing a safe, reliable, and consistent service product for our customers. The work our employees are doing as part of Unified Plan 2020 is foundational to the company’s success, and there are additional improvement opportunities going forward for both our customers and our shareholders. With that, I will turn it over to Kenny to provide more details on our results.

Thank you, Lance, and good morning. For the third quarter, our volume was down 8% as gains in our Industrial business group were more than offset by declines in Ag Products, Premium and Energy. At the same time, we generated a positive net core pricing of 2.5% 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 7%, driven by the decrease in volume partially offset by a 1% 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 down 1% on a 2% decrease in volume and a 2% improvement in average revenue per car. Grain carloads were down 3%, primarily driven by continued reductions in export grain shipments, partially offsetting feed grain declines with strength in wheat. Volume for grain products was flat as sustained demand for biofuels and supporting products was offset by reduced exports. Fertilizer and sulfur carloads were down 5% primarily due to soft global demand for potash. Moving on to Energy, revenue was down 20% as volume declined 15%, coupled with a 5% decrease in average revenue per car related to negative mix with the loss of long-haul sand volume. Sand carloads were down 45%, largely due to the impact of local sand. Coal and coke volume was down 17%, due to the softer market conditions resulting from lower natural gas prices and weak export demand. In addition, contract changes and retirements also impacted volumes in the quarter. However, on a positive note, favorable crude oil price spreads drove an increase in crude oil shipments, which was the primary driver for the 18% increase in petroleum, LPG, and renewable carloads for the quarter. Industrial revenue was down 1% on a 2% increase in volume and a 3% decrease in average revenue per car due to negative mix with increased short-haul business. Construction carloads increased 16%, primarily driven by a strong market demand in the south for rock shipments. Plastics volume increased 7% due to higher production. Forest product volume decreased 11% driven by softness in the lumber and paper markets. Turning to Premium, revenue for the quarter was down 9% on an 11% decrease in volume, while average revenue per car improved by 2%. Domestic intermodal volume declined 11%, primarily driven by an abundant truck supply coupled with softer demand during the quarter. International intermodal volume was down 12% during the quarter, reflecting weak market conditions related to trade uncertainty, escalating tariffs, and challenging year-over-year comparisons, driven by accelerated shipments seeking to avoid tariffs in September 2018. And finally, finished vehicle shipments were down 4% for the quarter. Third quarter U.S. auto sales were down approximately 2% from 2018. Strong light vehicle and SUV sales did not fully offset declining car demand. Looking ahead for the rest of 2019, for Ag Products, we anticipate continued strength in advanced biofuel shipments and associated feedstock due to an increase in demand, which will help offset challenges in the ethanol marketplace. We also expect stronger beer shipments along with long-term penetration growth across multiple segments of our food and refrigerated business. Furthermore, with the recent outlook with China to take more Ag Products, we hope to see some relief as those exports resume. However, we will continue to keep a watchful eye on foreign tariffs within our Ag market. For Energy, we expect favorable crude oil price spreads to drive positive results for petroleum products. Local sand supply will continue to impact volume, although the comps should improve over the long term. We also expect coal to experience continued challenges with volume throughout the balance of the year and weather conditions will always be a key factor for coal demand. Looking at 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 the south, but we continue to watch housing starts and the projected softness in the overall market. Lastly, for Premium, the light U.S. vehicle sales forecast for 2019 is down about 2% from 2018. Although, we remain encouraged by the tentative agreement between General Motors and their autoworkers, we are still keeping a close watch on it and the associated volume impact. Domestic intermodal volume is sequentially strengthening, but when compared to 2018, it is expected to be impacted by truck competition in the fourth quarter. We also expect international intermodal to return to its normal seasonal flow but face tough year-over-year comparisons due to accelerated shipments seeking to avoid tariff increases in 2018. And now, I will turn it over to Jim.

