Union Pacific Corp (UNP) — Q2 2020 Earnings Call Transcript

Thank you very much, Rob, and good morning, everybody, and welcome to Union Pacific's second quarter earnings conference call. With me today in Omaha practicing safe social distancing are Jim Vena, Chief Operating Officer; Kenny Rocker, Executive Vice President of Marketing and Sales; and Jennifer Hamann, Chief Financial Officer. Before discussing our second quarter results, I must first recognize the continued dedication of the women and men of Union Pacific. As we navigate the COVID-19 pandemic, our employees are protecting themselves and their coworkers in order to provide our customers with a service product that's fluid and uninterrupted. Our rail network continues to operate at a very high level as we provide safer, more reliable, and more efficient service product to our customers. As I reflect on what we dealt with and the results of the quarter, the true character of our organization was revealed, and it makes me very proud of the entire Union Pacific team. Moving on to the second quarter results. This morning, Union Pacific is reporting 2020 second quarter net income of $1.1 billion or $1.67 per share. This compares to $1.6 billion or $2.22 per share in the second quarter of 2019, reflecting the economic impact of the pandemic and the challenge of overcoming a 24% decline in revenue. Our quarterly operating ratio came in at 61%, a 1.4 percentage point increase compared to the second quarter of 2019. Despite the distractions created by the pandemic, our employees made progress on safety in the second quarter. For the first half of 2020, our employee safety results improved 5% versus 2019. I am very appreciative of our employees' continued focus on safety. Our second quarter results represent an achievement by the entire UP team as we dealt with a challenge unlike anything we've seen before. The women and men of Union Pacific answered the call to serve our customers, and the results provide further confirmation of the transformation our company has made through Unified Plan 2020. So with that, I'll turn it over to Jim to provide an operations update.

Thank you, Lance, and good morning, everyone. Let me start by echoing Lance's comments on how the UP team has performed throughout the pandemic. I'm extremely proud of the team's dedication to providing a safe and reliable service product to our customers. Our rail network remains fluid. I also want to commend the operating department on its performance over the past quarter; how the team managed through the rapid decline and eventual return of volume has been truly remarkable. The impact of all the changes we made is evident in our results this quarter. There remain many more opportunities ahead of us to further improve safety, asset utilization, and network efficiency. Turning to Slide 4. I'd like to update you on our key performance indicators, driven by continued improvement in asset utilization and fewer car classifications and car touches; freight car velocity improved 11% compared to the second quarter of 2019. Freight car terminal dwell improved 16%, largely due to improved terminal processes and transportation plan changes to eliminate switches and touch points. We continue to implement changes in order to run a more efficient network that requires fewer locomotives. In the second quarter, we achieved a quarterly record in locomotive productivity, a 12% improvement versus last year. Workforce productivity, which includes all employees, was flat versus last year, reflecting the impact of the steep decline in volumes in April. As we've adjusted resources, realized productivity gains, and seen volumes increase, this metric has rebounded strongly. In the quarter, the productivity improvements were boosted by reducing our train and engine workforce by 32%, which outpaced volume declines. Trip plan compliance improved for both intermodal and manifest in autos during the quarter. This is a direct result of our focus on improving network efficiency and service reliability as part of our operating model. We had a strong first half of the year, and we expect to see continued improvements in our service product going forward. Slide 5 highlights some of our recent network changes. Increasing train size remains one of our main areas of focus, and we are making excellent progress. Capital investments to extend sidings allow longer trains to run in both directions and reduce the number of train starts. There are around 40 projects included in the plan, and we have made good progress as 15,000-foot sidings have now been completed through the first half of the year. We plan to have another 4 completed by the end of this month. In addition, by putting more product on fewer trains, we have increased train length across our system by 23% to over 1,600 feet since the fourth quarter of 2018 to approximately 8,700 feet in the second quarter of 2020. This is a remarkable feat by the team to run longer trains with less volume while also making service gains. This indicates that we struck the right balance in prioritizing our actions during the quarter. We are continually modifying our transportation plan, including yard and local service to be more efficient. This contributed to our productivity gains by allowing us to reduce our daily crew starts while continuing to meet customer demands. We continue to make progress on our redesign of the intermodal network. As we've discussed before, we are completely redesigning our Chicago operations. In the second quarter, we closed Global 3, and additional changes will be completed by year-end. We are also redesigning the Houston area. Construction is underway at Settegast to consolidate our intermodal facilities into one location. In addition, we recently initiated construction at Houston Englewood Yard to expand switching capability and improve our ability to run longer trains out of that yard. Let me wrap up. We remain committed to protecting our employees' health and safety and providing strong service to our customers. As customers have resumed operations and volume has been increasing over the past month or so, the operating team has done a great job of balancing our resources while also providing superior service to our customers. We stored locomotives and railcars strategically placed. We have had the resources available when and where we need them. In addition, we are recalling employees from furlough to meet crew demand. However, we are leveraging our efficiencies and not bringing back resources on a one-for-one basis with volume. We have made great progress to this point, and we will continue to transform our operations in order to further improve safety, service, asset utilization, and network efficiency. And with that, Kenny, it's all yours.

