Union Pacific Corporation

Good morning. Thank you for accessing Union Pacific Corporation's 2024 Second Quarter Earnings Conference Call, held at 845 Eastern Time on July 25, 2024, in Omaha, Nebraska. This presentation and the accompanying materials include statements that contain estimates, projections, or expectations regarding the company's financial results and operations and future economic conditions. These statements are forward-looking statements, as defined by the Federal Securities Law. forward-looking statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. The materials accompanying this presentation include more detailed information regarding forward-looking information and these risks and uncertainties. In addition, please refer to the company's website and SEC filings for additional information about our risk factors. Thank you.

Greetings. Welcome to the Union Pacific second quarter earnings call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone this morning should require operator assistance during today's 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. Jim Venna, Chief Executive Officer for Union Pacific. Thank you, Mr. Venna. You may now begin.

Thanks, Rob. And good morning, and nice to come to you all from a beautiful morning here in Omaha. And thanks for joining us today to discuss Union Pacific's second quarter results. I'm joined 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 Geringer. As we dive into the discussion of the second quarter, you'll hear that operating outdoors these past few months has not been easy, but I'm pleased with how we manage those challenges to drive strong financial results. It provides another proof point that our strategy is the right one to drive success. And let's discuss second quarter results starting on slide three. This morning, Union Pacific reported 2024 second quarter net income of $1.7 billion, or $2.74 per share. This compares to 2023 second quarter net income of $1.6 billion or $2.57 per share. Second quarter operating revenue was up 1% as solid core pricing gains and slightly increased volume were reduced by a negative business mix and lower fuel surcharge revenue. And if you're normalizing for the yearly change in fuel, freight revenue was up 2% versus 2023. Reported expenses year over year were down 4%. This is very impressive work by the team to offset the high inflationary pressure we've experienced in a flattish volume environment, even when you adjust for one-time items and fuel. Our second quarter operating ratio of 60.0% improved 300 basis points versus last year, and despite some challenges, we still showed sequential improvement. Overall, this quarter was another solid step toward our goal of leading the industry in safety, service, and operational excellence. I'll let the team walk you through the quarter in more detail and then come back for a wrap-up before we go to Q&A. So we'll start with Jennifer and the second quarter financials. Jennifer?

Thanks, Jim, and good morning, everyone. Let's start on slide five with a walk-down of our second quarter income statement. We're operating revenue of $6 billion, increased 1% versus last year on slightly positive volumes. As Kenny will highlight, this strong top line performance was supported by solid pricing gains and business wins against the backdrop of weak coal demand. Second quarter freight revenue totaled $5.6 billion, a 1% gain. Digging into the revenue components, strong core pricing gains, partially offset by an unfavorable business mix, added 150 basis points to freight revenue. Double digit growth in international intermodal volume was the primary contributor to the negative mix dynamic, and further compounded by an overall decline in our higher average revenue per car industrial business. Slightly positive volumes in the quarter added 50 basis points to freight revenue, and lastly, fuel surcharge revenue of $669 million declined 5% as lower fuel prices impacted freight revenue 75 basis points. Excluding fuel surcharge, freight revenue grew 2% as the team continues to pace revenue growth faster than volumes. Wrapping up the top line, other revenue declined 6% as a result of lower intermodal accessorials and less demand for auto parts shipments at our loop subsidiary. Switching to expenses, second quarter operating expense of $3.6 billion decreased $152 million versus 2023 as we drove productivity across most cost categories. We have more details in the appendix, but let me highlight some of the performance drivers. Compensation and benefits expense declined 6% versus last year as we reduced headcount 5% and generated positive productivity. Although our training pipeline is significantly reduced compared to 2023, trained service employees increased 1% as we continue to carry more trained service employees as a buffer for our operations and to offset the impact of new labor agreements. The remainder of the workforce decreased 9% as we continue to focus on de-layering and pushing work down in the organization. And as you'll recall, last year's expenses included a $67 million one-time ratification payment. Following up on an item we highlighted at our first quarter report, last month we completed the transfer of around 350 mechanical employees to Metra in Chicago. Going forward, this transfer will lower both other revenue and our expenses by roughly $15 million a quarter. Excluding last year's one-time labor payment, cost per employee in the second quarter increased 4% as we continued to drive for better overall efficiency. Fuel expense in the quarter declined 6% on a 5% decrease in fuel prices from $2.86 per gallon to $2.73 per gallon. We overcame a challenging operating environment and less fuel-efficient freight mix to improve our fuel consumption rate 1%, largely by locomotive productivity. Equipment and other rents declined 12%, reflecting improved cycle times and lower lease expense, partially offset by business mix. Finally, other expense decreased 4% as we recorded a couple one-time items in the quarter. On the positive side, we added a $46 million gain from an intermodal equipment sale. Conversely, we recognized $23 million of additional environmental expense at a legacy California remediation site. Second quarter operating income of $2.4 billion increased 9% versus last year. Below the line, other income increased 11% as a result of interest received on tax refund claims, while interest expense declined 6% on lower average debt levels. Second quarter net income of $1.7 billion and earnings per share of $2.74 both improved 7% versus 2023. Our quarterly operating ratio of 60% improved 300 basis points year over year. As I just discussed, there were several puts and takes in the quarter. Key here is that our core operations drove 160 basis points of OR improvement and 21 cents of EPS growth year over year. This is a great continuation of the momentum we've created these past three quarters. Turning to shareholder returns in the balance sheet on slide six, second quarter cash from operations totaled $4 billion, up $175 million versus last year. Growth and operating income and 2023 labor agreement payments, partially offset by higher income tax payments, resulted in increasing cash from operations and our free cash flow improvement of 43% to $853 million. As stated back in April, we restarted share repurchases late in the second quarter. Although we plan to ramp up repurchases through the year, we started slowly with just over $100 million repurchased in June. Combined with our dividend payments, we've returned $1.7 billion to shareholders year-to-date. Finally, our adjusted debt-to-EBITDA ratio finished the quarter at 2.8 times, and we continue to be A-rated by our three credit rating agencies. Wrapping up on slide 7, as we've reached the midway point of 2024, there remains some uncertainty about the second-half recovery that many were forecasting. As Kenny will detail, there are definitely markets where we're seeing growth, and much of that growth is being driven by our business development efforts. There also are some challenge markets, particularly coal. Operationally, the team is making great progress towards our long-term goals to be the best in safety, service, and operational excellence. This is reflected in the progress in our safety and performance metrics, including our margins. Importantly, we believe the trend is indicative of where we can get to long-term, and each successive quarter is a step on our way to winning. We are highly confident in our ability to generate price dollars in excess of inflation dollars and still expect freight revenue to pace ahead of volume in 2024. We also remain committed to our long-term capital allocation strategy. This includes last week's announcement of a 3% increase in our dividend as we drive higher returns to our owners. This increase represents the 18th year in a row of annual dividend increases. With share repurchases, we expect to repurchase around $1.5 billion in 2024 as we maintain our current leverage. Before I turn it over to Kenny, I'd summarize our second quarter financial performance as strong and our confidence in the future stronger as we continue to unlock the potential of our great franchise. We're excited to execute on our strategy in the second half and lay out more of our long-term thoughts at our investor day in September. Kenny.

