Union Pacific Corporation

Greetings. Welcome to Union Pacific's third quarter earnings call. At this time, all participants will be in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone 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 will be available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Jim Venna, Chief Executive Officer for Union Pacific. Thank you, Mr. Venner, you may now begin.

Rob, thank you very much and good morning. And good morning to everyone that's joined us. And thank you for joining us today to discuss Union Pacific's third quarter results. I'm joined in Omaha by our Chief Financial Officer, Jennifer Heyman, our Executive Vice President of Marketing and Sales, Kenny Rocker, and our Executive Vice President of Operations, Eric Gerringer. It's been a busy couple of months since we joined in Union Pacific. I'm very excited to be back. I come back to work with over 40 years of railroading experience, including two years here at UP. I know this railroad, and I understand the opportunity. To win, you need a strong management team, the right culture, and a great franchise. And that's the goal, win and be the best in the industry. Since I started, I've spoken with employees, customers, regulators, community officials, and investors and my message has been consistent. It starts with safety. Our goal is to be the safest railroad in North America. That's the standard we should set for ourselves. We also expect to be the best in service and operational excellence. Service is delivering what we sold to our customers. Operational excellence is using our resources and assets as efficiently as possible. It's being mindful of our costs and developing our people. A key early initiative of mine is to drive decision-making lowering the organization. This means reducing layers and simplifying how we work. We need to deliver value with speed. This is a cultural change to empower our people. We recognize that our business volumes fluctuate and weather presents its challenges, so we will always keep a buffer of resources to manage those situations. This commitment to safety, service, and operational excellence will lead to growth. And for you, our owners, that generates industry-leading returns. There's work to be done, but the entire team understands our strategy for success. Now let's discuss third quarter results starting on slide three. This morning, Union Pacific reported 2023 third quarter net income of $1.5 billion or $2.51 per share. This compares the 2022 third quarter net income of $1.9 billion or $3.05 per share. Our third quarter operating revenue declined 10%, reflecting lower fuel surcharge revenue, reduced volumes, and decreased other revenue. Expenses also were lower year over year, driven by fuel expense and last year's one-time charge for labor agreements. But there's an ongoing mismatch in our cost structure, resulting in an operating ratio of 63.4, as we continue to be challenged by inflation, including pressure from new labor agreements and higher casualty costs. Additionally, the lag on our fuel surcharge program negatively impacted results as fuel prices rose during the quarter. No doubt about it, it was a tough quarter, but I'm pleased with the positive productivity we're quickly gaining. Our service performance also is strengthening as we're positioning ourselves to meet customer demand while at the same time storing assets. I'll let Eric and Kenny discuss both in more detail. Ultimately, we're taking the right actions to build from here. So with that, let me hand it to Jennifer to provide more details on the third quarter financials.

Thanks, Jim, and good morning. I'm going to discuss our third quarter results by walking through the income statement on slide five, starting with operating revenue of $5.9 billion, down 10% versus last year on a 3% year-over-year volume decline. Breaking it down further, as illustrated in the appendix slides, freight revenue totaled $5.5 billion, down 9% versus 2022. Total fuel surcharge revenue of $637 million declined $515 million from last year. The impact of lower year-over-year fuel prices as well as the lag in our surcharge programs reduced freight revenue 8%. The combination of price and mix increased freight revenue 150 basis points as solid core pricing gains were partially offset by an unfavorable business mix. Increased short-haul rock moves and fewer lumber carloads outweighed the impact of moving fewer low-average revenue per car intermodal shipments. In addition, our pricing gains continue to include the impact of certain coal and intermodal contracts that are more reflective of current market conditions. Wrapping up the top line, other revenue decreased 13% versus last year, driven by a $70 million year-over-year reduction in accessorials. Switching to expenses, where, again, more detailed information can be found in the appendix, operating expense of $3.8 billion declined 4%, driven by lower fuel prices, last year's one-time charge for labor agreements, and volume-related costs. Digging deeper into a few of the expense lines, compensation and benefits expense decreased $77 million versus 2022, which does include last year's $114 million one-time labor charge. Third quarter workforce levels increased 3%, and our active T, E, and Y workforce is up 2% as we graduated new train crew personnel during the quarter. At this point, with our train crews more appropriately staffed, our training pipeline is shrinking. Today we have just over 500 employees in training, down more than 50% from last quarter's pipeline of roughly 1,200. Excluding the impact of last year's labor charge, cost per employee was essentially flat in the third quarter as we are starting to generate better overall productivity. As a result, we now expect full-year costs per employee to be up closer to 3%. Both third quarter and full-year costs per employee reflect elevated workforce levels and better crew efficiency, partially offset by wage inflation, which includes $20 million in the third quarter from paid sick leave. Fuel expense in the quarter decreased 25% on a 21% decrease in fuel prices from $3.96 a gallon to $3.12. Our fuel consumption rate was flat, but showed positive momentum through the quarter as we stored locomotives and improved freight car velocity. Finally, other expense grew 18%, primarily related to continued pressure and casualty costs. It also reflects the impact of one-time write-offs, as highlighted in the financial walk-down slide on 22 in the appendix. The resulting outcome is third quarter operating income of $2.2 billion, down 17% versus last year. Below the line, other income decreased $18 million, driven by last year's $35 million gain from a real estate transaction. Interest expense increased 6%, reflecting higher average debt levels. Income taxes are lower in the quarter on reduced income and lower tax rates that resulted in a $41 million deferred tax expense reduction. Similar to last year's $40 million tax reduction, we again had three states cut corporate income tax rates in the third quarter. Net income of $1.5 billion declined 19% versus 2022, which when combined with a lower average share count resulted in an 18% decrease in earnings per share to $2.51. Third quarter operating ratio increased 3.5 points to 63.4%. Core results, which include the impact of inflation, lower volumes, and cost inefficiencies, accounted for the majority of the year-over-year change. Turning now to slide six and cash flows. Year to date, cash from operations totaled $6 billion, a decrease of roughly $1 billion from 2022. The combination of lower net income and nearly $450 million of labor payments were the main drivers. Free cash flow and our cash flow conversion rate also were impacted. Year to date, we've returned a little more than half of the cash generated or $3.1 billion to shareholders through dividends and share repurchases. And we finished the third quarter with an adjusted debt to EBITDA ratio up slightly from 2022 levels at three times, as we continue to be A-rated by our three credit agencies. Wrapping up now on slide seven, the overall financial story and outlook for the remainder of 2023 is largely unchanged. We're facing a demand environment where we don't expect full-year volumes to exceed industrial production. We do, however, still expect to generate pricing dollars in excessive inflation dollars. Although, as we've discussed through the year, not to the level that offsets the negative impact of elevated costs on our operating ratio. Fuel also remains a headwind on earnings per share, although moderating from the $0.34 negative EPS impact in the third quarter to approximately $0.10 of negative year-over-year impact in the fourth quarter. And that assumes fuel prices in the fourth quarter are around $3.30 a gallon. And significant inflation headwinds remain. primarily in the form of the new labor agreements. We expect similar levels for fourth quarter paid sick leave expense to third quarter, and the impact of the BLET work rest agreements will primarily be seen through elevated force levels. Finally, our capital plan is coming in a little bit higher at $3.7 billion. All that said, the important takeaway from today's results and our view of tomorrow is that we're making gains. From maximizing growth opportunities and repricing our business, to improving service and generating productivity, we're striving to build on the current momentum as we end 2023 and enter 2024 on a path to further financial improvement. With that, I'll turn it over to Kenny to give us a view of the business environment.