Thank you, Jim, and good morning. For the second quarter, our volume was down 20% as many of our market segments were negatively impacted by COVID-19 pandemic effects on manufacturing and retail sectors. The decrease in volume, coupled with a 6% lower average revenue per car drove freight revenue down 24% in the quarter. So let's take a closer look at how the second quarter played out for each of our business groups. Starting with bulk. Revenue for the quarter was down 17% on a 15% decrease in volume and a 3% decrease in average revenue per car. Coal and renewable carloads were down 24% as a result of softer market conditions from historically low natural gas prices and soft export demand. Looking ahead, we expect continued challenges in coal as natural gas futures remain low. Also, weather conditions will continue to be a factor. Volume from grain and grain products was down 6% as the pandemic reduced demand for ethanol and related products. This was partially offset by increased shipments of export feed grain. Looking forward, we continue to have a more positive outlook on grain exports due to purchases by China. In addition, we expect ethanol production to continue its recovery from historical lows in the second quarter. Fertilizer and sulfur carloads were slightly down 2%, driven by a one-time shipment in 2019 related to tight barge capacity due to the drought. Finally, food and beverage was down 21%, primarily driven by COVID-related production challenges for import beer and supply chain shifts in other food products. Industrial revenue declined 23% with an 18% decrease in volume. Average revenue per car also declined 6% due to negative mix and lower fuel store charge. Energy and specialized decreased 26%, primarily driven by reduced petroleum shipments due to low oil prices in connection with economic shutdown impacts on demand. The second half of 2020 potential for crew by rail remains largely uncertain. If oil prices remain depressed, we anticipate continued year-over-year decline. Forest product volume decreased by 11%. Fewer lumber shipments were driven by mill curtailments due to a reduction in housing starts. In addition, industrial chemical and plastic shipments declined by 10% due to pandemic-related impacts on demand. Industrial chemicals volume had the largest reductions as these carloads are closely tied to industrial production. Metals and minerals volumes decreased by 19% due primarily to reduced sand shipments from drilling budget reductions associated with the decline in oil prices and a surplus of local sand. We expect to see continued challenges in sand with oil prices, combined with the recent financial risks that frac sand producers are facing coupled with continued in-basin supply. Turning to premium, revenue for the quarter was down 33% on a 23% decrease in volume. Average revenue per car declined 13% due to a negative mix in traffic. Automotive volume was down 64% for the quarter. Most North American plant productions were temporarily suspended during the first several weeks of the quarter, which depressed our automotive shipments by up to 90%, marking the lowest point during the quarter. The majority of the manufacturers resumed production by mid-May, and our volume for the last week of the quarter recovered within 15% of 2019's volume. Intermodal volume declined 12% year-over-year, driven largely by pandemic-related items like shelter-in-place orders, which forced retailers to temporarily close. Softer international and domestic truckload shipments were partially offset by strength in parcel shipments related to e-commerce. Weekly intermodal volumes bottomed in mid-April, down approximately 25% year-over-year, but our weekly run rates have been improving since that time. Looking ahead, there still remains quite a bit of uncertainty as COVID evolves. As local economies reverse recent reopening measures, we remain watchful on their impact to supply chains. As we start off the third quarter, we are encouraged by the rebound in volume driven by our premium business segment as automotive and intermodal supply chains restock inventory and adjust to evolving demand. E-commerce strength is likely to continue, and volumes will be bolstered by recent business wins. We will also be watching automotive demand and any potential downtime for auto plant retooling as it could pose challenges to our current run rates. The U.S. light vehicle sales forecast for 2020 is at 13.2 million units, down 22% from 2019. In addition, we're closely watching unemployment levels and truck utilization rates as they have a direct impact on demand in a competitive landscape. While the macroeconomic outlook for energy and industrial production is forecasted to be negative in the third quarter, we're focused on what we can control. In fact, the team has been able to win new business throughout our premium and manifest networks. Our car velocity improvements allow us to better compete with trucks and open new markets for us. And finally, I wanted to take an opportunity to thank our employees for the preventative measures they are using to stay safe and healthy, so we can keep operations running for our customers. With that, I'll turn it over to Jennifer who's going to talk to you about our financial performance.