Thank you, Jennifer, and good morning. As Jennifer mentioned, we had a solid second quarter, especially if you put aside the lower volume from coal. Great revenues totaled $5.6 billion for the quarter, which was up 2% excluding fuel surcharges due to strong core pricing and a slight increase in volume. Let's jump right in and talk about the key drivers in each of our business groups. Starting with our bulk segment, revenue for the quarter was down 2%. compared to last year on a 5 percent decrease in volume and a 3 percent increase in average revenue per car driven by solid core pricing gains and a positive mix in traffic. However, if you exclude coal, bulk revenue for the quarter was up 4 percent year-over-year and volume grew by 6 percent. Coal volume was down 23 percent in the quarter due to ongoing secular decline of the market along with continued challenges from lower natural gas prices and higher inventory levels. Fertilizer volumes increased for the quarter due to strong export demand for Campotex potash and easier comps from a 2023 customer outage. In addition, grain products business was favorable due to increased demand for renewable diesel, strong demand for ethanol, and new business winds. Moving to industrial, Revenue was up 2% for the quarter on a 3% decrease in volume and a 5% increase in average revenue per car. Strong core pricing gains and a positive mix in traffic were partially offset by lower fuel surcharges. Our strong business development efforts in petroleum allowed us to capitalize on opportunities. Petrochemicals volume continued to grow due to improved domestic demand in plastics, and strong business development winds in our industrial chemicals markets from customers located along the Gulf Coast. However, challenges with high inventories and rainy weather in the south negatively impacted our ROC volumes. Premium revenue for the quarter was up 4% on a 6% increase in volume and a 2% decrease in average revenue per car, reflecting negative mix, lower fuel surcharges, and truck market pressures. Automotive volumes were positive due to business development wins with Volkswagen and General Motors, but offset by unplanned decreases in production impacting auto parts shipment. Intermodal volumes continue to remain strong due to West Coast import demand and positive domestic growth despite market conditions, especially within our parcel segment. Now, turning to slide 10, here's our outlook for the balance of 2024 for the key markets we serve. Starting with bulk, coal is expected to remain challenged as inventories remain high and natural gas futures stay at levels that make coal less competitive. For grain, as we sit here today, the markets look stable and healthy, although global export sales are off to a slow start. Crop conditions look good, and we'll have a better read over the next several weeks. In addition, we expect grain products to remain positive as we see incremental renewable diesel production coming online in California and continue to capture new business. Turning to industrial, our outlook remains the same as we laid out during our last earnings call. We expect our rock market will not match last year's record volume. However, both petroleum and petrochemical markets will remain favorable due to our focus on business development supported by our investments in the Gulf Coast. And wrapping up with premium, on the intermodal side, we expect to see continued strength for imports in the near term. And while we have seen imports drive pockets of increased demand, on the domestic side, the overall market remains soft. But our improved service products, along with our diversified set of private asset owners and IMCs, provide Union Pacific more at-bats when opportunities present themselves. And for automotive, we're still expecting year-over-year growth due to business development wins, despite some softening in the market. In summary, I'm proud of the commercial team and their focus to fill the volume gap we're seeing from coal. On the price side, we're achieving solid price results to overcome inflation and delivering the consistent and efficient service that we sold to our customers. As we head into the second half of the year, I am confident that our great franchise, along with the diverse product offerings we provide, gives our customers the ability to compete and win in the marketplace. Our commercial leaders are actively working with customers and the operating team to convert more over-the-road business to rail that allows us both to win and grow. And with that, I'll turn it over to Eric to review our operational performance.