Thank you, Jennifer, and good morning. You just heard from Jennifer that freight revenue declined 9% with a 3% decrease in volume for the third quarter. Let's jump right into the business team to recap the market drivers on the revenue side. Starting with bulk, revenue for the quarter was down 10% compared to last year, driven by a 6% decrease in average revenue per car due to lower fuel surcharges and a 4% decline in volume. Grain exports were softer than last year due to tight supply. Coal volume was down 5% for the quarter by continued decline for the use of coal in electricity natural gas prices. Lastly, we saw a reduction in import beer car loads due to the increased utilization of larger rail cars, which creates value for both the customer and Union Pacific. Industrial revenue was down for the quarter, driven by a 6% decrease in average revenue per car. Core pricing gains in the quarter were offset by lower fuel surcharges and a negative mix in volume. Softer declines for lumber and corrugated boxes continues to be a challenge, but our relentless focus on business development is driving excellent growth in our ROC network that supports construction of new emerging LNG facilities along the Texas Gulf and growth in petroleum products for both domestic and Mexico energy reform. Premium revenue for the quarter was down 12% on a 4% decrease in volume and a 9% decrease in average revenue per car from fuel surcharges in a challenging truck market. Automotive volumes were positive with continued strength in OEM production and dealer inventory replenishment for finished vehicles and auto parts. In addition, a robust business development pipeline, like winning Volkswagen shipments from the Texas Gulf, enabled us to outperform the market in the quarter. Intermodal volumes were down in the quarter, primarily driven by softness in parcel segment and weak imports on the West Coast. However, domestic truckload volume was slightly updriven by business development wins and strength in our Mexico shipments. Turning to slide 10, here is our outlook for the fourth quarter as we see it today. Starting with bulk, we anticipate continued challenges in coal as natural gas futures remain volatile. We are watching grain closely as we enter the export season. Crops are being harvested right now, and increased supplies will be available to move. U.S. soybean export sales have started out slower than forecasted. However, we have an improved service product this year to capture more available demand. Lastly, our forecast for renewable biofuels feedstock continues to remain strong. new business. We recently landed opportunities with projects coming online soon in Iowa, Louisiana, and Nevada. Moving on to industrial, the economic forecast for industrial production looks to stay depressed in the fourth quarter. However, we expect petroleum and construction markets to remain favorable due to our focus on business development. And finally, for premium, we are staying close with our intermodal customers in this challenging demand environment. We've seen a seasonal uptick at the beginning of the quarter, and we believe our improved service product positions us well to handle market demand. In addition, we expect automotive growth to continue, driven by strong OEM production and elevated shippable ground counts. However, we are watching closely the ongoing UAW negotiations and the negative impact they are having on four-quarter volumes as the strikes persist. In summary, we are fortunate to have a diverse portfolio that allows us to see positive momentum in some of our commodities. The team remains focused on what we can control, and I'm proud of the progress we've made in such a challenging market. We have a strong pipeline of opportunities that we're actively pursuing by leveraging our great franchise and extending our reach with transloads, Interline, and Shortline partners. We are winning new business, and I am confident that with our improved service product, we can open up more doors to new profitable growth opportunities. With that, I'll turn it over to Eric to review our operational performance.

Thank you, Kenny, and good morning. Starting on slide 12, as Jim mentioned, safety is the foundation of everything we do, and our goal is to lead the industry. Union Pacific can be the best because we've been there before. We have exceptional people, and the entire team is focused on returning every employee home safely every day. While our progress has been encouraging, we must continue to improve technology and strive to provide best practices to the industry and the communities that we serve. Safety impacts every facet of our business, our employees, customers, communities, and shareholders, and we are committed to world-class safety performances. Closely aligned with our goal of industry-leading safety, we are confident in our ability to lead the industry in both service and operational excellence. In late August, the southwestern portion of our network was challenged by a series of intense weather events that caused widespread flash flooding and washouts. However, through the bold and relentless efforts of our team, we were able to quickly respond and rapidly restore operations. Despite the weather headwinds, our performance metrics improved year over year. We look to maintain that positive momentum as the vast majority of our metrics in the month of September represented our best performance year to date. Freight car velocity improved 5% this quarter versus last year. Throughout the last several weeks, we have maintained a freight car velocity of around 210 miles per day. The impact of increased freight car velocity can be felt by our customers through the benefit of improved trip plan compliance, both intermodal and manifest and auto TPC, saw a sizable 13 and six point year over year improvement respectively. We will continue our work to deliver the service we sold our customers. Now let's review our key efficiency metrics for the quarter on slide 13. The team is continuing to take actions to right size resources to align with current volumes and run an even more efficient network. This incorporates Jim's strategy of empowering our people closest to the work and removing layers to increase the speed of decision making. Locomotive productivity improved 4% versus last year as we continue to identify opportunities to utilize the fleet more efficiently. The third quarter marked both our lowest active high horsepower fleet size and the highest quarterly locomotive productivity number since the first quarter of 2022. Workforce productivity, which includes all employees, was down 6% versus last year, reflecting the impact of volume declines coupled with increased workforce levels. Leveraging a larger workforce, we have reduced borrow-outs to the lowest total of the year and slowed hiring. We remain firmly focused on effectively managing our workforce levels and recognize the importance of balancing our resources as we plan for the future. Train length improved 1% compared to third quarter 2022, despite lower volumes in our intermodal business. By putting more product on fewer trains, we have increased train length across our system by over 500 feet, or 6%, since January of this year. Our focus on train length is paying dividends, and we are continuing our work to further improve this measure. While our service product demonstrated noticeable improvement, there are more opportunities to improve the efficiency of our locomotive fleet, increase workforce productivity, and maximize train length. We must sustain momentum across all of our operating metrics as we exit the year. So with that, I'll turn it back to Jim.

Thank you, Eric. Turning to slide 15. Before we get to your questions, I'd like to quickly summarize what you've heard from our team. Jennifer walked you through the inflationary pressure we continue to face broadly throughout our cost structure, but more specifically from new labor agreements. These are real hurdles that will require price generation and productivity to overcome. Kenny outlined a challenging volume environment, one with bright spots like construction and biofuels, but ultimately is being overwhelmed by soft consumer markets. Despite this environment, the team is leveraging our business development pipeline to bring new business to the railroad. And finally, from Eric, you heard that we're improving safety, service, and efficiency. We exited the quarter with great momentum. September was a very strong month across all of our operating metrics, and the momentum continues today. But we're still nowhere near what I believe we can deliver. There's still plenty of room to improve. I came back to win, and I could see the opportunity at Union Pacific. In a short period, we've increased the urgency across all facets of our strategy. The ultimate outcome is better service for our customers, which drives growth to the railroad. By aligning the team with a strategy of safety, service, and operational excellence, we will win. We're now ready to take your questions. Rob?