Thank you, Kenny, and good morning. As you heard from Lance earlier, Union Pacific is reporting second quarter earnings per share of $1.67 and a quarterly operating ratio of 61%. Looking a little deeper at our second quarter results compared to 2019, there are a couple of items I'd like to call out. Last year, we incurred higher weather-related expenses that negatively impacted the quarter. And in the second quarter of 2020, we received the final insurance recovery of $25 million related to 2019 weather. Together, these items favorably impacted our year-over-year operating ratio, by 90 basis points and earnings per share by $0.05. Additionally, you'll recall that we received a payroll tax refund in the second quarter of 2019 that added $0.04 to earnings per share and benefited the operating ratio by 70 basis points. Fuel provided a significant tailwind in the quarter as the year-over-year fuel price reduction favorably impacted our quarterly operating ratio by 270 basis points and added $0.09 to earnings per share. While today's low fuel prices do provide a short-term benefit, we prefer the trade-off of higher prices, coupled with increased business. Looking at our core results, we took a step back on our operating ratio in the quarter, which deteriorated 430 basis points with a corresponding reduction in earnings per share of $0.72. Despite our swift and strong actions to cut costs and drive productivity, we could not fully offset the impact of the steep volume decline that we experienced at the start of the second quarter. Finally, our quarterly results include recognition of $69 million related to a real estate sale with the Illinois Tollway. While the sale does not impact our quarterly operating ratio, it added $0.07 to second quarter EPS. So all in, really solid results for our railroad despite some extraordinary circumstances. Looking now at our second quarter income statement, 2020 operating revenue totaled $4.2 billion, down 24% versus last year on a 20% year-over-year volume decline. Demonstrating our ability to adjust costs with volume, operating expense decreased 22% to $2.6 billion. These results net to operating income of nearly $1.7 billion, a 27% decrease versus 2019. Other income of $131 million includes the real estate sale I just mentioned. Interest expense increased 12% due to increased debt levels, while income tax expense was lower, down 25% as a result of lower pretax quarterly income. Net income of $1.1 billion declined 28% versus last year, which when combined with the impact of our share repurchase activity, led to a 25% decrease in earnings per share to $1.67. Taking a more close look at second quarter revenue, Slide 15 provides a breakdown of our freight revenue, which totaled $4 billion, down 24% versus last year. Although the revenue decline was primarily driven by the 20% reduction in volume, the combination of price and mix negatively impacted revenue by about 2.25 points. The results of our pricing actions were positive in the quarter and continued to yield dollars in excess of inflation. However, those gains were more than offset by negative business mix related to steep declines in second quarter automotive, sand, and crude volumes. In addition, a 43% decrease in diesel fuel prices in the quarter versus last year, partially offset by the roughly two-month lag in our fuel surcharge recovery programs, impacted freight revenue by 2.25 points. Now let's move to Slide 16, which provides a summary of our second quarter operating expenses. As you saw in Kenny's carloading chart, we experienced a pretty dramatic change in our business volumes through the quarter, dipping as low as 120,000 carloads in April and then peaking near 150,000 to close the quarter. In the face of the volume decline, we reacted quickly to manage costs and adjust resources while still providing our customers with an excellent service product. As a result of these efforts, second quarter expenses were around 85% volume variable on a fuel adjusted basis, which is a strong achievement for the entire UP team, especially when you consider that we exited the quarter more rightsized than we entered it. In terms of the different expense lines, compensation and benefits expense decreased 21% year-over-year, primarily as a result of workforce reductions and productivity initiatives. Second quarter workforce levels declined 22% or about 8,600 full-time equivalents versus last year, and sequentially decreased 11%. As Jim mentioned earlier, our train and engine workforce was more than volume-variable, down 32%, while management, engineering, and mechanical workforces together decreased 17%. Fuel expense decreased 56% as a result of the significantly lower diesel fuel prices and lower volumes in the quarter, while our consumption rate was basically flat year-over-year. Purchase services and materials expense fell 23% in the quarter, as we used our locomotive fleet more productively, enabling us to store more locomotives and maintain a smaller active fleet. In addition, our subsidiary incurred less drayage expense as a result of auto plant shutdowns and lower intermodal