Thank you, Kenny, and good morning. Moving to slide 12. As you heard from Jim, Mother Nature delivered many powerful weather events throughout the quarter as we experienced impactful flooding across both our northern and southern regions. But we're not here to make excuses. Leveraging our intense focus on operational excellence and detailed contingency plans, the team quickly acted to mitigate the impact by adjusting trip plans and deploying temporary buffer resources to safely restore operations. I'm very proud of our frontline employees who worked tirelessly to repair our infrastructure to minimize the customer impact. There are countless examples highlighting their efforts as they repaired miles of damaged track, restored bridges, and cleared countless trees and debris. That being said, versus 2023, service levels and network performance for the second quarter remained strong, demonstrating our recoverability in the wake of major weather disruptions. Starting with our foundation of safety. We continue to drive improvements, building on the momentum of the first quarter. For the second quarter, both derailment and personal injury rates improved year over year. While I am proud of the team for making this progress, we will not rest until every employee goes home safe to their loved ones every day. Freight car velocity was flat in the second quarter compared to 2023 as improvements in terminal dwell were offset by weather-impacted train speeds. The opportunity here is to drive even stronger terminal dwell performance by removing unnecessary car touches across the network. On the service front, intermodal SPI improved four points as manifest and auto SPI remained flat. Although we worked hard to minimize impact on weather on our service product, we know customers felt the impact, particularly those located in the affected areas. Now let's review our key efficiency metrics on slide 13. The team remains highly focused on cost control, leveraging technology and other investments to drive productivity throughout our operation. As I mentioned last quarter, it is imperative to our strategy as it enables Kenny and the team to compete in the marketplace. Similar to the first quarter, we saw year-over-year improvements across all of our metrics. Locomotive productivity improved 6% compared to second quarter 2023, driven by improved network fluidity and asset utilization. Throughout the year, we have been able to efficiently flex our locomotive fleet with units readily available to adjust to varying volume levels. Workforce productivity, which does include all employees, improved 5% versus 2023. While overall employee levels decreased, our active train, engine, and yard employees increased as we implement new labor agreements. Train length improved 2% compared to second quarter 2023. and 3% sequentially due to increased intermodal volume combined with the usage of safety technologies like Precision Train Builder. In fact, our second quarter result was a quarterly record and June marked the first month ever with train length over 9,600 feet. This is a remarkable achievement by the team as they continue to generate mainline capacity for future growth. Wrapping up, it's important to note As we continue to implement new technology throughout our operation, we are also building new processes. These processes, powered by automation and real-time analytics, open new capabilities for Union Pacific and our customers. I'm looking forward to sharing such examples at our Investor Day in September. So with that, I'll turn it back to Jim.

Thank you, Eric. Turn it to slide 15. Before we get to your questions, I'd like to quickly summarize what you've heard from our team. First, as you heard from Jennifer, despite a challenging environment, we achieved strong financial results in the quarter. We continue to drive efficiency into the network, and the commercial team has done a good job generating price for the value we provide our customers. Kenny provided you with an overview of the second quarter volumes and laid out some updated thoughts for the remainder of the year. I think it's worth stating that when you remove coal, our total volume was up 3% in the second quarter. This demonstrates that even in a tough freight environment, we are winning with our customers to bring new business to the railroad. Lastly, Eric walked you through the progress we're making across safety, service, and operational excellence. In the first half of the year, our safety metrics improved, but we still have a way to go. Our service was challenged in the quarter, but I'm pleased with our ability to recover, and we're continuing to do things more efficiently, making good improvements in operational excellence. Look, the quarter presented its challenges, but I'm very pleased with the results we achieved. From the beginning, I said improvement wasn't going to be a straight line. There are just too many variables when you operate an outdoor factory. But I expect the trend line will be in the right direction, and we demonstrated that again this quarter. Over the past 12 months, we've put this company on the right path to redefining what's possible for Union Pacific, a theme we'll build on at our Investor Day in mid-September. With that, now we're 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, please press star 1 on your telephone keypad and a confirmation tone to indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants that are 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 the first question today is from the line of Brandon Oglenski with Barclays. Let's just hear your question.

Good morning, Brandon.

Hey, good morning. Good morning, and thanks for taking the question. So, Jim, if I recall, it was almost a year ago that you got appointed CEO, and I think you said publicly, like, give me a year, then let's look back and, you know, judge how things went. I think you just clearly articulated the coal headwinds in the quarter and But I guess how would you look at the past year in terms of operational improvement, network performance, and then maybe most importantly, customer growth, which I think you were alluding to?

Yeah, Brandon, I appreciate the question, and you're right on. I think they announced me last year on the 26th. We agreed that I was going to join this company, and the announcement came up. So guess what? It's a year. Now, I actually didn't start work until the 14th of August, but that's okay. A couple of weeks doesn't make a difference. Bottom line is, if I look at the quarter, Brandon, I'm very, very, very happy with how we've progressed on this railroad. If you start above the line, and Kenny and the entire team have done a great job of – we knew we had inflationary pressures with the contracts that were signed, and we knew that we had to do something above the line, and I think we've done a great job. And you can see that where the – revenue comes in against our volume growth. And we continue and we will continue to see that as we go through the year. So I'm very comfortable with that. Business development, I have personally spent a lot of time, Kenny as an entire team spends a lot of time, and the entire leadership group with customers looking for opportunity. And we've spent capital and developed new facilities and expanded facilities across our network to be able to handle more business. But the best part about it is our service level is to the point where the first discussion isn't are you providing the service that we agreed to, it's more of how do we work together to move ahead. Operationally, below the line, very comfortable. To be able to present today the numbers that we are on car velocity, dwell, locomotive, and things that you all don't see, how fast our crew changes are, how well we're able to, and the number of people it takes to operate the terminals. We see those numbers every day, and I'm very comfortable with where we are. And I'm also very happy that we continue to improve our operating ratio, and I don't see that stopping. I never give a number for operating ratio because it's a result of everything you do, But to have a 160 basis point improvement this last quarter, year over year operating ratio, and sequentially a small, is a great attestment with what we can do with everything that we were impacted with this customer. We are not a team that makes excuses. You won't hear us complain about coal. We just say that coal is a problem. But to be able to, when we were at 20 plus percent drop in our coal volume, to actually increase goes to show you the strength of our network. We're going to leverage. what we're doing in Mexico with our 26% ownership of FXE, and we think that's going to lead to more growth as we move ahead, and we're going to leverage this network we have. So, Brandon, I'm in a real good place. So hopefully you guys aren't the toughest markers in the world, because sometimes some of you are. But overall, I'm very happy with where we are today, and I look forward to how this next few years while I'm leading this company and show everybody what we can do.