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two 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. Due to the number of analysts joining us on the call today, we'll be limiting everyone to one question to accommodate as many as possible. Thank you, and our first question will be from the line of Ken Hexter with Bank of America. Please receive your questions.

Good morning, and congrats on the new role, Jim. Jim, maybe just starting there on operations and Eric, you know, is this, you know, what is changing here or what needs to change? Is it the plan? Is it you have too much equipment? Maybe talk a little bit about what metrics you focus on as you get started or productivity. You threw out there there were too many locomotives. Maybe, you know, provide some numbers and targets and thoughts on how you get there. Thanks.

Again, nice to be back and nice to hear your voice again. And I'll let Eric jump in in a minute, but... Because he's the operating person. He's responsible. He's the person I'm going to keep accountable for to make sure we drive it. But what metrics do I look at? I haven't changed. A successful railroad is always fluid. Make sure that you operate in a manner where you don't impact the network because of decisions you've made with the kind of service that you've sold and the way you use your assets and people and whether you have the capacity on the railroad. So when I look at Union Pacific, what do I look at? At a high level, I look at do we have the physical plant to be able to handle the traffic and be able to handle the ups and downs that every railroader knows happens with weather, like who thought we were ever going to get a hurricane in the west coast? Okay, that's always an eastern seaboard issue more and a gulf issue, but not a western. But I think we did as a team, we did a great job of recovering. So you need a strong network. And we have the capacity there. We'll continue to invest to make sure. So that's important to me. And we have to make sure that we have a buffer of people and assets so that we're ready for the ups and downs of the business that happens. Because I wish it was flatline, Ken, and you know it as well as I do. You've been following the railroads for a long time. So let me go on because this is an important question. What do I look at? I look at, in the morning, first thing when I get up, I'd probably get about 100 different touch points on the railroad, all in one spreadsheet. But what I actually look at is, I look at revenue first. Where are we financially? What was our volume like and where the revenue is? And if it's not good, the next call is to Kenny. Then the next thing I look at is car velocity. It's an end-to-end measure. It tells me how well the railroad's doing. You know, in two-tenths a good number, but nowhere near what's possible. So Eric's done a great job so far, but we need to push more. Then you continue to look at the fluidity numbers, how well we are at crew changes, how the intermodal terminals, how fast we're getting to pad, how fast we're allowing the truckers to go through. So there's a lot of metrics that we look at that most people probably haven't heard me talk about, but I thought I'd give you a little broader view of what I look at. And then after you do that, there's the hot de-asset issue. How many cars per car load, the locomotives? So we've got over 500 locomotives parked, and those 500 are ready-to-go locomotives. So we could turn them on in a short period of time. We've got some placed in strategic locations if we need them on the network to keep the service level that we sold. On top of that, we have more locomotives that are stored for longer term. So we're in good shape. On assets, we spool up this railroad to operate at the level that is possible with the type of business that we have, and I think it's a win-win for us, Ken, and that's what I look at every morning. Eric, you want to add anything?

So when we think about recapping the quarter, Ken, you start thinking about we did make great progress in the quarter from a foodie perspective to Jim's point. And when you think about what did we do with that, we were able to store approximately 300 locomotives during the quarter. We were able to reduce our re-crew rate. We took down our borrow out to the lowest level we've had all year. Now, we continue to face the headwind from a workforce productivity of some of our agreements. So clearly the challenge that we've given ourselves and we continue to challenge ourselves with is how do you work to overcome that productivity headwinds? So when you think about things like some of the agreements that we've signed that actually allow us to remove certain people off of certain jobs across the system, we work to continue to reduce the fleet even more as we grow train links. I'm super proud of the team for the train link they've grown since January. There's still more opportunity there. When I think about remote control locomotives and being able to reduce some of our gain productivity and some of that, that's an opportunity for us. And the list goes on and on. We probably could talk about it for an hour. So I'm very excited about it. I think this is just the beginning. Thanks for the question. Appreciate it.

Great. Thanks for the time.

The next question is from the line of Fadi Shamoon with BMO Capital Markets. Pleased to see you with your question.

Yeah, good morning and welcome back, Jim. I mean, quick question. I think, you know, we've heard this in the past, you know, many times and, you know, maybe from you, Jim, it's, you know, first you have to fix kind of the engine and, ultimately energize the commercial momentum. And I think the success story around the industry really are in that vein where collaboration between operation and commercial have been big catalyst for that. So my question is, in terms of fixing the engine, and you talked about car velocity, where do you think kind of you are for the network that you have in that process? And what is ultimately the right kind of, you know, goal from a car velocity perspective, from an asset velocity, you know, perspective for UP? Where are you in that process? And, you know, as you go into 2024, can you kind of make progress? Can you improve operating ratio, even if volume are flat or the economy is muted and there is no momentum on that front?

So, Thady, I like the question because it frames exactly what, when I came back to work, the challenges that I could see. The first challenge that we had was inflation, both input costs plus labor costs and some of the collective agreements we signed. Every CEO that comes in always wants to blame people beforehand. That's not the way I look at it. That's the challenge. I knew what I would get myself into. So how do we fix that piece? We drive and look for efficiency, and there's efficiency there. Usually I don't give a, and you know that, Fatty, I don't forecast numbers, but I'll tell you, I'll be disappointed if that car velocity doesn't return to where it was before that we had in 2020. There's no reason for us to not be... you know, low 220s. So that's about as far as I'm going to get on that number. If I look at the other piece that we have to do, and Kenny's all over it, and his team is, is we know that we can't, through efficiency and productivity, recover everything in the long term. But what we can do is we can price properly for what the service that we're providing our customers, and Kenny's all over that. And that's going to take a little bit of time, and I'll let Kenny later on talk about this. But so the way I look at it is those two things, if we do them right, and let's leverage this railroad that we have. Okay. We're a 70 mile an hour railroad. There's only one other railroad in North America that runs their freight trains at 70 miles an hour. Okay. So let's leverage that. And you could see that when we changed the service out of Mexico, because we want to leverage Mexico to grow our business in and out. And by doing that and providing customers a service that, from the border, nobody can beat us to Chicago. We have the fastest service of anybody, especially with the new train service that we have on. So we should leverage that. Now, not everybody wants speed, so we have to make sure that we're consistent. We also have to leverage our network. I love the places we serve and where we can take our customers to. I love the way our origination customers are and the number we have and the variety. crossing all market segments. And if we do that, Thaddee, we become the most efficient railroad. Operationally, I've always said this, and I will continue to say it, we will have the best margin railroad in North America. Best operating ratio, best margin, whichever way you want to look at it. I'm comfortable with that. And we give a chance for the customers that are with us to win, And we look to move customers that are using other modes, including trucks, to look at the railroad as their way that they want to win. So I'm happy. I didn't come back to work to lose. I came back to win. I was more than comfortable. You know, most people my age are thinking about doing other things. In fact, I had a trip to K2 planned. And when the opportunity came up and we agreed with the board on what the strategy was and what we wanted to do moving forward, I said, listen, I'm all in. Let's go. So I've been working hard with the team, and I'm pushing them hard. At the end of the day, we need to make decisions quicker. We need to react quicker. We need to quit having so many layers that slow down the decision-making. And with that, we end up winning, Fatty. Hopefully I answered your question. I know it was a long answer. And maybe there won't be any other questions after this.