volumes. Equipment and other rents declined 19%, led by car hire savings and lower lease expense for both locomotives and freight cars. We are continuing to use freight cars more productively as evidenced by our gains in freight car velocity and terminal dwell. Other expense was only down 5% in the quarter, reflecting the somewhat fixed cost nature of this expense line. Although we benefited from running a safer railroad in the second quarter and saw reduced business travel expenses, those savings were partially offset by lease impairments, lower equity income from our FXE investment, and increases in state and local taxes, which account for the majority of this cost category. The insurance recovery I mentioned earlier is also reflected in these results. Looking now at productivity, we generated strong net productivity, totaling approximately $185 million in the second quarter. As Jim mentioned earlier, the operating department's continued progress on train length initiatives, balanced with an improved service product, was especially impressive this quarter, given the severe volume decline. And while we have already achieved the low end of the full year productivity range we provided back in April, we do expect the pace of our productivity efforts to moderate some against a tougher second half comparison. We had a tailwind from weather events in the first half of 2019, which contrasts sharply with last year's strong second half productivity of $360 million. Nonetheless, our commitment to continued productivity is unwavering, and we now expect to exceed $500 million for full year 2020. Moving on to cash and liquidity. As we've discussed previously, Union Pacific's strong balance sheet, our ability to generate cash, and available liquidity enabled us to navigate the pandemic cost, business fall-off, and remain in a position of strength. Cash from operations in the first half of 2020 increased 13% versus 2019 to $4.4 billion. Free cash flow after capital investments totaled nearly $2.8 billion, resulting in a 107% cash conversion rate, which was helped a bit by first half income tax payment deferrals. We finished the quarter at an adjusted debt-to-EBITDA ratio of 2.9 times as we continue to maintain strong investment-grade credit ratings from both Standard & Poor's and Moody's. Cash on hand at the end of the quarter was $2.7 billion. Now this balance is more than we would typically hold and includes $300 million of short-term borrowing completed earlier in the second quarter to bolster our liquidity, as well as the nearly $600 million in deferred tax payments I just referenced. Finally, in the second quarter, we returned value to our shareholders through our industry-leading quarterly dividend payout and remain committed to providing strong cash returns to our owners. Turning now to our second half outlook. Although some items are more certain today than when we reported first quarter earnings back in April, there are still many unknowns. You just heard Kenny talk with some optimism about our second half 2020 business volumes, which are foundational to our guidance update. Assuming we maintain a consistent volume trend and do not experience the second wave of economic shutdowns, we expect our full year volumes to be down 10% or so. As I pointed out earlier, we expect productivity to exceed $500 million for full year 2020. And with regard to pricing, our long-standing guidance is unchanged. We expect the total dollars generated from our pricing actions to exceed rail inflation costs. Although we are facing a very competitive marketplace today, we are committed to making sure each piece of business we move is earning an adequate return. Together, our expectations for volume, price, and productivity should produce year-over-year operating ratio improvement on a full year basis in 2020. While the year certainly isn't playing out the way we had earlier anticipated, we are pleased by both our ability to manage costs in the downturn, as well as how we are now handling increased freight demand without adding back cost on a one-for-one basis. In terms of cash generation and capital allocation, we are more bullish on both given our current outlook. Full year capital expenditures will likely come in a little more than $2.9 billion as we continue to make progress on our renewal and productivity investments. We plan to maintain the dividend, but we are still paused as to share repurchases. We all see the news of COVID cases spiking in various parts of the U.S. and globally, so we plan to stay in a conservative posture for now. Longer term, our guidance of capital expenditures below 15% of revenue, a dividend payout ratio of 40% to 45% of earnings, and ultimately, a 55% operating ratio remain intact. Now before I turn it back to Lance, I would like to thank the exceptional employees of Union Pacific who continue to meet the service needs of our customers during this pandemic. They are leading the charge daily towards our collective goal of operating the safest, most efficient, and most reliable railroad in North America. So with that, I'll turn it back to Lance.

