Union Pacific Corporation

Greetings, and welcome to the Union Pacific Second Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President, and CEO for Union Pacific. Mr. Fritz, you may begin.

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 Venna, Chief Operating Officer, Kenny Rocker, Executive Vice President of Marketing and Sales, and Jennifer Heyman, 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 a 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 the 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've 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 four, 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. TRIPAN compliance improved for both intermodal and manifest and 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 five 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. A 16-, 15,000-foot sightings have now been completed through the first half of the year. We plan to have another four 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 SETIGUS 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. With 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 from COVID pandemic effects on manufacturing and retail sectors. The decrease in volume, coupled with a 6% lower average revenue per car, drove freight revenue to be down 24% in the quarter. 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 car loads 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 car loads were slightly down 2% driven by one-time shipments in 2019 related to tight barge capacity due to the floods. Finally, food and beverage was down 21%, primarily driven by COVID-related production challenges for import beer and supply chain shifts and 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 a lower fuel storage charge. Energy and specialized decreased 26%, primarily driven by reduced petroleum shipments due to low oil prices converging with economic shutdown impacts on demand. The second half of 2020 potential for crude by rail remains largely uncertain. If oil prices remain depressed, we anticipate continued year-over-year declines. Forest product volume decreased by 11%. Fewer lumber shipments were driven by mill curtailments due to a reduction in housing starts. In addition, industrial chemicals and plastic shipments declined by 10% due to pandemic-related impacts on demand. Industrial chemicals volume had the largest reductions as these car loads 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 fracked sand producers are facing coupled with continued in-basin supply. Turning to premiums, 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%, which was 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 reopenings, we remain watchful on their impact to supply chains. As we start off the third quarter, we are encouraged with 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 macroeconomics for energy and industrial production are 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 opens 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 items I'd like to call out. Last year, we incurred higher weather-related expenses that negatively impacted the quarter. And in second quarter 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, 90 basis points, and earnings per share by 5 cents. Additionally, you'll recall that we received a payroll tax refund in second quarter 2019 that added 4 cents 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, 270 basis points, and added 9 cents to earnings per share. While today's low fuel prices do provide a short-term benefit, we'd prefer the tradeoff 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 72 cents. Despite our swift and strong actions to cut costs and drive productivity, we could not fully offset the impact of the steep volume decline 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 7 cents 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 pre-tax 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 two and a quarter 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 seven-day 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, a strong achievement for the entire UP team, especially when you consider that we exited the quarter more right-sized 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 loop 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 expense, those savings were partially offset by lease impairments, lower equity income from our FXE investment, and increases in state and local taxes, which makes up 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 provided back in April, we do expect the pace of our productivity efforts to moderate some against the 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-caused business falloff 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 main 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 return 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 we do not experience a 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 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 very 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 costs 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 good 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 three to six 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.

Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your lines in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. In the interest of time, and so that we can accommodate as many analysts as possible, we ask everyone to please limit themselves to one question. Thank you. And the first question is from Chris Weatherby with Citi.

Hey, great. Thank you. You know, 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 right-size 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, you know, I guess maybe how should we be thinking about incremental margins? Has that changed? Has any of that math changed based on what you guys have done so far?

Why don't I just start with the – Chris, I appreciate the question. So I think the key to look at is you always learn something. And when you – I've been railroading for a long time. I've seen a drop in business. This was a big drop. The good part about it was we were set up in the right way. We were productive before. We had already – started in a lot of things, from engineering, mechanical, operations, local service, you know, five hump yards shut down, touch points off. So we had done lots to be able to be ready for any action that was going to happen. And we took the right actions this quarter, and you can see it in the key performance metrics. Those are productivity numbers. Those are not against, so we were able to drop more than what the business level changed on us. So what we learned was, and I knew it, and the team knows it, there's more there. So what we figured out was we can do more with less and even more than we thought. So across the spectrum and how we look at it. We've always balanced, Chris, and this is real important, and you heard Kenny talk about this. It's about service too. We did not take and make all the cuts just so that we could drop our cost down and impact our service because we want to win in the marketplace, and Kenny is optimistic that we're headed in the right way there.