Appreciate the answer, Jim. Thanks.

You're welcome, Brandon.

Our next question is from the line of Scott Group with Wolf Research. This is your question.

Good morning, Scott.

Hey, thanks. Good morning. So I know, Jennifer, mix can swing on you, positive, negative. Any thoughts on mix based on your volume outlook in the back half of the year? And then I just want a bigger picture, right? You know, even if I adjust for mix, The yield growth is still relatively muted in the context of higher inflation. And so I know I've asked this before. I keep asking because I just think it's so critical. Like, when do you guys think we truly get back to inflation plus pricing? And I don't mean like dollars versus dollars. I mean like margin accretive inflation plus pricing because I think that's sort of like the, in my opinion, the key to like having confidence in like sustained margin improvement. So... Any thoughts? Thank you.

Well, so a couple things there, Scott. On the mixed side of things, as we look ahead, you know, a lot of the drivers that were present in our volumes here in the second quarter are going to be present at least into the third quarter. You know, international intermodal is staying strong. You know, coal is weaker. The industrial portion of our portfolio, while we've got great business development opportunities, there's just a little softness there. And so if you assume that that dynamic continues, that's going to continue to have an impact on our mix, probably to the negative side. So, I mean, you guys get our volumes every week. You'll be able to see that and gauge that, but that's kind of our going-in expectation as we look at what's ahead of us, particularly into the third quarter, and we'll see how some of those intermodal trends move into 4Q. In terms of the question relative to price and price accretion, the team is doing, I think, a very good job of driving price in the areas where they can touch it and actively work with the customers. Jim mentioned the service aspect of it. That's critical when you're sitting in front of customers and driving the price. And so the thing that I'm very encouraged by is we know we'll get to that point. I'm not going to give you a date by which we'll get to that point. But what's encouraging is without that, we're still driving very solid margin improvement and looking for more going ahead. So that's what I would focus on. And as we continue to get more access to contracts, that's just going to give us more upside and more ability going forward.

Thank you for the question, Scott.

Our next question is from the line of Jason Seidel with TD Cowen. Please receive your question.

Thank you, Operator. Jim and team, good morning. Nice to see you guys recover from some of the weather in the quarter. You know, I want to focus in a little bit on something, Kenny, that you say. You mentioned there was some weakness on your rock business. You know, we've been hearing some of the infrastructure projects. that were planned are sort of really not getting off the ground. Is that part of the weakness that's behind that, or what are you looking at in the marketplace?

Yeah, Jason, you're right on. We've seen some NLG products down in the Gulf that have been delayed or slow roll, and a lot of it also is just overall demand, and we haven't had the best weather. Haven't seen that in that second quarter. So, yes, it is. I will tell you this, though, Jason, Eric's team is doing everything they can to capture the volume that is out there. We're looking at adding every car to every train that we can to maximize efficiency. So as the opportunities are there, we're taking advantage of it.

That makes sense. And, Kenny, on the delayed projects, is there any expectation for these things to sort of be lifted as we look at the 25 or is this sort of a wait and see?

I think it's wait and see. It's hard for us to go out and forecast what a lot of the customers will do and how the contractors will play out. Our best bet is just to be prepared, which we are.

Sounds good.

Appreciate the time.

Thanks for the question.

Our next question comes from the line of John Chappell with Evercore ISI. Please just hear us your question.

Thank you. Good morning. Jim, do we get to a point in your new tenure here where some of these productivity improvements that you've made start to hit a ceiling without volume? And clearly what you've been able to do on locomotives and workforce in a flat volume environment, and of course we understand what's happening with coal, is pretty impressive. But do you hit the ceiling without a volume tailwind at some point?

No. No, I don't see that. I think we've shown that we can improve, and I see more improvement even with a flat. I don't expect us to have our volume be flat, though. That's not the way we're working this. Everything that we've done is to increase our volume against some pretty big negatives that are structural that we can't control. So is it easier when you have an increase in volume? Yes. You know, you have another five cars on an intermodal train or a manifest train makes it a lot easier. But the technology that we're implementing, the speed that we're going to be able to change our plan, and what we're doing moving forward will help us to be able to, even on a flat volume, be able to improve our efficiency. So I'm very comfortable with as we move ahead, there'll be more even on a flat.

Great. Thanks, Jim.

Thank you.

Our next question comes from the line of Stephanie Moore with Jefferies. Let's see what's your question.

Hi. Good morning. Thank you. Good morning. You know, I think continuing on the prior question, really nice margin and margin performance for the first half of the year. Can you talk a little bit just based on maybe some of the mixed headwinds and the cost of initiatives and a lot of the kind of puts and takes here, what that should mean in terms of kind of normal seasonality for margins as the – OR is the year progressive. Thank you.

Stephanie, listen, I just sort of answered overall on the high level what I see, but I'm going to pass this off to Kenny. Kenny, you talk about margin, how we're looking at pricing, how we move ahead.

Yeah, thanks for that, Jim. So first of all, and you all have heard me say this before, when you look at our approach to revenue growth, it's volume growth through business development, but it's also our pricing approach. And our commercial team has been very clear to articulate some of the inflationary pressures that are out there. But more importantly, the team is taking risks. And so we are doing, as these contracts are coming up, everything we can do to maximize price for margin expansion. And so at every turn, at every contract, those are some, with our service improving, Eric, those are some really good opportunities for us to maximize our price. So we're doing everything we can do there.

So I guess just to follow up, really nothing from a seasonality standpoint to really call out as we think about performance as the year progresses.