Thank you, Jennifer. Our first priority has been and will always be safety. We made good progress on safety in the first half of the year, and I expect continued improvement in the second half. From a service and efficiency perspective, we took another step forward toward our strategic priority of operational excellence. The experience of the past 3 to 6 months has validated why we are transforming our company through the Unified Plan 2020. Our ability to be nimble and flexible in adjusting our resources to a rapid, severe decline in volume, while also improving our service product demonstrates the strength of our service model. As we continue to navigate the uncertainty caused by the COVID-19 pandemic, our optimism for the future is unchanged. Union Pacific is well positioned for a future of long-term growth and excellent returns. With that, let's open up the line for your questions.

Jim, maybe a sort of bigger picture question. When you think about what you've been through in terms of a very rapid decline in volume and then kind of a bounce back as we've seen here, you clearly made some strong efforts to control costs and sort of rightsize the network to a degree. Do you think this sort of, I guess, improves the potential of the business as you look forward? Are there lessons learned from here structurally that I think will potentially benefit? And when you think out to 2021, if you'd allow me, I guess, how should we be thinking about incremental margins? Has that changed? Is any of that math changed based on what you guys have done so far?

I appreciate your question, Chris. The main takeaway is that there are always lessons learned. Having been in the railroad industry for a long time, I have witnessed significant declines in business before. This recent drop was substantial, but the positive aspect is that we were well-prepared. We had already made strides in various areas such as engineering, mechanical work, operations, and local service, including shutting down five hump yards and optimizing touch points. We took appropriate actions this quarter, which is evident in our key performance metrics. These figures reflect our productivity, and we managed to reduce more than the decrease in business activity. What we discovered is that we can achieve more with less than we initially believed. It is vital to remember that we have always focused on balance. As Kenny mentioned, we did not implement cuts that would compromise our service because our goal is to succeed in the marketplace. Kenny remains optimistic about our direction moving forward.

And as regards your incremental margin question for next year, Chris, of course, we don't guide on incremental margin. But we do remain optimistic about, in a world where we get volume growing, we're going to generate productivity. We've got a pricing structure that works that should generate improved margins.

Lance or Jim, Jim you just mentioned kind of some increased competition and given the truck market is getting tighter and prices seem to be going up there. Are you referring more to rail to rail pricing competition? Maybe just give a little bit of thoughts on pricing. You mentioned kind of pricing moving above inflation. Maybe walk through a little bit more of the mix impact given the ARCs were down about 6% and give us some insight into the market.

Yes, Ken, let me start, and then I'm going to turn it over to Kenny to talk a little bit about what he sees in the pricing world. When we're talking about a very competitive market, it reflects both still a relatively loose but tightening truck capacity market and strong competition from our rail competitors. So that's a level set we're talking about in both worlds. From the standpoint of mix, bear in mind, we've mentioned it, but the automotive business is very good high ARC business. And in the first half of the quarter, it literally went to about zero. Kenny mentioned 90% off. But that all by itself is a significant mix impact. And Kenny, do you want to talk about the pricing dynamics?

Thank you for the question, Ken. I want to emphasize what Jennifer mentioned: we have positive pricing results and are managing to exceed the cost of inflation, which is important to acknowledge. In terms of the market dynamics, pricing has been challenging. However, we have a strong service product that enables us to engage effectively with our customers. By discussing how we are alleviating their costs and ensuring timely delivery of equipment, we can have tough conversations about justifying the price for the service we provide. Regarding the automotive network, inventories are at their lowest in nine years, indicating that dealerships need to restock. We are in discussions with our OEM customers and expect some retooling throughout the quarter, though it may not be as extensive as we previously anticipated. We'll monitor fleet sales, but overall, I remain optimistic about the direction things are heading.

I wanted to see if you could talk a little bit more about some of the changes in the network. And how you think about, I guess, schedule and train starts and train length are kind of a good one to think about in terms of operating leverage. So I don't know, Jim, if you can offer some thoughts on the reduction in train starts? And how much of the consolidation can persist as you go forward and you just show operating leverage in kind of longer trains as volume comes back?