Thank you, Kenny. Well, we finally had a clean quarter from a weather perspective, and I think our results speak volumes for what is possible. Our operating metrics continue to improve and as a result, we are seeing a better service product for our customers. Furthermore, I couldn’t be more proud of how the team has responded to the challenge of rightsizing our cost structure in the face of declining volumes while driving significant productivity. For example, crew starts were down 15% in the quarter and outpaced the 8% decline in carloads we experienced. This, along with our Unified Plan 2020 actions, drove an all-time best quarterly operating ratio of 59.5%, which truly was a remarkable achievement. While we are continuing to drive productivity, these gains are overshadowed if we aren’t simultaneously improving safety. Our incident experience has not improved, but we are committed to getting better; as always, safety remains job one at Union Pacific. I’d like to turn over to slide 11. I’d now like to update you on our six key performance indicators. We continue to see substantial year-over-year improvement in our metrics. In fact, earlier this year, I said we would blow by some of our goals and we are doing just that. It 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 20% improvement in freight car terminal dwell and a 10% improvement in freight car velocity compared to the third quarter of 2018. Our train speed for the third quarter as a whole decreased 1% to 23.7 miles per hour compared to 2018. We turned the corner in September and saw year-over-year improvement and the trend has continued into October. As I have mentioned in the past, our train speeds continue to be affected by additional 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, there is an opportunity to execute these work events even more efficiently and drive faster train speeds. Turning to slide 12, continuing our trend from the second quarter, locomotive productivity improved 18% versus last year as efforts to use the fleet more efficiently enabled us to park units. As of September 30th, we had around 2,600 locomotives stored. Driven by a 13% decrease in our workforce levels, workforce 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 compliance improved 10 points year-over-year driven by increased freight car velocity and lower terminal dwell. While we are pleased with our progress, we do expect our service product to improve going forward. In fact, we are already seeing sequential improvement in October. Slide 13 highlights some of the recent network changes we have made as part of Unified Plan 2020. By shifting classification work to surrounding terminals, we are able to reduce operations at our Roseville hump yard resulting in increased car velocity for associated manifest business. In addition, we reduced switching operations at our yard in Alexandria, Louisiana, moving the work to a more efficient terminal in Livonia. We also stopped humping cars at Neff yard in Kansas City. As a result, we will now build overhead blocks to drive cars deeper into the network and leverage existing flat switching terminals in the Kansas City Complex. Going forward, we will continue to look for ways to reduce car touches, which undoubtedly will lead to additional terminal rationalization opportunities on our network.

Thanks, Jim, and good morning. Today we are reporting third quarter earnings per share of $2.22 and a 2.2 points of year-over-year improvement in our operating ratio to 59.5%. This represents an all-time best quarterly operating ratio for Union Pacific and the second consecutive quarter with a sub-60% operating ratio. This is once again a testament to the great work that we are doing with G55 + 0 and the Unified Plan 2020. Our quarterly results were affected by some one-timers, so before I jump into the details, let me set the stage. An increased frequency of rail equipment incidents resulted in approximately $25 million of added operating expenses in the quarter. These excess costs for cleanup, destroyed equipment, and damaged freight resulted in a 0.5 point negative impact to our operating ratio and subtracted $0.02 of EPS compared to the third quarter of 2018. The combined impact of lower fuel prices and our fuel surcharge lag had a favorable impact for the quarter of 0.9 points on the operating ratio adding $0.04 of EPS compared to 2018. The good news is that despite lower volumes, we drove core margin improvement of almost 2 points compared to the third quarter of last year. Now let’s recap our third quarter results. Operating revenue was $5.5 billion in the quarter, down 7% versus last year. The primary driver was an 8% decrease in volume. Operating expense totaled $3.3 billion, down 10% from 2018. Operating income totaled $2.2 billion, a 2% decrease compared to last year. Below the line, other income was $53 million, up 10% from 2018 driven by lower benefit plan costs and increased rental income, partially offset by higher environmental costs. Interest expense of $266 million was up 10% compared to the previous year. This reflects the impact of a higher total debt balance. Income tax expense decreased 4% to $466 million. Our effective tax rate for the third quarter was 23.1% and for the full year we expect our annual effective tax rate to be around 23.5%. Net income totaled $1.6 billion, down 2% versus last year, while the outstanding share balance decreased 5% as a result of our continued share repurchases. As I noted earlier, these results combined to produce third quarter earnings per share of $2.22 and an operating ratio of 59.5%. Freight revenue of $5.1 billion was down 7% versus last year. Fuel surcharge revenue totaled $393 million, down $89 million compared to 2018. Business mix had almost a 1 point negative impact on freight revenue in the third quarter, driven by increased shorter-haul rock business and decreased agricultural product volumes, along with reduced sand carloadings, somewhat offset by fewer intermodal shipments. Core price was 2.5% in the third quarter, similar to the pricing that we achieved in the first half of 2019. Although, the reported yields are slightly lower, this is not indicative of any quarterly pricing actions. As you have heard me say many times before, in order to get credit for price under our methodology, which we believe is the right way to calculate price, you have to move the volumes. In the third quarter, the fall-off in volumes negatively impacted our price yield. Having said that, beginning with our fourth quarter results, we will no longer report detailed pricing numbers. We are making this change solely for commercial reasons as Union Pacific is the only Class 1 railroad to publicly report detailed pricing results, which we now believe disadvantages us in the marketplace. This should not be read in any way as Union Pacific becoming less disciplined or less focused on pricing. Of course, price will continue to play a key role in achieving our financial goals and our guidance is unchanged, and rest assured, we will continue to yield pricing dollars above our rail inflation costs.