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.

Got it. Thank you very much. I appreciate it.

The next question is from the line of Ken Hexter with Bank of America.

Great. Good morning. Lance or Jen, Jen, 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. Thanks.

Yeah, 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 both worlds. from the standpoint of mix, bear in mind we 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, you want to talk about the pricing dynamics?

Ken, first of all, thanks for the question. And I just want to really iterate something that Jennifer mentioned, which is, one, we have a positive pricing result and that we're going to exceed the cost of inflation. So it's critical we just kind of take that off the table. But as you look at the dynamics in the marketplace, I'll tell you, it was challenging to really price. What helps us is that we have a very strong service product. When you can walk in and talk to your customers about removing costs from their side, removing assets, delivering on time, getting the equipment on time, you're able to go in and have some really tough conversations to sell the price for the service that you're delivering on. So that's that. To land this point, I do want to just talk about the automotive network coming back. If you look at the data points out there, the inventories, are at the lowest that they've been in the last nine years. So we know the dealerships need to replenish. We've been talking to our OEM customers, and we'd expect retooling throughout the rest of the quarter, but maybe not as deep as what we thought it would be or what we've seen in the past. We'll keep an eye on the fleet sales, but looking forward, we feel pretty optimistic. I feel pretty optimistic about how things are shaping up.

Thanks for the thoughts. Appreciate that.

Mm-hmm. The next question is from the line of Tom Wateritz with UBS.

Yeah, good morning.

Wanted to see if you could talk a little bit more about some of the changes in the network and how you think about, you know, like I guess schedule and train starts and train lengths 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 like, you know, what was the reduction in train starts and How much of the consolidation can persist as you go forward and you just show operating leverage and kind of longer trains as volume comes back?

You know, 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 two to three times better than what they were on a flat-lift basis. So that's important to us. The touches of the cars, the whole change in network of having less touch points was able to be 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 to lessen the amount of service we provided customers, but be smart about how we serviced it. 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. And the way I see it going forward, what's left, someone's going to ask me the question. I might as well answer it. I'll save a question. There is 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. I don't think – 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. But 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 questions on it.

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, but business is coming back, and we're putting more of that business on the same trains that we had out there running.

Great, thank you.

You're welcome.

The next question is coming from the line of Brandon Glinski with Barclays.

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

Yeah, so let me start, and then I'll turn it over to Jim. One of the most astounding things to me, I've been with our railroad for 20 years now, and I was responsible for our operations for a bit of it. And if I look year over year, Jim mentioned this, our train starts, the number of trains on our network at any given time are about a third less which is much more than what you see in volume. And how that translates into a service product is there's less network congestion on average anywhere you look, less meets passes, et cetera. So that allows each train more free running time, and it really makes the network a little easier to dispatch. And that translates into a service product. You bet.

And how does the customer look at it? Service that we sell and we provide is what we sold to the customer. So if we agreed that we're going to move X amount of tons in a month or we need to run and we have a service product, our intermodal service product, our premium product is as good as anybody. We come out of that West Coast headed towards Texas and we get in there faster than anybody. So that's what we measure ourselves against. What is it that the customer wants? They want reliability. They want consistency. and they want to save on their assets. A lot of them own their cars, and if we can turn them faster for them, and not just over the road, but we turn them faster within the yard, and we're over 90% on our first mile, last mile, being able to spot the cars when we said that we were going to be there to give them service. So the customer wins. Now, what the longer trains do, We're not going to run longer trains just to run longer trains. You want to be more productive, but you also have to build the schedule so that the rail cars move from origin to destination. And I'll give you an example. Instead of running five trains between L.A. and Chicago, we run three. We meet the schedules, we tell them when the end gate is, and we build that in. Otherwise, I'll be honest, we could be running them even bigger if we did not take into account what the customer – perspective was. But we're not done with that. I think as we get closer, I know this is a long answer, but this is important. As we get closer with the customer, we understand better and they understand what we can deliver. They'll work with us to say, when do you really need those containers? When do you really need those rail cars? And there won't be as much buffer built into it. And they trust that we're going to deliver. They'll be able to save even more costs on their side. So very excited about that. I'm And that's the cool part about this is the time now, the next months as we transition into the next step of improving this place and making it the best operating railroad in North America. Long answer, I apologize, but I thought it was important to get it out. Appreciate it, guys. Thank you.