I appreciate it. Thanks.

Okay.

Our next question is from the line of Jason Seidel with TD Count. Pleased to see you with your question.

Thank you, operator. Good morning, Jim. Welcome back, Jennifer, Kenny, and Eric. Wanted to focus a little bit on sort of the inflation and pricing dynamic that we have going on here currently. You know, is this just a case for waiting till we can get to repricing some more of the contracts as we move through and seeing, you know, sort of better fluidity in the railroad? And are we just sort of, in for a few tough quarters here in terms of the comps.

Kenny, go ahead. Yeah, thanks for that question. No, we're not waiting. We're repricing these contracts right now in real time. We're having some very clear and direct conversations with customers. The commercial team is doing an excellent job of really articulating what took place from a labor standpoint and these costs, and specifically how what we're doing and what Eric is doing on his side, how it will benefit our customers. Now, I'll tell you, our customers are seeing some of the same pressures and it's playing out in their markets that way too. The other thing, and Jennifer talked about this a little bit, we're investing a lot of money here. We're investing $3.7 billion. We don't lose an opportunity to share that with customers and talk about the value that they get from those investments. You look at that, you look at the improved service product that Eric is delivering us, we have no problem looking our customers in the eye, talking to them about pricing the value that's there.

And can you just remind Jason and others, though, we can't access all of our contracts immediately from a price standpoint. So, you know, we do have, call it, half of our book of business has been multi-year contracts. So to your question, Jason, it does take us a bit to work through and reprice those contracts. But Kenny and team are very focused at every opportunity they get. They're having that conversation and they're winning in the marketplace with higher prices.

And Jennifer, could you remind us how they renew through the course of 24? What percent?

So we've not talked about 2024, but in general, call it half of our book is multi-year contracts. 25% is tariff and the other 25% or so are, are contracts that are a year or less in duration.

Okay. Fair enough. I appreciate the time.

Thank you.

Our next question is from Amit Mahantra with Deutsche Bank. Pleased to see you with your question.

Thanks very much. Hi, Jim. Hi, Jennifer. Hi, everyone. Jennifer, can you talk about, I guess, OR expectations as we move from 3Q to 4Q? Obviously, the fuel headwind, I think, gets even better sequentially. You talked about year over year, but I think it actually gets a little bit better sequentially. You're moving 8,000 more carloads per week. It's only two weeks into the quarter, so I don't want to get ahead of myself, but we're seeing some decent sequential volume growth. Can you talk about that? And then, Jim, just related to Jim and Eric, actually, you talked about getting car velocity up to 220 miles per day You've already had great improvement on that in recent months, and that has corresponded nicely to kind of this improvement in volume. Should we think that, you know, that increase to 220 allows you to essentially move more volume that's waiting to be moved, and we can see kind of a corresponding increase in kind of the seven-day car loadings in it? And how do you get comfortable or how do you get us comfortable that the added volume doesn't drive service challenges, which historically has been the case for all railroads? So if you could just talk about that as well. Thank you.

I'll maybe start off and address your question, at least the question about sequential OR improvement. As I've said in my prepared remarks, we're looking to build off the momentum that we have here as we ended out the third quarter and take that into the fourth quarter. without making any guide relative to what fourth quarter volumes are going to do. To your point, we're off to a good start, very pleased by that. But we're going to operate as efficiently as we can, and we do think we have an opportunity to have sequential gains going from third quarter to fourth quarter on the OR basis. It's going to take hard work by the team. It's going to take continued gains in terms of how we're operating the railroad and driving efficiency, but that's absolutely the goal that we're looking at. Jim, you want to maybe hit the rest of his question about freight car velocity?

So the reason I use freight car velocity is it truly is that end-to-end number that gives you a great indication. And it's not the only indicator, but it gives you an indicator. So I like the question. You said, can you handle an increase in business, and are you leaving business behind? I wish we were leaving business behind. I really do, and we are not. and we will look for everything we can to get more business. The railroad and railroads get themselves in trouble when they lose sight of what the fundamentals are for an increase in business. Increase in business can come in a lot of different ways. One is it can be bulk, which adds people, adds locomotives, puts more pressure on the capacity, and we built this railroad that has the capacity. which you always have to concentrate on and usually is the limiting factor when you increase, especially on the carload business, is how well your terminals and what the capacity is on the terminals. And when I was here last time, we worked in the Houston area and invested a lot of money to make sure that that terminal had the capacity to grow with the products that we handle in the industrial landscape. And it's important for us, and we are going through a process to – make sure that every car has the least amount of touch points, fluidity is king, and that we can handle the most cars per employee within all those terminals, and we have the gap that allows us to be able to react when the business comes up. You know, if you add an extra intermodal train or you add an extra 1,000 feet on one of our locomotive trains, that's an easier fix, again, as long as the terminals, whether it's Jeep or in Chicago or it's the Dallas terminals, have the capability to handle it in a expeditious manner the same way. I think we have it with all the business that Kenny's promised me, okay, is we have the capacity, but we will invest and make sure we try to stay ahead of the curve on the fluidity on our terminals. And if we drive the terminals properly, because that's usually your limiting factor, more so than what the physical plant is out in the railroad, and we keep that buffer of people so that we have the people to react, I'm not real worried about if we go up another 10,000 carloads. In fact, what a challenge to have. So, Kenny, your job to bring it on. Absolutely. So, thank you very much for the question.

Thank you. Our next question is from the line of Jordan Allinger with Goldman Sachs. Please proceed with your question.

Hi, thanks. I think intermodal is often viewed as a critical or key long-term growth engine for the industry. Are you now in a position, do you think, to start taking more share from trucks with trip plan compliance moving higher? And if not, what still needs to happen to get Intermodal to grow, obviously other than the macro? Is it more service from you? Do truck rates have to move up? Can you give some thoughts around that? Thank you.

Kenny, if I can just start real quick and then I'll pass it over to you. Price is important. You have to have the right price that allows you, but service has to be consistent. And a few weeks is not good enough for any customer to say, how's the railroad doing? If I was a customer, I'd be looking at, are you consistent in your service? And when you get impacted, because our car velocity will drop with some weather events through the winter. This is not a game where you can We're going to have some impact. Sometimes it will be higher, sometimes lower. It's how fast we recover. If we can do that and we can show shippers that we have the capability to deliver their products in a consistent manner, recover fast, then I think we have the opportunity. But it takes time. you the first time you show up and say, wow, we had a great September. Well, how about January? How was that? And how was 2022? I think they have memories of that.