That's a great question. I love that question because that's exactly what we're trying to do. So we came in with productivity gains before the pandemic hit. So what we were able to do was we accelerated it. And if you take a look at the metrics underneath the productivity metrics, by having trains that are longer, we were able to have way less starts. So the starts are like 2 to 3 times better than what they were on a flat basis. So that's important to us. The touches of the cars, the whole change in the network of having less touchpoints was able to take costs out. We spent a lot of time before the pandemic and then during the pandemic; we assigned the way we did local service, not less on the amount of service we provide customers but to be smart about how we service that. It was when they released the cars and we looked at our network, and that made a huge impact. So that's what we continue to do, Tom. The way I see it going forward, there's opportunity across the board in operations still. Is it as easy as walking in like I did the first day at Pine Bluff and said we're shutting it down after I was here for two weeks? No. But I've got my eye on a couple of yards that need to be tuned up. And if they don't tune up, they'll be gone. Other than that, I'm very happy with where we are, and we've got productivity across the board, as Jennifer said, on the $500 million. So hopefully, I answered your question, Tom.

I guess, just to be clear, though, to the extent that you consolidate business differently with the train schedule than you did before, you don't have to change that as volume comes back. You can kind of keep that base and just run longer trains. Is that fair?

Yes, sir. In fact, our trains, this morning, I look at it every morning, we're running over 9,000 feet. So we might have ended up at 87,000. But business is coming back, and we're putting more of that business on the same trains that we had out there running.

And I guess, Jim or Lance, to follow-up from that question or that response, it's maybe not quite intuitive to us as we look from the outside at train length going higher, it necessarily equates to better service for the customer. So can you help us understand how these structural changes and cost outcomes and efficiency actually result in better customer outcomes, too?

Yes. I'll start and then pass it to Jim. One of the most remarkable aspects is that after 20 years with our railroad, including a stint overseeing operations, I've seen our train starts year-over-year decrease by about one-third. This reduction is significantly more pronounced than what we observe in volume. The result is less congestion across the network, leading to fewer meets and passes. Consequently, each train enjoys more free running time, making it easier to dispatch the network. This ultimately improves our service product.

Absolutely. The service we provide is exactly what we promised our customers. When we agree to move a certain amount of tons in a month, our intermodal service product is top-notch. For example, when we transport goods from the West Coast to Texas, we do it faster than anyone else, which is how we gauge our performance. Our customers prioritize reliability, consistency, and cost savings, as many own their cars. We excel at turning them around quickly, not just on the road but also within the yard, achieving over 90% success in first-mile last-mile service. This benefits the customer. Regarding longer trains, our goal is efficiency, not simply to run longer trains. We need to create a schedule that allows railcars to move smoothly from origin to destination. For instance, instead of operating five trains between Los Angeles and Chicago, we operate three while keeping to the established schedules. It's crucial we consider the customer perspective in our planning, and there's still progress to be made. As we build stronger relationships with our customers, we gain a better understanding of their needs, which will help us reduce the buffer time and enhance their cost savings. I'm excited about this transition period as we strive to make our operations the best in North America. I apologize for the lengthy response, but I believe it's important to convey this information.

Lance, a question on nearshoring. Can you help us understand what kind of conversations you're having with your customers on this topic? Is this something that they think is real and imminent? Or is it something that's in very early stages and could take years to play out? And how is that likely to impact Union Pacific, both in terms of maybe some headwinds in international intermodal but maybe tailwinds in other domestic moves?

Thank you for the question, Ravi. Let me start, and I want Kenny to help me with some of the details. Many of our customers feel discouraged by the disruptions to their supply chains during the COVID pandemic. It began with significant shutdowns in parts of China that affected inbound shipments to the West Coast, followed by shutdowns in the United States impacting other parts of the supply chain and creating disconnects with U.S. MCA countries. Many of our customers are considering what to do with their supply chains, and some are discussing the possibility of nearshoring some operations. It’s still early in the process, so I can't indicate any major investments have been made regarding that yet. However, I know there is planning underway, and the net effect for us might be a change in inbound intermodal imports. Frankly, I would prefer that manufacturing is done nearshore as it offers better opportunities for both inbound and outbound logistics, particularly in areas where our commodities have a higher average revenue per container. Kenny?

Yes. Lance, you're exactly right. Ravi, thanks for the question. We haven't seen any customers make any really concrete bets yet on their shoring. I will tell you, we feel good about the service product and the interchange points that we have coming out of Mexico. The one thing that a number of folks have really harped on today is our premium and our intermodal network. And what I'll tell you is that our manifest network, our carload network benefits from a stronger service product. And so a lot of these short-term, short-haul lanes we're able to compete in because we do have a lower cost structure, and the car velocity is much longer now. And so as you think about nearshore, it becomes more of a sweet spot for us, and we'll be prepared for it if it comes on.