The next question comes from the line of Ravi Shankar with Morgan Stanley.

Thanks. Good morning, everyone. 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 like real and imminent or is something that's in the very early stages and kind of takes years to play out? And how is that likely to impact Union Pacific both in terms of maybe some headwinds in international and promotal but maybe tailwinds in other domestic moves?

Yeah, thank you for the question, Ravi. So let me start, and I want Kenny to help me with some of the detail. Many of our customers are discouraged by the impact to their supply chains during the COVID pandemic. It started with a hard shutdown in parts of China that really impacted inbound onto the West Coast. and ended up with the United States taking shutdowns that impacted other parts of the supply chain, and then some disconnects between ourselves and USMCA countries. So without a doubt, most of our customers on the margin are at least thinking about what to do in their supply chains, and some of them are talking about readjusting to bring some of that back nearshore. It's early innings, so I can't really point to any substantial investment that's occurred at this point in time in terms of executing on that. But I do know there's planning in place. And the net effect for us is going to be maybe an impact on inbound intermodal imports. But candidly, I think I would prefer having that manufacturing occur nearshore. It gives us a better opportunity for inbound and outbound imports. and typically in a part of our commodities that are a bit higher arc. Kenny?

Lance, you're exactly right. Robbie, 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 the day is our premium and our intermodal network. And what I'll tell you is that our manifest network, our car loan 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 nearshoring, it becomes more of a sweet spot for us and we'll be prepared for it if it comes on.

Very good, thank you.

Next question is from the line of Scott Group with Wolf Research.

Hey, thanks. Morning, guys. So I wanted to ask you, Jim, headcount's down about, I guess, 30% in two years. But that's, if you look at it, it's pretty similar with other rails that have done PSR. And because volumes are down so much over that period, We haven't actually gotten much workforce productivity yet. So I guess my question is, do you think headcount needs to move up much at all as volumes are recovering here?

Well, Scott, you're a little bit like Walter, a tough marker. I thought we did pretty good when we dropped 32% in T, E, and Y in the quarter versus the drop in business. But I understand what you're saying.

Your slide says flat workforce productivity.

Yeah, and that's the entire company, and you'll see it improve as the business comes back. The numerator at the top when you drop that kind of miles sort of hurts you. But I'm not here to argue about what the stat is. This is the way I see it. I think we can be more productive in the entire company, meaning that we need less people. And as we transition, we're not hiring. The normal attrition rate that goes out is going to go out. So our plan is in operations and the rest of the company, that we are going to be more productive. And I think in operations, you will continue to see us be more productive in pieces that we haven't even tackled yet as much as we should on our engineering side. And we've done a lot of work on the mechanical side. We've done a lot of work on the operations side, on the transportation side. But I think there's more there. And listen, I see the same number as you, Scott. I would have loved that number to be with the big drop in business, not be flat. Flat was a pretty tough thing for us to do, but as the business comes back, we're going to have less people to operate the railroad and be still safe and efficient. So I'm looking forward to it.

Okay, thanks. And then, Jennifer, can I just ask you one real quick?

I was just 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.

Okay. Thank you. Jennifer, I was just asking for any perspective on mix. So, like, yields of X fuel have never been so bad this quarter, but last quarter they were the best in five years. So the yields are obviously volatile quarter to quarter. I know it's tough to forecast, but any thoughts on how to think about mix based on what you see so far in the third quarter?

No, I mean, you're right. It is very tough to forecast. I mean, we've tried to give everyone a little bit more information on that with the RTM data that we're now providing, and so hopefully that's helpful. But you guys know where our business is, has the highest ARC. I mean, autos, as you've heard us reference already today, was really a big factor in yields and in the mixed impact in the second quarter. Certainly that has come back here in the third quarter, and so we'll continue to watch that. You know, we don't see crude oil coming back. That was another impact to mix. Sand has been a headwind for us as well, and that's another one that's probably not going to change. So keep those things in mind, and then just watch how the rest of the business plays out.