When you think about seasonality, I'll jump in here. It really has a lot to do with volumes. And if you look at our volume performance, generally speaking, the quarters where we have the strongest volume growth, that's where you tend to get your greatest margin improvement. It goes back to Jim's comments on productivity and that volume leverage piece. That said, we've shown really good sequential improvement in our margins and have kind of broke that trend as we've really come in and put a big focus on how we can drive greater productivity across the network over the last three quarters. And quite frankly, you know, I think that's something that maybe is a little bit underappreciated in terms of how hard it has been for the team to achieve that. Looking forward, it really is going to be about the volumes and the continued emphasis on the productivity and the price. Those are our three levers. As you're thinking sequentially, I'd be comparing volume sequentially and see how that progresses. That's going to really be the determinant. Thanks, Stephanie.

Our next question is from the line of Brian Asenbeck with J.P. Morgan. Let's just see what their question is.

Morning, Brian. Hey, good morning, Dean. Thanks for taking the question. Yeah, maybe a couple for Kenny. Can you just talk about The international intermodal has always been quite strong. There's been some expectation for that to spill over into domestic. Do you have any thoughts on when that might happen and whether that's good, bad, or indifferent for UP? And then secondly, I don't know who would want to take this, but just as we get to the investor day in a couple months, you talk about redefining what's possible. Meeting help level set expectations is what we're going to hear from you all on the team. Will we see, you know, multi-year growth strategy changes? again underpinned by some of the end markets. We talk about truckload conversion and quantify that. Maybe just help give us some expectations on what to think about in a couple months when we see you all in Dallas.

Let me take this first one on international intermodal. So first of all, yes, we've seen some very strong growth on the international intermodal side. And yes, we have seen some of that spill over on the domestic intermodal side. And I want to touch on the fact that, you know, our product development, meaning the investment that we've made, efficient investment in places like Inland Empire helping us to grow here recently, even though it's a short-term phenomenon because of the labor issues up in Canada, we're not going to just, you know, take that volume in the short term. We're doing everything we can to get it permanently. We want a piece of business into our Twin Cities Inland Intermodal Terminal. And that's a way we can take advantage, again, of the product development that's out there. So that's the international model. I talked a little bit about the fact that, yeah, we are seeing quite a bit that's being transloaded that's showing up on the domestic side, and our products are helping us grow. In fact, when we look at our domestic business, you know, year over year in the quarter it was up, and we feel pretty good about where it started off here in this quarter. So that's some, you know, some real specific feedback for you.

In terms of your question about the Investor Day and what's possible, that really is going to be how we're going to frame things. That's certainly been Jim's challenge to the team since he came here a little over a year ago. Don't look back at what you've done historically. Don't look back and see what you think has been best ever. Look forward and see what you really do think we can achieve together with this great franchise that we have. I don't want to front-run things too much with you, Brian. We want to make sure folks tune in in September. But we're excited about the message and the opportunity to speak to everybody and share some of our plans.

Okay, understood. Thank you. Thanks, Brian. Our next question is from the line of Ken Hexter with Bank of America. Let's just see if there are questions.

Good morning, Ken. So good morning. So service, you know, was challenged by the weather in the quarter. You're showing an ability to recover. Jim, you just noted we should continue to see operating ratio improvement going forward. Should we see that in an improved car velocity going forward? Now you don't have storms and and being the cost benefit, then I guess I'll ask kind of Stephanie's question a little differently. Given the hazy economic outlook, can operating ratio improve sequentially?

Well, Ken, you know, people always want me to start talking about where I think the end point is on this. And I think we continue to improve. We're going to have quarters that are better than other quarters. But operationally, you should always look at, we give a lot of metrics out there. And if you take a look at the metrics, car velocity is real important. dwell time is real important and then of course there's about a hundred others that I look at internally that tell me how we're operating and where we need to focus and how we need to do this. So that's one piece and we are aligned. We've got a great team. They know what the end goal is. So I see us optimizing the railroad and continue to get better at how we operate. But what really helps operating ratio and margins is revenue growth. And we are pushing hard on that piece by both bringing in volume at the right price and also pricing because of inflation and everything we've had. So when you put those two things together you know we might have some quarters where sequentially it doesn't improve as much as as as people would like because it's never a straight line. But I'm very comfortable I didn't come back to work. I look at it as I had a sabbatical for a couple of years away from Union Pacific, came on, did what we had to do operationally. I'm back here to drive this place to where I see is possible, and I'm very comfortable. And after the first year, I'm even more comfortable than I was on August 14th when I walked back in the front door. So, Ken, take a look at those metrics, but take a look at what's happening in our volume and translate that. on what we did in the second quarter on revenue against where we were with our carload growth. So hopefully that gives you a better frame of the way I look at it, Ken.

Thanks, Jim.

You're welcome.

Our next question is from the line of Tom Wadovitz with UBS. Please proceed with your question.

Yeah, good morning. So I wanted to ask just on kind of, you know, I think you talked about some weakness in industrial markets. How do you think about your markets overall if you say industrial and consumer? Are things getting kind of, you know, a little bit stronger or a little bit weaker in those two segments? And then, you know, maybe one more probably for Kenny as well. You mentioned a lot of times business development and new customer wins, which is great. Wondered if you could kind of give us a couple buckets to think about. where the opportunity for new business wins is the most significant, right? Are there some industrial segments or which customer segments give you the most opportunity in the future for those customer wins to matter? Thank you.

Yeah, thank you, Tom. So you've got a few macroeconomic indicators like industrial production, not strong housing starts aren't helping us either, and then you know where natural gas prices are. So we don't get the rollover and play dead because coal is not where it needs to be. The commercial team is out there hustling and getting more business. Let me talk about some of the areas that I feel good about from a business development perspective. Renewable diesel, I'll start with that. That's an emerging market. I've been really excited that the team has been out there growing origin points and destination points. It allows us to pitch and catch. On the petrochemical side, in the Gulf, we talked about the investments there and the wins that we've been able to get in that petrochemical market. And then on the premium side, I'll talk about it from a couple angles. One is Mexico will continue to be a market over the near term and long term, and you've seen that Eric's side has put up some really good products up against it. as we talk about that north-south corridor getting into the Midwest and products in terms of getting into the southeast, and then, boy, quite a few new products coming out of Houston, going into Phoenix, setting up our ramp and expanding in different areas. So in some cases, we have to create our own markets to make the pie larger, and that's exactly what you're seeing.