Thank you, Rob. As discussed today, we delivered solid third quarter financial results and we made tremendous strides to improve our productivity and service product as part of Unified Plan 2020. For the remainder of 2019, we look forward to building on our successes and we provide a highly consistent and reliable service product for our customers. Although, there are some unknowns looking ahead at the economy, confidence in our operational capabilities, as Rob just mentioned, has never been greater. As always, we are committed to operating a safe railroad for our employees and the communities that we serve, and we have some work to do there. We remain squarely focused on driving long-term shareholder value by appropriately investing in the railroad and returning excess cash to our shareholders through dividends and share repurchases. With that, let’s open up the line for your questions.

Thanks. Good morning. And I will start with a congrats to Rob and Jennifer on the announcement. Maybe to start on headcount, if we just look at the guidance for the fourth quarter and take the exit rate this year and hold that steady it seems to imply another 6% reduction or so in the headcount in 2020, if you just hold things flat sequentially throughout next year. I know it’s somewhat volume dependent, but should we be thinking about a 6% reduction in the headcount at a minimum for next year, and can you just speak to the opportunity beyond that level as you continue to implement PSR?

Yeah. Justin, this is Rob. We haven’t finalized our 2020 plan, and so volume will obviously have a role in what the headcount actually ends up being, but we are confident in that and we are hopeful that volume is positive, and we will grow that very efficiently from a productivity standpoint. Having said that, you are right, we are exiting at a very efficient level. We are gaining momentum with the Precision Rail Unified Plan 2020 initiatives that Jim talked about. So, directionally, I think you are thinking about it right, we are not guiding to that number, but that directionally is exactly what we are thinking.

Okay. And then maybe secondly more of a near-term question. Last couple of years, we have seen the OR stay fairly flat sequentially third quarter to fourth quarter. Should we be thinking about the OR staying flattish sequentially in 4Q of this year as well or is there something that could cause a divergence from that trend we have seen in the past couple of years?

Yeah. We are not giving quarterly guidance on that, but I think directionally also there you are thinking about it right and I gave you sort of an early look at what we expect to see on the volume front, which I think would be a similar decline in the fourth quarter that we saw in the third quarter. So there’s nothing unusual outside of that. We are obviously going to continue to implement the Unified Plan 2020 initiatives and do as good as we can, but you are thinking about it directionally right.

Thank you, Justin.

Hey. Thanks. Good morning and congrats to Rob and Jennifer. Rob, it’s been great working with you. Wish you all the best in your retirement. I guess I wanted to come back to the headcount dynamic, certainly a 15% reduction in the fourth quarter is dramatic and a big, big number. I guess when you think about sort of when you set the target for 10% decline earlier this year relative to what we have seen from a volume perspective, you can make an argument that obviously volume has sort of disappointed I guess. So, how do you feel about sort of the balance between your resources and what we are seeing from a volume perspective? Is there opportunity, I am coming at this question, I guess, slightly similarly to Justin, but kind of a little bit different. Is there an opportunity to kind of get a little bit more aggressive on the headcount as we kind of go through this 4Q, 1Q kind of hopefully bottoming in volume?

Yeah. Chris, this is Lance. Without putting a really fine point on it, the short answer is largely yes, right? We have been a little disappointed in the topline versus what we were hoping to see when we came into the year. As a result, we have adjusted headcount more aggressively to match that drop in volume. You see that happening in the third quarter as we had headcount lower than volume, and I expect we will continue that. Jim, do you want to add a little technicolor in terms of some of the opportunities that you see in the operations?

I believe the numbers are quite clear. Lance, the team effectively considered the volume for this quarter and responded accordingly, and we plan to continue doing the same. We will adjust based on any changes in volume. Ideally, we hope the volume increases, but regardless, we will respond appropriately and anticipate a gradual reduction in our workforce as we adapt to the steady business model.