Thanks so much for the time. I appreciate it.

Thanks, Scott.

The next question comes from the line of Amit Maharcha with Deutsche Bank. Thanks.

Hi, everybody. I just wanted to ask a quick question. There were some reports towards the end of June of equipment shortages on the West Coast because the UP didn't have enough locomotives or cars in the context of kind of a surge in e-commerce volumes. I know those reports can sometimes not necessarily capture the whole story, so I wanted to ask you about it in terms of, you know, your readiness from an asset side to handle the sequential higher volumes. And then I think, Kenny, I think you mentioned market share wins on the e-commerce side. I'm guessing that's with UPS, but I'm not sure. I'm sure you're not going to comment on that. But hopefully you can comment on and just talk about as much as you can about the market share win and what the, you know, whether that's when we should see that and what the context of those wins were. Thank you.

Thanks for the question. No, we do not have an equipment shortage. We had cars parked in places. I went for a train ride, and we had cars parked in places that I never thought that I would ever see cars parked. They were parked everywhere ready to go, and we had them close on hand. Locomotives, we had locomotives. We have more locomotives stored than we have operating. So We could double the business and, well, not quite. We could probably triple the business and use the locomotives that we got stored. So we have lots of locomotives. People-wise, we were real smart about it. And the return, when we called people back, the people are returning. It's in the low 90s that people are accepting to come back to work, which is fantastic. So we're not having to worry about having to retrain people, and we still have a lot of people furloughed. So given all that, what it is was some noise in, you know, one week it's x and then the next week you want to do x plus 40 percent and somebody says we're short of cars or short of people nobody can crank up a railroad running 2 000 different movements all over the place and in one week so if somebody thought that was equipment shortage of people the answer is no it's just there was no way i was going to flow trains one way and uh and have all the deadheads and extra costs. We took it on a systematic basis, and we're fluid now. The railroad's running smooth, and we're always going to have that little bit of a lag. I mean, that's the way to railroad. Somebody else might have done it differently. I would not have changed anything I did when we started back up and the business came back.

So thanks a lot for that question, Amit. I just want to talk about the network first and just say with the rail siting extensions, it's 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 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 those wins in the parcel, in the domestic, and we've got a nice win on the international and the modal side. So I tell you, I haven't been as bullish about it as I am today, and we've got a great leader in Jason Hess leading up that area, and Jim and his team are ready for it.

Okay. That sounds really great. For my follow-up question, very quickly, Jennifer, based on the volume guidance for this year, you're obviously assuming, you know, just higher absolute revenue levels versus the second quarter, which is not really that hard, right, given how bad the second quarter was. But, you know, like some other rails, you also took kind of the opportunity of COVID to really accelerate some of the structural cost reductions. So, you know, if you're getting several, several, several hundred million dollars more of revenue in the third quarter and fourth quarter relative to the second quarter. I'm not going to ask an incremental margin question because I know the answer I'm going to get, but the question I'm going to ask is just help us qualitatively think about what incremental costs need to come back to service that. Are we just talking about absolute fuel and some car hire? Are we talking about more people? What needs to happen to service $700 million more revenue in the next quarter or this quarter, rather?

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's people associated with that. There's locomotives, there's freight cars, car hire, and you're going to burn a little more fuel. So you're going to have all of those things will be part of it to move additional revenue. Our task and what we feel very confident about is that we'll 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.

Okay. Very good. Thank you very much, everybody.

Appreciate it.

Thank you, Amit. Thanks.

The next question comes from the line of Brian Asenbeck with J.P. Morgan.

Hey, good morning. Thanks for taking the question. This one's for Jim and Jennifer. You know, now that volumes are off the trough here, have you assessed volumes the level of excess locomotives and cars on the network at this point? Can you rationalize that a bit in any significant way? Are there leases to return, foreign cars to get rid of, any 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 it out of group accounting and don't get hit by those depreciation studies that we often see a couple 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 close hand-in-hand with Jennifer and her whole 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 was people that wanted to purchase locomotives 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. Jennifer?