Kenny? Just to build on what Jim mentioned, let me just level set. First, we've got a really strong stable of customers, private asset customers that are on our network along with our own railroad assets with EMP, UMAX. And so What that does is that provides optionality for the BCOs. So that's the first thing that we are appreciative of. Next is you look at all the product development that we're investing. Investing in a little bit more expansion in Kansas City, the new product development with Twin Cities, Inland Empire. You look at the discussion around Eric's really improved product around coming into and out of Mexico. That's been great for us. Setting aside this macro thing, as our service improves, really the North Star is going over the road. You've heard us say by our estimation that we've got a pretty low market share in terms of overall rail coming into and out of Mexico. That's ripe for more penetration and we're inserting more products out there. We announced that we've got a product to the southeast that we're taking advantage of. very bullish. We're on offense, and we're clear-eyed about growing there.

Thanks for the question, Jordan.

Our next question comes from the line of Brian Ostenbeck with J.P. Morgan. Pleased to see you with your question.

Thanks. Good morning. Welcome back, Jim. Just wanted to ask more about Visibility to the cost inflation on labor side specifically into 24 obviously it's been a challenge, but it's going to get There'll be a little bit more challenging next year. I think if the four and a half percent increase the bonus and maybe some Work rest rules around smart TD maybe Jennifer you can give us some sense as to how much visibility have for the cost inflation side When it comes to labor and then Jim would just love to get your thoughts on perhaps just the broader regulatory picture obviously UP had some challenges with the regulator on embargoes. Last year, there was the FRA letter about some of the inspections. So UP's been under the microscope a little bit. Just wanted to see how you perceive that as you're new into the seat. Thank you.

Talking about inflation, I mean, we're still in the process of putting together our 2024 plan, but you hit some of the key ones there, Brian, in terms of, you know, July 1, is the last of the scheduled wage increases for the craft professionals from the PEB, and that's 4.5%. Obviously, there will be, you know, wage increases on the non-agreement side as well. So there will be labor inflation pressures. You mentioned the work rest. And so those are all, while they're pressures, they're opportunities, right, for us to look at how we can be more productive in how we do every part of our business. And so that's one of the things we always challenge the team with is how can we chip away at inflation. It's not just Kenny's job from a price standpoint, it's all of our jobs as we look to drive productivity and work more efficiently. Purchase service and materials, that's an area that also has seen some pretty heavy inflation over the last couple of years. The labor piece of that probably will continue as the labor market stays tight, probably will continue to see more pressure as well. Beyond that, if I think about fuel, Obviously, driven by energy markets, we have opportunities there to be more efficient. On the equipment rent side, you know, that's where car velocity certainly can play a role for us as we speed up the network, turn the assets more efficiently. And then the last one I'll mention is the other expense line which, as you know, has been pressured the last year or so on the casualty side, and that's, you know, higher verdicts, higher awards, and that's probably something that's going to be around for a bit. That's why, you know, that's the corollary benefit to us running a safer railroad is taking those incidents off the table. We want everybody to go home safe. We want our customers' freight to arrive undamaged, but then it flows through from a cost standpoint as well. So those are kind of the big buckets I'll outline for you, and obviously we'll talk in more specifics when we put the plan together and talk to you in January.

So Brian, listen, good article on the cars per employee. I think it was a great comparison and it shows where the opportunity is. So well done on that. I enjoyed reading that last night. One of the last things I did before I went to bed. You asked about the regulatory agencies and how the relationship is. I think it's best to describe it like this. With the FRA, we're aligned. We have the exact same goal and I like that the FRA wants to come out and look at the railroad to see if our safety management system is proper. We're using the railroad in the proper manner and that we're safe. So I love that. I have no issue with it. And I have a good relationship. I've reached out. Good relationship with the FRA, but it's not my relationship that's the most important. It's how we deal with things out in the field. We're professional, we look for ways to improve, and we work with the FRA because they get to look at other railroads, and when they give us some feedback, we need to take it to see how we improve. So I think that's the way the relationship, and on the STB, there's lots going on, and I won't discuss the specifics, but I grew up in Canada working on a railroad that had inter-switching for a distance, and I know what the pluses and minuses are there. I don't see anything as we're moving forward And we'll give our feedback because I think we want to make sure that we don't impact our customers and what we serve and slow down the railroads because of a regulatory framework. So we have to be careful because our customers compete with people with other, of course, within the U.S., other modes, but they also compete in the world. There's products that we move for customers that go around the world that if we wreck the efficiency of the railroads, It's a mistake, and I know the STB does not want that. What they want is they want to make sure that we have good service, and that's the best way for us to make sure that the regulatory environment doesn't affect us is we provide good service. If we provide the service that we sold to our customers, then we win. So I'm very comfortable with the relationship. I think we need to continue to communicate, and we both, we have the same end goal with the STB and the FRA. So Brian, I think... The relationship is good. We'll take the feedback and we'll see where we can improve.

Thank you, Gene. Thank you. Our next question is from the line of Scott Group with Wolf Research. Please receive your question.

Hey, thanks. Morning and welcome back, Jim. So it sounds like we want to get more price, more productivity, but we still have inflation. You said you want to get to best-in-class margin. I guess We've got to get improvement first. So when do you think you can start improving margins again? And then separately, Jennifer, the buyback's just been a big part of the earnings growth for a long time. Is this a temporary pause, more of a prolonged change now you're thinking about the buyback? Any thoughts there? Thank you.

Jennifer, why don't you answer the first piece of Scott's question?

Sure. No, this is not a change in our philosophy around capital allocation, Scott, as we talked back in July. This is just looking at cash flows, looking at the balance sheet, and taking a temporary pause. You heard me mention that our debt to EBITDA levels are around three times here at the end of the quarter, a little bit elevated from where they have been historically. And so our job is to hit on the things you mentioned earlier with the price, productivity, grow the business, and generate more EBITDA, generate more cash flow, and resume our share repurchase program.

Scott, on the second piece is... The last time I showed up in January 14th of 2019 versus August 14th of this year is the railroad is more efficient. It did not back up to the place where it was before. It was very easy pickings to go park a thousand locomotives. So we don't have that. But what we do have is we still have productivity. I see productivity across everything that we do, from how management works, how many people we need to operate the railroad, to how well we use our assets. So it won't be quite as large. It won't be the billion three that we did last time, but there is productivity gain that we can do. So with that, it's going to take a little bit longer. Some of these changes that I see will not be as quick. I won't be able to go to North Platte and park 90 locomotives because we had them parked outside the diesel shop first day. But there is ways for us to speed it up. And there's still locomotives that we can park and make sure that they're used efficiently. So it'll take us a little bit longer. And stay tuned with us. And you'll see, hopefully, incremental changes to our numbers that'll tell you that we're headed the right way. And there'll be ups and downs. There is no advance or buts. There's some things we can't control. I really don't know what's going to happen to the economy. next year. Are we going to have a recession? Are we not going to have a recession? I'm hoping the country does not have a recession, and that would help us. So hopefully I answered your question, Scott.