Okay. Okay. That’s helpful and I appreciate that. Can we talk a little bit about the topline and yield specifically. I guess from a yield standpoint, some sequential deterioration here. Can you talk a little bit about sort of the competitive pricing environment that you are dealing with in your markets, and then maybe some of the mix dynamics that are kind of working their way through? Is there any predictability to the mix as we look out to 4Q or maybe 1Q, can you sort of highlight that, but those kind of dynamics around yield would be very helpful.

Before I turn it over to, Kenny, I just want to remind everybody, Rob said this, that we calculate yield in the most conservative way, and so when you get a 10% or an 8% drop in volume in the quarter, it has a real significant impact on our ability to generate yield. And Rob, again, had said very specifically that there was nothing specific in the quarter that drove yield sequentially to decline just a little bit. But with that, Kenny, do you want to talk about the pricing environment that you are in right now?

I want to take a moment to acknowledge Jim and the operating team for fostering an environment that allows us to effectively price our strong service product. Our commercial team is performing exceptionally well in maintaining pricing discipline and ensuring our prices are aligned with the improving service offering. However, it’s important to note that we are facing a highly competitive truck market. As you all know, we compete daily with several rail carriers in North America. Nevertheless, it's crucial for you to understand that we will uphold our pricing discipline, especially as our service products improve. We anticipate that as our service offering enhances, it will also aid in our growth.

We don’t provide guidance on mix because we have such a diverse product mix that includes various components. The challenges and what might be surprising to some in the third quarter mix were mainly due to the rise in shorter-haul rock shipments. Intermodal and other movements, like agriculture, are generally understood, but the increase in shorter-haul rock shipments might have caught some off guard. However, I don’t see any reasons for significant differences in the fourth quarter compared to the third quarter. While I won’t provide specific mix guidance, I anticipate it will look quite similar.

Okay. Okay. That’s helpful. I appreciate it. Thanks very much.

Thank you.

Good morning, Rob, and congratulations. It has been a pleasure working with you over the years, and congratulations to you as well, Jennifer. Regarding the volume trend, there are definitely a lot of factors at play contributing to the weakness in volume. It's important to note that there is a significant difference in volume performance between Union Pacific and Burlington Northern. Could you provide some insight into what might be causing this discrepancy? Specifically, I'm referring to intermodal performance, where the four-week moving average shows a decline of about 13% for Union Pacific compared to a 2% decline for Burlington Northern. There's also a notable gap in coal performance. I'm curious about what is driving this and if you expect any changes in the upcoming quarters.

Kenny?

Yeah. I will tell you that we would have appreciated a stronger economy to help us compete for more opportunities. But the fact that the service product on the intermodal side is actually strengthening is something that we appreciate. And yes, we have seen a lot of competition out there from both the trucking side, and as always, we compete with the western rail carriers and the North American rail carriers. So that has going to be around for us and we will continue to compete there.

Yeah. One thing that I would add, Tom, is we are very happy with our service product and the trend that it’s on. So it’s currently a very good service product and it’s showing itself to be reliable and consistent, and I think it’s going to continue to improve. So from that basis, we are in a great place to compete for business. Having said that, we are also continuing to be very, very disciplined on our price. So we are not trying to chase market share, we are not trying to chase the market down against loose truck, and we will just compete based on the service that we provide, we will price for that. And as the economy strengthens, which it will at some point and as truck capacity tightens up, which it will at some point, we are in a great place to take advantage of that.

Okay. Just, I guess to follow-up on that a little bit further, are there contract shifts in the intermodal and coal side that might account for part of that and I guess in terms of the PSR impact, sometimes you make big changes to, as an example, in Chicago, the terminals you are using and you can cause some initial disruption to the customer but then obviously you hope to run better in the future. But is there an impact from contracts or kind of initial disruption from PSR?

Certainly. The design of our intermodal network has seen a small, single-digit effect on volume due to the rationalization of low volume and low density lanes. This decision aligns with our overall business strategy. When considering the broader railroad context, the impact is minimal. Regarding contract changes, while we don’t disclose specific customer details, we did mention earlier in the year a coal contract change that is affecting us this year to some extent. We haven't provided updates on any other specific contracts.

Okay. Great. Thanks for the time.

All right.