Yeah, 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, you know, with the COVID impact of volumes and then, you know, really the whole rail network going through similar activities with PSR. So, you know, we do look at what locomotives we think are most likely to bring back into service and make adjustments as needed. That's kind of 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.

And it's not just the whole rationalization of the railroad. What we've been able to identify in Chicago when we consolidate and at the end of the year we're going to have our new facility, expanded facility at G2 opened up. We have a facility at G1 that's pretty close to downtown Chicago that becomes excess. Property on the south side, excess. Property... also in other locations. So all those are available to Jennifer and her team to go out there and see if we can monetize and bring some more value to this company. So I'm very excited.

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

Absolutely.

Right. Okay. Thank you for your time.

Thanks, Brian.

The next question comes from the line of Justin Long with Stevens.

Thanks, and good morning. So I wanted to ask about the volume guidance for a decline of 10% in 2020. Can you talk about what that assumes for the pace of the recovery in the back half of the year just generally? And then thinking about the quarterly cadence of volumes, even if it's just directionally, I mean, is your expectation that we could remain in this down double-digit range in the third quarter and then see an improvement in the fourth? Is the comp fees, or is there any color around that quarterly cadence you can provide?

Yeah, Justin, thanks for the question. This is Lance. So our full-year guidance of down 10%, if you do the math, that says the back half is going to be somewhere in the, call it 9%, 10% down. How it breaks out quarter to quarter is, something that is very difficult to estimate right now. Kenny's done a good job of sharing with you all the confidence he is growing and building as winds are starting to show up on the railroad. You know, it's one thing to secure a domestic intermodal wind in March, and then in the second quarter, nothing shipped. And now as retail is starting to restock, we'll start seeing some of those shipments occur. So it's a little bit difficult to parse it out exactly for you, so I won't attempt to do that, but your math broadly is right. In the second half, you know, you're going to have to be in that down 9% or 10% to hit down 10%, and we're growing our optimism here in the near term.

Okay, and just to clarify, that down 10%, is that a reference to RTMs or carloads?

That's a volume number. That's a carload number.

Okay. Just wanted to clarify that point. Thanks for the time.

Yep.

Sure thing, Justin.

The next question is from the line of Allison Landry, Recorded Suisse.

Thanks. Good morning. Jim, I mean, clearly it sounds like there's still a lot left to do in terms of reducing touch points and making structural changes to train design and just the overall network. But even with the changes that you've made so far, it would seem that you still haven't realized that the full margin benefits given the leaked volume for the last several quarters. So to the extent that the volume backdrop is cooperative in 2021 and maybe 2022, how quickly do you think you can get to the 55 long-term OR targets?

Well, Allison, I appreciate the question. We have a goal of 55, and you never hear me say a number on purpose because I like to deliver it. But you, structurally, you are absolutely correct. Kenny and his team bring the business back, which we see some wins and we see some optimism from Kenny. We grow this company, which I think we can with the service product we have. I've just stayed tuned. I think it's going to look pretty good. So I appreciate the question.

Thank you. I have to jump in here because all I said was stay tuned, okay? And you're spot on, Jim. I was just going to say, you know, we need all three levers, you know, and you've heard us say that very consistently. We need Kenny and team to bring in the volume and the price, and then we've got the productivity that Certainly Jim and the operating group are responsible for a big portion of that, but it's a whole team effort in terms of driving productivity and building on that good service product.

It's all together. Allison, I think she was worried I was going to use the word blow-by. I promised her I did. I was not going to use that today, okay? Not today. Thank you very much.

Our next question is from the line of Bascom Majors with Susquehanna.

Thanks for taking my question. Just to follow up on that, Jim, you're a year and a half-ish into the job now. Clearly, you didn't have to go back to work. It seems you took this because you saw a tremendous opportunity at UP, among other rails. When all is said and done and the world is back to some semblance of normal, do you think UP has the potential to have the best operating margin returns of any of the North American railroads? Or is the jury still out on that one? Thank you.