Thank you, guys.

Thank you.

Our next question is from the line of Walter Spracklin with RBC. Pleased to see you with your question.

Thanks very much, Operator, and welcome back, Jim. I know when you first came back and you just mentioned locomotive storage, employee productivity improvement were really a key focus for you, very successful on that. They had some pretty quick turnarounds. Just wondering now, you're in the seat, you probably have multi-year views here, and whether you can grab some longer-term kind of structural efficiency opportunities objectives and I'm referring here to things like hump yards and things that take a little longer time to address that perhaps you didn't look at immediately when you first were in the role that you may be looking at here now and just wondering if when you look at the hump yards that Union Pacific has on its network, do you think they're right aligned or do you see some opportunity to reduce some of those or any other infrastructure assets that are on the network?

Walter, nice talking to you again, and good question. So the railroad, the way I look at it is there's nothing wrong with hump yards, but they have to fit into the fluidity and the touch points of how many times we touch cars and how many cars we actually have to handle. And hump yards are okay. So at this point, with the way the network is as far as getting into that detail is good. What I don't like that I've seen is our put-through is not as fast. Our dwell needs to drop. Our dwell and the amount of time that we have at rail cars, in yards, at the intermodal terminals, at the intermediate points will drive productivity gains so that we are able to have more fluidity, and that's real important to me. Now, when I came back, last time I came with one goal. I came to work. to drive operational efficiency. I didn't look at the rest of the company very much, and the rest of the company needs to be looked at, and that's what we're doing now. So everything that we did operationally, we are going to look at what we've done. And one example is this de-layering exercise. You can't have nine levels from the CEO to the people who actually do the work and expect that the message is clear, the decisions are made clear, and there isn't some hiccup and the decision stops. And I want to drive it so that we have way less layers. And that means with less layers, the people out in the field are empowered to make the right decision. Which train to hump? Which train to switch? How we move the cars? What are we doing to customers? What are we doing for scheduling? How are we loading? Is our loading pattern right? So many things that we can do. And if we do that, they're better at it than us, Walter. There's no way that Jim Venna, even though I think I'm a decent operator, I could go operate a hump yard. Maybe when I retire next time, I'll become just a hump yard operator in one place and see how well, because I think a few people would love me to go out there and see if I'm as good as I say sometimes, okay? But at the end of the day, that's what's important, and that's one of the things. That's a big change, this de-layering exercise that we're going through, and stay tuned. We'll announce what the findings are as we move ahead. I'm looking forward to hearing about it. Good question.

Thank you.

Our next question is from the line of Tom Wadowitz with UBS. Pleasure to hear your question.

Yeah, good morning, and Jim, I also wanted to say welcome back. I think the, you know, this is a bit of a high-level question, and I'm guessing the answer is kind of both, but I wanted to see if you could give some color on how we should look at the opportunity in terms of being a volume story or a cost story. I mean, you clearly did a lot with cost last time in 2019, 2020. You are talking a lot about productivity, but what's really the more important lever for operating income growth the next couple of years? Is this a little bit of productivity and a lot of volume? And then I guess to the extent that there's the productivity side, is that driven by headcount reduction or is that really more other cost buckets like, you know, locomotive costs, car costs, that type of thing? Thank you.

Good question. Why don't we start with, Kenny, why don't you talk about the opportunity on the growth side, the pricing side, and what we're looking forward to?

Yeah, so we talked a little bit about it in terms of markets like our biofuels, very bullish on our construction and autos. I mean, just set aside the strike that's going on now. I talked about the business development wins. But it's still holding up from a demand environment. We need the strike to come back. And then we've talked about international intermodal. Now we've had a little bit of what I'll call a seasonal bump. We'll call it peak season. And you've heard me say we haven't had one in a few years, so it's nice to see one. But on the domestic side also, there's just still a tremendous amount of over-the-row share that's there. You know, we think it's in the low teens that's in between out of Mexico and into Mexico in terms of over-the-road share that we should be gathering. Eric is out there getting us a more improved product. We've got a lot of optionality out of Mexico. We see that as a growth engine. As some of these consumer-facing products improve, we've always said that we felt good about our petrochem business. Industrial chem is also included in that. So if you look across the line, there's a lot of upside, and we're very bullish on the volume growth that's there.

So, Eric, why don't you talk about it? Because the question is great. There's no if, ands, or buts, so we have to grow business. We have to price and take care of what's happened to us inflation-wise and leverage our network. But productivity, what do you see on your piece of it?

Absolutely. You know, we talk about productivity. We really differentiate into two buckets. to some of our commentary already this morning, there's no easy productivity, but this most straightforward productivity is when you get that volume, how do you leverage it on the existing network that we have, the existing trains we have, the whole idea of being volume variable plus. The other bucket of productivity is how we actually do the work. So when we think about our locomotive shops, our mechanical shops, our engineering gangs, for example, on the non-off side, it's a real challenge to them to say, hey, you still need to do the important work, how you do it more efficiently. So when we think about going into a locomotive facility and making sure that we balance the headcount to the exact number of locomotives they have, to the forecasted number, to being really thoughtful about how do we use that material in there, to being thoughtful about how do we think about redoing cores. I mean, there's infinite areas of opportunity within each one of our departments to be able to look deep into the business, deep into the work, and really find those opportunities. To Jim's point, It's a little bit harder work than it was a few years ago, but it's still work that we know how to do and work that we'll be successful doing.

And I know neither one of them wanted to touch it. They always leave those things for me. People, it's going to be one. You know, we look for cost savings on what our input costs are. And, of course, it's much more difficult in the inflationary place that we find ourselves in this country. But we're going to look for every opportunity to use less so that we can save costs that way. And on headcount, absolutely. We're going to use attrition to right-size the company as much as we can to what we know now we've identified of where we want to get to. So it will be through attrition mostly, and we'll move ahead from there. Thanks for the question.

The next question comes from the line of David Vernon with Bernstein. Please just hear their question.

Hey, good morning, guys. So I wanted to talk a little bit about – I wonder if you could talk a little bit about – you know, the earnings leverage we should have from some of the intermodal agreements you guys are signing. Obviously, the Falcon service, the partnership with NS. How should we be thinking about the profile from a margin perspective of that traffic coming on, particularly early here as truck rates remain low and it seems like intermodal companies are out there discounting the service to take some share? And then maybe bigger picture, Jim, could you talk a little bit about how you see the competitive dynamics for UP changing post the CPKC acquisition. We've heard a lot from Lance in the past on this, but I don't think we've had a chance to hear you talk about how that acquisition creates risks or opportunities for Union Pacific from your perspective. Thank you. Okay, Jennifer.

So thanks, David, for that question. You know, you've heard us talk about margins before in terms of when we look at it, where you see some of the greatest margin pressure relative to our book of business is in that business that's truck competitive. And we certainly are in a truck competitive market today. But that's also our opportunity that you've heard us talk about in terms of tremendous growth. And we know that there's leverage in margins from volume growth. That can help drive greater productivity. And as we are building a better service product, certainly, you know, as we provide better service, there's a price for that service. And we look to price to that to be able to meet that customer demand. I don't know, Kenny, if you want to add anything to that.