Hey. Thanks. Good morning, guys. So want to ask a couple on the cost side, comp per employee a little higher than we thought, any thoughts on how to model that going forward and rail inflation next year? And then purchase services were flat sequentially given the weak volumes and PSR. I would have thought there would be some opportunity there, maybe can you just talk about the opportunity that is left on purchase services cost?

Yeah. Scott, this is Rob. Let me take the cost per employee. The kind of delta, if you rose, as to why it was up above what we would expect in terms of the inflation was really some of the overtime which a lot of changes going on in operations but the overtime is something that did inflate that cost per employee up a little bit. As we look to 2020, again we haven’t finalized our planning assumptions yet, but I would say, it’s probably overall inflation for 2020 is going to be in the neighborhood of 2%, with labor probably in the 2.5-ish range again. And on the purchase services, I guess I wouldn’t call out anything unique there, obviously, as we pursue the Unified Plan 2020 initiatives there will be opportunities we think for us to continue to rationalize and be as efficient as we can on that line as well.

Okay. We have the sub-60 OR guidance for next year. Rob, Jennifer, or Jim, if you would like to comment, the market is already ahead of that. Considering the macro environment, does that seem reasonable? Also, when we examine past instances of railroads implementing PSR, there's often better margin improvement in the second year compared to the first. Does that sound like a reasonable perspective?

Yeah. Let me start, Scott, and then I will hand it over to Rob and Jim. So the bottom line for next year is we have got guidance out there sub-60, but we have constantly said we are going to be as sub-sub-60 as we possibly can be. As we enter next year, we have got good momentum, right? If we can get a little cooperation from the economy, that would be very helpful. We have had some puts and takes this year. We have discussed those through the quarter, so we know what those are. But we are going to get as sub of 60 as we possibly can. And with that, I will turn it over to Rob and Jim to fill in.

Yeah. Scott, I would just add to that that, as you know, every step on the ladder of efficiency that we have had over the years we have always tried to get there as safely and efficiently and quickly as we can, and frankly we have. So I would say that’s similar to the numbers that we have out there. I feel, as I said in my comments, I feel as good as I have ever felt in my career about where we are operationally. So the things that I feel like we can control to get to that sub-60, I feel extremely good about. So the variable right now as I look to 2020 is really the economy, and as we sit right here today, we are certainly hopeful and thinking that the volume will be on the maybe slightly on the positive side of the ledger, but that’s still an unknown at this point. So I think that’s really the big variable as to how sub, sub can be on that sub-60 guidance for next year.

Listen, I think Lance and Rob have done an excellent job providing the overall perspective. From an operational standpoint, we are just beginning, and there is much to accomplish. I recently completed nine months here. The results the team has achieved are evident in the key metrics. I am confident that next year will be a strong operational year for us. We are ready to take on any business, and we hope it will be a significant increase. We will demonstrate the capabilities of this team, and if things don't go as planned, we will respond appropriately. I see a lot of progress ahead, and I am excited about what’s in store for the end of this year and the next.

Jim, can I clarify something with you? At the beginning of the year, you set a target for a 10% increase in labor productivity. We have reduced headcount, but due to the significant drop in volumes, we are achieving only about half of that target in labor productivity. Does this indicate that there is still a major opportunity for improvement next year? Are we interpreting this correctly?

I think we are headed in the right direction. You are thinking right. The more we can put, the less train starts, put more product on the trains, make it more efficient, adjust our yards just like we did in Kansas City, we drive productivity better, we will see that improve as we move ahead, Scott. So nothing wrong with the way you are thinking.

Thanks to everyone. And Rob, good luck on your retirement and congratulations, Jen, from me as well. So it was pretty that you are no longer going to announce core price. I think that now makes every Class 1 rail that doesn’t disclose price. That’s a pretty dramatic change from five years or six years ago, where that was kind of key to the rail kind of bouquet as investment pieces. Why do you think that’s changed, I mean, is that because it’s just gotten more competitive to get price, is it because of a tougher regulatory environment? Why have you seen that shift do you think?

So I can’t speak for other railroads. I can speak for us. And that is by publishing a yield number every quarter. We work against ourselves commercially. I mean, in the simplest way, when Kenny is talking to a customer and trying to maximize that price discussion, our conservative yield calculation frequently works against us in that conversation. It’s as simple as that for us. Rob?