Basketball, I appreciate it. You're absolutely right. I came because I thought it was a great company, great network, great group of people. And when Lance and I talked when I joined, the whole team wants to win. And I'll tell you, it's a great team. And it doesn't matter whether I'm here or not. I'll be honest. We're building it so we have strength in the long term. And yes, This railroad has the capability to be the best margin railroad in North America, lowest operating costs bar none. So my job is to make sure that we get there and we deliver and have the right strength behind whenever I leave, that the team, they don't even miss me. In fact, they get better than when I was here, and I can – watch them from my rocking chair when I'm 90 years old and enjoy it.

That's him. This is Lance. I'll bring us back to something we've historically talked about all the time, and that is we're building this better operating model, this service excellence, operational excellence, on a franchise that's the best in the industry. We've got the wonderful Gulf Coast franchise. We've got great east-west corridors. We've got a great I-5 corridor. We service Mexico better and to a greater extent than anyone else in the industry. We are set for a very bright future.

I appreciate that from both of you. Maybe to follow up slightly on kind of the same thing, I know you've already been asked about a timeline to 55, and I guess that's understandable. I think Rob rolled that out in 2016, so it's been out there for a while. Lance, earlier this year, and clearly a lot has changed since January, you suggested there might be some kind of investor event to sketch out kind of how you expect to get or where you expect to go over the next couple of years sometime later this year. Clearly a lot has changed since then, but I'm curious. either Lance or Jim, when you think you might be in a position to kind of share what you're managing to over the next two to three years? Thank you.

Yeah, that's a great question, Bascom, and you got it exactly right. I think it's opportune time to start talking to or have a concentrated moment where we speak to our investors about the game plan looking forward in a holistic way. and we would have loved to have done that this fall. That's just not going to work with COVID, so stay tuned. We haven't announced anything, but I would imagine it'll be sometime in the first half of next year, presuming that we can do it safely and in a manner that protects everybody's health.

Yeah, because we'd really like to do something like that in person and be able to get the team together. I think it's important for you all to see the UP team, the management team, below who you normally talk to. And I think in-person is the best way to do that.

Thanks, everyone. Really appreciate the color there.

Yep.

Thanks, Beth.

Thank you. The next question comes from the line of Jason Seidel with Cowan.

Thanks, Operator. Good morning, everybody. I trust you all are well. How are you thinking about sort of that post-Labor Day peak season, especially as we've seen a much, much stronger July and a rebound? Assuming that we don't have any more stepbacks in the reopening of our country, I'd love to hear your thoughts on that, and do you think it'll be a strong enough environment to push through a peak season surcharge?

Danny? Well, I'll start from the back first. I'd say a premature right now to talk about a surcharge. Obviously, the demand is picking up. What I would tell you is that our volumes are really increasing each week. They're pretty strong. All the dynamics show that we're going to have a pretty solid peak season. The warehouse inventory is normalized, so you don't have a lot of product in storage. E-commerce has been pretty strong. Retail has been improving sequentially each month. So it looks to me, you know, barring any type of, you know, second wave, that we're going to be in a really good position to have a really solid peak season.

I just knocked on wood for you there. My follow-up question, Kenny, I'm going to stick with you here. I think you mentioned... that some of the beer shipments were down in the quarter. We were hearing there was a lot of sort of out of stocks, if you will, heading into July 4th. Is that fixing itself on the beverage side as we move to sort of the next beverage holiday, if you will, on Labor Day?

It is. You know, again, Jason, the run rates on our beer shipments are improving each week. What we saw in the second quarter was COVID-related downtime, production downtime. That's behind us now, and so we feel really good about those shipments heading into the holiday. Perfect.

Kenny, everyone else, appreciate the time as always. Thank you, Jason.

Our next question is from the line of Walter Spracklin with RBC Capital Markets.

Yeah, thanks very much. Good morning, everyone. So I was wondering if I could direct this question to Jim. And, Jim, if you could go back and draw a parallel, if it exists, between how you're operating versus your competitor, a PSR railroad versus a non-PSR, and how similar that was when you were operating CN versus CP before Hunter. I mean, obviously CN had some structural advantages from a cost perspective that allowed it to win in the marketplace more often than not. Do you see the same parallel here with Burlington Northern? And do you notice that the PSR versus non-PSR effect, particularly when you're competing for new business?