No, the only thing I'd say is that as we're looking in the current environment, we're certainly keeping our customers competitive with mechanisms that we have in our contracting. We are clear-eyed about as the markets change, they're stable now. If they get a little bit more tighter, demand strengthens. We'll see upside from a price perspective, which should show up in margin.

And on the competitive dynamic in the specific example of CPKC, so I think they're a great railroad. I think they have a great network. I think their leader, Keith, he's a friend. I've known him for a long time. And he's smart, knows how to railroad. So he knows how to balance safety, service, asset utilization, cost control, and developing his people. Same thing as we do. So the competition is, and I like it. There's nothing wrong with a little competition. So I want to win. He wants to win. There's no advantage of us that the CPKC, if it's origination to destination on their railroad, you know, we have a competitive disadvantage. But the advantage we have is we've got this great network. We go through 23 states. We serve the population in the U.S. We have fast access. We have a 70-mile-an-hour railroad. We're fast. And if we have to be, if that's what we sold was fast, we can do that. And you can see it when we move our parcel business as we're doing and getting up to their peak period coming up towards Christmas. So all those things, plus we have access into Mexico. broader access than one or two places. We go into Mexico from the west coast all the way east to a number of locations. And we have a strong partner in FXC, and as you know, we own 26% of them, and that helps us. So I'm excited. CPKC is going to make it difficult, and we're going to make it difficult. Now, I don't chase price. This is not a price discussion. It's about a service and access to markets and how we do it. And I'll walk away from business if somebody wants to lower their price. Go ahead. Take the business. I'll bring in business that fits our network, that makes sense. So that's how I think of the competitive, and I could have that discussion about all the other railroads. I want us all to be really good and strong.

So are you seeing a potential volume risk from a diversion standpoint?

Kenny? No, we're going out there. We feel good about the service product. We're We're going head on. We're ready to compete. Again, the North Star, and I said this earlier, it's over the road. So, you know, we're on offense and we're starting off well.

All right. Thank you, guys. Thank you.

Thank you. As a reminder, due to the number of analysts joining us on the call today, we ask you to please limit yourself to one question to accommodate as many participants as possible. The next question will be coming from the line of Allison Poliniak with Wells Fargo. Let's receive your questions.

Hi, good morning. Hey, Kenny, can you expand a little bit on that over-the-road opportunity? Is it something that you're seeing build a lot more in the pipeline today? I know you had talked about some of your customers wanting to see maybe more reliable service before that sort of conversion happens in terms of those opportunities. But any color on how we should think of that progression in terms of today versus the multi-year out? Thanks.

Yeah. So, again, I mentioned, you know, roughly mid-teens, call it 15%. That's our estimation that's moving rail out of there, we see that as a ripe opportunity to go after that over-the-road product. We've got to revise a more competitive, faster service product that Eric is delivering on in the high 90th percentile for what we've scheduled that to, and we have seen some wins. We have seen some over-the-road wins come early. We've added extra products that I talked about going into the southeast, Remember, we're moving, Allison, our product seven days a week. It's been a few days a week, and customers like that, and we see it as the right spot to go after and grow.

Great. Thank you.

Our next question is from the line of Chris Weatherby with Citigroup. Please proceed with your questions.

Hey, thanks. Good morning. So we noticed that headcount was down sequentially for the first time in a while, and Jim, you noted using attrition here. So You know, maybe thinking about the next couple of quarters, should we expect headcount to stay relatively flat, maybe come down a little bit as you use attrition, and then maybe ask a different way, how much volume do you think you can manage with current headcount? So as we, you know, hopefully see a recovery in freight as we move forward, is there an opportunity to leverage this existing workforce to drive more productivity without adding heads?

Chris, nice to hear your voice again. There's so many pluses and minuses, additions or subtractions, We still haven't fully implemented the 11 and 4 deal on scheduling with BLET. And we haven't concluded negotiations with Smart TD on what that does. So we have to see how that goes. The general way I see it, though, is that we do want to see a more productive workforce in the company as we move ahead. I would be remiss to tell you without those collective agreements in place of exactly what the timeline is. But you know me by now that I always look at what do we need of the railroad and is at the right level to be productive with it. So I'll do everything I can. But with those outstanding items, We still – I just can't give you a black-and-white answer of what the timeline is and how fast those changes go to where I want to take it. It might take a little bit longer than if we didn't have those deals in place.

Yeah, but, Jim, I do think it's safe to say once we have those deals implemented and we're working to drive the productivity, our long-term view is that we can grow volumes faster than we grow headcount. Absolutely.

Good story. Okay. Thanks for the time. Appreciate it. Thanks, Chris.

Our next question is from the line of Brandon Aglinski with Barclays. Please proceed with your question.

Hey, good morning and congrats, Jim. So, Jim, I guess, you know, I think if we look back over the last number of CEOs at Union Pacific, the disappointment that I think probably all of them would share would be, you know, lack of relative volume growth. And as I'm looking at my model here, I think, you know, our teams this year are probably going to end up being down more than like 25% from where this company peaked way back in 2006. As much as we're talking about service and the ability to grow and the pipeline looks strong, we've heard that before. What is different looking forward with you as CEO at Union Pacific that you think you can really capture some of that market opportunity?

I'm going to repeat myself, but it truly is. You have to have the fundamentals. You have to provide the service. You have to see what's happening. I think we can grow faster than what the economy gives us, and that's our goal, and that's where we're going to drive it. Judge me in a year, okay? I want the board to judge me. I want the shareholders to judge me and the team, and I think we're there. I think we can do that. Do we have some headwinds? Absolutely. You know the industry as well as I do. You know, coal is always an issue that we have to deal with, But the rest of the products that we have, we're going to go after it. We're going to go get it. We're going to bring it on in the right place. And if we grow not as fast as we want, we're going to price properly for the service we're providing. So I think it's a win-win, and let's talk next year. I'll put it on my calendar. You can ask me the question of how we're doing, okay?

Will do, Jim. Thanks.

Thank you.

Our next question is from the line of Jonathan Chappell with Evercore ISI. Please proceed with your questions.

Thank you. Good morning. Kenny, we've talked about a lot of things as it relates to intermodal, new services, you've had some wins. Conceptually, there should be some share shift back to the West Coast, hopefully after a couple of years of losses there. But the truckload market on the over-the-road opportunity continues to bounce along this bottom. So how competitive is the pricing dynamic within intermodal, whether it's your new services relative to other rail options or relative to truck, and how do you manage then the capacity you're willing to commit to these new kind of growth alternatives when you do have maybe a competitive pricing landscape that's more difficult at this point in the cycle?