When you say the premium side, you mean premium domestic and remodeled products, or how do you mean that? Both, both domestic and our international intermodal. Okay. And just back on the kind of economy question, do you think it's getting like stronger or weaker, or is that hard to say?

You know, it's still very unclear for us. I'm not in a position to forecast where it is. All I'm telling you is that We're going to go out and make our own markets where we can, and we're doing that through the product development that I mentioned and working with customers.

Okay, great. Thanks for the time. Thanks, Tom.

The next question is from the line of Chris Weatherby with Wells Fargo. This is his question.

Morning, Chris.

Hey, morning. Thanks for taking the question. You know, maybe, Kenny, coming back on the pricing side, I guess I'm just kind of curious, as you're saying, the market from a volume perspective, X coal look a little bit more supportive here in 24. Operationally, things are moving well. As you're having these incremental contract renewals, is it reasonable to say that the rate of increase is beginning to maybe pick up a little bit? I guess I just was curious kind of perspective when you're thinking in the old days when we used to get sort of same store sales type of numbers, how do you think about that? So I'm just kind of curious if we are actually starting to see any uptick there.

You know, the short answer is yes. The long answer is that, uh, Every contract is unique. Every customer is unique. Every discussion is unique. We're mixing that with what's happening on the service side. A stronger service product is helping us. We've always been very price disciplined as a company. What you're seeing is that now we're able to take a little bit more risk as we're talking to our customers because of the inflationary pressures that are out there.

Okay. That's very helpful. I appreciate it. Thank you. Thanks, Chris.

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

Thanks very much, Aubrey. So, Jim, good morning. You mentioned before your sabbatical there that you were able to achieve an operating ratio as low. I think a one-quarter is 55.1%. And there's been a lot of talk about how this time is different, and that might not be an achievable number. So not asking you a target, just rather asking you, Are there factors that are really limiting you that weren't there before, either cyclical, like volume, or structural, like the work rules? I was trying to get an apples-to-apples compare of what is the new 55. Not asking that, but more asking you, are there those factors, and are they meaningful enough to kind of put a permanent impairment on that on an objective or comparing it to any prior level of operating ratio achievement?

Walter, I like the question because that's exactly the way we need to look at it. We know what we've done before, and I could go back to when I was at Canadian National and numbers that were delivered back in 2013 to 2016. I know the game and the play and how you have to get there to be able to deliver. Is there some things that are structurally different? Yes. The collective agreements are an impact to our cost and will follow for a while with us. Now, we've done a great job of mitigating some of it, but it's pretty tough to mitigate it all. So that's a negative that's going to be with us for a while. So we'll probably carry a few more people than we normally would have if the railroad had not signed some of the last collective agreements. But I look at it this way. I see a clear picture as we move ahead that we can mitigate a lot of that and have a railroad that's very efficient. We're going to use the network we have to optimize our cost structure. We are implementing work patterns and how we operate that will help us. So I don't think we'll be able to mitigate all of that. But you can also mitigate it by bringing more business on and also leveraging our access to Mexico, leveraging our access to customers. Canada's a little reserved sometimes in Jennifer, but I'll tell you, we have a railroad that the opportunity is there. And when we have discussions, we don't talk about, oh, geez, you know, we have some problems with this. We look at what are we going to do. Phoenix, we opened it up because we think there's a market there. Minneapolis, we opened it up. Fritz Intermodal Terminal, we expanded. We spent money in the Gulf and working with customers that want to be with us. So we do both of those. I say hang on, watch us go. This is not a short-term. I said it the very first time I was on the call. This is not a short-term fix when you have that kind of inflationary pressure. But I'm very happy that this quarter we were able to deliver another $160 million. basis points of improvement in our OR with everything that we've done. And we're going to have some good quarters, some bad quarters, but I'm telling you, in the long run, stay tuned, Walter. And listen, Walter, as soon as you're probably in Canada, I know there's a lot of people that I know from CN and others impacted with the fire in my hometown, and I wish everybody the best.

Appreciate it. Okay, thanks for the call, Tim.

Our next question is from the line of Ben Nolan with Stiefel. Let's just see with your question.

Yeah, thanks. I was interested to see that the average train length, I think you said, was the highest that it's ever been. It was curious if, as you think about that going forward, maybe there were some puts and takes, like more international and remote, I assume is helpful to that, but maybe coal is – Do you think there's more room to go there? Can we continue to see the terrain lengths improve? And then obviously that is beneficial to everything across the board, but OR in particular.

Well, let me pass it over to Eric, and I can't give you the answer because Eric knows it's a different number, but I've got a goal out there. But, Eric, it's all yours.

Ben, to be very clear, the answer to your question is yes, we can continue to grow it. Now, let's make sure we're all on the same page, 2% improvement in the quarter, 3% sequential improvement. To your comment, best quarter we've ever had in June was the highest month in the history of Union Pacific at 9,600 feet. And we want to give a lot of credit to our team. That's hard work to do that. Now, when we have conversations about train length, we also got to remind ourselves that since 2019, our mainline derailments are down 42% while our train length has been up 20%. That's because we continue to invest in technology and science. And that's really going to be the continued foundation of how we keep building this out. Yes, to your point, mix makes a difference. But what makes more of a difference is getting more volume on the railroad, like we're seeing with intermodal. That's been a tailwind for us. But also using our precision train builder software, as well as other things that continue to identify opportunities for us to do it. And then on a day-to-day, just fundamentally how we run the railroad, and we've talked about this before, we still see opportunities to combo trains, largely on the bulk side. So, yes, if there's more opportunity that teams up against that, I'm looking forward to their continued gains.