Well, Walter, listen, that's a tricky question. I don't talk about how somebody else is operating. What I want to be able to do is operate and be the best operator in the industry so we have a better chance to win. There are certain markets that our competitor on a rail side is going to win because they have a better network in that piece and let them win that. And then we have a great network and we're going to win. But bottom line is if you can have a lower cost structure – What it does is it opens you up for a new truck opportunity. It opens you up for more fluidity because the customer sees how you're able to move more product with less rail cars for them. And you win on a head-to-head, and it gives you some pricing advantage in some areas. And Kenny's been real clear. We're all about making sure that we price ahead of what inflation is, rail cost inflation, and we're going to do that. That's where you want to win. I think you win by having the most efficient railroad, and you win in a number of lanes, not just one.

Let me add on to that. This is Kenny. Real quick, first of all, we've got a really strong competitor in the West and a lot of respect there. Our commercial team is really focused on opening up new markets and making the pie larger, and we talked about that a little bit on the call today. I talked about a lot of the business that we're winning that's, you know, short-haul business that in the past, because we didn't have the car velocity or the reliability or the lower cost structure, we weren't able to compete with the trucks on. And then I've also talked about a lot of these long-haul lanes that we're opening up new markets on. So our team focus is really on expanding the pie. And when I say that, I'm clearly looking at the truck markets.

Okay, you just answered my follow-up.

Thanks, Kenny. Walter, have a good one.

The next question is from the line of David Vernon with Bernstein.

David, are you out there?

It appears we lost David's line. Our next question then will come from the line of John Chappell with Evercore.

Thank you. Good morning, everybody. Good morning. As far as the average revenue per car is concerned, I understand the mix and the fuel surcharge, but if you look at the segment breakdown, there's some pretty big declines in metals and coal and obviously food and refrigerated. So just as we think about the 10% car load guidance for the full year, In one queue, revenue was better by 400 basis points versus carloads. In two queue, it was worse by 400 basis points. How do we think about the revenue versus the carload in the second half of the year with that 10% carload guidance?

Yeah, so let's talk a little bit more broadly, and then Jennifer, I'll bring it down to you for specific commentary on the guidance he's looking for. John, when we're thinking about the volume looking forward, there are still going to be weak spots for us. Kenny mentioned them. Frac sand is likely still to be weak. Coal is, you know, who knows what it will do, but it's not terribly strong. You probably got some weakness in some of the industrial products areas that are oriented towards shale-related plays. But absent those, setting them aside, most everything else should be showing improvement, certainly from the second quarter. And so when you think about it like that, and you first and foremost take automotive, finished vehicles, high arc business off the table as a substantial headwind, the big headwinds really come off the table. There's still a little bit of headwind in Fraxan, maybe a few others, but to that point there's tailwinds that are going to start showing up like in automotive companies.

Yeah, and I would just add to that. I mean, so when you're talking about ARC, obviously that's going to be driven by the business mix. And when you look at – I'll take it up a step from where you were talking to it. You know, through our three groups, you've got industrial. That is our highest ARC business. Then you've got the bulk, which is next, and then the premium, which has the lowest ARC. And so if you think about it just in terms of kind of those broad segments, you know, you're hearing us talk about being able to drive significant growth On the premium side of the business, autos is part of that. And then the industrial piece, that's where we're still seeing negative industrial production forecasts for third quarter. So I would think about it in kind of those broad economic things. And don't forget about fuel. Obviously, fuel surcharge is part of ARC. Fuel prices were significantly a part of the impact there in terms of the second quarter. And we're not looking for fuel prices to increase or really change pretty dramatically going from 2Q to 3Q. So that year-over-year impact is going to be there as well.

Okay. That's very helpful. Thanks, Jennifer. I'll keep it to one as instructed.

Thanks.

The next question is coming from the line of David Ross with Stiefel.