Yeah. Ravi, I would just add, Lance nailed it, but I would add, as I said in my comments, you are right, it is a shift. But I think, as I exit the company, I also have never felt better about the understanding and value of understanding the impact that the pricing has on our financials. And you combine that with the continually improving service product, there’s no doubt in my mind that Kenny and the marketing team completely understand that it’s our objective to drive as positive a price and earn the adequate returns that we can in the marketplace. So rest assured, I guess, the point is, rest assured that, because we think commercially it’s not to our advantage to be talking as precisely as we have about price, don’t interpret that to mean that we are not aggressively going after pricing opportunities, which we think are still there and we are going to aggressively pursue that.

Got it. Just a follow-up. Lance, I think, you said earlier that, you guys are very clearly not chasing share and going after volume over price. Just given some of the volume delta this quarter between you and your chief regional competitor, do you feel like there is some of that going on in the marketplace?

Our marketplace, as we relay to you every quarter, it remains very competitive and it remains competitive specifically in the intermodal space not just against rail competition, but specifically against truck competition. Trucks are pretty darn loose right now, which means the capacity is readily available and widely reported that truck pricing has been dropping. So we are looking forward to seeing a bottom of that and then an upturn. And I anticipate that will occur. I don’t know when. But you see truck orders substantially down, you see production starting to turn negative and that all bodes well for competition as we look forward.

And the best way to combat that is an improved service product and that’s what we are getting right now.

Hey. Good morning. Thanks for taking the question, and again, congrats, Rob and Jennifer. Just going back to the volume side for a minute, we have easier comps here in 2020. What do you feel, Kenny, about the absolute activity levels and maybe some of the key areas to talk about? You just mentioned truck, but honestly, I am a little surprised that that’s been such a factor, so maybe you can help expand on that? And then while we have talked about sand for a long time, it continues to go down. I just wanted to see when you mentioned the long-term comps get easier, is there still a big shift in local sand that’s coming up that you think is going to be a mix headwind as well?

Yeah. So, first of all, it’s a little premature for us to talk about the plan for the following year. But, yeah, I would expect that we would be on the slightly positive side of the ledger. As we look towards the future and the fact that we have got a good service product really helps us out. When you look at the sand business, yeah, that local sand penetration has been with us now for a good 18 months. I will tell you that I would expect that those comparisons to slow over time. So maybe not the immediate near-term, but over the longer term, it certainly should, those comparisons should get easier for us.

And then to follow-up on the trucking side, because I feel like you didn’t get as much benefit when the cycle was tight, so a little surprised to hear that it’s a bit of an overhang here in some of the markets?

Yeah. We are keeping an eye on the trucking market. Over the last couple months and even over the last couple weeks, we are seeing it firm up a little bit. We are also keeping an eye on what will happen in terms of a peak season out there because there is some interplay between our domestic business and our international business. But right now, we would really appreciate more help from the overall economy.

Sure. Let’s break this down into two parts. I'll begin with the regulatory environment. The Surface Transportation Board is expected to be fully staffed with five Board members soon and has already started to become more active on various issues, both old matters that were overlooked in the past five years and new ones as well. We are consistently engaging with the STB to highlight potential negative impacts of some proposed regulations and to explain that each regulation needs to be considered in the broader context of regulatory impact. The goal for the railroads and the STB is to ensure that railroads remain healthy and can continue to invest in infrastructure that supports the United States. We maintain ongoing discussions about the current state of the railroad, the quality of the service, our ongoing projects, and the risks associated with certain regulations under consideration. Regarding our negotiations with labor, a lawsuit was filed against the Smart TD to encourage that specific union to negotiate on crew consist or at least to consider it through arbitration. This is a technical issue, and I look forward to it being resolved in court. The current moratorium ends on November 1, which means that around that time, unions will be able to make demands on railroad management, and management can make demands for negotiations with the unions. I expect this will lead to an active negotiating season, and I look forward to collaborating with our unions to position Union Pacific as a strong and competitive supporter of the U.S. economy.

Okay. Thank you, Lance. Appreciate that.

Thank you, Rob, and thank you all for your questions. In closing, we have made really good progress in the third quarter delivering a more consistent reliable service product with a fundamentally smaller cost structure. And although, I’d much prefer a growth environment, our operating performance gives us a lot of confidence that as volume returns to the network, we are going to leverage it very efficiently and return even stronger results. With that, I look forward to talking with you again in January to discuss our fourth quarter and full year 2019 results. Thank you.