All right. I appreciate it. Thank you.

Our next question comes from the line of Jordan Allinger with Goldman Sachs. Let's just see if there are questions.

Hi. Just a couple demand-related questions, follow-ups. I think in the first quarter you had mentioned the commodity outlook was muted. Now it's uncertain. So I guess The first part of the question is, and some commodities have moved to the positive bucket, like international, intermodal, and grain. So I'm just sort of wondering, are you feeling better, or even though it's uncertain, are you feeling better than you did a quarter ago? And then specifically on coal, obviously there's been a lot of carload pressure, but can you give some sense as to the trajectory as we move through the back half of the year in terms of year-over-year pressures? Thanks.

Yeah, I'll start with coal first and then work my way back in. And again, coal is a natural gas prices are all over the place. If you look at April, they were the lowest on record for a few years. And as we move throughout the quarter by June, they had bounced back up. It's very difficult to go out and forecast based on that. We talked about preparedness. We're talking with Eric's team daily. to make sure we can capture the demand that's out there. I've been very encouraged that our commercial team is talking to each cold customer, each cold receiver, one by one to see when they can add inset. So we're doing everything we can to influence the demand there. So overall demand, let's just talk about a few things. One, on the international and remodeled side, You know, that's been a strength for us. I think that'll stay with us at least for the quarter. I can't see out further than that. I talked about a little bit earlier the positives we're seeing from that on the domestic side and the products that we have up against it to go out there and grow grain. You had a question about grain. You know, hey, look, the crop looks great right now as it stands today. The demand looks what I call stable. We'll see what happens on the export market, but while we are waiting for the export market, our commercial team is engaging those domestic receivers. And Mexico is also an area from a business development perspective that we want, so we can't just wait around for some of these markets to help us out. We're doing something about it and making something happen. Automotive, same thing. We talked about the wins. What I hadn't talked about is that we've had some products where Eric has helped us out where we've had land bridge opportunities. So, again, very specific actions up against the service and the product to really help overcome some of these other, you know, macroeconomic challenges on the housing and industrial side.

Okay, thank you.

Thank you.

Thanks for the question.

Our next question is from the line of Bascom Majors with Susquehanna. Pleased to see you with your question.

Good morning, Bascom. Good morning, Jim. Jim and Jennifer, you both talked about having to get past some of the inflationary pressures, and I know you mentioned contracts referring to the labor agreement. I know in the past, you know, this time last year, you were talking about some of the purchase services pressure as well. Can you help us understand kind of where you're tracking when you blend your sense of inflation and overall labor with both the contractual rates and then some of the work rule adjustments and purchase service? Like, where is that today? How does that compare to last year? And what's the steady state as you look at two, three years to understand what we're really pricing against the marketplace today? Thank you.

Yeah, thanks for the question, Bascom. So, you know, coming into the year, we said that we thought our full year inflation would be around 5% or so. I think we're probably tracking pretty close to that. We're seeing some wins in some of the purchase service categories, seeing a little bit greater acceptance in the marketplace, a few more people coming in to bid. That's encouraging, and certainly that's an opportunity for us to get a little bit better pricing on that purchase services side of the world. Same with materials, to a certain extent. Obviously, that plays more into our CapEx spend. than it does the OE, but both are very important to us, right? We're looking to control costs at every turn. You know, comp and benefits certainly is a big piece of our expenses. That inflation, I would say, is still probably running around that 5% level that we talked to coming into the year. I think, as you all know, we've got a 4.5% wage increase that became effective. It's the last one in this round of negotiations. became effective July 1 for our craft professionals. So, you know, I don't see a lot changing there. It's just some moving pieces and parts, and we're trying to find areas where we can try to mitigate that, either through our productivity, through our purchasing, and how we're just running the railroad in general. And obviously, that's the task that we have up against Kenny and his team is these are the inflationary pressures that we're facing. This is what's going into the cost structure. and we need to go out there, have those tough conversations, and the team is doing that, and I feel very confident about that.

To that point, if we get into next year, it sounds like it's probably a safer expectation to think still closer to that 5% range than maybe the 2.5%, 3% we saw for a long time.

Yeah, I mean, it's too soon to say, Baskin, at this point, but, boy, my hope is that we're talking about a number that's less than 5% next year. As we move in, it seems like all of those indicators are moving in the right direction, but we'll look at that. I think to your point, though, when I look back historically, we used to talk about an inflation rate that was around 2%. I don't think we're going to get back to those levels, but certainly we're going to work to push it down below 5%.

The only thing I would add, Bascom, is there's a lot of indicators that tell us that there's a change. what's happening to inflation, overall inflation, CPI, what's happening to the job market, and what's happening to the input cost for us. So those things are trending the right way, but how much of a drop we're going to see next year, you know, we'll see. But I'd rather have that view than where we were a year ago.

Thank you both.

Thanks for the question.

Our next question is from the line of Ravi Shankar with Morgan Stanley. This is you with your question. Morgan, Ravi.

Hey, good morning. This is Christine McGarvey. I'm for Ravi. Thanks for the question. I wanted to circle back to the business development conversation and maybe ask the question in a slightly different way. Just curious if you guys have seen any notable changes in terms of the makeup of the pipeline or maybe even more particularly customer behavior. Just as we think about pipeline conversion, is there anything out there with macro or political developments that's kind of leaving shippers with some decision paralysis that wears off in the coming months and that could, you know, start to see conversion accelerate. We'd just be curious on that angle how you guys are thinking about things.