I wanted to ask you, Jim, headcount has decreased by about 30% over the past two years. If you look at it, this trend is quite similar to other railroad companies that have implemented Precision Scheduled Railroading. Given that volumes have decreased significantly during this time, we haven't seen much improvement in workforce productivity. My question is, do you think headcount needs to increase substantially as volumes start to recover?

Scott, you're quite the tough critic. I expected better results considering the 32% drop in TE&Y this quarter relative to the overall business decline. I understand your point. We definitely have room to improve productivity across the company, which means we will require fewer employees. As we make this transition, we will not be hiring. The usual attrition will occur, but we will focus on enhancing productivity in operations and throughout the organization. I believe there are still areas, especially on the engineering front, where we can further increase our efficiency. We've made significant advancements in mechanical operations and transportation, but there’s more potential to explore. I see the same figures you do, and it would have been great if our numbers didn’t remain flat despite the significant drop in business. Maintaining flat numbers was quite challenging. However, as the business begins to pick up again, we will need fewer people to effectively operate the railroad while ensuring safety and efficiency. I’m optimistic about what lies ahead.

I was going to say, you can ask the follow-up, but let me just reiterate. We have said I think pretty clearly, Jim said it and so did I, we won't bring people back on a one-for-one with the business levels. And we're already doing that today. No, you're right. It is very challenging to predict. We've tried to provide additional information with the RTM data we are now sharing, and I hope that is useful. You are aware that our business has the highest ARC, particularly in autos, which, as we've mentioned today, significantly influenced yields and the mix impact in the second quarter. This has shown a recovery in the third quarter, and we'll keep monitoring it. We don't anticipate crude oil rebounding, which also affected the mix. Additionally, sand has been a challenge for us and is likely to remain so. Keep these factors in mind as you observe how the rest of the business develops.

I wanted to ask a quick question about reports from the end of June regarding equipment shortages on the West Coast, particularly concerning the UP's locomotive and car availability amidst the surge in e-commerce volumes. I understand that such reports might not always reflect the complete situation, so I wanted to get your insights on your asset readiness to manage the anticipated increase in volumes. Additionally, Kenny, you mentioned gaining market share in the e-commerce sector, which I assume relates to UPS. While I'm aware you might not be able to elaborate on that specifically, can you provide any details about the market share gains and when we might see the impacts of those successes?

Thank you for your question. No, we do not have an equipment shortage. We have cars parked in various locations. I recently took a train ride and noticed cars parked in places I never expected. They were ready to go and easily accessible. Regarding locomotives, we have more stored than in operation, which means we could potentially increase our business significantly with the locomotives we have. We have an ample supply of them. On the personnel side, we have been strategic, and when we reach out to bring people back, the acceptance rate is in the low 90s, which is great. This means we won't need to retrain many individuals, and we still have a considerable number on furlough. Therefore, any suggestion of an equipment or personnel shortage is inaccurate. There has been some confusion during our operations; it's challenging to ramp up our railroad with numerous movements in just one week. If someone thought there was an equipment or workforce issue, that's not the case. We didn't want to increase costs unnecessarily by moving trains inefficiently. We approached our operations in a systematic way and are currently running smoothly. There will always be a slight lag, which is typical in railroad operations. Others might have managed it differently, but I wouldn't have changed anything about our approach as we resumed operations and the business returned.

So thanks for that question, Amit. I just want to talk about the network first and just say what the rail site and extensions made us more reliable. I reflect on our lane, call it, Southern California into the East Coast or Southeast. It's just a sweet spot for us. We've put more and more volume on there. We've opened up the pie. When I talk about making the pie larger, I'm talking about trucks. And so yes, we have aligned ourselves with a number of e-commerce winners. We've been able to win business in those markets. We feel very bullish about the wins. They are coming on now. We're expecting more. We see that those wins in the parcel in the domestic, and we've got a nice win on the international intermodal side. So I'll tell you, I haven't been as bullish about it as I am today, and we've got a great leader and Jason has been leading up that area and Jim and his team are ready for it.