Yeah, first of all, it's great that we put the investments in for our intermodal network. You've heard me mention them. I won't go over them again, but it does start there. Obviously, the service matters. We've been deliberate about making sure we can insert optionality on that domestic intermodal product, and we've done that. You've heard us talk about the strong stable we have as you look at hub and schneider and swift and stg that's there our rail product with emp umax and we've invested in that fleet from a gps perspective invested in the ramps so we're prepared uh from that standpoint you you think your question is a little bit about how we keep them competitive and i've talked about that uh in terms of again we have mechanisms to make sure that our customers, regardless, IMCs, private assets, are competitive. And what we want to be is just nimble and quick and change with the market so that we can get that margin and price improvement as we move along.

Thank you. Our next question is from the line of FASCO majors with Susquehanna. Please proceed with your question.

Jim, you said you had about 500 locomotives parked. I was curious, just high level, how do you think about the locomotive strategy at UP versus what you inherited? I know you've got a big order for refurbishment that will go out several years, but just strategically, longer term, how are refurbished locomotives performing? Where do you see your CapEx going over the next three, five, seven years to satisfy both the service needs you have, and the emissions targets you put out there. Thank you.

Okay. So, you know, we'll continue to invest in our locomotives. And Baskin will always make sure that we have the right locomotive and make them as fuel efficient as possible so that we can save fuel when we're operating. No advance or buts. That's what we'll continue to do. And as far as where the capex, you know, we're not ready now, but I'm pretty sure that you'll see our CapEx being at a different starting point next year than where we were this year, and that's how I view it. Stay tuned, and when we get into January, we'll give you the numbers of what our plan is for next year.

Thank you. Our next question is from the line of Jeff Kaufman with Vertical Research Partners. Please proceed with your question.

Thank you very much, Jim. Welcome back and congratulations. You know, you've answered this a couple different ways, but let me come at this in terms of what's different from 2019 since you came back. I think you talked a little bit about what's different at the railroad, but maybe talk about in terms of the customer expectations in the market or kind of where volume is, where business is, and how the railroad, in your view, needs to adapt.

Well, I think railroading, the basic foundation of railroading, hasn't changed from 2019. How we look at the business at Union Pacific, how fast we are making decisions, needs to change. You know, when I showed up, I asked Kenny to give me a number of customers that I could talk to at a high level and talk about what our service is, what our plan was, and one of them said to me that they wanted to invest a lot of money to be able to build out because there was expansions going on in the soda patch, soda ash patch. So at the end of it, it was taking us over a year to give them a decision on whether we could do that. We need to change that. And if we change that and we were able to make the decision in four days, I got it, we can't make decisions in four days all the time, but we sure can make them in a few weeks instead of months. That's real important. That's a change in the way we want to do business. And the customers, the feedback was, There's opportunity for them to win in their marketplace, the customers that we have. So we need to build on that, and that's real important. The foundation is the same. We're going to operate a very efficient railroad. Having a buffer, the fundamentals, the five key fundamentals of how you operate a railroad, I'm not changing from. It's tested. It wins. It puts us in the right place. I'm not changing. But we need to be consistent with our customers, work better, for them to grow, and we win. So I'm looking forward to the challenge. One big difference between 2019 and now, my wife is still mad at me that I went back to work, okay? But other than that, everything else is good.

Awesome. Well, best of luck to you.

Thank you.

Thank you.

Our next question is from the line of Ravi Shankar with Morgan Stanley. Please proceed with your question.

Thanks. Hello, everybody. Just a follow-up on the Mexico and Falcon service commentary. Jim or Kenny, when you talk to customers who are looking to potentially convert from truck or convert from another railroad, how important is speed in their equation relative to an overall value proposition? I mean, you said that you're at a bit of a structural disadvantage given the interchange versus your peer, but What can you do from an overall value prop to kind of be competitive and kind of work against that structure?

Yeah, listen, I probably wasn't clear. I don't think structurally we have any issue with any competitor. I just wanted to give due to CPKC, if you're an origination railroad just like us, if we originate in Salt Lake and we're going to Boise, Idaho, it's pretty hard for somebody to compete against us another railroad. That's all I was saying. At the end of the day... I think we compete against anybody because of the network we have, the speed we have, and what we're capable to open up for markets. Kenny?

First of all, we know our customers. We know that automotive OEM with auto parts for production is different than, say, an FAK business of container pillars. They are different. What differentiates us in that sense, I talked about the revised OEMs. service products, that is going to help us with customers that are speed sensitive. The fact that we have every day per week service, that's going to help us because that matters also. The fact that we have a group of private asset owners and we also have our own containers to go into Mexico, that makes a difference. So, again, we know our customers and those are the things that we talk to our customers about as we're winning business over the road.

Great. Thank you.

Thanks for the question.

Appreciate it.

Thank you. Our final question is from the line of Justin Long with Stevens. Pleased to see you with your question.

Thanks. Good morning. Jennifer, you talked about comp per employee being up about 3% this year, but I wasn't sure if that included the impact of the abnormal labor costs from last year. So how do you expect comp per employee to trend sequentially into the fourth quarter? And as we move into 2024, do you think this is an area where the productivity opportunity has potential to fully offset the inflation headwinds we're seeing?

So thanks for the question, Justin. In terms of your first question, when we talk about comp per employee, we do try to make it apples to apples. So we take out any of the one-timers. In terms of looking at it sequentially, You know, as we go into the fourth quarter, there's probably a couple things going on there to think about and consider. One is, as we're continuing to take people out of training classes, put them into full-time positions on the railroad, there's a little bit higher cost associated with that. And then just some of the OE capital mix that you get in the fourth quarter as you wind down some of the capital programs, that can put a little pressure on there as well. Look, in long term, you know, again, productivity and being able to offset cost inflation with productivity is always one of our objectives. It certainly is hard in a very high inflation environment, but that's our opportunity as well. That gives us the opportunity to really look critically at the work that's being done and make sure that we're being as efficient as we possibly can be. And I think you've heard on the call today, we see opportunities across the board, whether you're talking about how we're maintaining our locomotive fleet, how we're looking at our back office functions, how we're managing the transportation employees, we have opportunities to be more efficient there.

Well, listen, thanks, everyone. And let me tie this up. And I really appreciate everybody taking the time this morning to join us and talk about Union Pacific. And I think the team that's with me here has done a great job of explaining what we do. But let me summarize it real quick. Our goals are clear. It's about safety, service, and operating excellence. That's how we win. And we're going to be really good at operations. We're going to provide consistent service to what we sold. Every customer has a different level of service they require. Some of them is fast. Some of them is sustainable. Some of it is making sure you're consistent. We're going to leverage the railroad. We're going to do everything we can to leverage the physical plant that we have We're going to be efficient in how we do it. We are going to deal with stakeholders at all levels in a professional manner and listen to their inputs and see what we can do. I think we can win. This is not going to be a short-term fix that you'll see it, but what you should notice is as we go through the next quarters, you will see us improve and we will get to the right place with the inputs that we have in this railroad. I'm excited. The team's excited. We're moving fast. And, again, thank you very much, everyone, for joining us. And we'll talk to you all in the next quarter, if not sometime before. Thank you very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines at this time and have a wonderful day.