Yeah, so the pipeline is strong. It's a robust pipeline. We feel good about the pipeline both near term and over the next couple years. The conversion rates haven't changed. We keep an eye on that. I know where it is there. What we saw here recently is the realization rates, meaning if a customer said, hey, it's going to be 100 cars, it wasn't as high as 100 cars. And so you would expect, as the markets improve, that realization rate to also go up. Again, we're looking at the same macroeconomic indicators. If housing starts to move, you know what? That moves a lot of things. That's cement. That's PVC. That's roofing. That's the carpet that goes in there. That's glass. That's the sodash we move. We play a role in all those products. And so we'll see where that happens. But the theme here is that the markets are going to do what the markets are going to do. We are going out and creating our own markets, again, through product development and business development and doing it as efficiently as possible as we can. Thanks for the question.

Appreciate it.

Our next question is in the line of Daniel Ember with Stevens. Please receive your question.

Good morning, Daniel. Yep. Hey, good morning, everybody. Thanks for taking our questions. Maybe one from a capital efficiency standpoint. So, Jim, how do you feel about the assets you guys have today? I think you all mentioned in the prepared remarks you could flex the fleet up and down. Utilization can probably always go up, but obviously there's longer-term savings. So how do you balance the need to refresh some of the fleet? How do you think about capital spending in this environment just potentially ahead of more volume growth as we look forward from here?

Yeah, I think we built our capital plan. We always build it from bottom up to see what we need to do. And we're very comfortable with the $3.4 billion that we have this year. And we don't see any substantial difference in our capital plan moving forward. Now, do we do have the capability? You know, you heard us talk about buying back bonds. A billion and a half dollars of shares. You've heard us on the cash that we're producing. So if we need to, if there's something out there that really we need to spend money on, we'll do that. But as far as the railroad, the assets, the plant, that's fixed. We don't fool around with that. What we need to spend, we spend. And then we have also built into that 3.4 was development and what we can do to – to drive more business to our railroad. So I'm very comfortable. That's the way you should think about it. I don't see a big change as we move ahead. Jennifer, anything else you wanted to add? No, you hit it just right. Okay, thank you.

So share repurchases would be the expected use of excess free cash flow if cash flow came in stronger. Jim, is that the right way to interpret that comment?

Yeah, I mean, so I'll jump in here. I mean, the priorities for our cash spending we've been, I think, very clear on. First dollar goes back into the business. Then we prioritize our dividend, which, again, You saw that we gave the 3% increase here last week, and then the excess cash is going to shares. So, yeah, if you look historically at what we've put into our share repurchase program, it's been greater than the $1.5 billion. Some of that's been using balance sheet capacity. We don't intend to add any leverage this year. We feel good about our leverage levels, but we're going to try to drive more cash, and if that's available, we would put it to shares.

Great. Thanks so much.

Best of luck.

Thanks for the question.

Thank you. Our last question is from the line of David Vernon with Bernstein. Please proceed with your question.

Hey, guys. Thanks for taking the question. So, Kenny, a quick one for you on intermodal pricing for domestic. Obviously, the truck markets remain weak. I'm just wondering if sequentially you're seeing anything month-to-month of those rates sort of firming or you know, how that direction looks in the back half of the year. And then bigger picture question for you, Jim, on, you know, the STB wanting to sort of convene a council to discuss railroad growth. I'd love to get your thoughts on kind of, you know, why you think the regulators, you know, pulling this thing together and maybe some early views of what you guys think you might have to say at that.

Yeah, David, Jim, I'll take the first one. So, look, we've been 18 months now, a little bit over 18 months. We're domestic intermodal pricing has either been going down or just staying at the bottom. And I'm not going to sit here today and try to forecast when it's going to move up. I'm highlighting the 18 months because it's been quite a time here. And so we'll see what happens. Here's the key thing I want you to focus on is that I mentioned here recently we've been able to see some year-over-year growth on domestic intermodal. We've got a group of private asset providers that give us a lot of at-bats, a lot of options, and we've been really, as a company, doubling down on our product development so that when things change, and they will change, but I'm not going to forecast it, we'll be prepared.

Listen, I appreciate the question on the STB. I think we have the exact same goal as the STB on growth. We want to grow our business, and I think we've done a – if you actually listen carefully to what we've said, we've been able to grow our business even with some markets that are giving us some huge headwinds, and that's a pretty good quarter. And if you watch the car loads so far this month, I'm pretty happy with where we're headed. We're going to have up and down, but we are working hard on that. So I think it's a great hearing. I'm looking forward to it. I can't make it personally because – We are headed to Dallas, and I'm looking forward to those couple of days, and that sort of is right in between when we need to be in Dallas, just before it. But guess who's going? And Kenny is going there. He's going to represent us well, and I'm looking forward to presenting to everybody to see who Union Pacific is, what we're doing, and how we're going to leverage this great franchise to be able to grow our business, even with all the challenges that we have. So I'm excited to hear what all the other railroads have to say, and I'm sure we're all in the same place. We all want to be price smart and also be able to move the products that are available to us. So I'm looking forward to the hearing. And, Kenny, I'm sure you're going to represent us real well. I'm ready. You betcha. Thank you very much for the question.

Thank you. This concludes the question and answer session. I'll now turn the call back over to Jim Venna for closing comments.

Well, listen, thanks everybody for listening in this morning. We are very excited with what we've been able to deliver as a team for our shareholders and what we've been able to do safety through the communities that we operate for our employees. And we're very excited that we've been able to take the head-on challenges that were presented and be able to deliver a quarter that showed improvements both underneath on how we operate and how we operate even safer and the metrics that we're moving ahead. So I'm very comfortable where we are. I like our future. I think we've got a great railroad. And I truly am looking forward to Dallas. I think it's a great spot to go and have our investor day. And at the investor day, we'll take you through with a little more substance about what we foresee in the future over the next two or three years and what we see in the next year that Union Pacific can deliver. and I'm looking forward to seeing all of you that can make it in Dallas. Wonderful location, great spot for us, important place for us. So thank you very much, everybody, for listening in.

This will conclude today's conference. Thanks for your participation. You may now disconnect your lines and have a wonderful day.