Okay, that sounds really great. For my follow-up question, Jennifer, based on the volume guidance for this year, you're obviously expecting higher absolute revenue levels compared to the second quarter, which isn't too far off given how challenging that quarter was. Similar to other rail companies, you also took the opportunity during COVID to accelerate some structural cost reductions. If you're anticipating several hundred million dollars more in revenue for the third and fourth quarters relative to the second quarter, I won't ask about the incremental margin since I already know the answer. Instead, could you help us qualitatively understand what incremental costs will be needed to support that? Are we talking about increased fuel costs and car hire, or do we need to bring in more people? What needs to be done to handle an additional $600 million to $700 million in revenue this quarter?

Well, I think you kind of answered your own question there a little bit. I mean, again, we won't do things on a one-for-one basis. But at some point, you will need to add train starts as the volume grows, and there are people associated with that. There are locomotives, there are freight cars, car hire, and you're going to burn a little more fuel. So you're going to have all of those things we will be part of it to move additional revenue. Our task and what we feel very confident about is that we will be able to do that in a more efficient way as the volumes come back, and we look forward to that because volume is definitely the friend of a railroad. So I think I'll leave it at that.

This is one for Jim and Jennifer. Now that volumes are of the trough here, have you assessed the level of excess locomotives and cars on the network at this point? Can you rationalize that a bit? And in any significant way, are there leases to return, foreign cars to get rid of in more maintenance shops to consolidate? And then I guess for Jennifer, when you go through that math, is it large enough to impair and dispose of them so you can pull out of group accounting and they'll get hit by those depreciation studies that we often see a couple of years down the road?

Well, listen, I appreciate it, Brian. Nice to talk to you this morning. At the end of the day, we've identified what's excess. We always want to keep a buffer so we work very closely hand-in-hand with Jennifer and our old group to say these are excess, what can you do about it? So I'll let Jennifer answer the next question. I think if there were people that wanted to purchase locomotives, if at the right price, we're not going to give them away. But at the right price, we would be more than willing to do that.

Yes. I mean, I think we've had a bit of a for sale sign up for locomotives for a little while now, but there's not much of a market, particularly with the COVID impact of volumes. And then really the whole rail network going through similar activities with PSR. So we do look at what locomotives we think are most likely to bring back into service and make adjustments as needed. That is a continual activity for the team. And if there's anything that we would do that is of a significant nature, we'd certainly talk to folks about it, but we feel pretty good where we're at right now.

It's not just about the overall rationalization of the railroad. In Chicago, we have identified opportunities for consolidation, and by the end of the year, our new expanded facility at G2 will be operational. We also have a facility at G1, which is close to downtown Chicago, that will become excess property along with other locations on the South side. All of these assets are available for Jennifer and her team to evaluate, allowing us to monetize them and create additional value for the company. I am very excited about this potential.

Yes. And it's latent capacity to grow into as well.

A question is to intermodal question. With all the service improvements that you've made in intermodal and trip plan compliance going up, do you think the gap required to really accelerate truck conversions, the price gap between rail and truck has narrowed? And what do you think the gap needs to be to really push the truck conversion thesis forward?

Yes. Thanks a lot, Jordan. First of all, we're nowhere near the levels that we enjoyed in 2018, the back half of 2018, where there were some pretty large gaps. When we look at the forecast, we certainly expect that the truck utilization and those rates will improve monthly well into 2021, which will put us in a better position to not only win more business but get a little bit more margin on that business. Having said that, we certainly aren't waiting around for something to happen. We're going after it right now. We feel good about the wins that we've made that we know will show up here in the near term. And it's broadly across the intermodal network. It's not just the international, it's not just the domestic, it's pretty broad, it's the parcel also. So we feel like we're capturing those wins right now, and we're excited to see them come on and onboard over the next several weeks. And we expect to continue to grab more share.

Jordan, let me put a little exclamation point on that for Kenny. So during the past domestic intermodal bid season, which happened starting late last year, but really at the heart of it was April, March, February this year, a little bit of May; that's right in the heart of the worst decline in volumes across the network, not just us, but trucks. So trucks were loose, pricing was tough. In that environment, Kenny's team grew share of wins. Now it didn't ship; it's starting to ship now. That's why Kenny is confident in the manner he is on our domestic intermodal product. For me, that's a proof statement that we don't have to wait for the gap between rail and truck to get better. Our service product, our ability to price and earn margin in today's environment is such where we have an ability to penetrate against truck right now.

And thank you, Rob, again, and thank you all for your questions and for joining us this morning on our call. We look forward to talking with you again in October to discuss our third quarter 2020 results. Until then, I wish you all good health. Take care and enjoy the rest of your day.