Yes. Good morning, everyone. Just want to get a little bit dirty and talk about coal. Is it 50% lower from here in a few years? Is there a scenario you can see where it's higher? How do you structurally think about the coal business and anything that you can do to mitigate the slide that we've seen?

Thanks for the question, David. We're going to have challenges here in the near term and long term. It's been structural decline. Obviously, there are some ins and outs with what happens with low natural gas We're staying very close to our customers and make sure we can stay competitive with them with each deal that comes up. But overall, we're just trying to backfill where we can because we do know that over time it's going to continue to leak.

And no scenario where it doesn't leak?

We don't see that. I think there's a scenario where we try to slow down the slope so that it's not a steep slope. But we'd expect that it will continue to just gradually decline.

Thank you. The next question comes from the line of David Vernon with Bernstein.

Hey, guys. Sorry about that. The joys of work from home and muted lines. So, Lance, I wanted to ask you a question about big picture returns. If you look at the last couple of years, you guys have done a great job offsetting the headwinds from asset turnover through the margin expansion and a lower tax rate to kind of stabilize the return profile of the business. As we look ahead, what can you guys do to kind of fix that revenue asset turnover question? And we talk a lot about service getting better and taking revenue from trucks. Is that going to be enough to get the assets moving in the right direction as you kind of get to whatever stable level of a war you're going to be at?

Yeah, that's a great question, David. And I'll start by saying we do believe that the new service product, the lower cost structure, opening up markets to us and Kenny's commercial team putting more of their posture on their front foot from a sales and business development perspective is All of that combines to definitely give us a better opportunity to get asset utilization up. I feel pretty good about that. I think there's plenty of opportunity. I look at our served markets, which are very broad. We touch a lot of the economy. And absent this immediate COVID impact and the behavioral changes that are in the near term, over the longer term, I think the argument for the United States and for North America is still pretty darn strong. That doesn't mean we're not looking at other things. We're always looking at ways to be more important to our customers, to serve them better, to play a different role in the supply chain if it makes sense. But I think our core business has a really good opportunity to continue generating both good margin and good ROICs.

Do you think you need to kind of invest more in some of that collaborative supply chain kind of resource within the company to unlock that potential, or do you think you've got the right level of kind of commercial focus on that? I know if you look back and look at, you know, CM's transition from the hunter's way or the highway to the kinder, gentler world of clode, is that something that is in the path for the company? Is that something you think you're going to be putting some effort into in the coming years?

I think what we're focused on is making sure Kenny's got the right culture and team members so that business development happens at the pace and magnitude that we think we should be capable of. I believe we're in process there. That might take some investments, and we've talked a little bit about it. They're small-cost investment, large impact, like Salesforce, Pros as a pricing tool, Tableau as an analytical tool, others. We talk about our APIs and making customers see more value and be stickier with us, and that's a manifestation of our net control investment. We talk about product development and making sure that we're doing what we need to do to serve the parts of the market that are now open to us. But in addition to that, kind of getting at your question, I wouldn't be surprised if there are other investments we make that look more like the activity Loop does where you're providing ancillary services from the railroad, but they are primary services to a customer, and it makes us a more valuable supplier, makes us stickier, and opens up even more markets for us. I think you're definitely on to something there, David, and it will be part of the conversation we talk about when we're at a moment in time having an analyst day.

All right. Thank you very much for the time, Jeff.

Thank you. Thank you. We have time for one additional question today, which is coming from the line of Jordan Allinger with Goldman Sachs.

Yeah, hi, thanks. Question, intermodal question. With all the service improvements that you've made in intermodal and trip plan compliance going up, do you see the gap required to really accelerate truck conversions? You know, 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? Thanks.

Yeah, 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 forecasts 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 a 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.

Hey, Jordan, let me put a little exclamation point on that for Kenny. Okay. So during the past domestic intermodal bid season, which happened at, you know, call it 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. But 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 a margin in today's environment is such where we have an ability to penetrate against truck right now. Great. Thank you very much. You're welcome. Thanks for your question.

Thank you. At this time, I'll let another tone to follow back to Mr. Lansford for closing comments.

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.

Thank you, everyone. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.